As filed with the Securities and Exchange Commission on August 29, 2000.
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. 24 (X)
------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 25 (X)
------
FRANKLIN FEDERAL TAX-FREE INCOME FUND
-------------------------------------
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (650) 312-2000
--------------
MURRAY L. SIMPSON, 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, 2000, pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) 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.
Prospectus
Franklin Federal Tax-Free Income Fund
CLASS A , B & C
INVESTMENT STRATEGY TAX-FREE INCOME
SEPTEMBER 1, 2000
Insert Franklin Templeton Ben Head
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
CONTENTS
THE FUND
[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
2 Goal and Strategies
4 Main Risks
6 Performance
8 Fees and Expenses
10 Management
11 Distributions and Taxes
13 Financial Highlights
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
15 Choosing a Share Class
19 Buying Shares
22 Investor Services
25 Selling Shares
27 Account Policies
30 Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]
Back Cover
THE FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
-------------------
GOAL The Fund's investment goal is to provide investors with as high a level of
income exempt from federal income taxes as is consistent with prudent investment
management and the preservation of shareholders' capital.
MAIN INVESTMENT STRATEGIES Under normal market conditions, the Fund invests
predominately in investment grade municipal securities whose interest is free
from federal income taxes, including the federal alternative minimum tax.
Although the Fund tries to invest all of its assets in tax-free securities, it
is possible, although not anticipated, that up to 20% of its assets may be in
securities that pay taxable interest, including interest that may be subject to
the federal alternative minimum tax.
[Begin callout]
MUNICIPAL SECURITIES are issued by state and local governments, their agencies
and authorities, as well as by the District of Columbia and U.S. territories and
possessions, to borrow money for various public and private projects. Municipal
securities pay a fixed, floating or variable rate of interest, and require that
the amount borrowed (principal) be repaid at maturity.
[End callout]
The Fund only buys municipal securities rated in the top four ratings by U.S.
nationally recognized rating services (or comparable unrated securities). The
manager selects securities that it believes will provide the best balance
between risk and return within the Fund's range of allowable investments and
typically uses a buy and hold strategy. This means it holds securities in the
Fund's portfolio for income purposes, rather than trading securities for capital
gains, although the manager may sell a security at any time if it believes it
could help the Fund meet its goal.
The Fund may also invest in municipal lease obligations, which generally are
issued to finance the purchase of public property. The property is leased to a
state or local government and the lease payments are used to pay the interest on
the obligations. These differ from other municipal securities because the money
to make the lease payments must be set aside each year or the lease can be
cancelled without penalty. If this happens, investors who own the obligations
may not be paid.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unusual or unfavorable for investors, the manager may invest up to 100% of
the Fund's assets in a temporary defensive manner by holding all or a
substantial portion of its assets in cash, cash equivalents or other high
quality short-term investments. Temporary defensive investments may include
securities that pay taxable interest. The manager also may invest in these types
of securities or hold cash when securities meeting the Fund's investment
criteria are unavailable or to maintain liquidity. In these circumstances, the
Fund may be unable to achieve its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
INCOME Since the Fund can only distribute what it earns, the Fund's
distributions to shareholders may decline when interest rates fall.
CREDIT An issuer of municipal securities may be unable to make interest payments
and repay principal. Changes in an issuer's financial strength or in a
security's credit rating may affect a security's value and, thus, impact Fund
performance.
Many of the Fund's portfolio securities may be supported by credit enhancements,
which may be provided by either U.S. or foreign banks and insurance companies.
These securities have the credit risk of the entity providing the credit
support. Credit support provided by a foreign bank or insurance company may be
less certain because of the possibility of adverse foreign economic, political
or legal developments that may affect the ability of that entity to meet its
obligations. To the extent the Fund holds insured securities, a change in the
credit rating of any one or more of the municipal bond insurers that insure
securities in the Fund's portfolio may affect the value of the securities they
insure, the Fund's share price and Fund performance. The Fund might also be
adversely impacted by the inability of an insurer to meet its insurance
obligations.
[Begin callout]
Because interest rates and municipal security prices fluctuate, the amount of
the Fund's distributions, the Fund's yield, and the value of your investment in
the Fund will go up and down. This means you could lose money over short or even
extended periods.
[End callout]
INTEREST RATE When interest rates rise, municipal security prices fall. The
opposite is also true: municipal security prices rise when interest rates fall.
In general, securities with longer maturities are more sensitive to these price
changes.
CALL A municipal security may be prepaid (called) before maturity. Securities
are more likely to be called when interest rates are falling, because the issuer
can issue new securities with lower interest payments. If a security is called,
the Fund may have to replace it with a lower-yielding security. At any time, the
Fund may have a large amount of its assets invested in municipal securities
subject to call risk. A call of some or all of these securities may lower the
Fund's income and yield and its distributions to shareholders.
MARKET A security's value may be reduced by market activity or the results of
supply and demand. This is a basic risk associated with all securities. When
there are more sellers than buyers, prices tend to fall. Likewise, when there
are more buyers than sellers, prices tend to rise.
The Fund may invest more than 25% of its assets in municipal securities that
finance similar types of projects, such as hospitals, housing, industrial
development, and transportation or pollution control. A change that affects one
project, such as proposed legislation on the financing of the project, a
shortage of the materials needed for the project, or a declining need for the
project, would likely affect all similar projects, thereby increasing market
risk.
STATE AND TERRITORY ECONOMIC CONDITIONS The Fund's portfolio is widely
diversified among issuers of municipal securities. However, from time to time,
the Fund may have a significant position in the municipal securities of a
particular state or territory. Under these circumstances, changes in the
economic conditions in that state or territory are likely to affect the Fund's
investments and performance.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS Municipal securities may be issued
on a when-issued or delayed delivery basis, where payment and delivery take
place at a future date. Since the market price of the security may fluctuate
during the time before payment and delivery, the Fund assumes the risk that the
value of the security at delivery may be more or less than the purchase price.
More detailed information about the Fund, its policies and risks and about
municipal securities held by the Fund can be found in the Fund's Statement of
Additional Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not insured by the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other agency of the U.S. government. Mutual
fund shares involve investment risks, including the possible loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
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This bar chart and table show the volatility of the Fund's returns, which is one
indicator of the risks of investing in the Fund. The bar chart shows changes in
the Fund's returns from year to year over the past 10 calendar years. The table
shows how the Fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS/1
[Insert bar graph]
5.53% 13.23% 9.55% 11.25% -3.74% 15.10% 4.70% 8.97% 5.94% -2.79%
90 91 92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST QUARTER:
Q1 '95 5.86%
WORST QUARTER:
Q1 '94 -3.92%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
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Franklin Federal Tax-Free Income -6.92% 5.31% 6.14%
Fund - Class A/2
Lehman Brothers Municipal Bond -2.06% 6.91% 6.89%
Index/3
SINCE
INCEPTION
1 YEAR (1/1/99)
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Franklin Federal Tax-Free Income -6.96% -6.96%
Fund Class B/2
Lehman Brothers Municipal Bond -2.06% -2.06%
Index/3
SINCE
INCEPTION
1 YEAR (5/1/95)
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Franklin Federal Tax-Free Income -5.26% 4.49%
Fund - Class C/2
Lehman Brothers Municipal Bond -2.06% 5.84%
Index/3
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of June 30, 2000, the Fund's year-to-date return was 3.92% for Class A.
2. Figures reflect sales charges.
All Fund performance assumes reinvestment of dividends and capital gains. May 1,
1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last
five years as part of a deal of over $50 million and with a maturity of at
least two years. It includes reinvested interest. One cannot invest directly
in an index, nor is an index representative of the Fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
-----------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS B CLASS C
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Maximum sales charge (load) as a
percentage of offering price 4.25% 4.00% 1.99%
Load imposed on purchases 4.25% None 1.00%
Maximum deferred sales charge (load) None/1 4.00%/2 0.99%/3
Please see "Choosing a Share Class" on page 15 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A CLASS B CLASS C
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Management fees 0.45% 0.45% 0.45%
Distribution and service
(12b-1) fees 0.08% 0.65% 0.65%
Other expenses 0.07% 0.07% 0.07%
------------------------------------
Total annual Fund operating expenses 0.60% 1.17% 1.17%
------------------------------------
1. Except for investments of $1 million or more (see page 15)
2. Declines to zero after six years.
3. This is equivalent to a charge of 1% based on net asset value.
EXAMPLE
This example can help you compare the cost of investing in the Fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o The Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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If you sell your shares at the end of the period:
CLASS A $484/1 $609 $746 $1,143
CLASS B $519 $672 $844 $1,261/2
CLASS C $317 $468 $737 $1,506
If you do not sell your shares:
CLASS B $119 $372 $644 $1,261/2
CLASS C $218 $468 $737 $1,506
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the Fund's investment manager. Together, Advisers and its
affiliates manage over $229 billion in assets.
The team responsible for the Fund's management is:
SHEILA AMOROSO, SENIOR VICE PRESIDENT OF ADVISERS
Ms. Amoroso has been an analyst or portfolio manager of the Fund since 1987.
She joined Franklin Templeton Investments in 1986.
FRANCISCO RIVERA, PORTFOLIO MANAGER OF ADVISERS
Mr. Rivera has been an analyst or portfolio manager of the Fund since 1996.
He joined Franklin Templeton Investments in 1994.
JOHN WILEY, VICE PRESIDENT OF ADVISERS
Mr. Wiley has been an analyst or portfolio manager of the Fund since 1991. He
joined Franklin Templeton Investments in 1989.
The Fund pays Advisers a fee for managing the Fund's assets. For the fiscal year
ended April 30, 2000, the Fund paid 0.45% of its average net assets to the
manager for its services.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
-----------------------
INCOME AND CAPITAL GAINS DISTRIBUTIONS The Fund intends to pay a dividend at
least monthly representing its net investment income. Capital gains, if any, may
be distributed annually. The amount of these distributions will vary and there
is no guarantee the Fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the Fund's distributions will vary. If you would like
information on upcoming record dates for the Fund's distributions, please call
1-800/DIAL BEN(R).
TAX CONSIDERATIONS Fund distributions will consist primarily of exempt-interest
dividends from interest earned on municipal securities. In general,
exempt-interest dividends are exempt from federal income tax. The Fund, however,
may invest a portion of its assets in securities that pay income that is not
tax-exempt. Fund distributions from such income are taxable to you as ordinary
income. Any capital gains the Fund distributes are taxable to you as long-term
capital gains no matter how long you have owned your shares. Distributions of
ordinary income or capital gains are taxable whether you reinvest your
distributions in additional Fund shares or receive them in cash.
[Begin callout]
BACKUP WITHHOLDING
By law, the Fund must withhold 31% of your taxable distributions and redemption
proceeds if you do not provide your correct social security or taxpayer
identification number and certify that you are not subject to backup
withholding, or if the IRS instructs the Fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of the Fund, you may have a capital gain or loss. For
tax purposes, an exchange of your Fund shares for shares of a different Franklin
Templeton fund is the same as a sale.
Exempt-interest dividends are taken into account when determining the taxable
portion of your social security or railroad retirement benefits. The Fund may
invest a portion of its assets in private activity bonds. The income from these
bonds is a preference item when determining your alternative minimum tax.
Exempt-interest dividends from interest earned on municipal securities of a
state or its political subdivisions, generally are exempt from that state's
personal income tax. Most states, however, do not grant tax-free treatment to
interest from municipal securities of other states.
Distributions of ordinary income and capital gains, and gains from the sale or
exchange of your Fund shares generally will be subject to state and local taxes.
Non-U.S. investors may be subject to U.S. withholding and estate tax. You should
consult your tax advisor about the federal, state, local or foreign tax
consequences of your investment in the Fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
--------------------
This table presents the Fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED APRIL 30,
-------------------------------------------------------------------------------
2000 1999/3 1998 1997 1996
-------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, 12.31 12.25 11.90 11.83 11.73
beginning of year
----------------------------------------------
Net investment income/1 .66 .67 .69 .71 .74
Net realized and unrealized (.89) .06 .35 .07 .10
gains (losses)
----------------------------------------------
Total from investment operations (.23) .73 1.04 .78 .84
----------------------------------------------
Distributions from net (.66) (.67) (.69) (.71) (.74)
investment income
Distributions from net (.01) - - - -
realized gains
----------------------------------------------
Total distributions (.67) (.67) (.69) (.71) (.74)
----------------------------------------------
Net asset value, end of year 11.41 12.31 12.25 11.90 11.83
----------------------------------------------
Total return (%)/2 (1.87) 6.10 8.92 6.81 7.33
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year 6,321 7,170 7,023 6,905 7,013
($ x 1 million)
Ratios to average net
assets: (%)
Expenses .60 .60 .59 .58 .57
Net investment income 5.64 5.41 5.70 6.00 6.20
Portfolio turnover rate (%) 16.63 9.90 14.54 16.43 25.10
CLASS B
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PER SHARE DATA ($)
Net asset value, 12.30 12.39
beginning of year
----------------------------------------------
Net investment income/4 .59 .23
Net realized and unrealized (.88) (.11)
losses
----------------------------------------------
Total from investment operations (.29) .12
----------------------------------------------
Distributions from net (.59) (.21)
investment income
Distributions from net (.01) -
realized gains
----------------------------------------------
Total distributions (.60) (.21)
----------------------------------------------
Net asset value, end of year 11.41 12.30
----------------------------------------------
Total return (%)/2 (2.35) 0.96
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year 66,158 27,988
($ x 1,000)
Ratios to average net
assets: (%)
Expenses 1.17 1.17/5
Net investment income 5.10 4.86/5
Portfolio turnover rate (%) 16.63 9.90
CLASS C YEAR ENDED APRIL 30,
--------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, 12.31 12.24 11.90 11.82 11.73
beginning of year
----------------------------------------------
Net investment income/1 .59 .60 .63 .66 .68
Net realized and unrealized (.89) .07 .33 .06 .09
gains(losses)
----------------------------------------------
Total from investment operations (.30) .67 .96 .72 .77
Distributions from net (.59) (.60) (.62) (.64) (.68)
investment income
Distributions from net (.01) - - - -
realized gains
----------------------------------------------
Total distributions (.60) (.60) (.62) (.64) (.68)
----------------------------------------------
Net asset value, end of year 11.41 12.31 12.24 11.90 11.82
----------------------------------------------
Total return (%)/2 (2.43) 5.58 8.22 6.28 6.68
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year 200,120 212,474 135,195 71,944 34,110
($ x 1,000)
Ratios to average net
assets: (%)
Expenses 1.17 1.17 1.17 1.16 1.15
Net investment income 5.07 4.83 5.12 5.42 5.68
Portfolio turnover rate (%) 16.63 9.90 14.54 16.43 25.10
1. Based on average shares outstanding effective year ended April 30, 2000.
2. Total return does not include sales charges, and is not annualized.
3. For the period January 1, 1999 (effective date) to April 30, 1999, for
class B.
