UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-03193
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FRANKLIN TAX-EXEMPT MONEY FUND
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(Exact name of registrant as specified in charter)
ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
(Address of principal executive offices) (Zip code)
MURRAY L. SIMPSON, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Name and address of agent for service)
Registrant's telephone number, including area code: (650) 312-2000
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Date of fiscal year end: 7/31
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Date of reporting period: 7/31/05
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ITEM 1. REPORTS TO STOCKHOLDERS.
JULY 31, 2005
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[GRAPHIC]
PHOTO OF SUBWAY
ANNUAL REPORT AND SHAREHOLDER LETTER TAX-FREE INCOME
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[GRAPHIC]
BUILDING PHOTO
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FRANKLIN TEMPLETON INVESTMENTS LOGO
FRANKLIN . Templeton . Mutual Series
FRANKLIN TEMPLETON INVESTMENTS
GAIN FROM OUR PERSPECTIVE(R)
Franklin Templeton's distinct multi-manager structure combines the specialized
expertise of three world-class investment management groups--Franklin, Templeton
and Mutual Series.
SPECIALIZED EXPERTISE
Each of our portfolio management groups operates autonomously, relying on its
own research and staying true to the unique investment disciplines that underlie
its success.
FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income
investing and also brings expertise in growth- and value-style U.S. equity
investing.
TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in
1954, launched what has become the industry's oldest global fund. Today, with
offices in over 25 countries, Templeton offers investors a truly global
perspective.
MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of
value investing, searching aggressively for opportunity among what it believes
are undervalued stocks, as well as arbitrage situations and distressed
securities.
TRUE DIVERSIFICATION
Because our management groups work independently and adhere to different
investment approaches, Franklin, Templeton and Mutual Series funds typically
have distinct portfolios. That's why our funds can be used to build truly
diversified allocation plans covering every major asset class.
RELIABILITY YOU CAN TRUST
At Franklin Templeton Investments, we seek to consistently provide investors
with exceptional risk-adjusted returns over the long term, as well as the
reliable, accurate and personal service that has helped us become one of the
most trusted names in financial services.
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
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OFFICE BUILDING PHOTO
Not part of the annual report
CONTENTS
SHAREHOLDER LETTER .................. 1
ANNUAL REPORT
Franklin Tax-Exempt
Money Fund .......................... 3
Performance Summary ................. 4
Your Fund's Expenses ................ 6
Financial Highlights and
Statement of Investments ............ 8
Financial Statements ................ 14
Notes to Financial Statements ....... 17
Report of Independent
Registered Public
Accounting Firm ..................... 22
Tax Designation ..................... 23
Board Members and Officers .......... 24
Shareholder Information ............. 28
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ANNUAL REPORT
FRANKLIN TAX-EXEMPT MONEY FUND
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Tax-Exempt Money Fund seeks to
provide as high a level of current income exempt from federal income taxes as is
consistent with prudent investment management and preservation of capital.1 The
Fund pursues a conservative investment policy by investing at least 80% of its
total assets in high quality, short-term, municipal securities free from federal
income taxes as it seeks to maintain a stable $1.00 share price.
[BEGIN SIDEBAR]
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PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN WILL FLUCTUATE. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
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AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY OR INSTITUTION. ALTHOUGH
THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT
IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND.
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[END SIDEBAR]
We are pleased to bring you Franklin Tax-Exempt Money Fund's annual report for
the fiscal year ended July 31, 2005.
PERFORMANCE OVERVIEW
With rising short-term interest rates, money market portfolio yields climbed
during the year under review. Largely as a result, Franklin Tax-Exempt Money
Fund's seven-day effective yield rose from 0.30% at the beginning of the period
to 1.49% on July 31, 2005.
ECONOMIC AND MARKET OVERVIEW
Overall domestic economic growth remained healthy during the reporting period.
Approximately two-thirds of U.S. gross domestic product (GDP) is generated by
consumer spending, and almost one-fifth by business spending. Since consumer
spending relies on consumers' ability to remain gainfully employed, many
analysts study the employment picture for indications of consumer spending. Over
the past year, nonfarm payroll data, as well as other indexes, showed growing
employment. This along with other factors helped consumer spending increase 6.9%
in July 2005 compared with the same month a year earlier, which supported U.S.
economic growth.2
1. For investors subject to alternative minimum tax, a small portion of Fund
dividends may be taxable. Distributions of capital gains are generally taxable.
2. Source: Bureau of Economic Analysis.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 9.
Annual Report | 3
[BEGIN SIDEBAR]
PERFORMANCE SUMMARY
7/31/05
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Seven-day effective yield1 1.49%
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Seven-day annualized yield 1.48%
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Taxable equivalent yield2 2.28%
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[END SIDEBAR]
1. Seven-day effective yield assumes the compounding of daily dividends.
2. Taxable equivalent yield assumes the 2005 maximum federal income tax rate of
35.00%.
Annualized and effective yields are for the seven-day period ended 7/31/05. The
Fund's average weighted maturity was 27 days. Yields reflect Fund expenses and
fluctuations in interest rates on portfolio investments.
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURNS WILL FLUCTUATE. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
[END SIDEBAR]
Business spending also rose during the reporting period, contributing to
economic growth. Nonresidential investment spending rose in each of the past
year's four quarters, resulting in 9.2% growth for the year ended July 31,
2005.2 Historically low interest rates continued to allow many companies easy
access to capital, and ample cash also helped some companies to support their
spending plans. Productivity continued to grow, which helped businesses generate
more goods and services without substantially raising inflation.
Energy prices rose significantly, as oil prices hit a record of $61.28 per
barrel on July 6.3 Inflation remained relatively contained for the 12 months
ended July 31, 2005, as measured by the 2.1% rise for the core Consumer Price
Index (CPI), which excludes volatile food and energy costs. This increase was
below the core CPI's 10-year average of 2.3%.4 However, acknowledging the
economy's strength as well as potential inflationary pressure from high energy
prices, the Federal Reserve Board (Fed) raised the federal funds target rate to
3.25% from 1.25% during the 12-month period and continued to hold the opinion
that monetary policy remains accommodative, that the risks to growth and
inflation remain equally balanced, and that future Fed policy can be tightened
in a measured way. During the period, the yield curve flattened, as the 10- and
30-year U.S. Treasury yields fell while those of shorter-maturity Treasuries
rose. At period-end, the 10-year Treasury yielded 4.28%.
INVESTMENT STRATEGY
We invest predominantly in high-quality, short-term tax-free securities.
Although the Fund tries to invest all of its assets in tax-free securities, it
is possible, although not anticipated, that a portion of its assets may be in
securities that pay taxable interest, including interest that may be subject to
federal alternative minimum tax. We maintain a dollar-weighted average portfolio
maturity of 90 days or less.
3. Source: Bloomberg Energy/Commodity Service.
4. Source: Bureau of Labor Statistics.
4 | Annual Report
MANAGER'S DISCUSSION
Short-term municipal bond yields increased during the Fund's fiscal year,
reflecting the Fed's consecutive federal funds target rate hikes. The Bond
Market Association Municipal Swap Index, a benchmark for variable rate
securities, which make up a large portion of Franklin Tax-Exempt Money Fund's
portfolio, averaged a rate of 1.96% for the period under review.5
During the reporting period, the Fund participated in several deals including
Temple University Fund notes, Iowa Schools Cash Anticipation Program notes,
Florida Local Government commercial paper, and Michigan Municipal Bond Authority
revenue notes.
Thank you for your continued participation in Franklin Tax-Exempt Money Fund. We
look forward to serving your future investment needs.
