As filed with the Securities and Exchange Commission on May 26, 1999
File Nos.
2-60470
811-2790
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 26 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 25 (X)
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (650) 312-2000
DEBORAH R. GATZEK, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] on August 1, 1999 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Prospectus
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND
CLASS A, B & C
INVESTMENT STRATEGY Tax-Free Income
AUGUST 1, 1999
[Insert Franklin Templeton Ben Head]
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
CONTENTS
THE FUND
[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
[insert page #] Goal and Strategies
[insert page #] Main Risks
[insert page #] Performance
[insert page #] Fees and Expenses
[insert page #] Management
[insert page #] Distributions and Taxes
[insert page #] Financial Highlights
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Choosing a Share Class
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]
Back Cover
THE FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is to provide investors with as high a level
of income exempt from federal income taxes as is consistent with prudent
investing, while seeking preservation of shareholders' capital. The fund also
tries to provide a maximum level of income exempt from California personal
income taxes for California residents, although this policy is not a
fundamental investment goal of the fund.
PRINCIPAL INVESTMENTS The fund normally invests predominately in investment
grade, California municipal securities whose interest is free from federal
income taxes, including the federal alternative minimum tax, and from
California personal income taxes. Although the fund tries to invest all of
its assets in tax-free securities, it is possible, although not anticipated,
that up to 20% of its assets may be in securities that pay taxable interest.
[Begin callout]
MUNICIPAL SECURITIES are issued by state and local governments, their
agencies and authorities, as well as by the District of Columbia and U.S.
territories and possessions, to borrow money for various public and private
projects. The issuer pays a fixed or variable rate of interest, and must
repay the amount borrowed (the "principal") at maturity.
[End callout]
The fund only buys securities rated in the top four ratings by U.S.
nationally recognized rating services (or comparable unrated securities). The
manager selects securities that it believes will provide the best balance
between risk and return within the fund's range of allowable investments and
typically uses a buy and hold strategy. This means it holds securities in the
fund's portfolio for income purposes, rather than trading securities for
capital gains, although the manager may sell a security at any time if it
believes it could help the fund meet its goal.
The fund may invest in municipal lease obligations, which generally are
issued to finance the purchase of public property. The property is leased to
a state or local government and the lease payments are used to pay the
interest on the obligations. These differ from other municipal securities
because the money to make the lease payments must be set aside each year or
the lease can be cancelled without penalty. If this happens, investors who
own the obligations may not be paid.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
unusual or adverse conditions exist. Under these circumstances, the fund may
be unable to pursue its investment goal, because it may not invest or may
invest substantially less in tax-free securities or in California municipal
securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
INCOME Since the fund can only distribute what it earns, the fund's
distributions to shareholders may decline when interest rates fall.
CREDIT There is the possibility that an issuer will be unable to make
interest payments and repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect a security's value and,
thus, impact fund performance.
Many of the fund's portfolio securities may be supported by credit
enhancements, which may be provided by either U.S. or foreign entities. These
securities have the credit risk of the entity providing the credit support.
To the extent the fund holds insured securities, a change in the credit
rating of any one or more of the municipal bond insurers that insure
securities in the fund's portfolio may affect the value of the securities
they insure and the fund's share price. Credit support provided by a foreign
entity may be less certain because of the possibility of adverse foreign
economic, political or legal developments that may affect the ability of that
entity to meet its obligations.
[Begin callout]
Because interest rates and municipal security prices fluctuate, the amount of
the fund's distributions and the value of your investment in the fund will go
up and down. This means you could lose money over short or even extended
periods.
[End callout]
INTEREST RATE When interest rates go up, municipal security prices fall. The
opposite is also true: municipal security prices go up when interest rates
fall. In general, securities with longer maturities are more sensitive to
these price changes.
CALL There is the likelihood that a security will be prepaid (called) before
maturity. An issuer is more likely to call its securities when interest rates
are falling, because the issuer can issue new securities with lower interest
payments. If a security is called, the fund may have to replace it with a
lower-yielding security. At any time, the fund may have a large amount of its
assets invested in municipal securities subject to call risk, including
escrow-secured or defeased bonds. A call of some or all of these securities
may lower the fund's income and its distributions to shareholders.
MARKET A security's value may be reduced by market activity or the results of
supply and demand. This is a basic risk associated with all securities. When
there are more sellers than buyers, prices tend to fall. Likewise, when there
are more buyers than sellers, prices tend to go up.
The fund may invest more than 25% of its assets in municipal securities that
finance similar types of projects, such as hospitals, housing, industrial
development, transportation or pollution control. A change that affects one
project, such as proposed legislation on the financing of the project, a
shortage of the materials needed for the project, or a declining need for the
project, would likely affect all similar projects, thereby increasing market
risk.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS Municipal securities may be
issued on a when-issued or delayed delivery basis, where payment and delivery
take place at a future date. Since the market price of the security may
fluctuate during the time before payment and delivery, the fund assumes the
risk that the value of the security at delivery may be more or less than the
purchase price.
CALIFORNIA Since the fund invests heavily in California municipal securities,
events in California are likely to affect the fund's investments and its
performance. These events may include economic or political policy changes,
tax base erosion, state constitutional limits on tax increases, budget
deficits and other financial difficulties, and changes in the ratings
assigned to California's municipal issuers.
A negative change in any one of these or other areas could affect the ability
of California's municipal issuers to meet their obligations. In recent years,
certain issuers in California have experienced financial difficulties, such
as the 1994 bankruptcy of Orange County. It is important to remember that
economic, budget and other conditions within California are unpredictable and
can change at any time.
U.S. TERRITORIES The fund may invest up to 35% of its assets in municipal
securities issued by U.S. territories. As with California municipal
securities, events in any of these territories where the fund is invested may
affect the fund's investments and its performance.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
Municipal issuers generally are not required to report on their Year 2000
readiness. This makes it more difficult for the manager to evaluate their
readiness. There have been reports, however, that many municipal issuers are
behind in their efforts to address the Year 2000 problem. The manager, of
course, cannot audit each issuer and its major suppliers to verify their Year
2000 readiness. The manager is making extensive efforts, however, to contact
the issuers of municipal securities held by the fund to try to assess their
Year 2000 readiness.
If an issuer in which the fund is invested is adversely affected by Year 2000
problems, it is possible that the issuer's ability to make timely interest
and principal payments also will be affected, at least temporarily. This may
affect both the amount and timing of the fund's distributions and the fund's
performance. It also is likely that the price of the issuer's securities will
be adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page [#] for more information.