4. Based on average shares outstanding.
5. Annualized.
YOUR ACCOUNT
[Insert graphic of pencil marking an "X"] CHOOSING A SHARE CLASS
----------------------
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. Your investment representative
can help you decide.
CLASS A CLASS B CLASS C
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o Initial sales o No initial sales o Initial sales
charge of 4.25% or charge charge of 1%
less
o Deferred sales o Deferred sales o Deferred sales
charge of 1% on charge of 4% on charge of 1% on
purchases of $1 shares you sell shares you sell
million or more sold within the first within 18 months
within 12 months year, declining to
1% within six years
and eliminated
after that
o Lower annual o Higher annual o Higher annual
expenses than Class expenses than Class expenses than Class
B or C due to lower A (same as Class C) A (same as Class B)
distribution fees due to higher due to higher
distribution fees. distribution fees.
Automatic No conversion to
conversion to Class Class A shares, so
A shares after annual expenses do
eight years, not decrease.
reducing future
annual expenses.
SALES CHARGES - CLASS A
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
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Under $100,000 4.25 4.44
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either as a
lump sum or through our cumulative quantity discount or letter of intent
programs (see page 18), you can buy Class A shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC is
the same for each class (please see page 17.
DISTRIBUTION AND SERVICE (12B-1) FEES Class A has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows the Fund to pay distribution fees of up
to 0.10% per year to those who sell and distribute Class A shares and provide
other services to shareholders. Because these fees are paid out of Class A's
assets on an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
SALES CHARGES - CLASS B
IF YOU SELL YOUR SHARES
WITHIN THIS MANY YEARS AFTER BUYING THIS % IS DEDUCTED FROM
THEM YOUR PROCEEDS AS A CDSC
---------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
With Class B shares, there is no initial sales charge. However, there is a CDSC
if you sell your shares within six years, as described in the table above. The
way we calculate the CDSC is the same for each class (please see page 17).
After 8 years, your Class B shares automatically convert to Class A shares,
lowering your annual expenses from that time on.
MAXIMUM PURCHASE AMOUNT The maximum amount you may invest in Class B shares at
one time is $249,999. We place any investment of $250,000 or more in Class A
shares, since a reduced initial sales charge is available and Class A's annual
expenses are lower.
DISTRIBUTION AND SERVICE (12B-1) FEES Class B has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows the Fund to pay distribution and other
fees of up to 0.65% per year for the sale of Class B shares and for services
provided to shareholders. Because these fees are paid out of Class B's assets on
an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
SALES CHARGES - CLASS C
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
-------------------------------------------------------------------------------
Under $1 million 1.00 1.01
WE PLACE ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS A SHARES, SINCE THERE
IS NO INITIAL SALES CHARGE AND CLASS A'S ANNUAL EXPENSES ARE LOWER.
CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C shares
you sell within 18 months of purchase. The way we calculate the CDSC is the same
for each class (please see below).
DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows the Fund to pay distribution and other
fees of up to 0.65% per year for the sale of Class C shares and for services
provided to shareholders. Because these fees are paid out of Class C's assets on
an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A , B & C
The CDSC for each class is based on the current value of the shares being sold
or their net asset value when purchased, whichever is less. There is no CDSC on
shares you acquire by reinvesting your dividends or capital gains distributions.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one month
on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to a
CDSC. If there are not enough of these to meet your request, we will sell the
shares in the order they were purchased. We will use this same method if you
exchange your shares into another Franklin Templeton fund (please see page 23
for exchange information).
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below, please
let us know at the time you make your investment to help ensure you receive the
lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases in
Franklin Templeton funds to take advantage of the lower sales charges for large
purchases of Class A shares.
[Begin callout]
FRANKLIN TEMPLETON FUNDS include all of the U.S. registered mutual funds of
Franklin Templeton Investments, except Franklin Templeton Variable Insurance
Products Trust and Templeton Capital Accumulator Fund, Inc.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in
Franklin Templeton funds for purposes of calculating the sales charge. You
also may combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts also may be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar amount
of shares over a 13-month period and lets you receive the same sales charge
as if all shares had been purchased at one time. We will reserve a portion of
your shares to cover any additional sales charge that may apply if you do not
buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE
APPROPRIATE SECTION OF YOUR ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton fund, you may
reinvest some or all of the proceeds within 365 days without an initial sales
charge. The proceeds must be reinvested within the same share class, except
proceeds from the sale of Class B shares will be reinvested in Class A shares.
If you paid a CDSC when you sold your Class A or C shares, we will credit your
account with the amount of the CDSC paid but a new CDSC will apply. For Class B
shares reinvested in Class A, a new CDSC will not apply, although your account
will not be credited with the amount of any CDSC paid when you sold your Class B
shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD) also
may be reinvested without an initial sales charge if you reinvest them within
365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject to
a sales charge.
SALES CHARGE WAIVERS Class A shares may be purchased without an initial sales
charge or CDSC by various individuals and institutions or by investors who
reinvest certain distributions and proceeds within 365 days. Certain investors
also may buy Class C shares without an initial sales charge. The CDSC for each
class may be waived for certain redemptions and distributions. If you would like
information about available sales charge waivers, call your investment
representative or call Shareholder Services at 1-800/632-2301. A list of
available sales charge waivers also may be found in the Statement of Additional
Information (SAI).
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors to
invest as a group. For sales charge purposes, the group's investments are added
together. There are certain other requirements and the group must have a purpose
other than buying Fund shares at a discount.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
-------------
MINIMUM INVESTMENTS
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INITIAL ADDITIONAL
-----------------------------------------------------------------------------
Regular accounts $1,000 $50
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Automatic investment plans $50 $50
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-----------------------------------------------------------------------------
UGMA/UTMA accounts $100 $50
-----------------------------------------------------------------------------
Broker-dealer sponsored wrap account programs
$250 $50
-----------------------------------------------------------------------------
Full-time employees, officers, trustees and directors of Franklin Templeton
entities, and their immediate family members
$100 $50
-----------------------------------------------------------------------------
PLEASE NOTE THAT YOU MAY ONLY BUY SHARES OF A FUND ELIGIBLE
FOR SALE IN YOUR STATE OR JURISDICTION.
ACCOUNT APPLICATION If you are opening a new account, please complete and sign
the enclosed account application. Make sure you indicate the share class you
have chosen. If you do not indicate a class, we will place your purchase in
Class A shares. To save time, you can sign up now for services you may want on
your account by completing the appropriate sections of the application (see
"Investor Services" on page 22). For example, if you would like to link one of
your bank accounts to your Fund account so that you may use electronic fund
transfers to and from your bank account to buy and sell shares, please complete
the bank information section of the application. We will keep your bank
information on file for future purchases and redemptions.
BUYING SHARES
-------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
-------------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
-------------------------------------------------------------------------------
[Insert graphic of If you have another Franklin Before requesting a
phone] Templeton fund account with telephone purchase, please
your bank account make sure we have your bank
BY PHONE information on file, you may account information on file.
open a new account by phone. If we do not have this
(Up to $100,000 per information, you will need
day) To make a same day to send written instructions
investment, please call us with your bank's name and
1-800/632-2301 by 1:00 p.m. Pacific time or address, a voided check or
the close of the New York savings account deposit
Stock Exchange, whichever is slip, and a signature
earlier. guarantee if the bank and
Fund accounts do not have at
least one common owner.
To make a same day
investment, please call us
by 1:00 p.m. Pacific time or
the close of the New York
Stock Exchange, whichever is
earlier.
-------------------------------------------------------------------------------
Make your check payable to Make your check payable to
[Insert graphic of Franklin Federal Tax-Free Franklin Federal Tax-Free
envelope] Income Fund. Income Fund. Include your
account number on the check.
BY MAIL Mail the check and your
signed application to Fill out the deposit slip
Investor Services. from your account statement.
If you do not have a slip,
include a note with your
name, the Fund name, and
your account number.
Mail the check and deposit
slip or note to Investor
Services.
-------------------------------------------------------------------------------
[Insert graphic of Call to receive a wire Call to receive a wire
three lightning control number and wire control number and wire
bolts] instructions. instructions.
Wire the funds and mail your To make a same day wire
signed application to investment, please call us
BY WIRE Investor Services. Please by 1:00 p.m. Pacific time
include the wire control and make sure your wire
1-800/632-2301 number or your new account arrives by 3:00 p.m.
(or 1-650/312-2000 number on the application.
collect)
To make a same day wire
investment, please call us
by 1:00 p.m. Pacific time
and make sure your wire
arrives by 3:00 p.m.
-------------------------------------------------------------------------------
[Insert graphic of Call Shareholder Services at Call Shareholder Services at
two arrows pointing the number below, or send the number below or our
in opposite signed written instructions. automated TeleFACTS system,
directions] The TeleFACTS system cannot or send signed written
be used to open a new instructions.
BY EXCHANGE account.
(Please see page 24 for (Please see page 24 for
TeleFACTS(R) information on exchanges.) information on exchanges.)
1-800/247-1753
(around-the-clock
access)
-------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
-----------------
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in
the Fund by automatically transferring money from your checking or savings
account each month to buy shares. To sign up, complete the appropriate section
of your account application and mail it to Investor Services. If you are opening
a new account, please include the minimum initial investment of $50 with your
application.
AUTOMATIC PAYROLL DEDUCTION You may invest in the Fund automatically by
transferring money from your paycheck to the Fund by electronic funds transfer.
If you are interested, indicate on your application that you would like to
receive an Automatic Payroll Deduction Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the Fund in
an existing account in the same share class* of the Fund or another Franklin
Templeton fund. Initial sales charges and CDSCs will not apply if you reinvest
your distributions within 365 days. You can also have your distributions
deposited in a bank account, or mailed by check. Deposits to a bank account may
be made by electronic funds transfer.
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
Fund.
*Class B and C shareholders may reinvest their distributions in Class A shares
of any Franklin Templeton money fund.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to buy,
sell or exchange your shares and make certain other changes to your account by
phone.
For accounts with more than one registered owner, telephone privileges also
allow the Fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions. In addition, our telephone exchange privilege allows you to
exchange shares by phone from a fund account requiring two or more signatures
into an identically registered money fund account requiring only one signature
for all transactions. This type of telephone exchange is available as long as
you have telephone exchange privileges on your account.
As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests. Of course,
you can decline telephone purchase, exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton funds
within the same class *, generally without paying any additional sales charges.
If you exchange shares held for less than six months, however, you may be
charged the difference between the initial sales charge of the two funds if the
difference is more than 0.25%. If you exchange shares from a money fund, a sales
charge may apply no matter how long you have held the shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges, including minimum investment amounts. Exchanges also have the same
tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC will
continue to be calculated from the date of your initial investment and will not
be charged at the time of the exchange. The purchase price for determining a
CDSC on exchanged shares will be the price you paid for the original shares. If
you exchange shares subject to a CDSC into a Class A money fund, the time your
shares are held in the money fund will not count towards the CDSC holding
period.
If you exchange your Class B shares for the same class of shares of another
Franklin Templeton fund, the time your shares are held in that fund will count
towards the eight year period for automatic conversion to Class A shares.
Because excessive trading can hurt fund performance, operations and
shareholders, the Fund effective November 1, 2000 reserves the right to revise
or terminate the exchange privilege, limit the amount or number of exchanges,
reject any exchange, or restrict or refuse purchases if (i) the Fund or its
manager believes 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 (please see "Market Timers" on page 28).
*Class Z shareholders of Franklin Mutual Series Fund Inc. may exchange into
Class A without any sales charge. Advisor Class shareholders of another Franklin
Templeton fund also may exchange into Class A without any sales charge. Advisor
Class shareholders who exchange their shares for Class A shares and later decide
they would like to exchange into another fund that offers Advisor Class may do
so.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of a certificate] SELLING SHARES
--------------
You can sell your shares at any time. Please keep in mind that a contingent
deferred sales charge (CDSC) may apply.
SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can be
made over the phone or with a simple letter. Sometimes, however, to protect you
and the Fund we will need written instructions signed by all registered owners,
with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a
signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the Fund
against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with a
check or draft, we may delay sending you the proceeds until your check or draft
has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days after
we receive your request in proper form. We are not able to receive or pay out
cash in the form of currency. Redemption proceeds may be delayed if we have not
yet received your signed account application.
SELLING SHARES
-------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
-------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
-------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
BY MAIL or trust accounts may need to send additional
documents.