[BEGIN SIDEBAR]
PORTFOLIO BREAKDOWN
7/31/05
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% OF TOTAL
INVESTMENTS
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Variable Rate Notes 82.0%
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Notes & Bonds 13.8%
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Tax-Exempt Commercial Paper 1.8%
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Put or Option Tender Bonds 2.4%
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[END SIDEBAR]
5. Source: Thomson Financial. The Bond Market Association Municipal Swap Index
is a weekly high-grade market index composed of seven-day tax-exempt variable
rate demand notes and is produced by the Municipal Market Data Group. Actual
issues are selected from Municipal Market Data's database of more than 10,000
active issues based on several specific criteria. The index is unmanaged and
does not reflect management fees and expenses that affect Fund performance.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF JULY 31, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE ADVISER MAKES NO REPRESENTATION OR WARRANTY AS TO
THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT
MANAGEMENT PHILOSOPHY.
Annual Report | 5
YOUR FUND'S EXPENSES
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600/$1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6X$7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
6 | Annual Report
YOUR FUND'S EXPENSES (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
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BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
VALUE 1/31/05 VALUE 7/31/05 PERIOD* 1/31/05-7/31/05
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Actual $1,000 $1,007.20 $3.58
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Hypothetical (5% return before expenses) $1,000 $1,021.22 $3.61
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<FN>
*Expenses are equal to the annualized expense ratio of 0.72%, multiplied by the
average account value over the period, multiplied by 181/365 to reflect the
one-half year period.
</FN>
Annual Report | 7
FRANKLIN TAX-EXEMPT MONEY FUND
FINANCIAL HIGHLIGHTS
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YEAR ENDED JULY 31,
2005 2004 2003 2002 2001
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PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................ $1.00 $1.00 $1.00 $1.00 $1.00
----------------------------------------------------------
Income from investment operations - net investment income ..... 0.011 0.002 0.005 0.011 0.029
Less distributions from net investment income ................. (0.011) (0.002) (0.005) (0.011) (0.029)
----------------------------------------------------------
Net asset value, end of year .................................. $1.00 $1.00 $1.00 $1.00 $1.00
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Total return a ................................................ 1.11% 0.23% 0.53% 1.06% 2.98%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................... $165,736 $179,372 $176,834 $163,710 $167,705
Ratios to average net assets:
Expenses ..................................................... 0.73% 0.74% 0.76% 0.76% 0.76%
Net investment income ........................................ 1.10% 0.24% 0.53% 1.05% 2.94%
<FN>
a Total return does not reflect the contingent deferred sales charge.
</FN>
8 | See notes to financial statements. | Annual Report
FRANKLIN TAX-EXEMPT MONEY FUND
STATEMENT OF INVESTMENTS, JULY 31, 2005
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PRINCIPAL AMOUNT VALUE
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SHORT TERM INVESTMENTS 99.3%
BONDS 99.3%
ALABAMA 1.4%
a Evergreen IDB, IDR, Tenax Manufacturing Project, Refunding, Weekly VRDN and Put, 2.34%,
12/01/12 ......................................................................................... $ 2,300,000 $ 2,300,000
--------------
ARIZONA 2.2%
a Apache County IDA, IDR, Tucson Electric Power Co. Project, Springerville Project, Series C,
Weekly VRDN and Put, 2.30%, 12/15/18 ............................................................. 1,000,000 1,000,000
a Arizona Health Facilities Authority Hospital System Revenue, Series B, MBIA Insured, Weekly
VRDN and Put, 2.33%, 10/01/26 .................................................................... 1,600,000 1,600,000
a Nanotechnology Research LLC Lease Revenue, Arizona State University Project, Series A,
MBIA Insured, Weekly VRDN and Put, 2.35%, 3/01/34 ................................................ 1,000,000 1,000,000
--------------
3,600,000
--------------
CALIFORNIA 1.2%
California State University Channel Islands Site Authority Financing Authority Revenue, Rental
Housing, Mandatory Put 8/01/05, 1.60%, 8/01/31 ................................................... 2,000,000 2,000,000
--------------
COLORADO 9.0%
a Colorado Springs Utilities Revenue, sub. lien, Series A, Weekly VRDN and Put, 2.32%,
11/01/29 ......................................................................................... 5,000,000 5,000,000
a Denver City and County COP,
Refunding, AMBAC Insured, Weekly VRDN and Put, 2.32%, 12/01/29 .................................. 4,000,000 4,000,000
Wellington E Web, Refunding, Series C3, AMBAC Insured, Weekly VRDN and Put, 2.35%,
12/01/29 ....................................................................................... 3,000,000 3,000,000
a University of Colorado COP, Series A, Weekly VRDN and Put, 2.33%, 7/01/18 .......................... 2,925,000 2,925,000
--------------
4,925,000
--------------
FLORIDA 5.4%
a Florida Higher Education Facilities Financing Authority Revenue, St. Thomas University
Project, Daily VRDN and Put, 2.33%, 1/01/19 ...................................................... 1,600,000 1,600,000
Florida Local Government Commission TECP, Series A, 2.60%, 9/06/05 ................................. 1,944,000 1,944,000
Florida Local Government Commission, TECP, Series A, 2.46%, 9/06/05 ................................ 1,000,000 1,000,000
a Martin County IDA, IDR, YMCA Treasure Coast Project, Weekly VRDN and Put, 2.35%,
10/01/16 ......................................................................................... 1,400,000 1,400,000
a Orange County School Board COP, Series B,
AMBAC Insured, Daily VRDN and Put, 2.30%, 8/01/25 ............................................... 1,650,000 1,650,000
MBIA Insured, Daily VRDN and Put, 2.30%, 8/01/27 ................................................ 1,310,000 1,310,000
--------------
8,904,000
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GEORGIA 11.0%
a Atlanta Downtown Development Authority Revenue, Underground Atlanta Project, Refunding,
AMBAC Insured, Weekly VRDN and Daily Put, 2.31%, 10/01/16 ........................................ 1,000,000 1,000,000
a Fulco Hospital Authority Revenue, Anticipation Certificates, Shepherd Center Inc. Project,
Weekly VRDN and Put, 2.35%, 9/01/17 .............................................................. 1,000,000 1,000,000
a Gainesville RDA Educational Facilities Revenue, Riverside Military Project, Weekly VRDN and
Put, 2.35%, 12/01/25 ............................................................................. 5,000,000 5,000,000
Annual Report | 9
FRANKLIN TAX-EXEMPT MONEY FUND
STATEMENT OF INVESTMENTS, JULY 31, 2005 (CONTINUED)
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PRINCIPAL AMOUNT VALUE
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SHORT TERM INVESTMENTS (CONT.)
BONDS (CONT.)
GEORGIA (CONT.)
