PROSPECTUS & APPLICATION
FRANKLIN
CALIFORNIA TAX-FREE
INCOME FUND
INVESTMENT STRATEGY
TAX-FREE INCOME
AUGUST 1, 1997 AS AMENDED APRIL 6, 1998
This prospectus describes the Franklin California Tax-Free Income Fund, Inc.
(the "Fund"). It contains information you should know before investing in the
Fund. Please keep it for future reference.
The Fund has a Statement of Additional Information ("SAI"), dated August 1,
1997, which may be amended from time to time. It includes more information about
the Fund's pro- cedures and policies. It has been filed with the SEC and is
incorporated by reference into this prospectus. For a free copy or a larger
print version of this prospectus, call 1-800/DIAL BEN.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Shares of the Fund involve investment risks, including the possible
loss of principal.
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
Franklin California
Tax-Free Income Fund
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country in which the offering is not authorized. No sales
representative, dealer, or other person is authorized to give any information or
make any representations other than those contained in this prospectus. Further
information may be obtained from Distributors.
TABLE OF CONTENTS
About the Fund
Expense Summary 2
Financial Highlights 3
How does the Fund Invest its Assets? 6
What are the Fund's Potential Risks? 9
Who Manages the Fund? 12
How does the Fund Measure Performance? 14
How Taxation Affects the Fund and its Shareholders 14
How is the Fund Organized? 17
About Your Account
How Do I Buy Shares? 18
May I Exchange Shares for Shares of Another Fund? 24
How Do I Sell Shares? 27
What Distributions Might I Receive from the Fund? 29
Transaction Procedures and Special Requirements 30
Services to Help You Manage Your Account 35
What If I Have Questions About My Account? 37
Glossary
Useful Terms and Definitions 38
Franklin
California
Tax-Free
Income Fund
August 1, 1997
as amended April 6, 1998
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our glossary section.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
Franklin California Tax-Free Income Fund
ABOUT THE FUND
Expense Summary
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of each class for the fiscal year
ended March 31, 1997. The Fund's actual expenses may vary.
CLASS I CLASS II
- --------------------------------------------------------------------------------
A. Shareholder Transaction Expenses
Maximum Sales Charge
(as a percentage of Offering Price) 4.25% 1.99%
Paid at time of purchase 4.25%++ 1.00%+++
Paid at redemption++++ None 0.99%
Exchange Fee (per transaction) $5.00* $5.00*
B. Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees 0.45% 0.45%
Rule 12b-1 Fees 0.07%** 0.65%**
Other Expenses 0.04% 0.04%
--------------------------
Total Fund Operating Expenses 0.56% 1.14%
==========================
C. Example
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------
Class I $48*** $60 $72 $110
Class II $31 $46 $72 $147
For the same Class II investment, you would pay projected expenses of $22 if
you did not sell your shares at the end of the first year. Your projected
expenses for the remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The Fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each class and are not
directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more in Class I
shares.
+++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? - Choosing a Share Class."
++++A Contingent Deferred Sales Charge may apply to any Class II purchase if you
sell the shares within 18 months and to Class I purchases of $1 million or more
if you sell the shares within one year. The charge is 1% of the value of the
shares sold or the Net Asset Value at the time of purchase, whichever is less.
The number in the table shows the charge as a percentage of Offering Price.
While the percentage is different depending on whether the charge is shown based
on the Net Asset Value or the Offering Price, the dollar amount you would pay is
the same. See "How Do I Sell Shares? - Contingent Deferred Sales Charge" for
details.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**These fees may not exceed 0.10% for Class I and 0.65% for Class II. The
combination of front-end sales charges and Rule 12b-1 fees could cause long-term
shareholders to pay more than the economic equivalent of the maximum front-end
sales charge permitted under the NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
Financial Highlights
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent five years appears in the
financial statements in the Fund's Annual Report to Shareholders for the fiscal
year ended March 31, 1997. The Annual Report to Shareholders also includes more
information about the Fund's performance. For a free copy, please call Fund
Information.
<TABLE>
<CAPTION>
Class I
Year Ended March 31 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $7.18 $7.11 $7.12 $7.36 $7.07 $6.92 $6.89 $6.80 $6.73 $7.32
-------------------------------------------------------------------------------------------------
Net investment income .43 .44 .45 .46 .48 .49 .50 .51 .51 .52
Net realized & unrealized
gain (loss) on securities (.037) .074 (.016) (.226) .288 .154 .036 .096 .076 (.584)
-------------------------------------------------------------------------------------------------
Total from investment
operations .393 .514 .434 .234 .768 .644 .536 .606 .586 (.064)
-------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.435) (.444) (.444) (.456) (.478) (.494) (.506) (.516) (.516) (.526)
Capital gains (.048) -- -- (.018) -- -- -- -- -- --
Total distributions (.483) (.444) (.444) (.474) (.478) (.494) (.506) (.516) (.516) (.526)
-------------------------------------------------------------------------------------------------
Net asset value at
end of period $7.09 $7.18 $7.11 $7.12 $7.36 $7.07 $6.92 $6.89 $6.80 $6.73
=================================================================================================
TOTAL RETURN* 5.67% 7.40% 6.37% 2.88% 10.95% 9.32% 7.76% 8.83% 8.67% (.94)%
RATIOS/SUPPLEMENTAL DATA
Net assets at
end of period
(in 000's) $13,633,542 $13,312,666 $12,923,031 $13,345,420 $13,541,443 $12,303,807 $11,466,168 $10,525,484 $8,768,832 $7,569,502
Ratio of expenses to
average net assets 0.56% 0.55% 0.55% 0.49% 0.49% 0.49% 0.48% 0.49% 0.49% 0.48%
Ratio of net investment
income to average net assets 6.07% 6.14% 6.36% 6.19% 6.61% 6.93% 7.22% 7.29% 7.53% 7.60%
Portfolio turnover rate 11.96% 19.24% 14.07% 18.12% 15.63% 16.13% 15.83% 11.09% 32.95% 23.14%
</TABLE>
Class II
Year Ended March 31 1997 1996+
---------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value at beginning of period $7.18 $7.09
---------------------------------
Net investment income .39 .38
Net realized & unrealized gain
(loss) on securities (.038) .082
---------------------------------
Total from investment operations .352 .462
---------------------------------
Less distributions from:
Net investment income (.394) (.372)
Capital gains (.048) --
---------------------------------
Total distributions (.442) (.372)
---------------------------------
Net asset value at end of period $7.09 $7.18
=================================
TOTAL RETURN* 5.06% 6.62%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in 000's) $138,509 $47,685
Ratio of expenses to average net assets 1.14% 1.14%**
Ratio of net investment income to
average net assets 5.47% 5.55%**
Portfolio turnover rate 11.96% 19.24%
*Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum front-end sales
charge or Contingent Deferred Sales Charge, and assumes reinvestment of
dividends and capital gains at Net Asset Value. Before May 1, 1994, dividends
were reinvested at the maximum Offering Price, and capital gains at Net Asset
Value. Effective May 1, 1994, with the implementation of the Rule 12b-1
distribution plan for Class I shares, the sales charge on reinvested dividends
was eliminated.