Specify the Fund, the account number and the dollar
value or number of shares you wish to sell. If you own
both Class A and B shares, also specify the class of
shares, otherwise we will sell your Class A shares
first. Be sure to include all necessary signatures and
any additional documents, as well as signature
guarantees if required.
A check will be mailed to the name(s) and address on
the account, or otherwise according to your written
instructions.
-------------------------------------------------------------------------
[Insert graphic of As long as your transaction is for $100,000 or
phone] less, you do not hold share certificates and
you have not changed your address by phone
BY PHONE within the last 15 days, you can sell your shares
by phone.
1-800/632-2301
A check will be mailed to the name(s) and address on
the account. Written instructions, with a signature
guarantee, are required to send the check to another
address or to make it payable to another person.
--------------------------------------------------------------------------
[Insert graphic of You can call or write to have redemption
three lightning bolts] proceeds sent to a bank account. See the
policies above for selling shares by mail or
phone.
Before requesting to have redemption proceeds
BY ELECTRONIC FUNDS sent to a bank account, please make sure we
TRANSFER (ACH) have your bank account information on file. If
we do not have this information, you will need to send
written instructions with your bank's name and
address, a voided check or savings account deposit
slip, and a signature guarantee if the bank and Fund
accounts do not have at least one common owner.
If we receive your request in proper form by 1:00 p.m.
Pacific time, proceeds sent by ACH generally will be
available within two to three business days.
--------------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund you
arrows pointing in are considering.
opposite directions]
Call Shareholder Services at the number below
BY EXCHANGE or our automated TeleFACTS system, or send
signed written instructions. See the policies
TeleFACTS(R) above for selling shares by mail or phone.
1-800/247-1753
(around-the-clock If you hold share certificates, you will need
access) to return them to the Fund before your
exchange can be processed.
-------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
----------------
CALCULATING SHARE PRICE The Fund calculates the net asset value per share (NAV)
each business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. Pacific time). Each class's NAV is calculated by dividing
its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the NAV
plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
The Fund's assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value.
Requests to buy and sell shares are processed at the NAV next calculated after
we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250($50 for
employee and UGMA/UTMA accounts) because you sell some of your shares, we may
mail you a notice asking you to bring the account back up to its applicable
minimum investment amount. If you choose not to do so within 30 days, we may
close your account and mail the proceeds to the address of record. You will not
be charged a CDSC if your account is closed for this reason.
STATEMENTS AND REPORTS You will receive quarterly account statements that show
all your account transactions during the quarter. You also will receive written
notification after each transaction affecting your account (except for
distributions and transactions made through automatic investment or withdrawal
programs, which will be reported on your quarterly statement). You also will
receive the Fund's financial reports every six months. To reduce Fund expenses,
we try to identify related shareholders in a household and send only one copy of
the financial reports. If you need additional copies, please call 1-800/DIAL
BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive copies of all notifications and statements
and other information about your account directly from the Fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have an
agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with two or
more owners are registered as "joint tenants with rights of survivorship" (shown
as "Jt Ten" on your account statement). To make any ownership changes to a joint
account, all owners must agree in writing, regardless of the law in your state.
MARKET TIMERS The Fund may restrict or refuse exchanges by Market Timers. You
may be considered a Market Timer if you have (i) requested an exchange out of
any of the Franklin Templeton funds within two weeks of an earlier exchange
request out of any fund, or (ii) exchanged shares out of any of the Franklin
Templeton funds more than twice within a rolling 90 day period, or (iii)
otherwise seem to follow a market timing pattern that may adversely affect the
Fund. Accounts under common ownership or control with an account that is covered
by (i), (ii), or (iii) are also subject to these limits.
Anyone, including the shareholder or the shareholder's agent, who is considered
to be a Market Timer by the Fund, its manager or shareholder services agent,
will be issued a written notice of their status and the Fund's policies.
Identified Market Timers will be required to register with the market timing
desk of Franklin Templeton Investor Services, Inc., and to place all purchase
and exchange trade requests through the desk. Some funds do not allow
investments by Market Timers.
ADDITIONAL POLICIES Please note that the Fund maintains additional policies and
reserves certain rights, including:
o The Fund may restrict or refuse any order to buy shares, including any
purchase under the exchange privilege.
o At any time, the Fund may change its investment minimums or waive or lower
its minimums for certain purchases.
o The Fund may modify or discontinue the exchange privilege on 60 days' notice.
o In unusual circumstances, we may temporarily suspend redemptions, or postpone
the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the Fund reserves the right, in the
case of an emergency, to make payments in securities or other assets of the
Fund, if the payment of cash proceeds by check, wire or electronic funds
transfer would be harmful to existing shareholders.
o To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to the Fund promptly.
DEALER COMPENSATION Qualifying dealers who sell Fund shares may receive sales
commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. from sales charges, distribution and service (12b-1) fees and
its other resources.
CLASS A CLASS B CLASS C
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COMMISSION (%) --- 3.00 2.00
Investment under $100,000 4.00 --- ---
$100,000 but under $250,000 3.25 --- ---
$250,000 but under $500,000 2.25 --- ---
$500,000 but under $1 million 1.85 --- ---
$1 million or more up to 0.75/1 --- ---
12B-1 FEE TO DEALER 0.10 0.15/2 0.65/3
A dealer commission of up to 1% may be paid on Class C NAV purchases. A dealer
commission of up to 0.25% may be paid on Class A NAV purchases by certain trust
companies and bank trust departments, eligible governmental authorities, and
broker-dealers or others on behalf of clients participating in comprehensive fee
programs.
MARKET TIMERS. Please note that for Class A NAV purchases by market timers,
including purchases of $1 million or more, dealers are not eligible to receive
the dealer commission. Dealers, however, may be eligible to receive the 12b-1
fee from the date of purchase.
1. During the first year after purchase, dealers may not be eligible to receive
the 12b-1 fee.
2. Dealers may be eligible to receive up to 0.15% from the date of purchase.
After 8 years, Class B shares convert to Class A shares and dealers may then
receive the 12b-1 fee applicable to Class A.
3. Dealers may be eligible to receive up to 0.15% during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the 13th
month.
[Insert graphic of question mark]QUESTIONS
If you have any questions about the Fund or your account, you can write to us at
P.O. Box 997151, Sacramento, CA 95899-9983. You also can call us at one of the
following numbers. For your protection and to help ensure we provide you with
quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
----------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m.
(Saturday)
Fund Information 1-800/DIAL BEN 5:30 a.m. to 5:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Advisor Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about the Fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and Fund strategies, financial
statements, detailed performance information, portfolio holdings and the
auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the Fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
franklintempleton.com
You also can obtain information about the Fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-202/942-8090) or the EDGAR Database
on the SEC's Internet site at http://www.sec.gov. You can obtain copies of this
information, after paying a duplicating fee, by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102 or by electronic request at the
following E-mail address: [email protected].
Investment Company Act file #811-3395 116 P 09/00
FRANKLIN FEDERAL TAX-FREE INCOME FUND
CLASS A , B & C
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 1, 2000
Insert Franklin Templeton Ben Head
P.O. BOX 997151, SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the Fund's prospectus. The Fund's
prospectus, dated September 1, 2000, which we may amend from time to time,
contains the basic information you should know before investing in the Fund. You
should read this SAI together with the Fund's prospectus.
The audited financial statements and auditor's report in the Fund's Annual
Report to Shareholders, for the fiscal year ended April 30, 2000, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goal and Strategies 2
Officers and Directors 6
Management and Other Services 9
Portfolio Transactions 10
Distributions and Taxes 11
Organization, Voting Rights and
Principal Holders 13
Buying and Selling Shares 13
Pricing Shares 19
The Underwriter 19
Performance 21
Miscellaneous Information 23
Description of Ratings 24
------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
------------------------------------------------------------------------------
GOAL AND STRATEGIES
------------------------------------------------------------------------------
The Fund's investment goal is to provide investors with as high a level of
income exempt from federal income taxes as is consistent with prudent investment
management and the preservation of shareholders' capital. This goal is
fundamental, which means that it may not be changed without shareholder
approval. Of course, there is no assurance that the Fund will meet its goal.
As a fundamental policy, the Fund normally invests at least 80% of its total
assets in municipal securities that pay interest free from federal income taxes
including the federal alternative minimum tax.
The Fund tries to invest all of its assets in municipal securities whose
interest is free from regular federal income taxes. The issuer's bond counsel
generally gives the issuer an opinion on the tax-exempt status of a municipal
security when the security is issued.
Below is a description of various types of municipal and other securities that
the Fund may buy. Other types of municipal securities may become available that
are similar to those described below and in which the Fund also may invest, if
consistent with its investment goal and policies.
MUNICIPAL BONDS have two principal classifications: general obligation bonds
and revenue bonds.
GENERAL OBLIGATION BONDS. Issuers of general obligation bonds include states,
counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads. The basic security
behind general obligation bonds is the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. The taxes that can
be levied for the payment of debt service may be limited or unlimited as to the
rate or amount of special assessments.
REVENUE BONDS. The full faith, credit and taxing power of the issuer do not
secure revenue bonds. Instead, the principal security for a revenue bond
generally is the net revenue derived from a particular facility, group of
facilities, or, in some cases, the proceeds of a special excise tax or other
specific revenue source. Revenue bonds are issued to finance a wide variety of
capital projects, including: electric, gas, water and sewer systems; highways,
bridges and tunnels; port and airport facilities; colleges and universities; and
hospitals. The principal security behind these bonds may vary. For example,
housing finance authorities have a wide range of security, including partially
or fully insured mortgages, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. Many bonds
provide additional security in the form of a debt service reserve fund that may
be used to make principal and interest payments. Some authorities have further
security in the form of state assurances (although without obligation) to make
up deficiencies in the debt service reserve fund.
ANTICIPATION NOTES are issued to provide interim financing of various municipal
needs in anticipation of the receipt of other sources of money for repayment of
the notes:
BOND ANTICIPATION NOTES are normally issued to provide interim financing until a
long-term bond financing can be arranged which provides the money for the
repayment of the notes.
REVENUE ANTICIPATION NOTES are issued in expectation of the receipt of revenue
sources, other than tax receipts, such as federal revenues available under the
Federal Revenue Sharing Program.
TAX ANTICIPATION NOTES are issued to finance the short-term working capital
needs of municipalities in anticipation of the receipt of various seasonal tax
revenues that are used to repay the notes. They are usually general obligations
of the issuer and are secured by the taxing power for the payment of principal
and interest.
CALLABLE BONDS The Fund may invest in callable bonds, which allow the issuer to
repay some or all of the bonds ahead of schedule. If a bond is called, the Fund
will receive the principal amount, the accrued interest, and may receive a small
additional payment as a call premium. The manager may sell a callable bond
before its call date, if it believes the bond is at its maximum premium
potential. When pricing callable bonds, the call feature is factored into the
price of the bonds and may impact the Fund's net asset value.
An issuer is more likely to call its bonds when interest rates are below the
rate at which the original bond was issued, because the issuer can issue new
bonds with lower interest payments. If a bond is called, the Fund may have to
replace it with a lower-yielding security. A call of some or all of these
securities may lower the Fund's income, its yield and its distributions to
shareholders. If the Fund originally paid a premium for the bond because it had
appreciated in value from its original issue price, the Fund also may not be
able to recover the full amount it paid for the bond. One way for the Fund to
protect itself from call risk is to buy bonds with call protection. Call
protection is an assurance that the bond will not be called for a specific time
period, typically five to 10 years from when the bond is issued.
COMMERCIAL PAPER is a promissory note issued by a corporation to finance its
short-term credit needs. The Fund may invest in taxable commercial paper only
for temporary defensive purposes.
CONVERTIBLE AND STEP COUPON BONDS The Fund may invest a portion of its assets in
convertible and step coupon bonds. Convertible bonds 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 when the security is issued.
ESCROW-SECURED OR DEFEASED BONDS are created when an issuer uses the proceeds
from a new bond issue to buy high grade, interest bearing debt securities,
generally direct obligations of the U.S. government in order to redeem (or
pre-refund), before maturity, an outstanding bond issue that is not immediately
callable. These securities are then deposited in an irrevocable escrow account
held by a trustee bank to secure all future payments of principal and interest
on the pre-refunded bond (or "defeased" bond). Escrow-secured bonds often
receive a triple A or equivalent rating. Because pre-refunded bonds still bear
the same interest rate, but have a very high credit quality, their price may
increase. However, as the original bond approaches its call date, the bond's
price will fall to its call price. The Fund's manager attempts to manage the
pre-refunded bonds in its portfolio so that it sells them before this decline in
price occurs.
MUNICIPAL LEASE OBLIGATIONS are created to finance the purchase of property for
public use. The property is then leased to the state or a local government and
these leases secure the Municipal lease obligations. The lease payments are used
to pay the interest on the obligations. However, Municipal lease obligations
differ from other municipal securities because each year the lessee's governing
body must appropriate (set aside) the money to make the lease payments. If the
money is not appropriated, the issuer or the lessee can end the lease without
penalty. If the lease is cancelled, investors who own the municipal lease
obligations may not be paid.
The board of directors reviews the Fund's municipal lease obligations to try to
assure that they are liquid investments based on various factors reviewed by the
Fund's manager.
Since annual appropriations are required to make lease payments, municipal lease
obligations generally are not subject to constitutional limitations on the
issuance of debt, and may allow an issuer to increase government liabilities
beyond constitutional debt limits. When faced with increasingly tight budgets,
local governments have more discretion to curtail lease payments under a
municipal lease obligation than they do to curtail payments on other municipal
securities. If not enough money is appropriated to make the lease payments, the
leased property may be repossessed as security for holders of the municipal
lease obligations. If this happens, there is no assurance that the property's
private sector or re-leasing value will be enough to make all outstanding
payments on the municipal lease obligations or that the payments will continue
to be tax-free.