More detailed information about the fund, its policies (including temporary
investments), risks and municipal securities ratings can be found in the
fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS1
[Insert bar graph]
8.67% 6.58% 10.97% 9.27% 9.49% -2.83% 15.04% 4.69% 8.81% 6.49%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q1 '95 6.09%
WORST QUARTER:
Q1 '94 -3.11%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
California Tax-Free Fund - Class
A2 1.92% 5.36% 7.15%
Lehman Brothers Municipal Bond
Index3 6.48% 6.23% 8.22%
SINCE
INCEPTION
1 YEAR (5/1/95)
- --------------------------------------------------------------------------
California Tax-Free Fund - Class
C2 3.76% 6.78%
Lehman Brothers Municipal Bond
Index3 6.48% 8.10%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of June 30, 1999, the fund's year-to-date return was []% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last
five years as part of a deal of over $50 million and with a maturity of at
least two years. It includes reinvested interest. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A 1 CLASS B 2 CLASS C 1
- -------------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 4.25% 4.00% 1.99%
Load imposed on purchases 4.25% None 1.00%
Maximum deferred sales charge (load) None3 4.00% 0.99%4
Exchange fee $5.00 $5.00 $5.00
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A 1 CLASS B 2 CLASS C 1
- -------------------------------------------------------------------------------
Management fees 0.44% 0.44% 0.44%
Distribution and service
(12b-1) fees5 0.08% 0.65% 0.65%
Other expenses 0.05% 0.05% 0.05%
------------------------------------
Total annual fund operating expenses 0.57% 1.14% 1.14%
====================================
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A and C for the fiscal
year ended March 31, 1999. The distribution and service (12b-1) fees are
based on the maximum fees allowed under Class B's Rule 12b-1 plan.
3. Except for investments of $1 million or more (see page [#]).
4. This is equivalent to a charge of 1% based on net asset value.
5. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
CLASS A $481 1 $600 $730 $1,108
CLASS B
Assuming you sold your shares
at the end of the period $516 $662 $828 $1,227 2
Assuming you stayed in the fund
$116 $362 $628 $1,227 2
CLASS C $313 3 $459 $721 $1,472
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
3. For the same Class C investment, your costs would be $215 if you did not
sell your shares at the end of the first year. Your costs for the remaining
periods would be the same.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $227 billion in assets.
The team responsible for the fund's management is:
THOMAS KENNY, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Kenny has been an analyst or portfolio manager of the fund since 1987. He
is the Director of Franklin's Municipal Bond Department. He joined the
Franklin Templeton Group in 1986.
BERNARD SCHROER, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Schroer has been an analyst or portfolio manager of the fund since 1987.
He joined the Franklin Templeton Group in 1987.
JOHN WILEY, VICE PRESIDENT OF ADVISERS
Mr. Wiley has been an analyst or portfolio manager of the fund since 1991. He
joined the Franklin Templeton Group in 1989.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended March 31, 1999, the fund paid
0.44% of its average net assets to the manager.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a leap year
may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund declares dividends daily
from its net investment income and pays them monthly on or about the 20th day
of the month. Your account may begin to receive dividends on the day after we
receive your investment and will continue to receive dividends through the
day we receive a request to sell your shares. Capital gains, if any, may be
distributed annually. The amount of these distributions will vary and there
is no guarantee the fund will pay dividends.
Please keep in mind that if you invest in the fund shortly before the fund
deducts a capital gain distribution from its net asset value, you will
receive some of your investment back in the form of a taxable distribution.
TAX CONSIDERATIONS Fund distributions will consist primarily of
exempt-interest dividends from interest earned on municipal securities. In
general, exempt-interest dividends are exempt from federal income tax.
However, the fund may invest a portion of its assets in securities that
generate income that is not tax-exempt. Fund distributions from such income
are taxable to you as ordinary income. Any capital gains the fund
distributes are taxable to you as long-term capital gains no matter how long
you have owned your shares. Distributions of ordinary income or capital
gains are taxable whether you reinvest your distributions in additional fund
shares or receive them in cash.
[Begin Callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct social security or taxpayer identification
number, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of the fund, you may have a capital gain or loss.
For tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale. The individual tax rate on
any gain from the sale or exchange of your shares depends on how long you
have held your shares.
Exempt-interest dividends are taken into account in determining the taxable
portion of your social security or railroad retirement benefits. The fund
also may invest a portion of its assets in private activity bonds. The
income from these bonds will be a preference item in determining your
alternative minimum tax.
Exempt-interest dividends from interest earned on municipal securities of the
State of California or its political subdivisions are generally exempt from
California personal income tax. Investments in municipal securities of other
states generally do not qualify for tax-free treatment in California.
Distributions of ordinary income and capital gain, and gains from the sale or
exchange of your fund shares generally will be subject to state and local
income tax. Non-U.S. investors may be subject to U.S. withholding and estate
tax. You should consult your tax advisor about the federal, state, local or
foreign tax consequences of your investment in a fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED MARCH 31,
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 7.35 7.09 7.18 7.11 7.12
------------------------------------------------
Net investment income (loss) .39 .42 .43 .44 .45
Net realized and unrealized
gains (losses) .07 .27 (.04) .07 (.02)
------------------------------------------------
Total from investment
operations .46 .69 .39 .51 .43
------------------------------------------------
Dividends from net
investment income (.39) (.42) (.43) (.44) (.44)
Distributions from net
realized gains (.02) (.01) (.05) -- --
------------------------------------------------
Total distributions (.41) (.43) (.48) (.44) (.44)
------------------------------------------------
Net asset value, end of year 7.40 7.35 7.09 7.18 7.11
================================================
Total return (%)1 6.43 10.10 5.67 7.40 6.37
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1 million) 15,474 14,767 13,634 13,313 12,923
Ratios to average net
assets: (%)
Expenses .57 .56 .56 .55 .55
Net investment income 5.21 5.71 6.07 6.14 6.36
Portfolio turnover rate (%) 18.66 17.29 11.96 19.24 14.07
CLASS B
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 7.41
---------
Net realized and unrealized
gains (losses) (.03)
---------
Total from investment
operations .07
Dividends from net
investment income (.09)
Distributions from net
realized gains -
---------
Total distributions (.09)
---------
Net asset value, end of year 7.39
=========
Total return (%)1 .88
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 43,674
Ratios to average net
assets: (%)
Expenses 1.14 2
Net investment income 4.59 3
Portfolio turnover rate (%) 18.6 6
CLASS C
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 7.35 7.09 7.18 7.09
--------------------------------------
Net investment income .35 .38 .39 .38
Net realized and unrealized
gains(losses) .06 .27 (.04) .08
--------------------------------------
Total from investment
operations .41 .65 .35 .46
Dividends from net
investment income (.35) (.38) (.39) (.37)
Distributions from net
realized gains (.02) (.01) (.05) --
--------------------------------------
Total distributions (.37) (.39) (.44) (.37)
--------------------------------------
Net asset value, end of year 7.39 7.35 7.09 7.18
======================================
Total return (%)1 5.70 9.49 5.06 6.62
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 464,535 295,976 138,509 47,685
Ratios to average net
assets: (%)
Expenses 1.14 1.14 1.14 1.14 3
Net investment income 4.61 5.13 5.47 5.55 4
Portfolio turnover rate (%) 18.66 17.29 11.96 19.24
1. Total return does not include sales charges, and is not annualized for
periods less than one year.