a Metropolitan Atlanta Rapid Transit Authority Sales Tax Revenue, Series B, Weekly VRDN and
Put, 2.30%, 7/01/25 .............................................................................. $ 8,000,000 $ 8,000,000
a Roswell Housing Authority MFR, Azalea Park Apartments, Refunding, FNMA Insured, Weekly
VRDN and Put, 2.36%, 6/15/25 ..................................................................... 3,200,000 3,200,000
--------------
18,200,000
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HAWAII 1.7%
a Hawaii State Department of Budget and Finance Special Purpose Revenue, Adventist Health
System West, Weekly VRDN and Put, 2.33%, 3/01/08 ................................................. 2,800,000 2,800,000
--------------
IDAHO 1.8%
Idaho State Revenue, TAN, 4.00%, 6/30/06 ........................................................... 3,000,000 3,036,473
--------------
ILLINOIS 6.0%
Chicago GO, Tender Notes, Mandatory Put 12/08/05, 2.20%, 1/27/06 ................................... 3,000,000 3,000,000
a Illinois State Toll Highway Authority Toll Highway Priority Revenue, Refunding, Series B,
MBIA Insured, Weekly VRDN and Daily Put, 2.33%, 1/01/10 .......................................... 7,000,000 7,000,000
--------------
10,000,000
--------------
IOWA 1.8%
Iowa School Cash Anticipation Program, wts. Certificates, Series A, FSA Insured, 4.00%,
6/28/06 .......................................................................................... 3,000,000 3,036,511
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KENTUCKY 2.5%
a Kentucky Development Finance Authority Revenue, Pooled Loan Program, Series A,
FGIC Insured, Weekly VRDN and Put, 2.35%, 12/01/15 ............................................... 4,100,000 4,100,000
--------------
LOUISIANA 2.4%
a Louisiana State Offshore Terminal Authority Deepwater Port Revenue, Loop Inc. Project,
First Stage, ACES, Refunding, Daily VRDN and Put, 2.30%, 9/01/17 ................................. 2,100,000 2,100,000
New Orleans Audubon Commission GO, Aquarium, Refunding, FSA Insured, Series A, 3.00%,
10/01/05 ......................................................................................... 1,930,000 1,934,606
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4,034,606
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MARYLAND 1.3%
a Community Development Administration MF Development Revenue, Avalon Ridge Apartments
Project, Refunding, FNMA Insured, Weekly VRDN and Put, 2.32%, 6/15/26 ............................ 2,100,000 2,100,000
--------------
MASSACHUSETTS 8.7%
a Massachusetts Bay Transportation Authority GO, General Transportation System, Weekly VRDN
and Put, 2.32%, 3/01/30 .......................................................................... 4,600,000 4,600,000
a Massachusetts State GO, Refunding, Series B, Weekly VRDN and Put, 2.33%, 9/01/16 ................... 1,800,000 1,800,000
a Massachusetts State Health and Educational Facilities Authority Revenue, Capital Assets
Program, Series D, MBIA Insured, Daily VRDN and Put, 2.27%, 1/01/35 .............................. 4,400,000 4,400,000
a Massachusetts State Water Resource Authority Revenue, Multi-Modal, Refunding, Sub Series D,
Daily VRDN and Put, 2.30%, 8/01/17 ............................................................... 3,600,000 3,600,000
--------------
14,400,000
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10 | Annual Report
FRANKLIN TAX-EXEMPT MONEY FUND
STATEMENT OF INVESTMENTS, JULY 31, 2005 (CONTINUED)
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PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONT.)
BONDS (CONT.)
MICHIGAN 8.8%
a Detroit Sewage Disposal Revenue,
Refunding, Series C-2, FGIC Insured, Weekly VRDN and Put, 2.35%, 7/01/29 ........................ $ 3,000,000 $ 3,000,000
senior lien, Series B, FSA Insured, Daily VRDN and Put, 2.30%, 7/01/33 .......................... 2,500,000 2,500,000
Michigan Municipal Bond Authority Revenue,
3.00%, 8/23/05 .................................................................................. 4,000,000 4,003,409
Detroit School District, Series A, 3.75%, 3/21/06 ............................................... 1,000,000 1,007,495
a Michigan State Revenue, Grant Anticipation Notes, Series B, FSA Insured, Weekly VRDN and
Put, 2.34%, 9/15/09 .............................................................................. 1,300,000 1,300,000
a Michigan State University Revenues, Series A, Daily VRDN and Put, 2.30%, 8/15/32 ................... 2,860,000 2,860,000
--------------
14,670,904
--------------
MINNESOTA 2.9%
a Brown County Purchase Revenue, Martin Luther College Project, Weekly VRDN and Put, 2.30%,
9/01/24 .......................................................................................... 1,500,000 1,500,000
a Minneapolis MFR, Seven Corners Apartments Project, Weekly VRDN and Put, 2.30%,
11/01/31 ......................................................................................... 250,000 250,000
a Minneapolis Revenue, Adjusted Guthrie Theater Project, Series A, Weekly VRDN and Put,
2.33%, 10/01/23 .................................................................................. 3,000,000 3,000,000
--------------
4,750,000
--------------
NEVADA 0.5%
a Clark County Airport Improvement Revenue, sub. lien, Series A-1, Weekly VRDN and Put,
2.33%, 7/01/25 ................................................................................... 800,000 800,000
--------------
NEW HAMPSHIRE 1.3%
a New Hampshire Higher Educational and Health Facilities Authority Revenue, VHA New
England Inc., Series G, AMBAC Insured, Weekly VRDN and Put, 2.35%, 12/01/25 ...................... 2,125,000 2,125,000
--------------
NEW JERSEY 1.5%
a New Jersey State Turnpike Authority Turnpike Revenue, Series C-2, FSA Insured, Weekly VRDN
and Put, 2.28%, 1/01/24 .......................................................................... 2,500,000 2,500,000
--------------
NEW MEXICO 4.1%
a Albuquerque Gross Receipts Lodgers Tax Revenue, Weekly VRDN and Put, 2.35%, 7/01/23 ................ 300,000 300,000
a Farmington PCR, Arizona Public Service Co.,
Refunding, Series B, Daily VRDN and Put, 2.30%, 9/01/24 ......................................... 2,000,000 2,000,000
Series A, Daily VRDN and Put, 2.34%, 5/01/24 .................................................... 4,400,000 4,400,000
a University of New Mexico Revenues, Refunding, AMBAC Insured, Weekly VRDN and Put, 2.33%,
6/01/06 .......................................................................................... 200,000 200,000
--------------
6,900,000
--------------
NORTH CAROLINA 0.6%
Wake County GO, Public Improvement, Mandatory Put 4/01/06, Series B, 4.00%, 4/01/16 ................ 1,000,000 1,012,360
--------------
OKLAHOMA 1.3%
a Oklahoma City Industrial and Cultural Facilities Trust Revenue, Oklahoma City University
Project, Weekly VRDN and Put, 2.43%, 8/01/15 ..................................................... 2,100,000 2,100,000
--------------
Annual Report | 11
FRANKLIN TAX-EXEMPT MONEY FUND
STATEMENT OF INVESTMENTS, JULY 31, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONT.)
BONDS (CONT.)
OREGON 0.2%
a Tri-County Metropolitan Transportation District Revenue, Interstate Max Project, Series A,
Weekly VRDN and Put, 2.35%, 12/01/21 ............................................................. $ 400,000 $ 400,000
--------------
PENNSYLVANIA 6.7%
a Delaware Valley Regional Finance Authority Local Government Revenue,
Series A, Weekly VRDN and Put, 2.35%, 12/01/20 .................................................. 2,150,000 2,150,000
Series C, Weekly VRDN and Put, 2.35%, 12/01/20 .................................................. 700,000 700,000
Series D, Weekly VRDN and Put, 2.35%, 12/01/20 .................................................. 3,100,000 3,100,000
a Emmaus General Authority Revenue,
Local Government, Series F-19, Weekly VRDN and Put, 2.36%, 3/01/24 .............................. 1,450,000 1,450,000
Sub Series G-19, Weekly VRDN and Put, 2.36%, 3/01/24 ............................................ 2,000,000 2,000,000
Temple University of the Commonweath System of Higher Education GO, University Funding
Obligation, 4.00%, 4/28/06 ....................................................................... 1,700,000 1,715,155
--------------
11,115,155
--------------
TENNESSEE 6.3%
a Clarksville PBA Revenue, Pooled Financing, Tennessee Municipal Bond Fund, Daily VRDN and
Put, 2.34%,
7/01/31 ......................................................................................... 800,000 800,000
1/01/33 ......................................................................................... 3,900,000 3,900,000
a Montgomery County PBA Pooled Financing Revenue, Tennessee County Loan Pool,
Daily VRDN and Put, 2.34%, 7/01/34 .............................................................. 3,900,000 3,900,000
Weekly VRDN and Put, 2.34%, 11/01/27 ............................................................ 1,800,000 1,800,000
--------------
10,400,000
--------------
TEXAS 7.2%
a Bexar County HFA, MFR, Altamonte Apartments Project, Refunding, FNMA Insured, Weekly
VRDN and Put, 2.34%, 9/15/26 ..................................................................... 3,900,000 3,900,000
Texas State TRAN, 3.00%, 8/31/05 ................................................................... 8,000,000 8,009,413
--------------
11,909,413
--------------
WASHINGTON 1.5%
a Snohomish County PUD No. 001 Generation System Revenue, Refunding, Series A-1,
FSA Insured, Weekly VRDN and Put, 2.34%, 12/01/19 ................................................ 2,470,000 2,470,000
--------------
TOTAL SHORT TERM INVESTMENTS (COST $164,589,422) ................................................... 164,589,422
OTHER ASSETS, LESS LIABILITIES 0.7% ................................................................ 1,146,229
--------------
NET ASSETS 100.0% .................................................................................. $ 165,735,651
==============
<FN>
aVariable rate demand notes (VRDNs) are tax-exempt obligations which contain a floating or variable interest rate
adjustment formula and an unconditional right of demand to receive payment of the principal balance plus accrued interest
at specified dates. The coupon rate shown represents the rate at period end. VRDNs are valued at cost.