**Annualized.
+For the period May 1, 1995 (effective date) to March 31, 1996.
How does the Fund Invest its Assets?
The Fund's Investment Objective
The Fund's investment objective is to provide as high a level of income exempt
from federal income taxes as is consistent with prudent investing, while seeking
preservation of shareholders' capital. The objective is a fundamental policy of
the Fund and may not be changed without shareholder approval. Of course, there
is no assurance that the Fund's objective will be achieved.
The Fund also seeks to pay dividends to its California resident shareholders
that are exempt from California personal income taxes.
Types of Securities in which the Fund May Invest
As a fundamental policy, the Fund invests at least 80% of its total assets in
securities that pay interest exempt from regular federal income taxes. As a
nonfundamental policy, the Fund invests at least 80% of its total assets in
securities that pay interest exempt from the federal alternative minimum tax.
As a nonfundamental policy, the Fund also invests at least 65% of its total
assets in securities that pay interest exempt from the personal income taxes of
California and at least 65% of its total assets in California Municipal
Securities. It is possible, although not anticipated, that up to 35% of the
Fund's total assets could be in municipal securities of a state, territory or
local government other than California.
The Fund invests in investment grade securities. Investment grade securities are
securities rated in one of the four highest rating categories of a nationally
recognized rating service, such as Moody's, S&P or Fitch, and also include
unrated securities that Advisers considers comparable in quality to securities
that have been rated investment grade. The four highest rating categories are
Aaa, Aa, A and Baa for Moody's and AAA, AA, A and BBB for both S&P and Fitch.
Although securities rated in the fourth highest rating category are considered
investment grade, they are generally more vulnerable to adverse economic
conditions than securities rated in the three highest categories and are
considered to have some speculative characteristics. If the rating services
lower the rating on a security in the Fund's portfolio, the Fund will consider
this change in its evaluation of the security's overall investment merits. A
change in a security's rating, however, does not automatically require the Fund
to sell the security. For a description of the various rating categories, please
see "Appendix - Description of Ratings" in the SAI.
When determining whether securities are consistent with the Fund's investment
objective and policies, and thereafter when determining an issuer's comparative
credit rating, Advisers considers the terms of an offering and various other
factors. Advisers may, among other things, (i) interview representatives of the
issuer at its offices; (ii) tour and inspect the physical facilities of the
issuer to evaluate the issuer and its operations; (iii) analyze the issuer's
financial and credit position, including all appropriate ratios; and (iv)
compare other similar securities offerings to the issuer's proposed offering.
Under normal market conditions, the Fund invests its assets as described above.
For temporary defensive purposes, however, the Fund may invest up to 100% of its
total assets in taxable obligations, including (i) municipal securities of a
state, territory or local government other than California; (ii) commercial
paper rated at least P-1 by Moody's, A-1 by S&P, or F-1 by Fitch and obligations
of U.S. banks (including commercial banks and savings and loan associations)
with assets of $1 billion or more; or (iii) obligations issued or guaranteed by
the full faith and credit of the U.S. government, including indirect U.S.
government obligations (such as mortgage-backed securities issued or guaranteed
by the Government National Mortgage Association (GNMA) or the Federal National
Mortgage Association (FNMA)) and repurchase agreements collateralized by U.S.
government securities. To the extent the Fund is restricted in its ability to
take advantage of defensive steps when necessary, an investment in the Fund may
be subject to greater risk than an investment in a similar fund with more
flexibility during defensive situations.
For more information about tax considerations affecting the Fund and its
shareholders, please see the tax sections in this prospectus and the SAI.
Municipal Securities. Municipal securities are obligations that pay interest
exempt from regular federal income tax and that are issued by or on behalf of
states, territories or possessions of the U.S., the District of Columbia, or
their political subdivisions, agencies or instrumentalities. An opinion as to
the tax-exempt status of a municipal security is generally given to the issuer
by the issuer's bond counsel when the security is issued.
Municipal securities are issued to raise money for various public purposes, such
as constructing public facilities and making loans to public institutions.
Certain types of municipal securities are issued to provide funding for
privately operated facilities.
The Fund has no restrictions on the maturity of municipal securities in which it
may invest. The Fund attempts to invest in municipal securities with maturities
that, in Advisers' judgment, will provide a high level of current income
consistent with prudent investing. Advisers will also consider current market
conditions when determining the securities it wants to buy and whether to hold
securities currently in the Fund's portfolio.
The Fund may invest more than 25% of its assets in municipal securities in
particular market segments, including, but not limited to, hospital revenue
bonds, housing agency bonds, tax-exempt industrial development revenue bonds,
transportation bonds, or pollution control revenue bonds. An economic, business,
political or other change that affects one security may also affect other
securities in the same market segment, thereby potentially increasing market
risk. Examples of changes that may affect certain market segments include
proposed legislation affecting the financing of a project, shortages or price
increases of needed materials, or declining markets or needs for the projects.