2. Annualized
3. For the period January 1, 1999 (effective date) to March 31, 1999.
4. For the period May 1, 1995 (effective date) to March 31, 1996.
YOUR ACCOUNT
[Insert graphic of pencil marking an "X"] CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. Your investment
representative can help you decide.
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------
o Initial sales o No initial sales o Initial sales
charge of 4.25% or charge charge of 1%
less
o Deferred sales o Deferred sales o Deferred sales
charge of 1% on charge of 4% or charge of 1% on
purchases of $1 less on shares you shares you sell
million or more sold sell within six within 18 months
within 12 months years
o Lower annual o Higher annual o Higher annual
expenses than Class expenses than Class expenses than Class
B or C due to lower A (same as Class C) A (same as Class B)
distribution fees due to higher due to higher
distribution fees. distribution fees.
Automatic No conversion to
conversion to Class Class A shares, so
A shares after annual expenses do
eight years, not decrease.
reducing future
annual expenses.
BEFORE JANUARY 1, 1999, CLASS A SHARES WERE DESIGNATED CLASS I AND CLASS C
SHARES WERE DESIGNATED CLASS II. THE FUND BEGAN OFFERING CLASS B SHARES ON
JANUARY 1, 1999.
SALES CHARGES - CLASS A
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $100,000 4.25 4.44
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either
as a lump sum or through our cumulative quantity discount or letter of intent
programs (see page [#]), you can buy Class A shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC
is the same for each class (please see page [#]).
DISTRIBUTION AND SERVICE (12B-1) FEES Class A has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution fees of up to 0.10% per year to those who sell and distribute
Class A shares and provide other services to shareholders. Because these fees
are paid out of Class A's assets on an on-going basis, over time these fees
will increase the cost of your investment and may cost you more than paying
other types of sales charges.
SALES CHARGES - CLASS B
IF YOU SELL YOUR SHARES
WITHIN THIS MANY YEARS AFTER BUYING THIS % IS DEDUCTED FROM
THEM YOUR PROCEEDS AS A CDSC
- --------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
With Class B shares, there is no initial sales charge. However, there is a
CDSC if you sell your shares within six years, as described in the table
above. The way we calculate the CDSC is the same for each class (please see
page [#]). After 8 years, your Class B shares automatically convert to Class
A shares, lowering your annual expenses from that time on.
MAXIMUM PURCHASE AMOUNT The maximum amount you may invest in Class B shares
at one time is $249,999. We place any investment of $250,000 or more in Class
A shares, since a reduced initial sales charge is available and Class A's
annual expenses are lower.
RETIREMENT PLANS Class B shares are not available to all retirement plans.
Class B shares are only available to IRAs (of any type), Franklin Templeton
Trust Company 403(b) plans, and Franklin Templeton Trust Company qualified
plans with participant or earmarked accounts.
DISTRIBUTION AND SERVICE (12B-1) FEES Class B has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution and other fees of up to 0.65% per year for the sale of Class B
shares and for services provided to shareholders. Because these fees are paid
out of Class B's assets on an on-going basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
SALES CHARGES - CLASS C
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $1 million 1.00 1.01
WE PLACE ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS A SHARES, SINCE THERE
IS NO INITIAL SALES CHARGE AND CLASS A'S ANNUAL EXPENSES ARE LOWER.
CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C
shares you sell within 18 months of purchase. The way we calculate the CDSC
is the same for each class (please see below).
DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution and other fees of up to 0.65% per year for the sale of Class C
shares and for services provided to shareholders. Because these fees are paid
out of Class C's assets on an on-going basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A, B & C
The CDSC for each class is based on the current value of the shares being
sold or their net asset value when purchased, whichever is less. There is no
CDSC on shares you acquire by reinvesting your dividends or capital gains
distributions.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one
month on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to
a CDSC. If there are not enough of these to meet your request, we will sell
the shares in the order they were purchased. We will use this same method if
you exchange your shares into another Franklin Templeton Fund (please see
page [#] for exchange information).
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below,
please let us know at the time you make your investment to help ensure you
receive the lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases
in the Franklin Templeton Funds to take advantage of the lower sales charges
for large purchases of Class A shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
also may combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts also may be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar
amount of shares over a 13-month period and lets you receive the same
sales charge as if all shares had been purchased at one time. We will
reserve a portion of your shares to cover any additional sales charge that
may apply if you do not buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE SECTION OF YOUR
ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you
may reinvest some or all of the proceeds within 365 days without an initial
sales charge. The proceeds must be reinvested within the same share class,
except proceeds from the sale of Class B shares will be reinvested in Class A
shares.
If you paid a CDSC when you sold your Class A or C shares, we will credit
your account with the amount of the CDSC paid but a new CDSC will apply. For
Class B shares reinvested in Class A, a new CDSC will not apply, although
your account will not be credited with the amount of any CDSC paid when you
sold your Class B shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD)
also may be reinvested without an initial sales charge if you reinvest them
within 365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject
to a sales charge.
SALES CHARGE WAIVERS Class A shares may be purchased without an initial
sales charge or CDSC by various individuals and institutions or by investors
who reinvest certain distributions and proceeds within 365 days. The CDSC for
each class also may be waived for certain redemptions and distributions. If
you would like information about available sales charge waivers, call your
investment representative or call Shareholder Services at 1-800/632-2301. A
list of available sales charge waivers also may be found in the Statement of
Additional Information (SAI).
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors
to invest as a group. For sales charge purposes, the group's investments are
added together. There are certain other requirements and the group must have
a purpose other than buying fund shares at a discount.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
MINIMUM INVESTMENTS
- --------------------------------------------------------------------------
INITIAL ADDITIONAL
- --------------------------------------------------------------------------
Regular accounts $1,000 $50
- --------------------------------------------------------------------------
UGMA/UTMA accounts $100 $50
- --------------------------------------------------------------------------
Broker-dealer sponsored wrap account
programs $250 $50
- --------------------------------------------------------------------------
Full-time employees, officers, trustees and
directors of Franklin Templeton entities,
and their immediate family members
$100 $50
- --------------------------------------------------------------------------
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. Make sure you indicate the share class
you have chosen. If you do not indicate a class, we will place your purchase
in Class A shares. To save time, you can sign up now for services you may
want on your account by completing the appropriate sections of the
application (see the next page).
BUYING SHARES
- -------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- -------------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------------
Make your check payable to Make your check payable to
[Insert graphic of California Tax-Free Income California Tax-Free Income
envelope] Fund. Fund. Include your account
number on the check.
BY MAIL Mail the check and your
signed application to Fill out the deposit slip
Investor Services. from your account statement.
If you do not have a slip,
include a note with your
name, the fund name, and
your account number.
Mail the check and deposit
slip or note to Investor
Services.
- --------------------------------------------------------------------------------
[Insert graphic of Call to receive a wire Call to receive a wire
three lightning control number and wire control number and wire
bolts] instructions. instructions.