While cancellation risk is inherent to municipal lease obligations, the Fund
believes that this risk may be reduced, although not eliminated, by its policies
on the quality of municipal lease securities in which it may invest.
STRIPPED MUNICIPAL SECURITIES Municipal securities may be sold in "stripped"
form. Stripped municipal securities represent separate ownership of principal
and interest payments on municipal securities.
TAX-EXEMPT COMMERCIAL PAPER typically represents a short-term obligation (270
days or less) issued by a municipality to meet working capital needs.
TAX-EXEMPT INDUSTRIAL DEVELOPMENT REVENUE BONDS are issued by or on behalf of
public authorities to finance various privately operated facilities which are
expected to benefit the municipality and its residents, such as business,
manufacturing, housing, sports and pollution control, as well as public
facilities such as airports, mass transit systems, ports and parking. The
payment of principal and interest is solely dependent on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of the
facility or other property as security for payment.
U.S. GOVERNMENT SECURITIES are issued by the U.S. Treasury or by agencies and
instrumentalities of the U.S. government and are backed by the full faith and
credit of the U.S. government. They include Treasury bills, notes and bonds.
VARIABLE OR FLOATING RATE SECURITIES The Fund may invest in variable or floating
rate securities, including variable rate demand notes, which have interest rates
that change either at specific intervals (variable rate), from daily up to
monthly, or whenever a benchmark rate changes (floating rate). The interest rate
adjustments are designed to help stabilize the security's price. While this
feature helps protect against a decline in the security's market price when
interest rates rise, it lowers the Fund's income when interest rates fall. Of
course, the Fund's income from its variable rate investments also may increase
if interest rates rise.
Variable or floating rate securities may include a demand feature, which may be
unconditional. The demand feature allows the holder to demand prepayment of the
principal amount before maturity, generally on one to 30 days' notice. The
holder receives the principal amount plus any accrued interest either from the
issuer or by drawing on a bank letter of credit, a guarantee or insurance issued
with respect to the security. The Fund generally uses variable or floating rate
securities as short-term investments while waiting for long-term investment
opportunities.
ZERO-COUPON AND DELAYED INTEREST SECURITIES The Fund may invest in zero-coupon
and delayed interest securities. Zero-coupon securities make no periodic
interest payments, but are sold at a deep discount from their face value. The
buyer recognizes a rate of return determined by the gradual appreciation of the
security, which is redeemed at face value on a specified maturity date. The
discount varies depending on the time remaining until maturity, as well as
market interest rates, liquidity of the security, and the issuer's perceived
credit quality. The discount, in the absence of financial difficulties of the
issuer, typically decreases as the final maturity date approaches. If the issuer
defaults, the Fund may not receive any return on its investment.
Because zero-coupon securities bear no interest and compound semiannually at the
rate fixed at the time of issuance, their value generally is more volatile than
the value of other fixed-income securities. Since zero-coupon bondholders do not
receive interest payments, when interest rates rise, zero-coupon securities fall
more dramatically in value than bonds paying interest on a current basis. When
interest rates fall, zero-coupon securities rise more rapidly in value because
the bonds reflect a fixed rate of return.
An investment in zero-coupon and delayed interest securities may cause the Fund
to recognize income and make distributions to shareholders before it receives
any cash payments on its investment. To generate cash to satisfy distribution
requirements, the Fund may have to sell 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.
In addition to standard purchases and sales of various municipal securities, the
Fund may also engage in other strategies, which are described below. Should
other strategies, not specifically described below, become available or
attractive, the manager may engage in them so long as they are consistent with
the Fund's goals and objectives.
CREDIT QUALITY All things being equal, the lower a security's credit quality,
the higher the risk and the higher the yield the security generally must pay as
compensation to investors for the higher risk.
A security's credit quality depends on the issuer's ability to pay interest on
the security and, ultimately, to repay the principal. Independent rating
agencies, such as Fitch Investors Service Inc. (Fitch), Moody's Investors
Service, Inc. (Moody's), and Standard & Poor's Ratings Group (S&P(R)), often
rate municipal securities based on their analysis of the issuer's credit
quality. Most rating agencies use a descending alphabet scale to rate long-term
securities, and a descending numerical scale to rate short-term securities.
Securities in the top four ratings are "investment grade," although securities
in the fourth highest rating may have some speculative features. These ratings
are described at the end of this SAI under "Description of Ratings."
An insurance company, bank or other foreign or domestic entity may provide
credit support for a municipal security and enhance its credit quality. For
example, some municipal securities are insured, which means they are covered by
an insurance policy that guarantees the timely payment of principal and
interest. Other municipal securities may be backed by letters of credit,
guarantees, or escrow or trust accounts that contain securities backed by the
full faith and credit of the U.S. government to secure the payment of principal
and interest.
In addition to considering ratings in its selection of the Fund's portfolio
securities, the manager may consider, among other things, information about the
financial history and condition of the issuer, revenue and expense prospects
and, in the case of revenue bonds, the financial history and condition of the
source of revenue to service the bonds. Securities that depend on the credit of
the U.S. government are regarded as having a triple A or equivalent rating.
As discussed in the prospectus, the Fund has limitations on the credit quality
of the securities it may buy. These limitations generally are applied when the
Fund makes an investment so that the Fund is not required to sell a security
because of a later change in circumstances.
DIVERSIFICATION The Fund is a diversified fund. As a fundamental policy, the
Fund will not buy a security if, with respect to 75% of its total assets, more
than 5% would be in the securities of any single issuer. This limitation does
not apply to investments issued or guaranteed by the U.S. government or its
instrumentalities. For this purpose, each political subdivision, agency, or
instrumentality, each multi-state agency of which a state is a member, and each
public authority that issues private activity bonds on behalf of a private
entity, is considered a separate issuer. Escrow-secured or defeased bonds are
not generally considered an obligation of the original municipality when
determining diversification. For securities backed only by the assets or
revenues of a particular instrumentality, facility or subdivision, the entity is
considered the issuer.
The Fund intends to meet certain diversification requirements for tax purposes.
Generally, to meet federal tax requirements at the close of each quarter, the
Fund may not invest more than 25% of its total assets in any one issuer and,
with respect to 50% of total assets, may not invest more than 5% of its total
assets in any one issuer. These limitations do not apply to U.S. government
securities and may be revised if applicable federal income tax requirements are
revised.
ILLIQUID INVESTMENTS The Fund may invest up to 10% of its net assets in illiquid
securities. Illiquid securities generally are 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.
MATURITY Municipal securities are issued with a specific maturity date - the
date when the issuer must repay the amount borrowed. Maturities typically range
from the less than one-year (short term) to 30 years (long term). In general,
securities with longer maturities are more sensitive to price changes, although
they may provide higher yields. The Fund has no restrictions on the maturity of
the securities it may buy or on its average portfolio maturity.
PORTFOLIO TURNOVER The frequency of portfolio transactions, usually referred to
as the portfolio turnover rate, varies for the Fund from year to year, depending
on market conditions. Short-term trading increases portfolio turnover and may
increase costs. However, the execution costs for municipal securities are
substantially less than for equivalent dollar values of equity securities.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unusual or unfavorable for investors, the manager may invest up to 100% of
the Fund's assets in a temporary defensive manner or hold a substantial portion
of its portfolio in cash, cash equivalents or other high quality short-term
investments. Unfavorable market or economic conditions may include excessive
volatility or a prolonged general decline in the securities markets or in the
securities in which the Fund normally invests or in the economies of the states
or territories where the fund invests.
Temporary defensive investments may include securities that pay taxable
interest, including (i) high quality commercial paper; (ii) securities issued by
or guaranteed by the full faith and credit of the U.S. government. The manager
also may invest in these types of securities or hold cash when securities
meeting the Fund's investment criteria are unavailable or to maintain liquidity.
WHEN-ISSUED TRANSACTIONS Municipal securities are frequently offered on a
"when-issued" basis. When so offered, the price, which is generally expressed in
yield terms, is fixed at the time the commitment to buy is made, but delivery
and payment take place at a later date. During the time between purchase and
settlement, no payment is made by the Fund to the issuer and no interest accrues
to the Fund. If the other party to the transaction fails to deliver or pay for
the security, the Fund could miss a favorable price or yield opportunity, or
could experience a loss.
When the Fund makes the commitment to buy a municipal security on a when-issued
basis, it records the transaction and includes the value of the security in the
calculation of its net asset value. The Fund does not believe that its net asset
value or income will be negatively affected by its purchase of municipal
securities on a when-issued basis. The Fund will not engage in when-issued
transactions for investment leverage purposes.
Although the Fund generally will buy municipal securities on a when-issued basis
with the intention of acquiring the securities, it may sell the securities
before the settlement date if it is considered advisable. When the Fund is the
buyer, it will set aside on its books cash or liquid securities, with an
aggregate value equal to the amount of its purchase commitments, until payment
is made. If assets of the Fund are held in cash pending the settlement of a
purchase of securities, the Fund will not earn income on those assets.
INVESTMENT RESTRICTIONS The Fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the Fund's outstanding shares or (ii) 67% or
more of the Fund's shares present at a shareholder meeting if more than 50% of
the Fund's outstanding shares are represented at the meeting in person or by
proxy, whichever is less.
The Fund may not:
1. 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 advisor, own beneficially more than
one-half 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 Franklin Templeton
Investments 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)
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.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the Fund owns, the Fund may receive stock, real estate, or other
investments that the Fund would not, or could not, buy. If this happens, the
Fund intends to sell such investments as soon as practicable while trying to
maximize the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the Fund makes an investment. In most cases, the Fund is
not required to sell a security because circumstances change and the security no
longer meets one or more of the Fund's policies or restrictions. If a percentage
restriction or limitation is met at the time of investment, a later increase or
decrease in the percentage due to a change in the value or liquidity of
portfolio securities will not be considered a violation of the restriction or
limitation.
OFFICERS AND DIRECTORS
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The Fund has a board of directors. The board is responsible for the overall
management of the Fund, including general supervision and review of the Fund's
investment activities. The board, in turn, elects the officers of the Fund who
are responsible for administering the Fund's day-to-day operations. The board
also monitors the Fund to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the Fund, and principal occupations during the
past five years are shown below.
Frank H. Abbott, III (79)
1045 Sansome Street, San Francisco, CA 94111
DIRECTOR
President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 28 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) (until 1996) and Vacu-Dry Co. (food processing)
(until 1996).
Harris J. Ashton (68)
191 Clapboard Ridge Road, Greenwich, CT 06830
DIRECTOR
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 47 of the
investment companies in Franklin Templeton Investments; and FORMERLY, President,
Chief Executive Officer and Chairman of the Board, General Host Corporation
(nursery and craft centers) (until 1998).
*Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND DIRECTOR
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Executive Vice President and Director, Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.;
Director, Franklin Investment Advisory Services, Inc., Franklin/Templeton
Investor Services, Inc. and Franklin Templeton Services, Inc.; and officer
and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 51 of the investment
companies in Franklin Templeton Investments.
Robert F. Carlson (72)
2120 Lambeth Way, Carmichael, CA 95608
DIRECTOR
Vice President and past President, Board of Administration, California Public
Employees Retirement Systems (CALPERS); director or trustee, as the case may be,
of 11 of the investment companies in Franklin Templeton Investments; and
FORMERLY, member and Chairman of the Board, Sutter Community Hospitals, member,
Corporate Board, Blue Shield of California, and Chief Counsel, California
Department of Transportation.
S. Joseph Fortunato (68)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
DIRECTOR
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or trustee,
as the case may be, of 49 of the investment companies in Franklin Templeton
Investments.
*Charles B. Johnson (67)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND DIRECTOR
Chairman of the Board, Chief Executive Officer, Member - Office of the
Chairman and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Investment Advisory Services, Inc.; Vice President,
Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton Investor
Services, Inc. and Franklin Templeton Services, Inc.; officer and/or director
or trustee, as the case may be, of most of the other subsidiaries of Franklin
Resources, Inc. and of 48 of the investment companies in Franklin Templeton
Investments.
*Rupert H. Johnson, Jr. (60)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND DIRECTOR
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Executive Vice President and Director, Franklin Templeton
Distributors, Inc.; Director, Franklin Advisers, Inc., Franklin Investment
Advisory Services, Inc. and Franklin/Templeton Investor Services, Inc.;
Senior Vice President, Franklin Advisory Services, LLC; and officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 51 of the investment companies in Franklin
Templeton Investments.
Frank W.T. LaHaye (71)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
DIRECTOR
Chairman, Peregrine Venture Management Company (venture capital); Director, The
California Center for Land Recycling (redevelopment); director or trustee, as
the case may be, of 28 of the investment companies in Franklin Templeton
Investments; and FORMERLY, General Partner, Miller & LaHaye and Peregrine
Associates, the general partners of Peregrine Venture funds.
Gordon S. Macklin (72)
8212 Burning Tree Road, Bethesda, MD 20817
DIRECTOR
Director, Martek Biosciences Corporation, WorldCom, Inc. (communications
services), MedImmune, Inc. (biotechnology), Overstock.com (internet
services), White Mountains Insurance Group, Ltd. (holding company) and
Spacehab, Inc. (aerospace services); director or trustee, as the case may be,
of 47 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Chairman, White River Corporation (financial services) (until 1998)
and Hambrecht & Quist Group (investment banking) (until 1992), and President,
National Association of Securities Dealers, Inc. (until 1987).
Sheila Amoroso (40)
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 Franklin Templeton Investments.
Rafael R. Costas, Jr. (35)
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 Franklin Templeton Investments.