Floating and Variable Rate Obligations. The Fund may buy floating and variable
rate obligations. The interest rates on these obligations are not fixed, but
vary with changes in prevailing market rates on predesignated dates. The Fund
may also invest in floating or variable rate demand notes ("VRDNs"). VRDNs carry
a demand feature that allows the Fund to tender the obligation back to the
issuer or a third party before maturity, at par value plus accrued interest,
according to the terms of the obligation. Although it is not a put option in the
usual sense, the demand feature is sometimes known as a "put." Frequently, VRDNs
are secured by letters of credit or other credit support arrangements. The Fund
limits its purchase of floating and variable rate obligations to those that are
investment grade.
With respect to 75% of the total value of the Fund's assets, no more than 5% may
be in securities underlying "puts" from the same institution. The Fund may,
however, invest up to 10% of its assets in unconditional "puts," which are
exercisable even in the event of a default in the payment of principal or
interest on the underlying security, and other securities issued by the same
institution.
Certificates of Participation. The Fund may invest in municipal lease
obligations, primarily through certificates of participation ("COPs"). COPs are
widely used by state and local governments to finance the purchase of property
and function much like installment purchase agreements. COPs are created when
long-term lease revenue obligations are issued by a governmental corporation to
pay for the acquisition of property or facilities. The property or facilities
acquired are then leased to a municipality and the lease payments are used to
repay interest and principal on the obligations issued to buy the property.
After all of the lease payments have been made, according to the terms of the
lease, the municipality gains ownership of the property for a nominal sum. This
lease format is generally not subject to constitutional limitations on the
issuance of state debt. Thus, COPs may enable a governmental issuer to increase
government liabilities beyond constitutional debt limits.
Callable Bonds. The Fund may buy and hold callable municipal bonds. Callable
bonds have a provision in their indenture allowing the issuer to redeem the
bonds before their maturity dates at a specified price. This price typically
reflects a premium over the bonds' original issue price. Callable bonds
generally have call protection, that is, a period of time when the bonds may not
be called. This period usually lasts for five to ten years. An issuer may
generally be expected to call its bonds, or a portion of them, during periods of
declining interest rates, when borrowings may be replaced at lower rates than
those obtained in prior years. If the proceeds of a bond called under these
circumstances are reinvested, the result may be a lower overall yield due to
lower current interest rates. If the purchase price of the bonds included a
premium related to the appreciated value of the bonds, some or all of that
premium may not be recovered by bondholders, such as the Fund, depending on the
price at which the bonds were redeemed. Normally, the Fund will not hold called
bonds until they are redeemed if it will result in a loss of premium. In most
cases, Advisers attempts to time the sale to recover what Advisers considers to
be the optimum amount of premium obtainable, considering market conditions and
the time remaining before redemption.
Mello-Roos Bonds. The Fund may invest in bonds issued under the California
Mello-Roos Community Facilities Act, commonly known as Mello-Roos bonds.
Mello-Roos bonds are issued to finance the building of roads, sewage treatment
plants and other projects designed to improve the infrastructure of a community.
Other Investment Policies of the Fund
When-Issued and Delayed Delivery Transactions. The Fund may buy and sell
municipal securities on a "when-issued" and "delayed delivery" basis. These are
trading practices where payment and delivery of the securities take place at a
future date. These transactions are subject to market fluctuations and the risk
that the value of a security at delivery may be more or less than its purchase
price. Although the Fund will generally buy municipal securities on a
when-issued basis with the intention of acquiring the securities, it may sell
the securities before the settlement date if it is deemed advisable. When the
Fund is the buyer, it will maintain cash or liquid securities, with an aggregate
value equal to the amount of its purchase commitments, in a segregated account
with its custodian bank until payment is made. The Fund will not engage in
when-issued and delayed delivery transactions for investment leverage purposes.
Other Policies and Restrictions. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How does the Fund Invest its Assets?" and "Investment Restrictions" in the
SAI.
Each of the Fund's policies and restrictions discussed in this prospectus and in
the SAI is considered at the time the Fund makes an investment. The Fund is
generally not required to sell a security because of a change in circumstances.
What are the Fund's Potential Risks?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the bond market as a whole.
Yields on municipal securities vary, depending on a variety of factors. These
include the general condition of the financial and municipal securities markets,
the size of a particular offering, the credit rating of the issuer and the
maturity of the obligation. Generally, municipal securities with longer
maturities produce higher current yields than municipal securities with shorter
maturities. Prices of longer-term securities, however, typically fluctuate more
than those of shorter-term securities due to changes in interest rates, tax laws
and other general market conditions. Lower-quality municipal securities also
generally produce higher yields than higher-quality municipal securities.
Lower-quality securities, however, generally have a higher degree of risk
associated with the issuer's ability to make timely principal and interest
payments.
Nonappropriation Risk of COPs. A feature that distinguishes COPs from more
traditional forms of municipal debt is the "nonappropriation" clause in the
lease. A nonappropriation clause allows the municipality to terminate the lease
annually without penalty if the municipality's appropriating body does not
allocate the necessary funds. Local administrations, when faced with
increasingly tight budgets, have more discretion to curtail payments under COPs
than they do to curtail payments on traditionally funded debt obligations. If
the municipality does not appropriate sufficient monies to make lease payments,
the lessor or its agent is typically entitled to repossess the property. The
private sector value of the property may be more or less than the amount the
municipality was paying.
While the risk of nonappropriation is inherent to COPs financing, the Fund
believes that this risk may be reduced, although not eliminated, by its policy
of investing only in investment grade COPs. When assessing the risk of
nonappropriation, the rating services and Advisers consider, among other
factors, the issuing municipality's credit rating, how essential the leased
property is to the municipality, and the term of the lease compared to the
useful life of the leased property. While there is no limit as to the amount of
assets that the Fund may invest in COPs, as of March 31, 1997, the Fund held
14.89% of its net assets in COPs or other municipal leases.