Wire the funds and mail your To make a same day wire
signed application to investment, please call us
BY WIRE Investor Services. Please by 1:00 p.m. pacific time
include the wire control and make sure your wire
1-800/632-2301 number or your new account arrives by 3:00 p.m.
(or 1-650/312-2000 number on the application.
collect)
To make a same day wire
investment, please call us
by 1:00 p.m. pacific time
and make sure your wire
arrives by 3:00 p.m.
- -------------------------------------------------------------------------------
[Insert graphic of Call Shareholder Services at Call Shareholder Services at
two arrows pointing the number below, or send the number below or our
in opposite signed written instructions. automated TeleFACTS system,
directions] The TeleFACTS system cannot or send signed written
be used to open a new instructions.
BY EXCHANGE account.
(Please see page # for (Please see page # for
TeleFACTS(R) information on exchanges.) information on exchanges.)
1-800/247-1753
(around-the-clock
access)
- -------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in the fund by automatically transferring money from your checking or
savings account each month to buy shares. The minimum investment to open an
account with an automatic investment plan is $50. To sign up, complete the
appropriate section of your account application.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in Class
A shares of the fund by transferring money from your paycheck to the fund by
electronic funds transfer. If you are interested, indicate on your
application that you would like to receive an Automatic Payroll Deduction
Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the
fund in an existing account in the same share class* of the fund or another
Franklin Templeton Fund. Initial sales charges and CDSCs will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
*Class B and C shareholders may reinvest their distributions in Class A
shares of any Franklin Templeton money fund.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class*, generally without paying any additional sales
charges. If you exchange shares held for less than six months, however, you
may be charged the difference between the initial sales charge of the two
funds if the difference is more than 0.25%. If you exchange shares from a
money fund, a sales charge may apply no matter how long you have held the
shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC
will continue to be calculated from the date of your initial investment and
will not be charged at the time of the exchange. The purchase price for
determining a CDSC on exchanged shares will be the price you paid for the
original shares. If you exchange shares subject to a CDSC into a Class A
money fund, the time your shares are held in the money fund will not count
towards the CDSC holding period.
If you exchange your Class B shares for the same class of shares of another
Franklin Templeton Fund, the time your shares are held in that fund will
count towards the eight year period for automatic conversion to Class A
shares.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page [#]).
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may
exchange into Class A without any sales charge. Advisor Class shareholders of
another Franklin Templeton Fund also may exchange into Class A without any
sales charge. Advisor Class shareholders who exchange their shares for Class
A shares and later decide they would like to exchange into another fund that
offers Advisor Class may do so.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Requests to sell $100,000 or less can generally be
made over the phone or with a simple letter. Sometimes, however, to protect
you and the fund we will need written instructions signed by all registered
owners, with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud.
You can obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
fund against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with
a check or draft, we may delay sending you the proceeds until your check or
draft has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
SELLING SHARES
- -------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- -------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
BY MAIL or trust accounts may need to send additional
documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. If you own both Class A and B shares,
also specify the class of shares, otherwise we
will sell your Class A shares first. Be sure
to include all necessary signatures and any
additional documents, as well as signature
guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise according
to your written instructions.
- -------------------------------------------------------------------------
[Insert graphic of As long as your transaction is for $100,000 or
phone] less, you do not hold share certificates and
you have not changed your address by phone
BY PHONE within the last 15 days, you can sell your
shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and
address on the account. Written instructions,
with a signature guarantee, are required to
send the check to another address or to make
it payable to another person.
- -------------------------------------------------------------------------
[Insert graphic of You can call or write to have redemption
three lightning bolts] proceeds of $1,000 or more wired to a bank or
escrow account. See the policies above for
selling shares by mail or phone.
Before requesting a bank wire, please make
BY WIRE sure we have your bank account information on
file. If we do not have this information, you
will need to send written instructions with
your bank's name and address, your bank
account number, the ABA routing number, and a
signature guarantee.
Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business
day.
- -------------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund you
arrows pointing in are considering.
opposite directions]
Call Shareholder Services at the number below
BY EXCHANGE or our automated TeleFACTS system, or send
signed written instructions. See the policies
TeleFACTS(R) above for selling shares by mail or phone.
1-800/247-1753
(around-the-clock If you hold share certificates, you will need
access) to return them to the fund before your
exchange can be processed.
- -------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE The fund calculates the net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. pacific time). Each class's NAV is calculated
by dividing its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the
NAV plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
The fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250
($50 for employee and UGMA/UTMA accounts) because you sell some of your
shares, we may mail you a notice asking you to bring the account back up to
its applicable minimum investment amount. If you choose not to do so within
30 days, we may close your account and mail the proceeds to the address of
record. You will not be charged a CDSC if your account is closed for this
reason.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You also will receive the fund's
financial reports every six months. To reduce fund expenses, we try to
identify related shareholders in a household and send only one copy of the
financial reports. If you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive confirmations, account statements and
other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with
two or more owners are registered as "joint tenants with rights of
survivorship" (shown as "Jt Ten" on your account statement). To make any
ownership changes to a joint account, all owners must agree in writing,
regardless of the law in your state.
MARKET TIMERS The fund may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5 by
Franklin/Templeton Investor Services, Inc., the fund's transfer agent. You
will be considered a market timer if you have (i) requested an exchange out
of the fund within two weeks of an earlier exchange request, or (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, or (iv) otherwise seem to follow a timing pattern. Shares
under common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies
and reserves certain rights, including:
o The fund may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the fund may change its investment minimums or waive or
lower its minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right to
make payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check or wire would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive
sales commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and
service (12b-1) fees and its other resources.
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
COMMISSION (%) --- 3.00 2.00
Investment under $100,000 4.00 --- ---
$100,000 but under $250,000 3.25 --- ---
$250,000 but under $500,000 2.25 --- ---
$500,000 but under $1 million 1.85 --- ---
$1 million or more up to 0.75 1 --- ---
12B-1 FEE TO DEALER 0.10 0.15 2 0.65 3
A dealer commission of up to 0.25% may be paid on Class A NAV purchases by
certain trust companies and bank trust departments, eligible governmental
authorities, and broker-dealers or others on behalf of clients participating
in comprehensive fee programs.
1. During the first year after purchase, dealers may not be eligible to
receive the 12b-1 fee.
2. Dealers may be eligible to receive up to 0.15% from the date of purchase.
After 8 years, Class B shares convert to Class A shares and dealers may then
receive the 12b-1 fee applicable to Class A.
3. Dealers may be eligible to receive up to 0.15% during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the
13th month.
[Insert graphic of question mark]QUESTIONS
If you have any questions about the fund or your account, you can write to us
at P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one of
the following numbers. For your protection and to help ensure we provide you
with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- ---------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m. (Saturday)
Fund Information 1-800/DIAL BEN 5:30 a.m. to 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.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about the fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file #811-2790 112 P 01/99
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND
CLASS A, B & C
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 1, 1999
P.O. BOX 997151
SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the fund's prospectus.