Martin L. Flanagan (40)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
President, Member - Office of the President, Chief Financial Officer and
Chief Operating Officer, Franklin Resources, Inc.; Executive Vice President,
and Director, Franklin/Templeton Investor Services, Inc.; President and Chief
Financial Officer, Franklin Mutual Advisers, LLC; Executive Vice President,
Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating Officer and Director, Templeton Investment
Counsel, Inc.; Executive Vice President, Franklin Advisers, Inc. and Franklin
Investment Advisory Services, Inc.; Chief Financial Officer, Franklin
Advisory Services, LLC; Chairman and Director, Franklin Templeton Services,
Inc.; officer and/or director of some of the other subsidiaries of Franklin
Resources, Inc.; and officer and/or director or trustee, as the case may be,
of 51 of the investment companies in Franklin Templeton Investments.
David P. Goss (53)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Counsel, Franklin Resources, Inc; President, Chief Executive Officer and
Director, Franklin Select Realty Trust, Property Resources, Inc., Property
Resources Equity Trust, Franklin Real Estate Management, Inc. and Franklin
Properties, Inc.; officer and director of some of the other subsidiaries of
Franklin Resources, Inc.; officer of 52 of the investment companies in
Franklin Templeton Investments; and FORMERLY, President, Chief Executive
Officer and Director, Franklin Real Estate Income Fund and Franklin Advantage
Real Estate Income Fund (until 1996).
Barbara J. Green (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior
Vice President, Templeton Worldwide, Inc. and Templeton Global Investors,
Inc.; officer of 52 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Deputy Director, Division of Investment
Management, Executive Assistant and Senior Advisor to the Chairman, Counselor
to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and
Exchange Commission (1986-1995), Attorney, Rogers & Wells (until 1986), and
Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979).
Edward V. McVey (63)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President, Franklin Templeton Distributors, Inc.; officer of one
of the other subsidiaries of Franklin Resources, Inc. and of 29 of the
investment companies in Franklin Templeton Investments.
Kimberley Monasterio (36)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 33
of the investment companies in Franklin Templeton Investments.
Murray L. Simpson (63)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND SECRETARY
Executive Vice President and General Counsel, Franklin Resources, Inc.;
officer and/or director of some of the subsidiaries of Franklin Resources,
Inc.; officer of 52 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Chief Executive Officer and Managing Director,
Templeton Franklin Investment Services (Asia) Limited (until January 2000)
and Director, Templeton Asset Management Ltd. (until 1999).
Thomas Walsh (38)
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 Franklin Templeton Investments.
R. Martin Wiskemann (72)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and Director, Franklin Advisers, Inc.; Senior Vice
President, Franklin Management, Inc.; and officer and/or director or trustee,
as the case may be, of 15 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Vice President and Director, ILA Financial
Services, Inc. (until 1998).
*This board member is considered an "interested person" under federal securities
laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
The Fund pays noninterested board members $1,100 per month plus $1,050 per
meeting attended. Board members who serve on the audit committee of the Fund and
other funds in Franklin Templeton Investments receive a flat fee of $2,000 per
committee meeting attended, a portion of which is allocated to the Fund. Members
of a committee are not compensated for any committee meeting held on the day of
a board meeting. Noninterested board members also may serve as directors or
trustees of other funds in Franklin Templeton Investments and may receive fees
from these funds for their services. The fees payable to noninterested board
members by the Fund are subject to reductions resulting from fee caps limiting
the amount of fees payable to board members who serve on other boards within
Franklin Templeton Investments. The following table provides the total fees paid
to noninterested board members by the Fund and by Franklin Templeton
Investments.
NUMBER OF BOARDS IN
TOTAL FEES TOTAL FEES RECEIVED FRANKLIN TEMPLETON
RECEIVED FROM FRANKLIN INVESTMENTS ON
FROM THE TRUST/1 TEMPLETON WHICH EACH SERVES/3
NAME ($) INVESTMENTS/2 ($) ($)
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Frank H. Abbott III 19,197 156,060 28
Harris J. Ashton 19,706 363,165 47
Robert F. Carlson 25,930 89,690 11
S. Joseph Fortunato 18,357 363,238 49
Frank W.T. LaHaye 18,147 156,060 28
Gordon S. Macklin 19,706 363,165 47
1. For the fiscal year ended April 30, 2000.
2. For the calendar year ended December 31, 1999.
3. We base the number of boards on the number of registered investment companies
in Franklin Templeton Investments. This number does not include the total number
of series or funds within each investment company for which the board members
are responsible. Franklin Templeton Investments currently includes 52 registered
investment companies, with approximately 157 U.S. based funds or series.
Noninterested board members are reimbursed for expenses incurred in connection
with attending board meetings, paid pro rata by each fund in Franklin Templeton
Investments for which they serve as director or trustee. No officer or board
member received any other compensation, including pension or retirement
benefits, directly or indirectly from the Fund or other funds in Franklin
Templeton Investments. Certain officers or board members who are shareholders of
Franklin Resources, Inc. may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in Franklin Templeton Investments, as is
consistent with their individual financial goals. In February 1998, this policy
was formalized through adoption of a requirement that each board member invest
one-third of fees received for serving as a director or trustee of a Templeton
fund in shares of one or more Templeton funds and one-third of fees received for
serving as a director or trustee of a Franklin fund in shares of one or more
Franklin funds until the value of such investments equals or exceeds five times
the annual fees paid such board member. Investments in the name of family
members or entities controlled by a board member constitute fund holdings of
such board member for purposes of this policy, and a three year phase-in period
applies to such investment requirements for newly elected board members. In
implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED The Fund's manager is Franklin Advisers, Inc.
The manager is a wholly owned subsidiary of Franklin Resources, Inc.
(Resources), a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson,
Jr. are the principal shareholders of Resources.
The manager provides investment research and portfolio management services, and
selects the securities for the Fund to buy, hold or sell. The manager's
extensive research activities include, as appropriate, traveling to meet with
issuers and to review project sites. The manager also selects the brokers who
execute the Fund's portfolio transactions. The manager provides periodic reports
to the board, which reviews and supervises the manager's investment activities.
To protect the Fund, the manager and its officers, directors and employees are
covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of the
other funds it manages, or for its own account, that may differ from action
taken by the manager on behalf of the Fund. Similarly, with respect to the Fund,
the manager is not obligated to recommend, buy or sell, or to refrain from
recommending, buying or selling any security that the manager and access
persons, as defined by applicable federal securities laws, may buy or sell for
its or their own account or for the accounts of any other fund. The manager is
not obligated to refrain from investing in securities held by the Fund or other
funds it manages.
The Fund, its manager and principal underwriter have each adopted a code of
ethics, as required by federal securities laws. Under the code of ethics,
employees who are designated as access persons may engage in personal securities
transactions, including transactions involving securities that are being
considered for the Fund or that are currently held by the Fund, subject to
certain general restrictions and procedures. The personal securities
transactions of access persons of the Fund, its manager and principal
underwriter will be governed by the code of ethics. The code of ethics is on
file with, and available from, the U.S. Securities and Exchange Commission
(SEC).
MANAGEMENT FEES The Fund pays the manager a fee equal to a monthly rate of:
o 5/96 of 1% of the value of net assets up to and including $100 million;
o 1/24 of 1% of the value of net assets in excess of $100 million up to
$250 million;
o 9/240 of 1% of the value of net assets in excess of $250 million up to
$10 billion;
o 11/300 of 1% of the value of net assets in excess of $10 billion up to
$12.5 billion;
o 7/200 of 1% of the value of net assets in excess of $12.5 billion up to
$15 billion;
o 1/30 of 1% of the value of net assets in excess of $15 billion up to
$17.5 billion;
o 19/600 of 1% of the value of net assets in excess of $17.5 billion up
to $20 billion; and
o 3/100 of 1% of the value of net assets in excess of $20 billion.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of the
Fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended April 30, the Fund paid the following
management fees:
MANAGEMENT FEES PAID ($)
-------------------------------------------------
2000 31,729,190
1999 33,328,560
1998 32,368,130
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the Fund. FT Services is wholly owned by Resources
and is an affiliate of the Fund's manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the Fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended April 30, the manager paid FT Services
the following administration fees:
ADMINISTRATION FEES PAID ($)
-------------------------------------------------
2000 5,843,074
1999 6,062,749
1998 5,913,433
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is the Fund's shareholder servicing agent and acts as
the Fund's transfer agent and dividend-paying agent. Investor Services is
located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please send all
correspondence to Investor Services to P.O. Box 997151, Sacramento, CA
95899-9983.
For its services, Investor Services receives a fixed fee per account. The Fund
also will reimburse Investor Services for certain out-of-pocket expenses, which
may include payments by Investor Services to entities, including affiliated
entities, that provide sub-shareholder services, recordkeeping and/or transfer
agency services to beneficial owners of the Fund. The amount of reimbursements
for these services per benefit plan participant Fund account per year will not
exceed the per account fee payable by the Fund to Investor Services in
connection with maintaining shareholder accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the Fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA 94105,
is the Fund's independent auditor. The auditor gives an opinion on the financial
statements included in the Fund's Annual Report to Shareholders and reviews the
Fund's registration statement filed with the SEC.
PORTFOLIO TRANSACTIONS
------------------------------------------------------------------------------
Since most purchases by the Fund are principal transactions at net prices, the
Fund incurs little or no brokerage costs. The Fund deals directly with the
selling or buying principal or market maker without incurring charges for the
services of a broker on its behalf, unless it is determined that a better price
or execution may be obtained by using the services of a broker. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask prices. As a general rule, the Fund does not buy
securities in underwritings where it is given no choice, or only limited choice,
in the designation of dealers to receive the commission. The Fund seeks to
obtain prompt execution of orders at the most favorable net price. Transactions
may be directed to dealers in return for research and statistical information,
as well as for special services provided by the dealers in the execution of
orders.
It is not possible to place a dollar value on the special executions or on the
research services the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions to obtain additional
research services allows the manager to supplement its own research and analysis
activities and to receive the views and information of individuals and research
staffs of other securities firms. As long as it is lawful and appropriate to do
so, the manager and its affiliates may use this research and data in their
investment advisory capacities with other clients. If the Fund's officers are
satisfied that the best execution is obtained, the sale of Fund shares, as well
as shares of other funds in Franklin Templeton Investments, also may be
considered a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by the manager are considered at or about the
same time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions may improve execution and reduce transaction costs to the
Fund.
As of April 30, 2000, the Fund did not own securities of its regular
broker-dealers.
DISTRIBUTIONS AND TAXES
------------------------------------------------------------------------------
The Fund calculates dividends and capital gains the same way for each class. The
amount of any income dividends per share will differ, however, generally due to
the difference in the distribution and service (Rule 12b-1) fees of each class.
Distributions are subject to approval by the board. The Fund does not pay
"interest" or guarantee any fixed rate of return on an investment in its shares.
The Fund intends to pay a dividend at least monthly representing its net
investment income. Capital gains, if any, may be distributed annually. The
amount of these distributions will vary and there is no guarantee the Fund will
pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the Fund's distributions will vary. Please keep in mind that if
you invest in the Fund shortly before the record date of a distribution, any
distribution will lower the value of the Fund's shares by the amount of the
distribution. If you invest in the Fund shortly before the Fund deducts a
capital gains distribution from its net asset value, you will receive some of
your investment back in the form of a taxable distribution. If you would like
information on upcoming record dates for the Fund's distributions, please call
1-800/DIAL BEN(R).
DISTRIBUTIONS OF NET INVESTMENT INCOME The Fund receives income generally in the
form of interest on its investments. This income, less expenses incurred in the
operation of the Fund, constitutes the Fund's net investment income from which
dividends may be paid to you.
By meeting certain requirements of the Internal Revenue Code (the Code), the
Fund has qualified and continues to qualify to pay exempt-interest dividends to
you. These dividends are derived from interest income exempt from regular
federal income tax, and are not subject to regular federal income tax when they
are distributed to you. In addition, to the extent that exempt-interest
dividends are derived from interest on obligations of a state or its political
subdivisions, or from interest on qualifying U.S. territorial obligations
(including qualifying obligations of Puerto Rico, the U.S. Virgin Islands or
Guam), they also may be exempt from that state's personal income taxes. Most
states generally do not grant tax-free treatment to interest on state and
municipal securities of other states.
The Fund may earn taxable income from many sources, including on any temporary
investments, the discount from stripped obligations or their coupons, income
from securities loans or other taxable transactions, or ordinary income derived
from the sale of market discount bonds. Any distributions by the Fund from such
income will be taxable to you as ordinary income, whether you receive them in
cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The Fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in the Fund. Any net capital gains realized by the Fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, to reduce or eliminate excise or income taxes on the Fund.
Beginning in the year 2001 for shareholders in the 15% federal income tax
bracket (or in the year 2006 for shareholders in the 28% or higher bracket),
capital gain distributions from the Fund's sale of securities held for more than
five years may be subject to a reduced tax rate.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The Fund will inform you of
the amount of your ordinary income dividends and capital gain distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year, including the
portion of the distributions that on average comprise taxable income or interest
income that is a tax preference item under the alternative minimum tax. If you
have not held Fund shares for a full year, the Fund may designate and distribute
to you, as taxable, tax-exempt or tax preference income, a percentage of income
that is not equal to the actual amount of such income earned during the period
of your investment in the Fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The Fund has elected to
be treated as a regulated investment company under Subchapter M of the Code. The
Fund has qualified as a regulated investment company for its most recent fiscal
year, and intends to continue to qualify during the current fiscal year. As a
regulated investment company, the Fund generally pays no federal income tax on
the income and gains it distributes to you. The board reserves the right not to
maintain the qualification of the Fund as a regulated investment company if it
determines such course of action to be beneficial to shareholders. In such case,
the Fund will be subject to federal, and possibly state, corporate taxes on its
taxable income and gains, and distributions to you will be taxed as ordinary
dividend income to the extent of the Fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Code
requires the Fund to distribute to you by December 31 of each year, at a
minimum, the following amounts: 98% of its taxable ordinary income earned during
the calendar year; 98% of its capital gain net income earned during the twelve
month period ending October 31; and 100% of any undistributed amounts from the
prior year. The Fund intends to declare and pay these distributions in December
(or to pay them in January, in which case you must treat them as received in
December) but can give no assurances that its distributions will be sufficient
to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions (including redemptions in kind) and
exchanges of Fund shares are taxable transactions for federal and state income
tax purposes. If you redeem your Fund shares, or exchange your Fund shares for
shares of a different Franklin Templeton fund, the IRS will require that you
report any gain or loss on your redemption or exchange. If you hold your shares
as a capital asset, the gain or loss that you realize will be capital gain or
loss and will be long-term or short-term, generally depending on how long you
hold your shares.