</FN>
12 | See notes to financial statements. | Annual Report
FRANKLIN TAX-EXEMPT MONEY FUND
STATEMENT OF INVESTMENTS, JULY 31, 2005 (CONTINUED)
SELECTED PORTFOLIO ABBREVIATIONS
ACES - Adjustable Convertible Exempt Securities
AMBAC - American Municipal Bond Assurance Corp.
COP - Certificate of Participation
FGIC - Financial Guaranty Insurance Co.
FNMA - Federal National Mortgage Association
FSA - Financial Security Assurance Inc.
GO - General Obligation
HFA - Housing Finance Authority/Agency
IDA - Industrial Development Authority/Agency
IDB - Industrial Development Bond/Board
IDR - Industrial Development Revenue
MBIA - Municipal Bond Investors Assurance Corp.
MF - Multi-Family
MFR - Multi-Family Revenue
PBA - Public Building Authority
PCR - Pollution Control Revenue
PUD - Public Utility District
RDA - Redevelopment Agency/Authority
TAN - Tax Anticipation Notes
TECP - Tax-Exempt Commercial Paper
TRAN - Tax and Revenue Anticipation Notes
VHA - Volunteer Hospital of America
Annual Report | See notes to financial statements. | 13
FRANKLIN TAX-EXEMPT MONEY FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
July 31, 2005
Assets:
Investments in securities, at value and cost ................. $164,589,422
Cash ......................................................... 183,639
Receivables:
Capital shares sold ......................................... 600,232
Interest .................................................... 770,203
--------------
Total assets ............................................ 166,143,496
--------------
Liabilities:
Payables:
Capital shares redeemed ..................................... 299,692
Affiliates .................................................. 84,894
Distributions to shareholders ............................... 6,383
Other liabilities ............................................ 16,876
--------------
Total liabilities ....................................... 407,845
--------------
Net assets, at value .......................................... $165,735,651
==============
Shares outstanding ............................................ 165,735,651
==============
Net asset value per sharea .................................... $1.00
==============
aRedemption price is equal to net asset value less contingent deferred sales
charges, if applicable.
14 | See notes to financial statements. | Annual Report
FRANKLIN TAX-EXEMPT MONEY FUND
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended July 31, 2005
Investment income:
Interest ....................................................... $ 3,124,422
-------------
Expenses:
Management fees (Note 3a) ...................................... 973,922
Transfer agent fees (Note 3d) .................................. 156,501
Custodian fees ................................................. 2,564
Reports to shareholders ........................................ 29,006
Registration and filing fees ................................... 49,937
Professional fees .............................................. 12,488
Directors' fees and expenses ................................... 7,365
Other .......................................................... 19,114
-------------
Total expenses ............................................ 1,250,897
-------------
Net investment income .................................... 1,873,525
-------------
Net realized gain (loss) from investments ....................... (282)
-------------
Net increase (decrease) in net assets resulting from operations . $ 1,873,243
=============
Annual Report | See notes to financial statements. | 15
FRANKLIN TAX-EXEMPT MONEY FUND
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
-------------------------------
YEAR ENDED JULY 31,
2005 2004
-------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ..................................................................... $ 1,873,525 $ 401,039
Net realized gain (loss) from investments ................................................. (282) (15,236)
-------------------------------
Net increase (decrease) in net assets resulting from operations ....................... 1,873,243 385,803
-------------------------------
Distributions to shareholders from net investment income ................................... (1,873,243) a (385,803) b
Capital share transactions (Note 2) ........................................................ (13,636,263) 2,537,557
-------------------------------
Net increase (decrease) in net assets ................................................. (13,636,263) 2,537,557
-------------------------------
Net assets (there is no undistributed net investment income at beginning or end of year):
Beginning of year .......................................................................... 179,371,914 176,834,357
-------------------------------
End of year ................................................................................ $ 165,735,651 $ 179,371,914
===============================
<FN>
aDistributions were decreased by a net realized loss from investments of $282.
bDistributions were decreased by a net realized loss from investments of $15,236.
</FN>
16 | See notes to financial statements. | Annual Report
FRANKLIN TAX-EXEMPT MONEY FUND
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Tax-Exempt Money Fund (the Fund) is registered under the Investment
Company Act of 1940 as a diversified, open-end investment company.
The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Securities are valued at amortized cost which approximates market value. This
method involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium. All security
valuation procedures are approved by the Fund's Board of Directors.
B. INCOME TAXES
No provision has been made for U.S. income taxes because the Fund's policy is to
continue to qualify as a regulated investment company under Subchapter M of the
Internal Revenue Code and to distribute substantially all of its income. Fund
distributions to shareholders are determined on an income tax basis and may
differ from net investment income and realized gains for financial reporting
purposes.
C. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Discounts and premiums
on securities purchased are amortized over the lives of the respective
securities. Dividends from net investment income and capital gains or losses are
normally declared daily. Such distributions are reinvested in additional shares
of the Fund.
D. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.
E. GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and directors are
indemnified by the Fund against certain liabilities arising out of the
performance of their duties to the Fund. Additionally, in the normal course of
business, the Fund enters into contracts with service providers that contain
general indemnification clauses. The Fund's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Fund that have not yet occurred. However, based on experience, the
Fund expects the risk of loss to be remote.
Annual Report | 17
FRANKLIN TAX-EXEMPT MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK
At July 31, 2005, there were 5 billion shares authorized (no par value).
Transactions in the Fund's shares at $1.00 per share were as follows:
----------------------------------
YEAR ENDED JULY 31,
2005 2004
----------------------------------
Shares sold ..................................................... $ 212,615,914 $ 205,085,529
Shares issued in reinvestment of distributions .................. 1,880,299 390,258
Shares redeemed ................................................. (228,132,476) (202,938,230)
----------------------------------
Net increase (decrease) ......................................... $ (13,636,263) $ 2,537,557
==================================
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
directors of the Fund are also officers and/or directors of the following
subsidiaries:
- -------------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- -------------------------------------------------------------------------------------------
Franklin Advisers Inc. (Advisers) Investment manager
Franklin Templeton Services LLC (FT Services) Administrative manager
Franklin Templeton Distributors Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Fund pays an investment management fee to Advisers based on the average
daily net assets of the Fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.625% Up to and including $100 million
0.500% Over $100 million, up to and including $250 million
0.450% In excess of $250 million
B. ADMINISTRATIVE FEES
Under an agreement with Advisers, FT Services provides administrative services
to the Fund. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Fund.
C. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Fund of the following commission transactions
related to the sales and redemptions of the Fund's shares for the year:
Contingent deferred sales charges retained .................... $13,360
18 | Annual Report
FRANKLIN TAX-EXEMPT MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
D. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $156,501, of which $118,096 was retained by
Investor Services.
4. INCOME TAXES
At July 31, 2005, the Fund had tax basis capital losses which may be carried
over to offset future capital gains. Such losses expire as follows:
Capital losses carryovers expiring in:
2008 ......................................................... $ 8,419
2009 ......................................................... 26,572
2012 ......................................................... 17,134
2013 ......................................................... 932
--------
$ 53,057
========
On July 31, 2005, the Fund had expired capital loss carryovers of $1,844.