The fund's prospectus, dated August 1, 1999, which we may amend from time to
time, contains the basic information you should know before investing in the
fund. You should read this SAI together with the fund's prospectus.
The audited financial statements and auditor's report in the fund's Annual
Report to Shareholders, for the fiscal year ended March 31, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies
Risks
Officers and Directors
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Ratings
- -------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
- -------------------------------------------------------------------------------
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
- -------------------------------------------------------------------------------
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
- -------------------------------------------------------------------------------
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
- -------------------------------------------------------------------------------
GOAL AND STRATEGIES
- -------------------------------------------------------------------------------
The fund's investment goal is to provide investors with as high a level of
income exempt from federal income taxes as is consistent with prudent
investing, while seeking preservation of shareholders' capital. This goal is
fundamental, which means it may not be changed without shareholder approval.
Of course, there is no assurance that the fund will meet its goal. The fund
also tries to provide a maximum level of income exempt from California
personal income taxes for California residents, although this policy is not a
fundamental investment goal of the fund.
As a fundamental policy, the fund normally invests at least 80% of its total
assets in securities that pay interest free from regular federal income
taxes. As nonfundamental policies, the fund also normally invests at least
80% of its total assets in securities that pay interest free from the federal
alternative minimum tax, at least 65% of its total assets in securities that
pay interest free from California personal income taxes, and at least 65% of
its total assets in California municipal securities.
Municipal securities issued by California or its counties, municipalities,
authorities, agencies, or other subdivisions, as well as municipal securities
issued by U.S. territories such as Guam, Puerto Rico, or the Mariana Islands,
generally pay interest free from federal income tax and from California
personal income taxes for California residents.
The fund tries to invest all of its assets in tax-free municipal securities.
The issuer's bond counsel generally gives the issuer an opinion on the
tax-exempt status of a municipal security when the security is issued.
Below is a description of various types of municipal and other securities
that the fund may buy. Other types of municipal securities may become
available that are similar to those described below and in which the fund may
also invest, if consistent with its investment goal and policies.
TAX ANTICIPATION NOTES are issued to finance short-term working capital needs
of municipalities in anticipation of various seasonal tax revenues, which
will be used to pay the notes. They are usually general obligations of the
issuer, secured by the taxing power for the payment of principal and interest.
REVENUE ANTICIPATION NOTES are similar to tax anticipation notes except they
are issued in expectation of the receipt of other kinds of revenue, such as
federal revenues available under the Federal Revenue Sharing Program.
BOND ANTICIPATION NOTES are normally issued to provide interim financing
until long-term financing can be arranged. Proceeds from long-term bond
issues then provide the money for the repayment of the notes.
TAX-EXEMPT COMMERCIAL PAPER typically represents a short-term obligation (270
days or less) issued by a municipality to meet working capital needs.
MUNICIPAL BONDS meet longer-term capital needs and generally have maturities
from one to 30 years when issued. They have two principal classifications:
general obligation bonds and revenue bonds.
GENERAL OBLIGATION BONDS. Issuers of general obligation bonds include states,
counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads. The basic
security behind general obligation bonds is the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest. The
taxes that can be levied for the payment of debt service may be limited or
unlimited as to the rate or amount of special assessments.
REVENUE BONDS. The full faith, credit and taxing power of the issuer do not
secure revenue bonds. Instead, the principal security for a revenue bond is
generally the net revenue derived from a particular facility, group of
facilities, or, in some cases, the proceeds of a special excise tax or other
specific revenue source. Revenue bonds are issued to finance a wide variety
of capital projects, including: electric, gas, water and sewer systems;
highways, bridges and tunnels; port and airport facilities; colleges and
universities; and hospitals. The principal security behind these bonds may
vary. For example, housing finance authorities have a wide range of security,
including partially or fully insured mortgages, rent subsidized and/or
collateralized mortgages, and/or the net revenues from housing or other
public projects. Many bonds provide additional security in the form of a debt
service reserve fund that may be used to make principal and interest
payments. Some authorities have further security in the form of state
assurances (although without obligation) to make up deficiencies in the debt
service reserve fund.
TAX-EXEMPT INDUSTRIAL DEVELOPMENT REVENUE BONDS are issued by or on behalf of
public authorities to finance various privately operated facilities for
business, manufacturing, housing, sports and pollution control, as well as
public facilities such as airports, mass transit systems, ports and parking.
The payment of principal and interest is solely dependent on the ability of
the facility's user to meet its financial obligations and the pledge, if any,
of the facility or other property as security for payment.
VARIABLE OR FLOATING RATE SECURITIES The fund may invest in variable or
floating rate securities, including variable rate demand notes, which have
interest rates that change either at specific intervals (variable rate), from
daily up to monthly, or whenever a benchmark rate changes (floating rate).
The interest rate adjustments are designed to help stabilize the security's
price. While this feature helps protect against a decline in the security's
market price when interest rates go up, it lowers the fund's income when
interest rates fall. Variable or floating rate securities may include a
demand feature, which may be unconditional. The demand feature allows the
holder to demand prepayment of the principal amount before maturity,
generally on one to 30 days' notice. The holder receives the principal amount
plus any accrued interest either from the issuer or by drawing on a bank
letter of credit, a guarantee or insurance issued with respect to the
security. The fund generally uses variable or floating rate securities as
short-term investments while waiting for long-term investment opportunities.
MUNICIPAL LEASE OBLIGATIONS The fund may invest in municipal lease
obligations, including certificates of participation. Municipal lease
obligations generally finance the purchase of public property. The property
is leased to the state or a local government, and the lease payments are used
to pay the interest on the obligations. Municipal lease obligations differ
from other municipal securities because the lessee's governing body must
appropriate (set aside) the money to make the lease payments each year. If
the money is not appropriated, the issuer or the lessee can end the lease
without penalty. If the lease is cancelled, investors who own the municipal
lease obligations may not be paid.
The board of directors reviews the fund's municipal lease obligations to try
to assure that they are liquid investments based on various factors reviewed
by the fund's manager and monitored by the board. These factors may include
(a) the credit quality of the obligations and the extent to which they are
rated or, if unrated, comply with existing criteria and procedures followed
to ensure that they are comparable in quality to the ratings required for the
fund to invest, including an assessment of the likelihood of the lease being
canceled, taking into account how essential the leased property is and the
term of the lease compared to the useful life of the leased property; (b) the
size of the municipal securities market, both in general and with respect to
municipal lease obligations; and (c) the extent to which the type of
municipal lease obligations held by the fund trade on the same basis and with
the same degree of dealer participation as other municipal securities of
comparable credit rating or quality.