Beginning in the year 2001 for shareholders in the 15% federal income tax
bracket (or in the year 2006 for shareholders in the 28% or higher bracket),
gain from the sale of Fund shares held for more than five years may be subject
to a reduced rate of tax.
Any loss incurred on the redemption or exchange of shares held for six months or
less will be disallowed to the extent of any exempt-interest dividends
distributed to you with respect to your Fund shares and any remaining loss will
be treated as a long-term capital loss to the extent of any long-term capital
gains distributed to you by the Fund on those shares. All or a portion of any
loss that you realize upon the redemption of your Fund shares will be disallowed
to the extent that you buy other shares in the Fund (through reinvestment of
dividends or otherwise) within 30 days before or after your share redemption.
Any loss disallowed under these rules will be added to your tax basis in the new
shares you buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in the Fund, and then
reinvest the sales proceeds in the Fund or in another Franklin Templeton fund
within 90 days of buying the original shares, the sales charge that would
otherwise apply to your reinvestment may be reduced or eliminated. The IRS will
require you to report any gain or loss on the redemption of your original shares
in the Fund. In doing so, all or a portion of the sales charge that you paid for
your original shares in the Fund will be excluded from your tax basis in the
shares sold (for the purpose of determining gain or loss upon the sale of such
shares). The portion of the sales charge excluded will equal the amount that the
sales charge is reduced on your reinvestment. Any portion of the sales charge
excluded from your tax basis in the shares sold will be added to the tax basis
of the shares you acquire from your reinvestment.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because the Fund's income is
derived primarily from interest rather than dividends, none of its distributions
will be eligible for the corporate dividends-received deduction.
INVESTMENT IN COMPLEX SECURITIES The Fund may invest in complex securities,
including stripped municipal securities, zero coupon and delayed interest
securities, and convertible and step coupon bonds. These investments may be
subject to special tax rules that could accelerate the recognition of income to
the Fund (possibly causing the Fund to sell securities to raise the cash for
necessary distributions). These rules may affect the amount, timing or character
of the income distributed to you by the Fund.
TREATMENT OF PRIVATE ACTIVITY BOND INTEREST Interest on certain private activity
bonds, while exempt from regular federal income tax, is a preference item for
taxpayers when determining their alternative minimum tax under the Code and
under the income tax provisions of several states. Private activity bond
interest could subject you to or increase your liability under federal and state
alternative minimum taxes, depending on your individual or corporate tax
position. Persons who are defined in the Code as substantial users (or persons
related to such users) of facilities financed by private activity bonds should
consult with their tax advisors before buying Fund shares.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
------------------------------------------------------------------------------
The Fund is an open-end management investment company, commonly called a mutual
fund. The Fund was organized as a California corporation on January 7, 1982, and
is registered with the SEC.
The Fund currently offers three classes of shares, Class A, Class B, and Class
C. The Fund began offering Class B shares on January 1, 1999. The Fund may offer
additional classes of shares in the future. The full title of each class is:
o Franklin Federal Tax-Free Income Fund, Franklin Federal Tax-Free Income
Fund Series, Franklin Federal Tax-Free Income Fund - Class A
o Franklin Federal Tax-Free Income Fund, Franklin Federal Tax-Free Income
Fund Series, Franklin Federal Tax-Free Income Fund - Class B
o Franklin Federal Tax-Free Income Fund, Franklin Federal Tax-Free Income
Fund Series, Franklin Federal Tax-Free Income Fund - Class C
Shares of each class represent proportionate interests in the Fund's assets. On
matters that affect the Fund as a whole, each class has the same voting and
other rights and preferences as any other class. On matters that affect only one
class, only shareholders of that class may vote. Each class votes separately on
matters affecting only that class, or expressly required to be voted on
separately by state or federal law.
The Fund has cumulative voting rights. For board member elections, this means
the number of votes you will have is equal to the number of shares you own times
the number of board members to be elected. You may cast all of your votes for
one candidate or distribute your votes between two or more candidates.
The Fund does not intend to hold annual shareholder meetings. The Fund may hold
special meetings, however, for matters requiring shareholder approval. A meeting
may be called by the board to consider the removal of a board member if
requested in writing by shareholders holding at least 10% of the outstanding
shares. In certain circumstances, we are required to help you communicate with
other shareholders about the removal of a board member. A special meeting also
may be called by the board in its discretion.
From time to time, the number of Fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of the Fund, no other person holds beneficially or of record more
than 5% of the outstanding shares of any class.
As of August 2, 2000, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each class.
The board members may own shares in other funds in Franklin Templeton
Investments.
BUYING AND SELLING SHARES
------------------------------------------------------------------------------
The Fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer orders
and accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity. Banks and financial institutions that
sell shares of the Fund may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of Fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the Fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
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. We may deduct any applicable banking charges
imposed by the bank from your account.
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.
If you buy shares through the reinvestment of dividends, the shares 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.
INITIAL SALES CHARGES The maximum initial sales charge is 4.25% for Class A and
1% for Class C. There is no initial sales charge for Class B.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in Franklin Templeton funds to take advantage of the
lower sales charges for large purchases. Franklin Templeton funds include the
U.S. registered mutual funds in Franklin Templeton Investments except Franklin
Templeton Variable Insurance Products Trust and Templeton Capital Accumulator
Fund, Inc.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in Franklin
Templeton funds. You also may combine the shares of your spouse, children under
the age of 21 or grandchildren under the age of 21. If you are the sole owner of
a company, you also may add any company accounts, including retirement plan
accounts.
LETTER OF INTENT (LOI). You may buy Class A shares at a reduced sales charge by
completing the letter of intent section of your account 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. By completing the letter of intent section of the application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares you
own, and we will pay or reinvest dividend and capital gain distributions on
the reserved shares according to the distribution option you have chosen.
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 LOI.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the LOI or pay the higher sales charge.
After you file your LOI with the Fund, you may buy Class A shares at the sales
charge applicable to the amount specified in your LOI. 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. Any Class A purchases you made within 90 days before you filed your
LOI also may qualify for a retroactive reduction in the sales charge. If you
file your LOI with the Fund before a change in the Fund's sales charge, you may
complete the LOI at the lower of the new sales charge or the sales charge in
effect when the LOI was filed.
Your holdings in Franklin Templeton funds acquired more than 90 days before you
filed your LOI will be counted towards the completion of the LOI, but they will
not be entitled to a retroactive reduction 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 LOI have been
completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of your
total purchases, less redemptions, is more than the amount specified in your LOI
and is an amount that would qualify for a further sales charge reduction, a
retroactive price adjustment will be made by Distributors and the securities
dealer through whom purchases were made. The price adjustment will be made on
purchases made within 90 days before and on those made after you filed your LOI
and will be applied towards the purchase of additional shares at the offering
price applicable to a single purchase or the dollar amount of the total
purchases.
If the amount of your total purchases, less redemptions, is less than the amount
specified in your LOI, the sales charge will be adjusted upward, depending on
the actual amount purchased (less redemptions) during the period. You will need
to send Distributors an amount equal to the difference in the actual dollar
amount of sales charge paid and the amount of sales charge that would have
applied to the total purchases if the total of the purchases had been made at
one time. Upon payment of this amount, 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, we will redeem an appropriate number of reserved shares to realize
the difference. If you redeem the total amount in your account before you
fulfill your LOI, we will deduct the additional sales charge due from the sale
proceeds and forward the balance to you.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class A
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 Franklin Templeton fund sales and other 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.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be purchased
without an initial sales charge or contingent deferred sales charge (CDSC) by
investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton fund. The
distributions generally must be reinvested in the same share class. Certain
exceptions apply, however, to Class C shareholders who chose to reinvest
their distributions in Class A shares of the Fund before November 17, 1997,
and to Advisor Class or Class Z shareholders of a Franklin Templeton fund who
may reinvest their distributions in the Fund's Class A shares. This waiver
category also applies to Class B and C shares.
o Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option the
Franklin Templeton Variable Insurance Products Trust. You should contact your
tax advisor for information on any tax consequences that may apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or a
Franklin Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date the CD matures,
including any rollover, or the date you redeem your money fund shares.
o Redemption proceeds from the sale of Class A shares of any of the Templeton
Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of Fund shares
and the CDSC holding period will begin again. We will, however, credit your
Fund account with additional shares based on the CDSC you previously paid and
the amount of the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without an
initial sales charge or CDSC by various individuals and institutions due to
anticipated economies in sales efforts and expenses, including:
o Trust companies and bank trust departments investing assets held in a
fiduciary, agency, advisory, custodial 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 may accept orders for these accounts 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.
o 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 Fund shares without paying sales charges.
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.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a
broker-dealer or service agent who has entered into an agreement with
Distributors
o Registered securities dealers and their affiliates, for their
investment accounts only
o Current employees of securities dealers and their affiliates and their family
members, as allowed by the internal policies of their employer
o Officers, trustees, directors and full-time employees of Franklin Templeton
Investments, and their family members, consistent with our then-current
policies
o Any investor who is currently a Class Z shareholder of Franklin Mutual Series
Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31, 1996,
or who sold his or her shares of Mutual Series Class Z within the past 365
days
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by Franklin Templeton Investments
o Certain unit investment trusts and their holders reinvesting
distributions from the trusts
In addition, Class C shares may be purchased without an initial sales charge by
any investor who buys Class C shares through an omnibus account with Merrill
Lynch Pierce Fenner & Smith, Inc. A CDSC may apply, however, if the shares are
sold within 18 months of purchase.
SALES IN TAIWAN. 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.
The Fund's Class A shares 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 A
shares may be offered with the following schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE (%)
----------------------------------------------------------------------
Under $30,000 3.0
$30,000 but less than $100,000 2.0
$100,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION 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. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the dealer compensation table in the Fund's
prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
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.
In addition to the payments above, Distributors and/or its affiliates may
provide financial support to securities dealers that sell shares of Franklin
Templeton Investments. This support is based primarily on the amount of sales of
fund shares and/or total assets with Franklin Templeton Investments. The amount
of support may be affected by: total sales; net sales; levels of redemptions;
the proportion of a securities dealer's sales and marketing efforts in Franklin
Templeton Investments; a securities dealer's support of, and participation in,
Distributors' marketing programs; a securities dealer's compensation programs
for its registered representatives; and the extent of a securities dealer's
marketing programs relating to Franklin Templeton Investments. Financial support
to securities dealers may be made by payments from Distributors' resources, from
Distributors' retention of underwriting concessions and, in the case of funds
that have Rule 12b-1 plans, from payments to Distributors under such plans. In
addition, certain securities dealers may receive brokerage commissions generated
by fund portfolio transactions in accordance with the rules of the National
Association of Securities Dealers, Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in Franklin Templeton funds, however,
are more likely to be considered. To the extent permitted by their firm's
policies and procedures, registered representatives' expenses in attending these
meetings may be covered by Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity discount
or letter of intent programs, a CDSC may apply on any shares you sell within 12
months of purchase. For Class C shares, a CDSC may apply if you sell your shares
within 18 months of purchase. The CDSC is 1% of the value of the shares sold or
the net asset value at the time of purchase, whichever is less.
For Class B shares, there is a CDSC if you sell your shares within six years, as
described in the table below. The charge is based on the value of the shares
sold or the net asset value at the time of purchase, whichever is less.
IF YOU SELL YOUR CLASS B SHARES
WITHIN THIS MANY YEARS AFTER BUYING THIS % IS DEDUCTED FROM
THEM YOUR PROCEEDS AS A CDSC
---------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Account fees
o Redemptions of Class A shares by investors who purchased $1 million or more
without an initial sales charge if the securities dealer of record waived its
commission in connection with the purchase
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 on or after February
1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12% annually of
your account's net asset value depending on the frequency of your plan
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the Fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their Fund shares under the exchange privilege, the Fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. 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 goal 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 generally are not
available until the seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh day. The sale of Fund shares to complete an exchange will be effected at
net asset value at the close of business on the day the request for exchange is
received in proper form.
SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell
your shares and receive regular payments from your account on a monthly,
quarterly, semiannual or annual basis. The value of your account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at least
$50. There are no service charges for establishing or maintaining a systematic
withdrawal plan.
Each month in which a payment is scheduled, we will redeem an equivalent amount
of shares in your account on the day of the month you have indicated on your
account application or, if no day is indicated, on the 20th day of the month. If
that day falls on a weekend or holiday, we will process the redemption on the
next business day. For plans set up before June 1, 2000, we will continue to
process redemptions on the 25th day of the month (or the next business day)
unless you instruct us to change the processing date. Available processing dates
currently are the 1st, 5th, 10th, 15th, 20th and 25th days of the month. When
you sell your shares under a systematic withdrawal plan, it is a taxable
transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, 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 also may be
subject to a CDSC.
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.