Mello-Roos Bonds. Generally, Mello-Roos bonds are unrated and are not considered
obligations of a municipality. They are primarily secured by real estate taxes
levied on property located in the community, and the timely payment of principal
and interest on the bonds depends on the developer or other property owners'
ability to pay their real estate taxes. This ability could be adversely affected
by a declining economy or real estate market within California. While there is
no limit as to the amount of assets that the Fund may invest in Mello-Roos
bonds, as of March 31, 1997, 3.9% of the Fund's assets were invested in
Mello-Roos bonds.
Credit and Market Risk. Credit risk is a function of the ability of an issuer of
a municipal security to make timely interest payments and to pay the principal
of a security upon maturity. It is generally reflected in a security's
underlying credit rating and its stated interest rate (normally the coupon
rate). A change in the credit risk associated with a municipal security may
cause a corresponding change in the security's price. Market risk is the risk of
price fluctuation of a municipal security caused by changes in general economic
and interest rate conditions that affect the market as a whole.
Interest Rate Risk. Changes in interest rates will affect the value of the
Fund's portfolio and its share price. Rising interest rates, which often occur
during times of inflation or a growing economy, are likely to have a negative
effect on the value of the Fund's shares. Interest rates have increased and
decreased in the past. These changes are unpredictable.
Risk Factors in California. Since the Fund primarily invests in California
Municipal Securities, its performance is closely tied to the continuing ability
of issuers of California Municipal Securities to meet their debt obligations and
to the economic and political conditions within California.
California's diverse economic base has continued to recover from the recession
of the early 1990s, when the state experienced significant job losses and
general fund deficits. While the state's financial performance has improved in
recent years, its fiscal operations have remained vulnerable. Increased funding
for schools, prisons, and social services, and reduced federal aid levels have
offset some of the growth in revenues that has resulted from the improving
economy. The state's budget approval process, which requires a two-thirds
legislative vote, has also hampered the state's financial stability. In the
past, California voters have passed amendments to the state's constitution and
other measures that have limited the taxing and spending authority of various
government entities in California. Future voter initiatives may adversely affect
issuers of California Municipal Securities.
In recent years, certain issuers of California Municipal Securities have
experienced financial difficulties, such as the 1994 bankruptcy of Orange
County. A recurrence of these financial difficulties could adversely affect the
market values and marketability of certain California Municipal Securities, as
well as the Net Asset Value of the Fund.
The information provided above is based on information from independent
municipal credit reports and other historically reliable sources. It is not a
complete analysis of every material fact that may affect the ability of issuers
of California Municipal Securities to meet their debt obligations or the
economic or political conditions within the state. The information has not been
independently verified by the Fund.
Although the Fund's policy of investing in investment grade securities may
reduce the credit and other risks that may exist on California Municipal
Securities, it does not eliminate them. Before investing you should consider the
risks discussed in this prospectus. For more information about California's
economy and the Fund's potential risks, please see "What are the Fund's
Potential Risks?" in the SAI.
Who Manages the Fund?
The Board. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist among the
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
Investment Manager. Advisers manages the Fund's assets and makes its investment
decisions. Advisers also performs similar services for other funds. It is wholly
owned by Resources, a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr.
are the principal shareholders of Resources. Together, Advisers and its
affiliates manage over $222 billion in assets, including $47 billion in the
municipal securities market. Please see "Investment Management and Other
Services" and "Miscellaneous Information" in the SAI for information on
securities transactions and a summary of the Fund's Code of Ethics.
Management Team. The team responsible for the day-to-day management of the
Fund's portfolio is: Mr. Kenny since 1987, Mr. Schroer since 1987, and Mr. Wiley
since 1991.
Thomas Kenny
Senior Vice President of Advisers
Mr. Kenny is the Director of Franklin's Municipal Bond Department. He holds a
Master of Science degree in Finance from Golden Gate University and a Bachelor
of Arts degree in Business and Economics from the University of California at
Santa Barbara. Mr. Kenny joined the Franklin Templeton Group in 1986. He is a
member of several municipal securities industry-related committees and
associations.
Bernard Schroer
Vice President of Advisers
Mr. Schroer holds a Bachelor of Arts degree in Finance from Santa Clara
University. He has been with the Franklin Templeton Group since 1987. He is a
member of several municipal securities industry-related committees and
associations.
John Wiley
Portfolio Manager of Advisers
Mr. Wiley holds a Master of Business Administration degree in Finance from Saint
Mary's College and a Bachelor of Science degree from the University of
California at Berkeley. He joined the Franklin Templeton Group in 1989. He is a
member of several securities industry-related committees and associations.
Management Fees. During the fiscal year ended March 31, 1997, management fees
totaling 0.45% of the average net assets of the Fund were paid to Advisers.
Total expenses, including fees paid to Advisers, were 0.56% for Class I and
1.14% for Class II.
Portfolio Transactions. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares, as well as shares of other funds in the Franklin Templeton Group
of Funds, when selecting a broker or dealer. Please see "How does the Fund Buy
Securities for its Portfolio?" in the SAI for more information.
Administrative Services. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. Please see
"Investment Management and Other Services" in the SAI for more information.
The Rule 12b-1 Plans
Class I and Class II have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
Fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by the Fund under the Class I plan may not exceed 0.10% per year of
Class I's average daily net assets. All distribution expenses over this amount
will be borne by those who have incurred them. During the first year after
certain Class I purchases made without a sales charge, Securities Dealers may
not be eligible to receive the Rule 12b-1 fees associated with the purchase.
Under the Class II plan, the Fund may pay Distributors up to 0.50% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Securities
Dealers may not be eligible to receive this portion of the Rule 12b-1 fees
associated with the purchase.
The Fund may also pay a servicing fee of up to 0.15% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
How does the Fund Measure Performance?
From time to time, each class of the Fund advertises its performance. Commonly
used measures of performance include total return, current yield and current
distribution rate. Each class may also advertise its taxable-equivalent yield
and distribution rate. Performance figures are usually calculated using the
maximum sales charges, but certain figures may not include sales charges.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund. The taxable-equivalent yield and distribution rate show the before-tax
yield or distribution rate that would have to be earned from a taxable
investment to equal the yield or distribution rate of the class, assuming one or
more tax rates.