Since annual appropriations are required to make lease payments, municipal
lease obligations generally are not subject to constitutional limitations on
the issuance of debt and may allow an issuer to increase government
liabilities beyond constitutional debt limits. When faced with increasingly
tight budgets, local governments have more discretion to curtail lease
payments under a municipal lease obligation than they do to curtail payments
on other municipal securities. If not enough money is appropriated to make
the lease payments, the leased property may be repossessed as security for
holders of the municipal lease obligations. If this happens, there is no
assurance that the property's private sector or re-leasing value will be
enough to make all outstanding payments on the municipal lease obligations or
that the payments will continue to be tax-free.
While cancellation risk is inherent to municipal lease obligations, the fund
believes that this risk may be reduced, although not eliminated, by its
policies on the quality of securities in which it may invest.
MELLO-ROOS BONDS are issued under the California Mello-Roos Community
Facilities Act to finance the building of roads, sewage treatment plants and
other projects designed to improve the infrastructure of a community. They
are not rated and are not considered obligations of the municipality.
Mello-Roos bonds are primarily secured by real estate taxes levied on
property located in the community. The timely payment of principal and
interest on the bonds depends on the developer's or other property owner's
ability to pay the real estate taxes. This ability could be negatively
affected by a declining economy or real estate market in California.
CALLABLE BONDS The fund may invest in callable bonds, which allow the issuer
to repay some or all of the bonds ahead of schedule. If a bond is called, the
fund will receive the principal amount, the accrued interest, and may receive
a small additional payment as a call premium. The manager may sell a callable
bond before its call date, if it believes the bond is at its maximum premium
potential. When pricing callable bonds, the call feature is factored into the
price of the bonds and may impact the fund's net asset value.
An issuer is more likely to call its bonds when interest rates are falling,
because the issuer can issue new bonds with lower interest payments. If a
bond is called, the fund may have to replace it with a lower-yielding
security. A call of some or all of these securities may lower a fund's income
and its distributions to shareholders. If the fund originally paid a premium
for the bond because it had appreciated in value from its original issue
price, the fund also may not be able to recover the full amount it paid for
the bond. One way for the fund to protect itself from call risk is to buy
bonds with call protection. Call protection is an assurance that the bond
will not be called for a specific time period, typically five to 10 years
from when the bond is issued.
ESCROW-SECURED OR DEFEASED BONDS are created when an issuer refunds, before
maturity, an outstanding bond issue that is not immediately callable (or
pre-refunds), and sets aside funds for redemption of the bonds at a future
date. The issuer uses the proceeds from a new bond issue to buy high grade,
interest bearing debt securities, generally direct obligations of the U.S.
government. These securities are then deposited in an irrevocable escrow
account held by a trustee bank to secure all future payments of principal and
interest on the pre-refunded bond. Escrow-secured bonds often receive a
triple A or equivalent rating.
STRIPPED MUNICIPAL SECURITIES Municipal securities may be sold in "stripped"
form. Stripped municipal securities represent separate ownership of principal
and interest payments on municipal securities.
ZERO-COUPON SECURITIES The fund may invest in zero-coupon and delayed
interest securities. Zero-coupon securities make no periodic interest
payments, but are sold at a deep discount from their face value. The buyer
recognizes a rate of return determined by the gradual appreciation of the
security, which is redeemed at face value on a specified maturity date. The
discount varies depending on the time remaining until maturity, as well as
market interest rates, liquidity of the security, and the issuer's perceived
credit quality. The discount, in the absence of financial difficulties of the
issuer, typically decreases as the final maturity date approaches. If the
issuer defaults, the fund may not receive any return on its investment.
Because zero-coupon securities bear no interest and compound semiannually at
the rate fixed at the time of issuance, their value is generally more
volatile than the value of other fixed-income securities. Since zero-coupon
bondholders do not receive interest payments, zero-coupon securities fall
more dramatically than bonds paying interest on a current basis when interest
rates rise. When interest rates fall, zero-coupon securities rise more
rapidly in value, because the bonds reflect a fixed rate of return.
An investment in zero-coupon and delayed interest securities may cause the
fund to recognize income and make distributions to shareholders before it
receives any cash payments on its investment. To generate cash to satisfy
distribution requirements, the fund may have to sell portfolio securities
that it otherwise would have continued to hold or to use cash flows from
other sources such as the sale of fund shares.
CONVERTIBLE AND STEP COUPON BONDS The fund may invest a portion of its assets
in convertible and step coupon bonds. Convertible bonds are zero-coupon
securities until a predetermined date, at which time they convert to a
specified coupon security. The coupon on step coupon bonds changes
periodically during the life of the security based on predetermined dates
chosen when the security is issued.
U.S. GOVERNMENT OBLIGATIONS are issued by the U.S. Treasury or by agencies
and instrumentalities of the U.S. government and are backed by the full faith
and credit of the U.S. government. They include Treasury bills, notes and
bonds.
COMMERCIAL PAPER is a promissory note issued by a corporation to finance its
short-term credit needs. The fund may invest in taxable commercial paper only
for temporary defensive purposes.
WHEN-ISSUED TRANSACTIONS Municipal securities are frequently offered on a
"when-issued" basis. When so offered, the price, which is generally expressed
in yield terms, is fixed at the time the commitment to buy is made, but
delivery and payment take place at a later date. During the time between
purchase and settlement, no payment is made by the fund to the issuer and no
interest accrues to the fund. If the other party to the transaction fails to
deliver or pay for the security, the fund could miss a favorable price or
yield opportunity, or could experience a loss.
When the fund makes the commitment to buy a municipal security on a
when-issued basis, it records the transaction and reflects the value of the
security in the determination of its net asset value. The fund believes its
net asset value or income will not be negatively affected by its purchase of
municipal securities on a when-issued basis. The fund will not engage in
when-issued transactions for investment leverage purposes.
Although the fund generally will buy municipal securities on a when-issued
basis with the intention of acquiring the securities, it may sell the
securities before the settlement date if it is considered advisable. When the
fund is the buyer, it will 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. If assets
of the fund are held in cash pending the settlement of a purchase of
securities, the fund will not earn income on those assets.
DIVERSIFICATION The fund is a diversified fund. As a fundamental policy, the
fund will not buy a security if more than 5% of the value of its total assets
would be in the securities of any single issuer. This limitation does not
apply to investments issued or guaranteed by the U.S. government or its
instrumentalities. For this purpose, each political subdivision, agency, or
instrumentality, each multi-state agency of which a state is a member, and
each public authority that issues private activity bonds on behalf of a
private entity, is considered a separate issuer. Escrow-secured or defeased
bonds generally are not considered an obligation of the original municipality
when determining diversification. For securities backed only by the assets or
revenues of a particular instrumentality, facility or subdivision, the entity
is considered the issuer.
The fund intends to meet certain diversification requirements for tax
purposes. Generally, to meet federal tax requirements at the close of each
quarter, the fund may not invest more than 25% of its total assets in any one
issuer and, with respect to 50% of total assets, may not invest more than 5%
of its total assets in any one issuer. These limitations do not apply to U.S.
government securities and may be revised if applicable federal income tax
requirements are revised.