To discontinue a systematic withdrawal plan, change the amount and schedule of
withdrawal payments, or suspend one payment, we must receive instructions from
you at least three business days before a scheduled payment. The Fund may
discontinue a systematic withdrawal plan by notifying you in writing and will
discontinue a systematic withdrawal plan automatically if all shares in your
account are withdrawn or if the Fund receives notification of the shareholder's
death or incapacity.
REDEMPTIONS IN KIND The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the U.S. Securities and Exchange
Commission (SEC). In the case of redemption requests in excess of these amounts,
the board reserves the right to make payments in whole or in part in securities
or other assets of the Fund, in case of an emergency, or if the payment of such
a redemption in cash would be detrimental to the existing shareholders of the
Fund. In these circumstances, the securities distributed would be valued at the
price used to compute the Fund's net assets and you may incur brokerage fees in
converting the securities to cash. 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.
SHARE CERTIFICATES We will credit your shares to your Fund account. We do not
issue share certificates unless you specifically request them. This eliminates
the costly problem of replacing lost, stolen or destroyed certificates. If a
certificate is lost, stolen or destroyed, you may have to pay an insurance
premium of up to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to the Fund marked "unable
to forward" by the postal service, we will consider this a request by you to
change your dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at net asset value until we receive new
instructions.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. The Fund is not responsible for tracking down uncashed checks, unless a
check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.
Sending redemption proceeds by wire or electronic funds transfer (ACH) is a
special service that we make available whenever possible. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire or ACH is not processed as described in the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay certain
financial institutions that maintain omnibus accounts with the Fund on behalf of
numerous beneficial owners for recordkeeping operations performed with respect
to such owners. For each beneficial owner in the omnibus account, the Fund may
reimburse Investor Services an amount not to exceed the per account fee that the
Fund normally pays Investor Services. These financial institutions also may
charge a fee for their services directly to their clients.
There are special procedures for banks and other institutions that wish to open
multiple accounts. An institution may open a single master account by filing one
application form with the Fund, signed by personnel authorized to act for the
institution. Individual sub-accounts may be opened when the master account is
opened by listing them on the application, or by providing instructions to the
Fund at a later date. These sub-accounts may be registered either by name or
number. The Fund's investment minimums apply to each sub-account. The Fund will
send confirmation and account statements for the sub-accounts to the
institution.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the Fund. 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. 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. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the Fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
Fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a notice of levy.
PRICING SHARES
------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the net
asset value (NAV) per share plus any applicable sales charge, calculated to two
decimal places using standard rounding criteria. When you sell shares, you
receive the NAV minus any applicable CDSC.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of shares
outstanding.
The Fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. Pacific
time). The Fund does not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the Fund values cash and receivables at their
realizable amounts, and records interest as accrued. The Fund values
over-the-counter portfolio securities within the range of the most recent quoted
bid and ask prices. If portfolio securities trade both in the over-the-counter
market and on a stock exchange, the Fund values them according to the broadest
and most representative market as determined by the manager. Municipal
securities generally trade in the over-the-counter market rather than on a
securities exchange. 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 close of the NYSE.
The value of these securities used in computing the NAV 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 close of the NYSE that
will not be reflected in the computation of the NAV. 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 use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the Fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the Fund's shares, the net
underwriting discounts and commissions Distributors retained after allowances to
dealers, and the amounts Distributors received in connection with redemptions or
repurchases of shares for the last three fiscal years ended April 30:
AMOUNT RECEIVED IN
CONNECTION WITH
TOTAL COMMISSIONS AMOUNT RETAINED BY REDEMPTIONS AND
RECEIVED ($) DISTRIBUTORS ($) REPURCHASES ($)
-------------------------------------------------------------------------------
2000 8,017,453 495,571 439,402
1999 14,011,675 919,576 160,824
1998 12,768,187 811,334 23,704
Distributors may be entitled to payments from the Fund under the Rule 12b-1
plans, as discussed below. Except as noted, Distributors received no other
compensation from the Fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES The board has adopted a separate plan
pursuant to Rule 12b-1 for each class. Although the plans differ in some ways
for each class, each plan is designed to benefit the Fund and its shareholders.
The plans are expected to, among other things, increase advertising of the Fund,
encourage sales of the Fund and service to its shareholders, and increase or
maintain assets of the Fund so that certain fixed expenses may be spread over a
broader asset base, resulting in lower per share expense ratios. In addition, a
positive cash flow into the Fund is useful in managing the Fund because the
manager has more flexibility in taking advantage of new investment opportunities
and handling shareholder redemptions.
Under each plan, the Fund pays Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses also may include service fees paid to securities dealers or others who
have executed a servicing agreement with the Fund, Distributors or its
affiliates and who provide service or account maintenance to shareholders
(service fees); the expenses of printing prospectuses and reports used for sales
purposes, and of preparing and distributing sales literature and advertisements;
and a prorated portion of Distributors' overhead expenses related to these
activities. Together, these expenses, including the service fees, are "eligible
expenses." The 12b-1 fees charged to each class are based only on the fees
attributable to that particular class.
THE CLASS A PLAN. The Fund may pay up to 0.10% per year of Class A's average
daily net assets. The Class A plan is a reimbursement plan. It allows the Fund
to reimburse Distributors for eligible expenses that Distributors has shown it
has incurred. The Fund will not reimburse more than the maximum amount allowed
under the plan.
For the fiscal year ended April 30, 2000, the amounts paid by the Fund pursuant
to the plan were:
($)
-----------------------------------------------------
Advertising 170,047
Printing and mailing prospectuses 108,332
other than to current shareholders
Payments to underwriters 71,247
Payments to broker-dealers 4,785,748
Other 345,609
-------------
Total 5,480,983
-------------
THE CLASS B AND C PLANS. The Fund pays Distributors up to 0.65% per year of the
class's average daily net assets, out of which 0.15% may be used for service
fees. The Class B and C plans also may be used to pay Distributors for advancing
commissions to securities dealers with respect to the initial sale of Class B
and C shares. Class B plan fees payable to Distributors are used by Distributors
to pay third party financing entities that have provided financing to
Distributors in connection with advancing commissions to securities dealers.
Franklin Resources owns a minority interest in one of the third party financing
entities.
Under the Class B plan, the amounts paid by the Fund pursuant to the plan for
the fiscal year ended April 30, 2000, were:
($)
-----------------------------------------------------
Advertising 4,469
Printing and mailing prospectuses 293
other than to current shareholders
Payments to underwriters 3,741
Payments to broker-dealers 253,389
Other 5,194
-------------
Total 267,086
-------------
Under the Class C plan, the amounts paid by the Fund pursuant to the plan for
the fiscal year ended April 30, 2000, were:
($)
-----------------------------------------------------
Advertising 31,095
Printing and mailing prospectuses 8,454
other than to current shareholders
Payments to underwriters 18,917
Payments to broker-dealers 1,272,509
Other 40,795
-------------
Total 1,371,770
-------------
THE CLASS A , B AND C 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, the manager or Distributors or other parties on behalf of the
Fund, the manager or Distributors make payments that are deemed to be for the
financing of any activity primarily intended to result in the sale of Fund
shares within the context of Rule 12b-1 under the Investment Company Act of
1940, as amended, then such payments shall be deemed to have been made pursuant
to the plan.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks may not
participate in the plans because of applicable federal law prohibiting certain
banks from engaging in the distribution of mutual fund shares. These banks,
however, are allowed to receive fees under the plans for administrative
servicing or for agency transactions.
Distributors must provide written reports to the board at least quarterly on the
amounts and purpose of any payment made under the plans and any related
agreements, and furnish the board with such other information as the board may
reasonably request to enable it to make an informed determination of whether the
plans should be continued.
Each plan has been approved according to the provisions of Rule 12b-1. The terms
and provisions of each plan also are consistent with Rule 12b-1.
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.
Average annual total return and current yield quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
Performance figures reflect Rule 12b-1 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 follows. Regardless of the method used, past
performance does not guarantee future results, and is an indication of the
return to shareholders only for the limited historical period used.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by finding
the average annual rates of return over the periods indicated below that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes the maximum initial 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 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 initial sales
charge currently in effect.
When considering the average annual total return quotations for Class A and C
shares, you should keep in mind that the maximum initial sales charge reflected
in each quotation is a one time fee charged on all direct purchases, which will
have its greatest impact during the early stages of your investment. This charge
will affect actual performance less the longer you retain your investment in the
Fund. The average annual total returns for the indicated periods ended April 30,
2000, were:
1 YEAR (%) 5 YEARS (%) 10 YEARS (%)
-----------------------------------------------------------------------------
Class A -6.07 4.48 6.44
SINCE INCEPTION
1 YEAR (%) (1/1/99) (%)
------------------------------------------------------------
Class B -6.06 -3.86
SINCE INCEPTION
1 YEAR (%) (5/1/95) (%)
------------------------------------------------------------
Class C -4.29 4.58
The following SEC formula was used to calculate these figures:
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 each period at the end
of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial sales charge is deducted from the initial
$1,000 purchase, income dividends and capital gain distributions are reinvested
at net asset value, the account was completely redeemed at the end of each
period and the deduction of all applicable charges and fees. Cumulative total
return, however, is based on the actual return for a specified period rather
than on the average return over the periods indicated above. The cumulative
total returns for the indicated periods ended April 30, 2000, were:
1 YEAR (%) 5 YEARS (%) 10 YEARS (%)
-----------------------------------------------------------------------------
Class A -6.07 24.48 86.67
SINCE INCEPTION
1 YEAR (%) (1/1/99) (%)
------------------------------------------------------------
Class B -6.06 -5.10
SINCE
1 YEAR (%) 5 YEARS (%) INCEPTION
(5/1/95) (%)
-----------------------------------------------------------------------------
Class C -4.29 24.45 25.11
CURRENT YIELD Current yield shows the income per share earned by the Fund. It is
calculated by dividing the net investment income per share 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 yields for the 30-day period ended April 30, 2000, were:
CLASS A (%) CLASS B (%) CLASS C (%)
---------------------------------------------
5.11 4.77 4.73
The following SEC formula was used to calculate these figures:
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 also may quote a taxable-equivalent yield that
shows the before-tax yield that would have to be earned from a taxable
investment to equal the yield. Taxable-equivalent yield is computed by dividing
the portion of the yield that is tax-exempt by one minus the highest applicable
federal income tax rate and adding the product to the portion of the yield that
is not tax-exempt, if any. The taxable-equivalent yields for the 30-day period
ended April 30, 2000, were:
CLASS A (%) CLASS B (%) CLASS C (%)
---------------------------------------------
8.46 7.90 7.83
As of April 30, 2000, the federal income tax rate upon which the
taxable-equivalent yield quotations were based was 39.6%. From time to time, as
any changes to the rate become effective, taxable-equivalent yield quotations
advertised by the Fund will be updated to reflect these changes. The Fund
expects updates may be necessary as tax rates are changed by 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 that were or will be paid to shareholders. 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, if
any, and is calculated over a different period of time. The current distribution
rates for the 30-day period ended April 30, 2000, were:
CLASS A (%) CLASS B (%) CLASS C (%)
---------------------------------------------
5.49 5.16 5.11
A taxable-equivalent distribution rate shows the taxable distribution rate
equivalent to the 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 rates for the 30-day period ended
April 30, 2000, were:
CLASS A (%) CLASS B (%) CLASS C (%)
---------------------------------------------
9.09 8.54 8.46
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 The Fund also may quote the performance of shares
without a sales charge. Sales literature and advertising may quote a cumulative
total return, average annual total return and other measures of performance 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 goals and performance results of funds belonging to
Franklin Templeton Investments. Franklin Resources, Inc. is the parent
company of the advisors and underwriter of Franklin Templeton funds.
COMPARISONS To help you better evaluate how an investment in the Fund may
satisfy your investment goal, advertisements and other materials about the Fund
may discuss certain measures of Fund performance as reported by various
financial publications. Materials also may 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:
o Salomon Smith Barney Broad Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate and mortgage
bonds.
o Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
o Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.
o Bond Buyer 20 Index - an index of municipal bond yields based upon yields of
20 general obligation bonds maturing in 20 years.
o Bond Buyer 40 Index - an index composed of the yield to maturity of 40 bonds.
The index attempts to track the new-issue market as closely as possible, so
it changes bonds twice a month, adding all new bonds that meet certain
requirements and deleting an equivalent number according to their secondary
market trading activity. As a result, the average par call date, average
maturity date, and average coupon rate can and have changed over time. The
average maturity generally has been about 29-30 years.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK, FINANCIAL
WORLD, FORBES, FORTUNE, and MONEY magazines - provide performance statistics
over specified time periods.
o Salomon Smith Barney 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.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J.P. Morgan(R)companies, Salomon Smith Barney Inc.,
Merrill Lynch, Lehman Brothers(R)and Bloomberg(R)L.P.
o 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 category.
o 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.
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 sales material issued by the Fund also may discuss or be based
upon information in a recent issue of the Special Report on Tax Freedom Day
published by the Tax Foundation, a Washington, D.C. based nonprofit research and
public education organization. The report illustrates, among other things, the
annual amount of time the average taxpayer works to satisfy his or her tax
obligations to the federal, state and local taxing authorities.