At July 31, 2005, the Fund had deferred capital losses occurring subsequent to
October 31, 2004 of $282. For tax purposes, such losses will be reflected in the
year ending July 31, 2006.
The tax character of distributions paid during the years ended July 31, 2005 and
2004, was as follows:
-----------------------
2005 2004
-----------------------
Distributions paid from tax-exempt income ..... $1,873,243 $385,803
=======================
At July 31, 2005, the cost of investments and undistributed tax-exempt income
for income tax purposes were as follows:
Costs of investments .................................. $ 164,589,422
==============
Undistributed tax-exempt income ....................... $ 56,729
==============
5. REGULATORY MATTERS
INVESTIGATIONS AND SETTLEMENTS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), the California Attorney General's Office ("CAGO"), and the
National Association of Securities Dealers, Inc. ("NASD"), relating to certain
practices in the mutual fund industry, including late trading, market timing and
marketing support payments to securities dealers who sell fund shares, Franklin
Resources, Inc. and certain of its subsidiaries (as used in this section,
together, the "Company"),
Annual Report | 19
FRANKLIN TAX-EXEMPT MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. REGULATORY MATTERS (CONTINUED)
INVESTIGATIONS AND SETTLEMENTS (CONTINUED)
as well as certain current or former executives and employees of the Company,
provided documents and information in response to subpoenas and/or requests for
documents, information and/or testimony. Beginning in August 2004, the Company
entered into settlements with certain of the regulators and a governmental
entity investigating the mutual fund industry practices noted above. The Company
believes that settlement of each of the matters is in the best interest of the
Company and shareholders of the Franklin, Templeton, and Mutual Series mutual
funds (the "funds").
Two of the settlement agreements, those with the SEC and the CAGO concerning
marketing support payments, provide that the distribution of settlement monies
are to be made to the relevant funds, not to individual shareholders. The CAGO
has approved the distribution plan pertaining to the distribution of the monies
owed under the CAGO settlement agreement and, in accordance with the terms and
conditions of that settlement, the monies were disbursed to the participating
funds. The Fund did not participate in the CAGO settlement. The SEC has not yet
approved the distribution plan pertaining to the SEC settlement. When approved,
disbursements of settlement monies under the SEC's settlement will be made
promptly in accordance with the terms and conditions of that order.
OTHER LEGAL PROCEEDINGS
On April 12, 2005, the Attorney General of West Virginia filed a complaint in
the Circuit Court of Marshall County, West Virginia against a number of
companies engaged in the mutual fund industry, including Franklin Resources,
Inc. and its subsidiary, Franklin Advisers, Inc., and certain other parties
alleging violations of the West Virginia Consumer Credit and Protection Act and
seeking, among other things, civil penalties and attorneys' fees and costs.
Defendants have since removed the matter to the United States District Court for
the Northern District of West Virginia. To the extent applicable to the Company,
the complaint arises from activity that occurred in 2001 and duplicates, in
whole or in part, the allegations asserted in the February 4, 2004 Massachusetts
Administrative Complaint concerning one instance of market timing (the
"Administrative Complaint") and the SEC's findings regarding market timing in
its August 2, 2004 Order (the "SEC Order"), both of which matters were
previously reported.
The Company, in addition to certain Franklin, Templeton, and Mutual Series
mutual funds, and certain current and former officers, employees, and directors
have been named in multiple lawsuits in different courts alleging violations of
various federal securities and state laws and seeking, among other relief,
monetary damages, restitution, removal of fund trustees, directors, advisers,
administrators, and distributors, rescission of management contracts and 12b-1
plans, and/or attorneys' fees and costs. Specifically, the lawsuits claim breach
of duty with respect to alleged arrangements to permit market timing and/or late
trading activity, or breach of duty with respect to the valuation of the
portfolio securities of certain Templeton funds managed by Franklin Resources,
Inc. subsidiaries, allegedly resulting in market timing activity. The majority
of these
20 | Annual Report
FRANKLIN TAX-EXEMPT MONEY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. REGULATORY MATTERS (CONTINUED)
OTHER LEGAL PROCEEDINGS (CONTINUED)
lawsuits duplicate, in whole or in part, the allegations asserted in the
Administrative Complaint and the SEC's findings regarding market timing in the
SEC Order. The lawsuits are styled as class actions, or derivative actions on
behalf of either the named funds or Franklin Resources, Inc.
The Company, in addition to certain Franklin, Templeton, and Mutual Series
mutual funds, and certain current and former officers, employees, and directors
have been named in multiple lawsuits alleging violations of various securities
laws and pendent state law claims relating to the disclosure of marketing
support payments and/or payment of allegedly excessive commissions and/or
advisory or distribution fees, and seeking, among other relief, monetary
damages, restitution, rescission of advisory contracts, including recovery of
all fees paid pursuant to those contracts, an accounting of all monies paid to
the named advisers, declaratory relief, injunctive relief, and/or attorneys'
fees and costs. These lawsuits are styled as class actions or derivative actions
brought on behalf of the named funds.
The Company and fund management strongly believe that the claims made in each of
the lawsuits described above are without merit and intends to defend against
them vigorously. The Company cannot predict with certainty the eventual outcome
of these lawsuits, nor whether they will have a material negative impact on the
Company. Public trust and confidence are critical to the Company's business and
any material loss of investor and/or client confidence could result in a
significant decline in assets under management by the Company, which would have
an adverse effect on future financial results. If it is determined that the
Company bears responsibility for any unlawful or inappropriate conduct that
caused losses to the Fund, it is committed to making the Fund or its
shareholders whole, as appropriate. The Company is committed to taking all
appropriate actions to protect the interests of its funds' shareholders.
Annual Report | 21
FRANKLIN TAX-EXEMPT MONEY FUND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF FRANKLIN TAX-EXEMPT MONEY FUND
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Franklin Tax-Exempt Money Fund (the
"Fund") at July 31, 2005, the results of its operations for the year then ended,
the changes in its net assets for each of the two years in the period then ended
and the financial highlights for each of the five years in the period then
ended, in conformity with accounting principles generally accepted in the United
States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at July 31, 2005 by correspondence with the custodian and brokers,
provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
September 9, 2005
22 | Annual Report
FRANKLIN TAX-EXEMPT MONEY FUND
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(5)(A) of the Internal Revenue Code, the Fund hereby
designates 100% of the distributions paid from net investment income as
exempt-interest dividends for the fiscal year ended July 31, 2005. A portion of
the Fund's exempt-interest dividends may be subject to the federal alternative
minimum tax. In January 2006, shareholders will be notified of amounts for use
in preparing their 2005 income tax returns.
Annual Report | 23
FRANKLIN TAX-EXEMPT MONEY FUND
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Fund, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Each board member will serve
until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
- ---------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ---------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (1932) Director Since 1982 141 Director, Bar-S Foods (meat
One Franklin Parkway packing company).
San Mateo, CA 94403-1906
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and
President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers)
(until 1998).
- --------------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO (1932) Director Since 1989 142 None
One Franklin Parkway
San Mateo, CA 94403-1906
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch (until 2002) (Consultant (2003)).
- --------------------------------------------------------------------------------------------------------------------------
FRANK W.T. LAHAYE (1929) Director Since 1980 115 Director, The California
One Franklin Parkway Center for Land Recycling
San Mateo, CA 94403-1906 (redevelopment).
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company
(venture capital).
- --------------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN (1928) Director Since 1992 141 Director, Martek Biosciences
One Franklin Parkway Corporation, MedImmune, Inc.
San Mateo, CA 94403-1906 (biotechnology), and Overstock.com
(Internet services); and formerly,
Director, MCI Communication
Corporation (subsequently known as
MCI WorldCom, Inc. and WorldCom,
Inc.) (communications services)
(1988-2002), White Mountains
Insurance Group, Ltd. (holding
company) (1987-2004) and Spacehab,
Inc. (aerospace services)
(1994-2003).