The investment results of each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How does the Fund Measure Performance?" in the SAI.
How Taxation Affects the Fund and its Shareholders
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund has elected and intends to continue to qualify as a regulated
investment company under Subchapter M of the Code. By distributing all of its
income and meeting certain other requirements relating to the sources of its
income and diversification of its assets, the Fund will generally not be liable
for federal income or excise taxes.
By meeting certain requirements of the Code and California personal income tax
law, the Fund has qualified and continues to qualify to pay exempt-interest
dividends to its shareholders. Exempt-interest dividends are derived from
interest income exempt from regular federal income tax, and are not subject to
regular federal income tax for you. In addition, to the extent that
exempt-interest dividends are derived from interest on obligations of California
or its political subdivisions, from interest on direct obligations of the
federal government, or from interest on U.S. territorial obligations, including
Puerto Rico, the U.S. Virgin Islands or Guam, they will also be exempt from
California personal income tax.
Dividends paid by the Fund from interest on obligations exempt from tax in
California will generally be fully taxable to corporate shareholders who are
subject to California's corporate franchise tax.
To the extent dividends are derived from taxable income from temporary
investments, including the discount from certain stripped obligations or their
coupons or income from securities loans or other taxable transactions, from the
excess of net short-term capital gain over net long-term capital loss, or from
ordinary income derived from the sale or disposition of bonds purchased with
market discount after April 30, 1993, they are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
From time to time, the Fund may buy a tax-exempt obligation with market
discount; that is, for a price that is less than the principal amount of the
bond or for a price that is less than the principal amount of the bond where the
bond was issued with original issue discount, and such market discount exceeds a
de minimis amount. For obligations purchased after April 30, 1993, a portion of
the gain (not to exceed the accrued portion of market discount as of the time of
sale or disposition) is treated as ordinary income rather than capital gain. Any
distribution by the Fund of such market discount income will be taxable as
ordinary income. In any fiscal year, the Fund may elect not to distribute its
taxable ordinary income and, instead, to pay federal income or excise taxes on
this income at the Fund level. The amount of such distributions, if any, is
expected to be small.
Pursuant to the Code, certain distributions that are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January will be treated, for tax purposes, as if received by
you on December 31 of the calendar year in which they are declared.
The Fund may derive capital gains and losses in connection with sales of its
portfolio securities. Distributions derived from the excess of net short-term
capital gain over net long-term capital loss will be taxable to you as ordinary
income. Distributions paid from long-term capital gain will be taxable to you as
long-term capital gain, regardless of the length of time you have owned Fund
shares and regardless of whether such distributions are received in cash or in
additional shares.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be disallowed to the extent of any
exempt-interest dividends received with respect to such shares and will be
treated as a long-term capital loss to the extent of capital gain dividends
received with respect to such shares.
All or a portion of any loss that you realize when you redeem Fund shares will
be disallowed to the extent that you buy other shares in the Fund (through
reinvestment of dividends or otherwise) within 30 days before or after your
share redemption. Any loss disallowed under these rules will be added to the tax
basis that you receive in the purchase of your new shares.
Since the Fund's income is derived from interest income and gain on the sale of
portfolio securities rather than dividend income, no portion of the Fund's
distributions will generally be eligible for the corporate dividends-received
deduction.
The Fund will inform you of the source of its dividends and distributions at the
time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of such dividends
and distributions, including the portion of the dividends on an average basis
that is a tax preference item under the federal alternative minimum tax. If you
have not held shares of the Fund for a full calendar year, you may have
designated as tax-exempt or as tax preference income a percentage of income that
is not equal to the actual amount of tax-exempt or tax preference income earned
during the period of your investment in the Fund.
The interest on bonds issued to finance public purpose state and local
government operations is generally tax-exempt. Interest on certain private
activity bonds, while still tax-exempt for regular income tax reporting, is a
preference item in determining if you are subject to the alternative minimum
tax, and could subject you to, or increase your liability for, federal and state
alternative minimum taxes. In addition, all distributions derived from interest
exempt from regular federal income tax may subject a corporate shareholder to,
or increase a corporate shareholder's liability for, the federal alternative
minimum tax, because these distributions are included in the corporation's
adjusted current earnings.
Consistent with its investment objective, the Fund may buy private activity
bonds if, in Advisers' opinion, the bonds represent the most attractive
investment opportunity then available to the Fund. For the fiscal year ended
March 31, 1997, the Fund derived 9.15% of its income from bonds, the interest on
which is a preference item subject to the federal alternative minimum tax for
certain investors.
Exempt-interest dividends of the Fund, although exempt from regular federal
income tax, are includable in the tax base for determining the extent to which a
shareholder's social security or railroad retirement benefits will be subject to
regular federal income tax. You are required to disclose the receipt of
tax-exempt interest on your federal income tax returns.
Interest on indebtedness incurred (directly or indirectly) by you to buy or
carry Fund shares may not be fully deductible for federal income tax purposes.
You should consult with your personal tax advisor on the deductibility of this
interest.
The description above relates only to federal income tax law and to California
personal and corporate income tax treatment to the extent indicated. You should
consult your tax advisor to determine whether other state or local income or
franchise taxes will apply to your investment in the Fund or to distributions or
redemption proceeds received from the Fund.
If you are not considered a U.S. person for federal income tax purposes, you
should consult with your financial or tax advisor regarding the applicability of
U.S. withholding or other taxes on distributions received by you from the Fund
and the application of foreign tax laws to these distributions.
How is the Fund Organized?
The Fund is a diversified, open-end management investment company, commonly
called a mutual fund. It was organized as a Maryland corporation on November 28,
1977, and is registered with the SEC. The Fund offers two classes of shares:
Franklin California Tax-Free Income Fund - Class I and Franklin California
Tax-Free Income Fund - Class II. All shares outstanding before the offering of
Class II shares are considered Class I shares. Additional classes of shares may
be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters affecting only that class, or expressly required
to be voted on separately by state or federal law.