Advertisements or information also may compare the Fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the Fund involves the risk of fluctuation
of principal value, a risk generally not present in an investment in a CD issued
by a bank. CDs are frequently insured by an agency of the U.S. government. An
investment in the Fund is not insured by any federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition,
there can be no assurance that the Fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
------------------------------------------------------------------------------
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 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 Franklin Templeton Investments, one of the largest
mutual fund organizations in the U.S., and may be considered in a program for
diversification of assets. Founded in 1947, Franklin is one of the oldest mutual
fund organizations and now services approximately 3 million shareholder
accounts. In 1992, Franklin, a leader in managing fixed-income mutual funds and
an innovator in creating domestic equity funds, joined forces with Templeton, a
pioneer in international investing. The Mutual Series team, known for its
value-driven approach to domestic equity investing, became part of the
organization four years later. Together, Franklin Templeton Investments has over
$229 billion in assets under management for more than 5 million U.S. based
mutual fund shareholder and other accounts. Franklin Templeton Investments
offers 108 U.S. based open-end investment companies 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 security assets for over three quarters of a million
investors.
Under current tax laws, municipal securities remain one of the few investments
offering the potential for tax-free income. In 2000, taxes could cost almost $47
on every $100 earned from a fully taxable investment (based on the maximum
combined 39.6% federal tax rate and the highest state tax rate of 12% for 2000).
Franklin tax-free funds, however, offer tax relief through a professionally
managed portfolio of tax-free securities selected based on their yield, quality
and maturity. An investment in a Franklin tax-free fund can provide you with the
potential to earn income free of federal taxes and, depending on the fund, state
and local taxes as well, while supporting state and local public projects.
Franklin tax-free funds also may provide tax-free compounding, when dividends
are reinvested. An investment in Franklin's tax-free funds can grow more rapidly
than similar taxable investments.
Municipal securities are generally considered to be creditworthy, second in
quality only to securities issued or guaranteed by the U.S. government and its
agencies. The market price of municipal securities, however, may fluctuate. This
fluctuation will have a direct impact on the net asset value of the Fund's
shares.
Currently, there are more mutual funds than there are stocks listed on the New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the Fund are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.
DESCRIPTION OF RATINGS
------------------------------------------------------------------------------
MUNICIPAL BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
INVESTMENT GRADE
Aaa: Municipal bonds rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Municipal bonds rated Aa are judged to be high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present that make the
long-term risks appear somewhat larger.
A: Municipal bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa: Municipal bonds rated Baa are considered medium-grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
These bonds lack outstanding investment characteristics and, in fact, have
speculative characteristics as well.
BELOW INVESTMENT GRADE
Ba: Municipal bonds rated Ba are judged to have predominantly speculative
elements and their future cannot be considered well assured. Often the
protection of interest and principal payments may be very moderate and, thereby,
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
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. These 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 that are speculative to a
high degree. These 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 that begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon the
completion of construction or the elimination of the basis of the condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Caa in its municipal bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S RATINGS GROUP (S&P(R))
INVESTMENT GRADE
AAA: Municipal bonds rated AAA are the highest-grade obligations. They possess
the ultimate degree of protection as to principal and interest. In the market,
they move with interest rates and, hence, provide the maximum safety on all
counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations, and in the
majority of instances differ from AAA issues only in a small degree. Here, too,
prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium-grade. They have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions. Interest and principal are regarded
as safe. They predominantly reflect money rates in their market behavior but
also, to some extent, economic conditions.
BBB: Municipal bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BELOW INVESTMENT GRADE
BB, B, CCC, CC: Municipal 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 these bonds will likely have some quality and
protective characteristics, they 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.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
FITCH INVESTORS SERVICE, INC. (FITCH)
INVESTMENT GRADE
AAA: Municipal bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal that is unlikely to be affected by reasonably
foreseeable events.
AA: Municipal bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong although not quite as strong as bonds rated AAA and not
significantly vulnerable to foreseeable future developments.
A: Municipal bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Municipal bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BELOW INVESTMENT GRADE
BB: Municipal bonds rated BB are considered speculative. The obligor's ability
to pay interest and repay principal may be affected over time by adverse
economic changes. Business and financial alternatives can be identified,
however, that could assist the obligor in satisfying its debt service
requirements.
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 signs
are not used with the AAA, 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 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.
SHORT-TERM DEBT & COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted. Moody's commercial paper
ratings, which are also applicable to municipal paper investments, are opinions
of the ability of issuers to repay punctually their promissory obligations not
having an original maturity in excess of nine months. Moody's employs the
following designations for both short-term debt and commercial paper, all judged
to be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FITCH
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes. The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. Reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues assigned F-1+
and F-1 ratings.
F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-5: Weak credit quality. Have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
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 23. EXHIBITS
The following exhibits are incorporated by reference to the previously
filed documents indicated below, except as noted:
(a) Articles of Incorporation
(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: July 3, 1995
(ii) Certificate of Amendment of 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: July 3, 1995
(iii)Certificate of Amendment of 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: July 3, 1995
(iv) Certificate of Amendment of 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: July 3, 1995
(v) Certificate of Amendment of Articles 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: July 3, 1995
(b) By-Laws
(i) By-Laws
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: July 3, 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: July 3, 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: July 3, 1995
(c) Instruments Defining Rights of Security Holders
Not Applicable
(d) Investment Advisory Contracts
(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: July 3, 1995
(e) Underwriting Contracts
(i) Amended and Restated Distribution Agreement between
Registrant and Franklin/Templeton Distributors, Inc. dated
March 29, 1995
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: July 3, 1995
(ii) Forms of Dealer Agreements between Franklin/Templeton
Distributors, Inc. and Securities Dealers dated March 1,
1998
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: December 22, 1998
(iii)Amendment of Amended and Restated Distribution Agreement
between Registrant and Franklin/Tempelton Distributors,
Inc. dated January 12, 1999
Filing: Post-Effective Amendment No. 23 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: June 22, 1999
(f) Bonus or Profit Sharing Contracts
Not Applicable
(g) Custodian Agreements
(i) Master Custody Agreement between Registrant and Bank of
New York dated February 16, 1996
Filing: Post-Effective Amendment No. 20 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: August 21, 1997
(ii) Terminal Link Agreement between Registrant and Bank of New
York dated February 16, 1996
Filing: Post-Effective Amendment No. 20 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: August 21, 1997
(iii)Amendment dated May 7, 1997 to the Master Custody Agreement
dated February 16, 1996 between the Registrant and Bank of
New York
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: June 23, 1998
(iv) Amendment dated February 27, 1998 to Exhibit A of the
Master Custody Agreement between Registrant and Bank of
New York dated February 16, 1996
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: December 22, 1998
(v) Amendment dated March 21, 2000, to Exhibit A of the Master
Custody Agreement between Registrant and Bank of New York
dated February 16, 1996
(h) Other Material Contracts
(i) Subcontract for Fund Administrative Services dated October
1, 1996 and Amendment thereto dated December 1, 1998
between Franklin Advisers, Inc. and Franklin Templeton
Services Inc.
Filing: Post-Effective Amendment No. 23 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: June 22, 1999
(i) Legal Opinion
(i) Opinion and Consent of Counsel dated June 19, 1998
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: June 23, 1998
(j) Other Opinions
(i) Consent of Independent Auditors
(k) Omitted Financial Statements
Not Applicable
(l) Initial Capital Agreements
(i) Letter of Understanding dated April 12, 1995
Filing: Post-Effective Amendment No. 19 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: August 23, 1996
(m) Rule 12b-1 Plan
(i) Distribution Plan pursuant to Rule 12b-1 between Registrant
and Franklin/Templeton Distributors, Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: July 3, 1995
(ii) Class C 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: July 3, 1995
(iii)Class B Distribution Plan pursuant to Rule 12b-1 between
Registrant and Franklin/Templeton Distributors, Inc. dated
October 16, 1998
Filing: Post-Effective Amendment No. 23 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: June 22, 1999
(n) Rule 18f-3 Plan
(i) Multiple Class Plan on behalf of Franklin Federal TaX-Free
Income Fund dated March 19, 1998
Filing: Post-Effective Amendment No. 23 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: June 22, 1999
(p) Code of Ethics
(i) Code of Ethics
(q) Power of Attorney
(i) Power of Attorney dated May 16, 2000
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE REGISTRANT
None
ITEM 25. INDEMNIFICATION
Please see Section 6 of the Management Agreement, and Section 16 of the
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 of 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.
Please see the By-Laws, Management Agreement and Distribution Agreements
previously filed as exhibits and incorporated herein by reference.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
The officers and directors of the Registrant's investment advisor Franklin
Advisers, Inc. (Advisers) also serve as officers and/or directors or trustees
for (1) the advisor's corporate parent, Franklin Resources, Inc., and/or (2)
other investment companies in the Franklin Templeton Group of Funds. In
addition, Mr. Charles B. Johnson was formerly a director of General Host
Corporation. For additional information please see Part B and Schedules A and D
of Form ADV of Advisers (SEC File 801-26292), incorporated herein by reference,
which sets forth the officers and directors of Advisers and information as to
any business, profession, vocation or employment of a substantial nature engaged
in by those officers and directors during the past two years.
ITEM 27. PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., (Distributors) also acts as
principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Groth and Income Fund
Franklin Federal Money Fund
Franklin Floating Rate Master Trust
Franklin Floating Rate Trust
Franklin Gold and Precious Metal Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income
Fund Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Franklin Templeton Variable Insurance Products Trust
Institutional Fiduciary Trust
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
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 28. 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 29. MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 30. UNDERTAKINGS
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certified that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and 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 29th day
of August, 2000.
FRANKLIN FEDERAL TAX-FREE INCOME FUND
(Registrant)
By: David P. Goss
Vice 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 Principal
------------------------
Rupert H. Johnson, Jr. Executive Officer
Dated: August 29, 2000
Martin L. Flanagan* Principal Financial Officer
------------------------
Martin L. Flanagan Dated: August 29, 2000
Kimberely H. Monasterio* Principal Accounting Officer
------------------------
Kimberely H. Monasterio Dated: August 29, 2000
Frank H. Abbott, III* Director
------------------------
Frank H. Abbott, III Dated: August 29, 2000
Harris J. Ashton* Director
------------------------
Harris J. Ashton Dated: August 29, 2000
Harmon E. Burns* Director
------------------------
Harmon E. Burns Dated: August 29, 2000
Robert F. Carlson* Director
------------------------
Robert F. Carlson Dated: August 29, 2000
S. Joseph Fortunato* Director
------------------------
S. Joseph Fortunato Dated: August 29, 2000
Charles B. Johnson* Director
------------------------
Charles B. Johnson Dated: August 29, 2000
Frank W.T. LaHaye* Director
------------------------
Frank W.T. LaHaye Dated: August 29, 2000
Gordon S. Macklin* Director
------------------------
Gordon S. Macklin Dated: August 29, 2000
By: /s/David P. Goss
David P. Goss, Attorney-in-Fact
(Pursuant to Power of Attorney filed herewith)
FRANKLIN FEDERAL TAX-FREE INCOME FUND
REGISTRATION STATEMENT
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.a(i) Articles of Incorporation dated *
January 5, 1981
EX-99.a(ii) Certificate of Amendment of Articles *
of Incorporation dated November 1,
1982
EX-99.a(iii) Certificate of Amendment of Articles *
of Incorporation dated June 20, 1983
EX-99.a(iv) Certificate of Amendment of Articles *
of Incorporation dated September 20,
1983
EX-99.a(v) Certificate of Amendment of Articles *
of Incorporation dated April 11, 1995
EX-99.b(i) By-Laws *
EX-99.b(ii) Amendment to By-Laws dated November *
17, 1987
EX-99.b(iii) Amendment to By-Laws dated February *
28, 1994
EX-99.d(i) Management Agreement between *
Registrant and Franklin Advisers,
Inc. dated May 1, 1994
EX-99.e(i) Amended and Restated Distribution *
Agreement between Registrant and
Franklin/Templeton Distributors,
Inc. dated March 29, 1995
EX-99.e(ii) Forms of Dealer Agreements between *
Franklin/Templeton Distributors,
Inc. and Securities Dealers
EX-99.e(iii) Amendment of Amended and Restated *
Distribution Agreement between
Registrant and Franklin/Templeton
Distributors, Inc. dated January 12,
1999
EX-99.g(i) Master Custody Agreement between *
Registrant and Bank of New York
dated February 16, 1996
EX-99.g(ii) Terminal Link Agreement between *
Registrant and Bank of New York
dated February 16, 1996
EX-99.g(iii) Amendment dated May 7, 1997, to the *
Master Custody Agreement dated
February 16, 1996 between the
Registrant and Bank of New York
EX-99.g(iv) Amendment dated February 27, 1998 to *
Exhibit A of the Master Custody
Agreement between Registrant and
Bank of New York dated February 16,
1996
EX-99.g(v) Amendment dated March 21, 2000, to Attached
Exhibit A of the Master Custody
Agreement between Registrant and
Bank of New York dated February 16,
1996
EX-99.h(i) Subcontract for Fund Administrative *
Services dated October 1, 1996 and
Amendment thereto dated December 1,
1998 between Franklin Advisers, Inc.
and Franklin Templeton Services Inc.
EX-99.i(i) Opinion and Consent of Counsel dated *
June 19, 1998
EX-99.j(i) Consent of Independent Auditors Attached
EX-99.l(i) Letter of Understanding dated April *
12, 1995
EX-99.m(i) Distribution Plan pursuant to Rule *
12b-1 between Registrant and
Franklin/Templeton Distributors,
Inc. dated May 1, 1994
EX-99.m(ii) Class C Distribution Plan pursuant *
to Rule 12b-1 dated March 30, 1995
EX-99.m(iii) Class B Distribution Plan pursuant *
to Rule 12b-1 between Registrant and
Franklin/Templeton Distributors,
Inc. dated October 16, 1998
EX-99.n(i) Multiple Class Plan on behalf of *
Franklin Federal Tax-Free Income
Fund dated March 19, 1998
EX-99.p(i) Code of Ethics Attached
EX-99.q(i) Power of Attorney dated May 16, 2000 Attached
* Incorporated by Reference