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company)
(2001-2004); Chairman, White River Corporation (financial services) (1993-1998) and Hambrecht & Quist Group (investment
banking) (1987-1992); and President, National Association of Securities Dealers, Inc. (1970-1987).
- --------------------------------------------------------------------------------------------------------------------------
24 | Annual Report
INTERESTED BOARD MEMBERS AND OFFICERS
- -------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -------------------------------------------------------------------------------------------------------------------------
**CHARLES B. JOHNSON (1933) Director and Director since 141 None
One Franklin Parkway Chairman of 1980 and
San Mateo, CA 94403-1906 the Board Chairman of the
Board since 1993
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member-Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin
Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee,
as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies
in Franklin Templeton Investments.
- -------------------------------------------------------------------------------------------------------------------------
**RUPERT H. JOHNSON, JR.(1940) Director, Director since 125 None
One Franklin Parkway President 1980, President
San Mateo, CA 94403-1906 and Chief since 1993 and
Executive Chief Executive
Officer- Officer-Investment
Investment Management since
Management 2002
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member-Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director,
Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc.; Senior Vice President, Franklin Advisory
Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of
Franklin Resources, Inc. and of 47 of the investment companies in Franklin Templeton Investments.
- --------------------------------------------------------------------------------------------------------------------------
SHEILA AMOROSO (1959) Vice Since 1999 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton
Investments.
- --------------------------------------------------------------------------------------------------------------------------
HARMON E. BURNS (1945) Vice Since 1986 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member-Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director,
Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; and officer and/or director
or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 47 of the
investment companies in Franklin Templeton Investments.
- --------------------------------------------------------------------------------------------------------------------------
RAFAEL R. COSTAS, JR. (1965) Vice Since 1999 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton
Investments.
- --------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Since 2004 Not Applicable Not Applicable
One Franklin Parkway Compliance
San Mateo, CA 94403-1906 Officer
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of 48 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- --------------------------------------------------------------------------------------------------------------------------
Annual Report | 25
- -------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -------------------------------------------------------------------------------------------------------------------------
LAURA FERGERSON (1962) Treasurer Since 2004 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 32 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director and member of Audit
and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the investment companies in
Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003).
- --------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President and
Suite 2100 Chief Executive
Fort Lauderdale, FL Officer-Finance
33394-3091 and Administration
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 48 of the
investment companies in Franklin Templeton Investments.
- --------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) Vice Since 2000 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; officer of 48 of the investment companies in Franklin Templeton Investments; and FORMERLY, President,
Chief Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust
(until 2000).
- --------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) Vice Since 2000 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
--------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President,
Templeton Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment
Advisory Services, LLC, Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin
Templeton Investor Services, LLC, Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton
Investment Counsel, LLC, and Templeton/Franklin Investment Services, Inc.; and officer of some of the other
subsidiaries of Franklin Resources, Inc. and of 48 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).
- --------------------------------------------------------------------------------------------------------------------------
MICHAEL O. MAGDOL (1937) Vice President- Since 2002 Not Applicable Not Applicable
600 Fifth Avenue AML Compliance
Rockefeller Center
New York, NY 10020-2302
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, FTI Banque, Arch
Chemicals, Inc. and Lingnan Foundation; and officer and/or director, as the case may be, of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
- --------------------------------------------------------------------------------------------------------------------------
26 | Annual Report
- -------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -------------------------------------------------------------------------------------------------------------------------
MURRAY L. SIMPSON (1937) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway and Secretary
San Mateo, CA 94403-1906
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director, as the case may be, of
some of the subsidiaries of Franklin Resources, Inc. and of 48 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia)
Limited (until 2000); and Director, Templeton Asset Management Ltd. (until 1999).
- --------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (1951) Chief Since 2004 Not Applicable Not Applicable
500 East Broward Blvd. Financial
Suite 2100 Officer and
Fort Lauderdale, FL Chief
33394-3091 Accounting
Officer
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 48 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc.; and Partner, McGladrey & Pullen, LLP.
- --------------------------------------------------------------------------------------------------------------------------
THOMAS WALSH (1961) Vice Since 1999 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the investment companies in Franklin Templeton
Investments.
- --------------------------------------------------------------------------------------------------------------------------
<FN>
*We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin
Templeton Investments fund complex. These portfolios have a common investment adviser or affiliated investment advisers.
**Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be interested persons of the Fund under the federal
securities laws due to their positions as officers and directors and major shareholders of Franklin Resources, Inc.,
which is the parent company of the Fund's adviser and distributor.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
</FN>
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF DIRECTORS HAS DETERMINED
THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS
DESIGNATED FRANK W.T. LAHAYE AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD
BELIEVES THAT MR. LAHAYE QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE
BUSINESS BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS PRESIDENT AND DIRECTOR
OF MCCORMICK SELPH ASSOCIATES FROM 1954 THROUGH 1965; DIRECTOR AND CHAIRMAN OF
TELEDYNE CANADA LTD. FROM 1966 THROUGH 1971; DIRECTOR AND CHAIRMAN OF
QUARTERDECK CORPORATION FROM 1982 THROUGH 1998; AND SERVICES AS A DIRECTOR OF
VARIOUS OTHER PUBLIC COMPANIES INCLUDING U.S. TELEPHONE INC. (1981-1984), FISHER
IMAGING INC. (1991-1998) AND DIGITAL TRANSMISSIONS SYSTEMS (1995-1999). IN
ADDITION, MR. LAHAYE SERVED FROM 1981 TO 2000 AS A DIRECTOR AND CHAIRMAN OF
PEREGRINE VENTURE MANAGEMENT CO., A VENTURE CAPITAL FIRM, AND HAS BEEN A MEMBER
AND CHAIRMAN OF THE FUND'S AUDIT COMMITTEE SINCE ITS INCEPTION. AS A RESULT OF
SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF DIRECTORS BELIEVES THAT MR. LAHAYE
HAS ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND
FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION
WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND
EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY
OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN
UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN
UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MR. LAHAYE IS AN INDEPENDENT
DIRECTOR AS THAT TERM IS DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE
COMMISSION RULES AND RELEASES.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
Annual Report | 27
FRANKLIN TAX-EXEMPT MONEY FUND
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT
At a meeting held February 28, 2005, the Board of Directors ("Board"), including
a majority of non-interested or independent Directors, approved renewal of the
investment advisory contract for the Fund. In reaching this decision, the Board
took into account information furnished throughout the year at regular Board
meetings, as well as information prepared specifically in connection with the
annual renewal review process. Information furnished and discussed throughout
the year included investment performance reports and related financial
information for the Fund, as well as periodic reports on shareholder services,
legal, compliance, pricing, brokerage commissions and execution and other
services provided by the Investment Manager ("Manager") and its affiliates.
Information furnished specifically in connection with the renewal process
included a report for the Fund prepared by Lipper Financial Services ("Lipper"),
an independent organization, as well as a Fund profitability analysis report
prepared by management. The Lipper report compared the Fund's investment
performance and expenses with those of other mutual funds deemed comparable to
the Fund as selected by Lipper. The Fund profitability analysis report discussed
the profitability to Franklin Templeton Investments from its overall U.S. fund
operations, as well as on an individual fund-by-fund basis. Included with such
profitability analysis report was information on a fund-by-fund basis listing
portfolio managers and other accounts they manage, as well as information on
management fees charged by the Manager including management's explanation of
differences where relevant and a three-year expense analysis with an explanation
for any increase in expense ratios. Additional information accompanying such
report was a memorandum prepared by management describing enhancements to the
services provided to the Fund by the Franklin Templeton Investments
organization, as well as a memorandum relating to economies of scale.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel. In approving
continuance of the investment advisory contract for the Fund, the Board,
including a majority of independent Trustees, determined that the existing
management fee structure was fair and reasonable and that continuance of the
investment advisory contract was in the best interests of the Fund and its
shareholders. While attention was given to all information furnished, the
following discusses the primary factors relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF SERVICES. The Board was satisfied with the nature
and quality of the overall services provided by the Manager and its affiliates
to the Fund and its shareholders. In addition to investment performance and
expenses of the Fund discussed later, the Board's opinion was based, in part,
upon periodic reports furnished them showing that the investment policies and
restrictions for the Fund were consistently complied with as well as other
reports periodically furnished the Board covering matters such as the compliance
of portfolio managers and other management personnel with the code of ethics
adopted throughout the Franklin Templeton fund complex, the adherence to fair
value pricing procedures established by the Board, and the accuracy of net asset
value calculations. The Board also noted the extent of benefits provided Fund
shareholders from being part of the Franklin Templeton family of funds,
including the right to exchange investments between the same class of funds
without a sales charge, the ability to reinvest Fund dividends into other funds
and the right to combine holdings in other funds to obtain a reduced sales
charge.