TEMPORARY INVESTMENTS When the manager believes the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other unusual or adverse conditions exist, it may invest
the fund's portfolio in a temporary defensive manner. Under these
circumstances, the fund may invest all of its assets in securities that pay
taxable interest, including (i) high quality commercial paper and obligations
of U.S. banks (including commercial banks and savings and loan associations)
with assets of $1 billion or more; (ii) securities issued by or guaranteed by
the full faith and credit of the U.S. government, including indirect U.S.
government securities such as mortgage-backed securities issued or guaranteed
by the Government National Mortgage Association or the Federal National
Mortgage Association, and repurchase agreements collateralized by U.S.
government securities; or (iii) municipal securities issued by a state or
local government other than California. The fund also may invest all of its
assets in municipal securities issued by a U.S. territory such as Guam,
Puerto Rico or the Mariana Islands.
SECURITIES TRANSACTIONS The frequency of portfolio transactions, usually
referred to as the portfolio turnover rate, varies for the fund from year to
year, depending on market conditions. While short-term trading increases
portfolio turnover and may increase costs, the execution costs for municipal
securities are substantially less than for equivalent dollar values of equity
securities.
CREDIT QUALITY All things being equal, the lower a security's credit quality,
the higher the risk and the higher the yield the security generally must pay
as compensation to investors for the higher risk.
A security's credit quality depends on the issuer's ability to pay interest
on the security and, ultimately, to repay the principal. Independent rating
agencies, such as Fitch Investors Service Inc. (Fitch), Moody's Investors
Service, Inc. (Moody's), and Standard & Poor's Corporation (S&P), often rate
municipal securities based on their opinion of the issuer's credit quality.
Most rating agencies use a descending alphabet scale to rate long-term
securities, and a descending numerical scale to rate short-term securities.
Securities in the top four ratings are "investment grade," although
securities in the fourth highest rating may have some speculative features.
These ratings are described at the end of this SAI under "Description of
Ratings."
An insurance company, bank or other foreign or domestic entity may provide
credit support for a municipal security and enhance its credit quality. For
example, some municipal securities are insured, which means they are covered
by an insurance policy that guarantees the timely payment of principal and
interest. Other municipal securities may be backed by letters of credit,
guarantees, or escrow or trust accounts that contain securities backed by the
full faith and credit of the U.S. government to secure the payment of
principal and interest.
As discussed in the prospectus, the fund has limitations on the credit
quality of securities it may buy. These limitations are generally applied
when the fund makes an investment so that the fund is not required to sell a
security because of a later change in circumstances.
INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50%
of the fund's outstanding shares are represented at the meeting in person or
by proxy, whichever is less.
The fund may not:
1. Borrow money or mortgage or pledge any of its assets, except that
borrowings for temporary or emergency purposes may be made in an amount up to
5% of the total asset value.
2. Buy any securities on "margin" or sell any securities "short."
3. Lend any funds or other assets, except by the purchase of a portion of an
issue of publicly distributed bonds, debentures, notes or other debt
securities, or to the extent the entry into a repurchase agreement may be
deemed a loan. Although such loans are not presently intended, this
prohibition will not preclude the fund from loaning securities to securities
dealers or other institutional investors if at least 102% cash collateral is
pledged and maintained by the borrower provided such security loans may not
be made if, as a result, the aggregate of such loans exceeds 10% of the value
of the fund's total assets at the time of the most recent loan.
4. Act as underwriter of securities issued by other persons except insofar as
the fund may be technically deemed an underwriter under federal securities
laws in connection with the disposition of portfolio securities.
5. Purchase the securities of any issuer which would result in owning more
than 10% of the voting securities of such issuer.
6. Purchase from or sell to its officers and directors, or any firm of which
any officer or director is a member, as principal, any securities, but may
deal with such persons or firms as brokers and pay a customary brokerage
commission; retain securities of any issuer if, to the knowledge of the fund,
one or more of the its officers, directors, or investment manager own
beneficially more than one-half of 1% of the securities of such issuer and
all such officers and directors together own beneficially more than 5% of
such securities.
7. Acquire, lease or hold real estate, except such as may be necessary or
advisable for the maintenance of its offices.
8. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads or any combination thereof, or interests in oil, gas, or other
mineral exploration or development programs. The fund may, however, write
covered call options listed for trading on a national securities exchange and
purchase call options to the extent necessary to cancel call options
previously written. At present there are no options listed for trading on a
national securities exchange covering the types of securities which are
appropriate for investment by the fund and, therefore, there are no option
transactions available for the fund.
9. Invest in companies for the purpose of exercising control or management.
10. Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization; except to the
extent the fund invests its uninvested daily cash balances in shares of
Franklin California Tax-Exempt Money Fund and other tax-exempt money market
funds in the Franklin Templeton Group of Funds provided i) its purchases and
redemptions of such money market fund shares may not be subject to any
purchase or redemption fees, ii) its investments may not be subject to
duplication of management fees, nor to any charge related to the expense of
distributing the fund's shares (as determined under Rule 12b-1, as amended
under the federal securities laws) and iii) aggregate investments by the fund
in any such money market fund do not exceed (A) the greater of (i) 5% of the
fund's total net assets or (ii) $2.5 million, or (B) more than 3% of the
outstanding shares of any such money market fund.
11. Purchase securities in private placements or in other transactions for
which there are legal or contractual restrictions on resale.
12. Invest more than 25% of assets in securities of any industry. For
purposes of this limitation, tax-exempt securities issued by governments or
political subdivisions of governments are not considered to be part of any
industry.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the fund makes an investment. In most cases, the fund
is not required to sell a security because circumstances change and the
security no longer meets one or more of the fund's policies or restrictions.
If a percentage restriction or limitation is met at the time of investment, a
later increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities will not be considered a violation of the
restriction or limitation.
RISKS
- -------------------------------------------------------------------------------
CALIFORNIA Since the fund mainly invests in California municipal securities,
its performance is closely tied to the ability of issuers of California
municipal securities to continue to make principal and interest payments on
their securities. The issuers' ability to do this is in turn dependent on
economic, political and other conditions within California. Below is a
discussion of certain conditions that may affect California municipal
issuers. 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 California and is
subject to change. The information below is based on data available to the
fund from historically reliable sources, but the fund has not independently
verified it.
The ability of California's issuers to continue to make principal and
interest payments is dependent in large part on their ability to raise
revenues, primarily through taxes, and to control spending. Many factors can
affect the state's revenues including the rate of population growth,
unemployment rates, personal income growth, federal aid, and the ability to
attract and keep successful businesses. A number of factors can also affect
the state's spending including current debt levels, and the existence of
accumulated budget deficits. The following provides some information on these
and other factors.
California's economy has been the largest of all the states in the nation.
Like many other states, however, California was significantly affected by the
national recession of the early 1990s, especially in the southern portion of
the state. Most of its job losses during its recession resulted from military
cutbacks and the downturn in the construction industry. Downsizing in the
state's aerospace industry, excess office capacity, and slow growth in
California's export market also contributed to the state's recession.