The Fund has noncumulative voting rights. This gives holders of more than 50% of
the shares voting the ability to elect all of the members of the Board. If this
happens, holders of the remaining shares voting will not be able to elect anyone
to the Board.
The Fund does not intend to hold annual shareholder meetings. It may hold
special meetings, however, for matters requiring shareholder approval. A meeting
may also be called by the Board in its discretion or when requested in writing
by shareholders holding at least 25% of the outstanding shares. In certain
circumstances, we are required to help you communicate with other shareholders
about the removal of a Board member.
ABOUT YOUR ACCOUNT
How Do I Buy Shares?
Opening Your Account
To open your account, please follow the steps below. This will help avoid any
delays in processing your request.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The Fund's minimum
investments are:
o To open your account: $100*
o To add to your account: $ 25*
*We reserve the right to refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application,
including the optional shareholder privileges section. By applying for
privileges now, you can avoid the delay and inconvenience of having to send
an additional application to add privileges later. Please also indicate which
class of shares you want to buy. If you do not specify a class, we will
automatically invest your purchase in Class I shares. It is important that we
receive a signed application since we will not be able to process any
redemptions from your account until we receive your signed application.
4. Make your investment using the table below.
<TABLE>
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METHOD STEPS TO FOLLOW
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By Mail For an initial investment:
Return the application to the Fund with your check made payable to
the Fund.
For additional investments:
Send a check made payable to the Fund. Please include your account
number on the check.
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By Wire 1. Call Shareholder Services or, if that number is busy, call
1-650/312-2000 collect, to receive a wire control number and wire
instructions. You need a new wire control number every time you wire money
into your account. If you do not have a currently effective wire control
number, we will return the money to the bank, and we will not credit the
purchase to your account.
2. For initial investments you must also return your signed
shareholder application to the Fund.
Important Deadlines: If we receive your call before 1:00 p.m.
Pacific time and the bank receives the wired funds and reports the receipt of
wired funds to the Fund by 3:00 p.m. Pacific time, we will credit the
purchase to your account that day. If we receive your call after 1:00 p.m. or
the bank receives the wire after 3:00 p.m., we will credit the purchase to
your account the following business day.
- --------------------------------------------------------------------------------------------------------
Through Your Dealer Call your investment representative
- --------------------------------------------------------------------------------------------------------
</TABLE>
Choosing a Share Class
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. The class that may be best for
you depends on a number of factors, including the amount and length of time you
expect to invest. Generally, Class I shares may be more attractive for long-term
investors or investors who qualify to buy Class I shares at a reduced sales
charge. Your financial representative can help you decide.
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CLASS I CLASS II
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o Higher front-end sales charges than o Lower front-end sales charges than
Class II shares. There are several ways Class I shares
to reduce these charges, as described
below. There is no front-end sales charge
for purchases of $1 million or more.*
o Contingent Deferred Sales Charge on o Contingent Deferred Sales Charge on purchases
purchases of $1 million or more sold sold within 18 months
within one year
o Lower annual expenses than Class II shares o Higher annual expenses than Class I shares
</TABLE>
*If you are investing $1 million or more, it is generally more beneficial for
you to buy Class I shares because there is no front-end sales charge and the
annual expenses are lower. Therefore, any purchase of $1 million or more is
automatically invested in Class I shares. You may accumulate more than $1
million in Class II shares through purchases over time. If you plan to do this,
however, you should determine if it would be better for you to buy Class I
shares through a Letter of Intent.
Purchase Price of Fund Shares
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
<TABLE>
<CAPTION>
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
-----------------------
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- ---------------------------------------------------------------------------------------
CLASS I
<S> <C> <C> <C> <C>
Under $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more* None None None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
</TABLE>
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Choosing a Share
Class."
Sales Charge Reductions and Waivers
- - If you qualify to buy shares under one of the sales charge reduction or waiver
categories described below, please include a written statement with each
purchase order explaining which privilege applies. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
Cumulative Quantity Discounts - Class I Only. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds, as well as those of your spouse, children under the
age of 21 and grandchildren under the age of 21. If you are the sole owner of a
company, you may also add any company accounts, including retirement plan
accounts.
Letter of Intent - Class I Only. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
Group Purchases - Class I Only. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
Sales Charge Waivers. If one of the following sales charge waivers applies to
you or your purchase of Fund shares, you may buy shares of the Fund without a
front-end sales charge or a Contingent Deferred Sales Charge. All of the sales
charge waivers listed below apply to purchases of Class I shares only, except
for items 1 and 2 which also apply to Class II purchases.
Certain distributions, payments or redemption proceeds that you receive may be
used to buy shares of the Fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton Fund. The
distributions generally must be reinvested in the same class of shares. Certain
exceptions apply, however, to Class II shareholders who chose to reinvest their
distributions in Class I shares of the Fund before November 17, 1997, and to
Advisor Class or Class Z shareholders of a Franklin Templeton Fund who may
reinvest their distributions in Class I shares of the Fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton Fund if
you originally paid a sales charge on the shares and you reinvest the money in
the same class of shares. This waiver does not apply to exchanges.
If you paid a Contingent Deferred Sales Charge when you redeemed your shares
from a Franklin Templeton Fund, a Contingent Deferred Sales Charge will apply to
your purchase of Fund shares and a new Contingency Period will begin. We will,
however, credit your Fund account with additional shares based on the Contingent
Deferred Sales Charge you paid and the amount of redemption proceeds that you
reinvest.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
3. Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
4. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, the Templeton Variable Annuity Fund, or the
Templeton Variable Products Series Fund. You should contact your tax advisor for
information on any tax consequences that may apply.
5. Redemption proceeds from the sale of Class A shares of any of the Templeton
Global Strategy Funds if you are a qualified investor.