28 | Annual Report
FRANKLIN TAX-EXEMPT MONEY FUND
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED)
Favorable consideration was given to management's efforts and expenditures in
establishing back-up systems and recovery procedures to function in the event of
a natural disaster, it being noted by the Board that such systems and procedures
had functioned smoothly during the hurricanes and blackout experienced last year
in Florida. Other factors taken into account by the Board were the Manager's
best execution trading policies, as well as the compliance procedures and
qualifications of the Chief Compliance Officer established in accordance with
recently adopted SEC requirements. Consideration was also given to the
experience of the Fund's portfolio management team, the number of accounts
managed and general method of compensation. In this latter respect, the Board
noted that a primary factor in management's determination of the amount of a
portfolio manager's bonus compensation was the relative investment performance
of the funds he or she managed so as to be aligned with the interests of Fund
shareholders. The Board also took into account the transfer agent and
shareholder services provided Fund shareholders by an affiliate of the Manager,
noting continuing expenditures by management to increase and improve the scope
of such services, periodic favorable reports on such service conducted by third
parties such as Dalbar, and the firsthand experience of the individual Trustees
who deal with the shareholder services department in their capacities as
shareholders in one or more of the various Franklin Templeton funds.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment
performance of the Fund in view of its importance to shareholders. While
consideration was given to performance reports and discussions with portfolio
managers at Board meetings during the year, particular attention in assessing
such performance was given to the Lipper report furnished for the contract
renewal. The Lipper report prepared for the Fund showed the investment
performance for the year ended December 31, 2004, as well as the previous ten
years ended that date in comparison to a performance universe consisting of the
Fund and all retail tax-exempt money market funds as selected by Lipper. The
Lipper report showed that the Fund's total return for the one-year period, as
well as for the previous three- and five-year periods, on an annualized basis,
was in the fourth- or second-lowest quintiles of such universe, and was in the
lowest quintile for the previous ten-year period on an annualized basis. In
discussing this comparative performance, management pointed out that the Fund
follows a very conservative investment approach with no investments in non-rated
securities or tier 2 securities and with less than 2% of its assets held in
securities subject to the alternative minimum tax. Management further pointed
out that its total return was close to the median of its expense universe, being
within 15 basis points of such median for the annualized ten- year period as
shown in the Lipper report. The Board found such performance to be acceptable,
noting the points raised by management.
COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the
management fee and total expense ratios of the Fund compared with those of a
group of other funds selected by Lipper as its appropriate Lipper expense group
under the Lipper report. Prior to making such comparison, the Board relied upon
a survey showing that the scope of management advisory services covered under
the Fund's investment advisory contract was similar to those provided by fund
Annual Report | 29
FRANKLIN TAX-EXEMPT MONEY FUND
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED)
managers to other mutual fund groups that would be used as a basis of comparison
in the Lipper reports. In reviewing comparative costs, emphasis was given to the
Fund's management fee in comparison with the effective management fee that would
have been charged by other funds within its Lipper expense group assuming they
were the same size as the Fund, as well as the actual total expenses of the Fund
in comparison with those of its Lipper expense group. The Lipper effective
management fee analysis includes administrative charges as being part of a
management fee. The results of such comparisons showed the Fund's effective
management fee to be the eleventh highest of the thirteen funds comprising the
Lipper expense group, and its actual total expense to be the ninth highest
within such group and the highest if expenses were to exclude 12b-1 fees which
are not charged by the Fund. In discussing the expense comparisons, management
pointed out that this Fund is not actively marketed and largely serves as an
alternative investment vehicle for shareholders of the various
Franklin/Templeton/Mutual Series fund families and provides a number of courtesy
services to shareholders, including check writing and exchange privileges.
Management also pointed out that the Fund's effective management fee rate was
within eight basis points of the median for its Lipper expense group and that
the Fund's actual total expenses were within five basis points of the median for
such group, and if 12b-1 expenses were to be excluded from the group, were
within thirteen basis points of the median for such group as shown in the Lipper
report. The Board found such comparative expenses to be acceptable, noting the
points raised by management.
MANAGEMENT PROFITABILITY. The Board also considered the level of profits
realized by the Manager and its affiliates in connection with the operation of
the Fund. In this respect, the Board reviewed the Fund profitability analysis
that addresses the overall profitability of Franklin Templeton's U.S. fund
business, as well as its profits in providing management and other services to
each of the individual funds. The Board also considered the extent to which the
Manager and its affiliates might derive ancillary benefits from fund operations,
including potential benefits resulting from allocation of fund brokerage and the
use of "soft" commission dollars to pay for research. Specific attention was
given to the methodology followed in allocating costs to the Fund, it being
recognized that allocation methodologies are inherently subjective and various
allocation methodologies may each be reasonable while producing different
results. In this respect, the Board noted that the cost allocation methodology
was consistent with that followed in profitability report presentations for the
Fund made in prior years and that it had engaged on a biennial basis the Fund's
independent accountants to perform certain procedures specified by the Board
solely for its purpose and use. It was also noted that legal costs and payments
incurred by Franklin Templeton in resolving various legal proceedings arising
from its U.S. fund operations had not been allocated to the Fund for purposes of
determining profitability. Included in the analysis for the Fund were the
revenue and related costs broken down separately from the management,
underwriting and shareholder services functions provided by the Manager and its
affiliates to the Fund, as well as the relative contribution of the Fund to the
profitability of the Manager's parent. In reviewing and discussing such
analysis, management discussed with the Board its belief that costs incurred in
establishing the infrastructure necessary to the type of mutual fund operations
conducted by the Manager and its corporate affiliates may not be fully reflected
in the expenses allocated to the Fund in determining its profitability, as well
as the fact that
30 | Annual Report
FRANKLIN TAX-EXEMPT MONEY FUND
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED)
the level of profits, to a certain extent, reflected operational cost savings
and efficiencies initiated by management. The Board also took into account
management's expenditures in improving shareholder services provided the Fund,
as well as the need to meet additional regulatory and compliance requirements
resulting from the Sarbanes-Oxley Act and recent SEC requirements. In addition,
the Board considered a third-party study comparing the profitability of the
Manager's parent on an overall basis as compared to other publicly held managers
broken down to show profitability from management operations exclusive of
distribution expenses, as well as profitability including distribution expenses.
Based upon their consideration of all these factors, the Board determined that
the level of profits realized by the Manager under its investment advisory
contract with the Fund was not excessive in view of the nature, quality and
extent of services provided.
ECONOMIES OF SCALE. The Board also considered whether economies of scale are
realized by the Manager as the Fund grows larger and the extent to which this is
reflected in the level of management fees charged. While recognizing that any
precise determination is inherently subjective, the Board noted that based upon
the Fund profitability analysis, it appears that as some funds get larger, at
some point economies of scale do result in the Manager realizing a larger profit
margin on management services provided such a fund. The Board also noted that
economies of scale are shared with a fund and its shareholders through
management fee breakpoints so that as a fund grows in size, its effective
management fee rate declines. The fee structure under the Fund's management
contract provides an initial fee of 0.625% on the first $100 million of net
assets; 0.50% on the next $150 million of net assets; and 0.45% of net assets in
excess of $250 million. The Fund's net assets were approximately $170 million at
December 31, 2004, and the Board believed that to the extent any economies of
scale may be realized by the Manager and its affiliates, the schedule of fees
under the investment advisory contract provides a sharing of benefits with the
Fund and its shareholders.