If you paid a contingent deferred sales charge when you redeemed your Class A
shares from a Templeton Global Strategy Fund, a Contingent Deferred Sales Charge
will apply to your purchase of Fund shares and a new Contingency Period will
begin. We will, however, credit your Fund account with additional shares based
on the contingent deferred sales charge you paid and the amount of the
redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money fund.
Various individuals and institutions also may buy Class I shares without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following the order.
2. An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is permissible and suitable
for you and the effect, if any, of payments by the Fund on arbitrage rebate
calculations.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
4. Registered Securities Dealers and their affiliates, for their investment
accounts only
5. Current employees of Securities Dealers and their affiliates and their family
members, as allowed by the internal policies of their employer
6. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
7. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
8. Accounts managed by the Franklin Templeton Group
9. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
Other Payments to Securities Dealers
The payments described below may be made to Securities Dealers who initiate and
are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not by
the Fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 0.75% of the amount invested.
3. Class I purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the amount
invested.
A Securities Dealer may receive only one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1 or 2 above will be eligible to receive the Rule 12b-1
fee associated with the purchase starting in the thirteenth calendar month after
the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
For Investors Outside the U.S.
The distribution of this prospectus and the offering of Fund shares may be
limited in many jurisdictions. An investor who wishes to buy shares of the Fund
should determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
May I Exchange Shares for Shares of Another Fund?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums. Some Franklin Templeton Funds do not offer Class II shares.
<TABLE>
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METHOD STEPS TO FOLLOW
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<S> <C>
By Mail 1. Send us signed written instructions
2. Include any outstanding share certificates for the shares
you want to exchange
- -----------------------------------------------------------------------------------------
By Phone Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone to
apply to your account, please let us know.
- -----------------------------------------------------------------------------------------
Through Your Dealer Call your investment representative
- -----------------------------------------------------------------------------------------
</TABLE>
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
Will Sales Charges Apply to My Exchange?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
Contingent Deferred Sales Charge. We will not impose a Contingent Deferred Sales
Charge when you exchange shares. Any shares subject to a Contingent Deferred
Sales Charge at the time of exchange, however, will remain so in the new fund.
For accounts with shares subject to a Contingent Deferred Sales Charge, we will
first exchange any shares in your account that are not subject to the charge. If
there are not enough of these to meet your exchange request, we will exchange
shares subject to the charge in the order they were purchased.
If you exchange Class I shares into one of our money funds, the time your shares
are held in that fund will not count towards the completion of any Contingency
Period. If you exchange your Class II shares for shares of Money Fund II,
however, the time your shares are held in that fund will count towards the
completion of any Contingency Period.
For more information about the Contingent Deferred Sales Charge, please see "How
Do I Sell Shares?"
Exchange Restrictions
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. Please notify us in writing if you do not want this
option to be available on your account. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the Fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the Fund more than twice in a calendar
quarter, or (iii) exchanged shares equal to at least $5 million, or more
than 1% of the Fund's net assets. Shares under common ownership or control
are combined for these limits. If you have exchanged shares as described in
this paragraph, you will be considered a Market Timer. Each exchange by a
Market Timer, if accepted, will be charged $5.00. Some of our funds do not
allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
Limited Exchanges Between Different Classes of Shares
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Advisor Class" or "Class Z" shares. Because the
Fund does not currently offer an Advisor Class, you may exchange Advisor Class
shares of any Franklin Templeton Fund for Class I shares of the Fund at Net
Asset Value. If you do so and you later decide you would like to exchange into a
fund that offers an Advisor Class, you may exchange your Class I shares for
Advisor Class shares of that fund. Certain shareholders of Class Z shares of
Franklin Mutual Series Fund Inc. may also exchange their Class Z shares for
Class I shares of the Fund at Net Asset Value.
How Do I Sell Shares?
You may sell (redeem) your shares at any time.
<TABLE>
<CAPTION>
METHOD STEPS TO FOLLOW
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<S> <C>
By Mail 1.Send us signed written instructions. If you would like your redemption proceeds
wired to a bank account, your instructions should include:
o The name, address and telephone number of the bank where you
want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit union,
the name of the corresponding bank and the account number
2.Include any outstanding share certificates for the shares you are selling
3.Provide a signature guarantee if required
4.Corporate, partnership and trust accounts may need to send additional documents.
Accounts under court jurisdiction may have other requirements.
- ------------------------------------------------------------------------------------------------------------------
By Phone Call Shareholder Services. If you would like your redemption
proceeds wired to a bank account, other than an escrow account, you must
first sign up for the wire feature. To sign up, send us written instructions,
with a signature guarantee. To avoid any delay in processing, the
instructions should include the items listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts may
exceed $50,000 by completing a separate agreement. Call Institutional
Services to receive a copy.
o If there are no share certificates issued for the shares you want
to sell or you have already returned them to the Fund
o Unless the address on your account was changed by phone within the
last 15 days
- If you do not want the ability to redeem by phone to apply to your
account, please let us know.
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Through Your Dealer Call your investment representative
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</TABLE>
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
Contingent Deferred Sales Charge
For Class I purchases, if you did not pay a front-end sales charge because you
invested $1 million or more or agreed to invest $1 million or more under a
Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell all
or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class I investments you make without
a sales charge may also be subject to a Contingent Deferred Sales Charge if they
are sold within the Contingency Period. For any Class II purchase, a Contingent
Deferred Sales Charge may apply if you sell the shares within the Contingency
Period. The charge is 1% of the value of the shares sold or the Net Asset Value
at the time of purchase, whichever is less.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated dollar amount, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated number of shares, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
Waivers. We waive the Contingent Deferred Sales Charge for:
o Account fees
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, at a rate of up to 1% a month of an account's Net Asset
Value. For example, if you maintain an annual balance of $1 million in
Class I shares, you can redeem up to $120,000 annually through a systematic
withdrawal plan free of charge. Likewise, if you maintain an annual balance
of $10,000 in Class II shares, $1,200 may be redeemed annually free of
charge.
What Distributions Might I Receive from the Fund?