PROXY VOTING POLICIES AND PROCEDURES
The Fund has established Proxy Voting Policies and Procedures ("Policies") that
the Fund uses to determine how to vote proxies relating to portfolio securities.
Shareholders may view the Fund's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Fund's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
Annual Report | 31
FRANKLIN TAX-EXEMPT MONEY FUND
SHAREHOLDER INFORMATION (CONTINUED)
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
32 | Annual Report
LITERATURE REQUEST
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON INVESTMENTS
INTERNATIONAL
Mutual European Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II 1
VALUE
Franklin Balance Sheet Investment Fund 2
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 2
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Blue Chip Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio
Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
INCOME
Franklin Adjustable U.S. Government Securities Fund 4
Franklin's AGE High Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 5
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 6
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term
Tax-Free Income Fund
Federal Intermediate-Term
Tax-Free Income Fund
New York Intermediate-Term
Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California 7
Colorado
Connecticut
Florida 7
Georgia
Kentucky
Louisiana
Maryland
Massachusetts 6
Michigan 6
Minnesota 6
Missouri
New Jersey
New York 7
North Carolina
Ohio 7
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 8
1.The fund is closed to new investors. Existing shareholders can continue adding
to their accounts.
2.The fund is only open to existing shareholders and select retirement plans.
3.The fund is a continuously offered, closed-end fund. Shares may be purchased
daily; there is no daily redemption. However, each quarter, pending board
approval, the fund will authorize the repurchase of 5%-25% of the outstanding
number of shares. Investors may tender all or a portion of their shares during
the tender period.
4.An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5.For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are generally
taxable.
6.Portfolio of insured municipal securities.
7.These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA) and
limited-term, intermediate-term and money market portfolios (CA and NY).
8.The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
06/05 Not part of the annual report
[GRAPHIC] One Franklin Parkway
FRANKLIN TEMPLETON INVESTMENTS LOGO San Mateo, CA 94403-1906
WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
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ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN TAX-EXEMPT
MONEY FUND
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. The prospectus contains this and other
information; please read it carefully before investing.
To ensure the highest quality of service, telephone calls to and from our
service departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
114 A2005 09/05
ITEM 2. CODE OF ETHICS.
(a) The Registrant has adopted a code of ethics that applies to its principal
executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy
of its code of ethics that applies to its principal executive officers and
principal financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1) The Registrant has an audit committee financial expert serving on its
audit committee.
(2) The audit committee financial expert is Frank W. T. LaHaye, and he is
"independent" as defined under the relevant Securities and Exchange Commission
Rules and Releases.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant for the audit of the registrant's annual
financial statements or for services that are normally provided by the principal
accountant in connection with statutory and regulatory filings or engagements
were $874 for the fiscal year ended July 31, 2005 and $21,460 for the fiscal
year ended July 31, 2004.
(b) Audit-Related Fees
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant that are
reasonably related to the performance of the audit of the registrant's financial
statements and are not reported under paragraph (a) of Item 4.
The aggregate fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant's investment
adviser and any entity controlling, controlled by or under common control with
the investment adviser that provides ongoing services to the registrant that are
reasonably related to the performance of the audit of their financial statements
were $0 for the fiscal year ended July 31, 2005 and $48,579 for the fiscal year
ended July 31, 2004. The services for which these fees were paid included
attestation services.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant for tax compliance, tax
advice and tax planning.
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant for tax
compliance, tax advice and tax planning were $19,591 for the fiscal year ended
July 31, 2005 and $0 for the fiscal year ended July 31, 2004. The services for
which these fees were paid included tax compliance and advise.
(d) All Other Fees
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant not reported in
paragraphs (a)-(c) of Item 4 were $0 for the fiscal year ended July 31, 2005 and
$85 for the fiscal year ended July 31, 2004. The services for which these fees
were paid included review of materials provided to the fund Board in connection
with the investment management contract renewal process.
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant not reported
in paragraphs (a)-(c) of Item 4 were $4,500 for the fiscal year ended July 31,
2005 and $99,915 for the fiscal year ended July 31, 2004. The services for which
these fees were paid included review of materials provided to the fund Board in
connection with the investment management contract renewal process and the
review of the ICI transfer agent survey.
(e) (1) The registrant's audit committee is directly responsible for approving
the services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be provided to the
Fund by the auditors;
(iii)pre-approval of all non-audit related services to be provided to the
registrant by the auditors to the registrant's investment adviser or to any
entity that controls, is controlled by or is under common control with the
registrant's investment adviser and that provides ongoing services to the
registrant where the non-audit services relate directly to the operations or
financial reporting of the registrant; and
(iv) establishment by the audit committee, if deemed necessary or
appropriate, as an alternative to committee pre-approval of services to be
provided by the auditors, as required by paragraphs (ii) and (iii) above, of
policies and procedures to permit such services to be pre-approved by other
means, such as through establishment of guidelines or by action of a designated
member or members of the committee; provided the policies and procedures are
detailed as to the particular service and the committee is informed of each
service and such policies and procedures do not include delegation of audit
committee responsibilities, as contemplated under the Securities Exchange Act of
1934, to management; subject, in the case of (ii) through (iv), to any waivers,
exceptions or exemptions that may be available under applicable law or rules.
(e) (2) None of the services provided to the registrant described in paragraphs
(b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required by this Item 4(f).
(g) The aggregate non-audit fees paid to the principal accountant for services
rendered by the principal accountant to the registrant and the registrant's
investment adviser and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant were $24,091 for the fiscal year ended July 31, 2005 and $148,579 for
the fiscal year ended July 31, 2004.
(h) The registrant's audit committee of the board of trustees has considered
whether the provision of non-audit services that were rendered to the
registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A
ITEM 6. SCHEDULE OF INVESTMENTS. N/A
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES
FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A
ITEM 8 PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT
INVESTMENT COMPANIES. N/A
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END
MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY Holders. There have
been no changes to the procedures by which shareholders may recommend nominees
to the Registrant's Board of Directors that would require disclosure herein.
ITEM 11. CONTROLS AND PROCEDURES. (A) EVALUATION OF DISCLOSURE CONTROLS
AND PROCEDURES. The Registrant maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed in the
Registrant's filings under the Securities Exchange Act of 1934 and the
Investment Company Act of 1940 is recorded, processed, summarized and reported
within the periods specified in the rules and forms of the Securities and
Exchange Commission. Such information is accumulated and communicated to the
Registrant's management, including its principal executive officer and principal
financial officer, as appropriate, to allow timely decisions regarding required
disclosure. The Registrant's management, including the principal executive
officer and the principal financial officer, recognizes that any set of controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form
N-CSR, the Registrant had carried out an evaluation, under the supervision and
with the participation of the Registrant's management, including the
Registrant's principal executive officer and the Registrant's principal
financial officer, of the effectiveness of the design and operation of the
Registrant's disclosure controls and procedures. Based on such evaluation, the
Registrant's principal executive officer and principal financial officer
concluded that the Registrant's disclosure controls and procedures are
effective.
(B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the
Registrant's internal controls or in other factors that could significantly
affect the internal controls subsequent to the date of their evaluation in
connection with the preparation of this Shareholder Report on Form N-CSR.
ITEM 12. EXHIBITS.
(a) (1) Code of Ethics
(a) (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN TAX-EXEMPT MONEY FUND
By /s/JIMMY D. GAMBILL
-------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date September 26, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/JIMMY D. GAMBILL
-------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date September 26, 2005
By /s/GALEN G. VETTER
------------------
Galen G. Vetter
Chief Financial Officer
Date September 26, 2005