The Fund receives income generally in the form of interest and other income
derived from its investments. This income, less the expenses incurred in the
Fund's operations, is its net investment income from which income dividends may
be distributed. Thus, the amount of dividends paid per share may vary with each
distribution.
The Fund declares dividends from its net investment income monthly to
shareholders of record on the last business day of that month and pays them on
or about the 15th day of the next month.
Capital gains, if any, may be distributed twice a year, usually once in December
and once after the end of the Fund's fiscal year.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of Class I and Class II.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution. If you buy shares just before the Fund deducts a capital gain
distribution from its Net Asset Value, you will receive a portion of the price
you paid back in the form of a taxable distribution.
Distribution Options
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy additional shares of the Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge) by
reinvesting capital gain distributions, or both dividend and capital gain
distributions. This is a convenient way to accumulate additional shares and
maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy shares of another Franklin Templeton Fund (without a sales
charge or imposition of a Contingent Deferred Sales Charge). Many shareholders
find this a convenient way to diversify their investments.
3. Receive distributions in cash - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers - Class I
Only" under "Services to Help You Manage Your Account."
Distributions may be reinvested only in the same class of shares, except as
follows: (i) Class II shareholders who chose to reinvest their distributions in
Class I shares of the Fund or another Franklin Templeton Fund before November
17, 1997, may continue to do so; and (ii) Class II shareholders may reinvest
their distributions in shares of any Franklin Templeton money fund.
To select one of these options, please complete sections 6 and 7 of the
shareholder application included with this prospectus or tell your investment
representative which option you prefer. If you do not select an option, we will
automatically reinvest dividend and capital gain distributions in the same class
of the Fund. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days before the record date for us
to process the new option.
Transaction Procedures and Special Requirements
Share Price
When you buy shares, you pay the Offering Price. This is the Net Asset Value per
share of the class you wish to purchase, plus any applicable sales charges. When
you sell shares, you receive the Net Asset Value per share minus any applicable
Contingent Deferred Sales Charges.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
How and When Shares are Priced
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the close of the NYSE, normally 1:00
p.m. Pacific time. You can find the prior day's closing Net Asset Value and
Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
Written Instructions
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
Joint Accounts. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of transactions
or account changes. These include transactions or account changes that you could
also make by phone, such as certain redemptions of $50,000 or less, exchanges
between identically registered accounts, and changes to the address of record.
For most other types of transactions or changes, written instructions must be
signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed by
all registered owners on the account.
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. A notarized
signature is not sufficient.
Share Certificates
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
Telephone Transactions
You may initiate many transactions and changes to your account by phone. Please
refer to the sections of this prospectus that discuss the transaction you would
like to make or call Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to ask
your investment representative for assistance or send us written instructions,
as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we are
not reasonably satisfied that the instructions are genuine. If this occurs, we
will not be liable for any loss. We also will not be liable for any loss if we
follow instructions by phone that we reasonably believe are genuine or if you
are unable to execute a transaction by phone.
Account Registrations and Required Documents
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
Joint Ownership. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, we cannot accept instructions to change owners on the account unless all
owners agree in writing, even if the law in your state says otherwise. If you
would like another person or owner to sign for you, please send us a current
power of attorney.
Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Trusts. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
Required Documents. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
<TABLE>
<CAPTION>
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- ---------------------------------------------------------------------------------------------------
Corporation Corporate Resolution
- ---------------------------------------------------------------------------------------------------
<S> <C>
Partnership 1. The pages from the partnership agreement that identify
the general partners, or
2. A certification for a partnership agreement
- ---------------------------------------------------------------------------------------------------
Trust 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- ---------------------------------------------------------------------------------------------------
</TABLE>
Street or Nominee Accounts. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
Important Information If You Have an Investment Representative
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have told us that
you do not want telephone privileges to apply to your account.
Tax Identification Number
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
Services to Help You Manage Your Account
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
Automatic Payroll Deduction - Class I Only
You may have money transferred from your paycheck to the Fund to buy additional
Class I shares. Your investments will continue automatically until you instruct
the Fund and your employer to discontinue the plan. To process your investment,
we must receive both the check and payroll deduction information in required
form. Due to different procedures used by employers to handle payroll
deductions, there may be a delay between the time of the payroll deduction and
the time we receive the money.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers - Class I Only" below.
Once your plan is established, any distributions paid by the Fund will be
automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
Electronic Fund Transfers - Class I Only
You may choose to have dividend and capital gain distributions from Class I
shares of the Fund or payments under a systematic withdrawal plan sent directly
to a checking account. If the checking account is with a bank that is a member
of the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If you choose this option, please allow at least
fifteen days for initial processing. We will send any payments made during that
time to the address of record on your account.
TeleFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares (within the same class)between identically registered
Franklin Templeton Class I and Class II accounts; and
o request duplicate statements and deposit slips for Franklin Templeton
accounts.
You will need the code number for each class to use TeleFACTS(R). The code
number is 112 for Class I and 212 for Class II.
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. Please
verify the accuracy of your statements when you receive them.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household
and send only one copy of a report. Call Fund Information if you would like
an additional free copy of the Fund's financial reports.
Institutional Accounts
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
Availability of These Services
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
What If I Have Questions About My Account?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- --------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
Useful Terms and Definitions
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Directors of the Fund
California Municipal Securities - Municipal securities issued by or on behalf of
the state of California, its local governments, municipalities, authorities,
agencies and political subdivisions
CD - Certificate of deposit
Class I and Class II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
Code - Internal Revenue Code of 1986, as amended
Contingency Period - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
Contingent Deferred Sales Charge (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Directors."
Eligible Governmental Authority - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
Fitch - Fitch Investors Service, Inc.
Franklin Templeton Funds - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Franklin Templeton Group of Funds - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT Services - Franklin Templeton Services, Inc., the Fund's administrator
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
Market Timers - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
Moody's - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
Offering Price - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class I and 1% for Class II.
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TeleFACTS(R) - Franklin Templeton's automated customer servicing system
U.S. - United States
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