Since mid-1993, California's economic recovery has been fueled by growth in
the export, entertainment, tourism and computer services sectors. The state's
diverse employment base has reached prerecession levels with manufacturing
accounting for 14.5% of employment (based on 1997 state figures), trade
23.2%, services 30.8%, and government 16.3%. Despite strong employment
growth, California's unemployment rate has remained above the national
average. Recent economic problems in Asia have adversely affected the state's
high tech manufacturing and related industries, resulting in slower growth
than in previous years. Further weakening of the economies of California's
international trade partners could have a negative impact on the state.
During the period from 1990 to 1994, California experienced large budget
deficits due to its economic recession, as well as unrealistic budget
assumptions. School expenditures totaling $1.8 billion were recorded as "loan
assets" on the state's books to be repaid by 2002. When adjusted to account
for these loans, California's deficit balance was 10.7% of expenditures in
1992. At the end of fiscal 1998, general fund balances were a positive $547
million or 1.1% of expenditures on a GAAP basis.
California's debt levels have grown in recent years. In 1990, the state's
debt per capita was below the median for all states. By 1998, debt per capita
had risen to $675, above the $446 median for all states. California's debt
levels may increase further as the state attempts to address its
infrastructure needs and school improvements.
While the state's financial performance has improved in recent years, its
fiscal operations have remained vulnerable. Increased funding for schools and
infrastructure improvements and various tax cuts 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, also
has hampered the state's financial flexibility, as has its lack of a
formalized mid-year budget correction process. The state's relatively low
budget reserves and reduced flexibility make the state vulnerable to a future
economic downturn. Overall, however, S&P considers California's outlook to be
positive.
U.S. TERRITORIES Since the fund may invest up to 35% of its assets in
municipal securities issued by U.S. territories, the ability of municipal
issuers in U.S. territories to continue to make principal and interest
payments also may affect the fund's performance. As with California municipal
issuers, the ability to make these payments is dependent on economic,
political and other conditions. Below is a discussion of certain conditions
within some of the territories where the fund may be invested. It is not a
complete analysis of every material fact that may affect the ability of
issuers of U.S. territory municipal securities to meet their debt obligations
or the economic or political conditions within the territories and is subject
to change. It is based on data available to the fund from historically
reliable sources, but it has not been independently verified by the fund.
GUAM. Guam's economy has been heavily dependent on tourism. It has been
especially dependent on Japanese tourism, which has made Guam vulnerable to
fluctuations in the relationship between the U.S. dollar and the Japanese
yen. The recent Asian economic crisis and Typhoon Paka, which hit Guam in
December 1997, negatively affected both tourism and other economic activities
in Guam and contributed to a decline of 1.9% in gross island product between
1997 and 1998.
In the early to mid-1990s, Guam's financial position deteriorated due to a
series of natural disasters that led to increased spending on top of already
significant budget gaps. As a result, the government introduced a
comprehensive financial plan in June 1995 to help balance the budget and
reduce the general fund deficit by fiscal 1999. As of fiscal 1997, the
deficit had improved and the budget was balanced. Preliminary results for
fiscal 1998, however, have shown a decline in the general fund ending balance.
While Guam's debt burden has been manageable, Guam's ability to maintain
current debt levels may be challenged in the near future. U.S. military
downsizing has reduced the federal presence on the island and also may reduce
federal support for infrastructure projects. At the same time, Guam has faced
increasing pressure to improve its infrastructure to help generate economic
development.
Overall, S&P's outlook for Guam has been negative due to Guam's continued
weak financial position and the need for continued political support towards
the goals of the financial plan.
MARIANA ISLANDS. The Mariana Islands became a commonwealth in 1975. At that
time, the U.S. government agreed to exempt the islands from federal minimum
wage and immigration laws in an effort to help stimulate industry and the
economy. The islands' minimum wage has been more than $2 per hour below the
U.S. level and tens of thousands of workers have immigrated from various
Asian countries to provide cheap labor for the islands' industries. Recently,
the islands' tourism and apparel industries combined to help increase gross
business receipts from $224 million in 1985 to $2 billion in 1996.
PUERTO RICO. Overall, Moody's considered Puerto Rico's outlook stable as of
January 1999. In recent years, Puerto Rico's financial performance has
improved. Relatively strong revenue growth and more aggressive tax collection
procedures resulted in a general fund surplus for fiscal 1998 (unaudited).
For fiscal 1999, spending increases of 11% are budgeted, which may create an
operating deficit and deplete the commonwealth's unreserved fund balance.
Puerto Rico's debt levels have been high. Going forward, these levels may
increase as Puerto Rico attempts to finance significant capital and
infrastructure improvements. Puerto Rico will also need to address its large
unfunded pension liability of more than $6 billion.
Despite Puerto Rico's stable outlook, Puerto Rico may face challenges in the
coming years with the 1996 passage of a bill eliminating section 936 of the
Internal Revenue Code. This section has given certain U.S. corporations
operating in Puerto Rico significant tax advantages. These incentives have
helped considerably with Puerto Rico's economic growth, especially with the
development of its manufacturing sector. U.S. firms that have benefited from
these incentives have provided a significant portion of Puerto Rico's
revenues, employment and deposits in local financial institutions. The
section 936 incentives will be phased out over a 10-year period ending in
2006. It is hoped that this long phase-out period will give Puerto Rico
sufficient time to lessen the potentially negative effects of section 936's
elimination. Outstanding issues relating to the potential for a transition to
statehood also may have broad implications for Puerto Rico and its financial
and credit position.
OFFICERS AND DIRECTORS
- -------------------------------------------------------------------------------
The fund has a board of directors. The board is responsible for the overall
management of the fund, including general supervision and review of the
fund's investment activities. The board, in turn, elects the officers of the
fund who are responsible for administering the fund's day-to-day operations.
The board also monitors the fund to ensure no material conflicts exist among
share classes. While none is expected, the board will act appropriately to
resolve any material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the fund, and principal occupations during
the past five years are shown below.
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
DIRECTOR
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 48 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
DIRECTOR
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee,
as the case may be, of 50 of the investment companies in the Franklin
Templeton Group of Funds.
Edith E. Holiday (47)
3239 38th Street, N.W., Washington, DC 20016
DIRECTOR
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and
H.J. Heinz Company (processed foods and allied products) (1994-present);
director or trustee, as the case may be, of 24 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and
Trustee (1993-1997), National Child Research Center, Assistant to the
President of the United States and Secretary of the Cabinet (1990-1993),
General Counsel to the United States Treasury Department (1989-1990), and
Counselor to the Secretary and Assistant Secretary for Public Affairs and
Public Liaison-United States Treasury Department (1988-1989).
*Charles B. Johnson (66)
777 Mariners Island Blvd., San Mateo, CA 94404
President and Director
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Investment Advisory Services, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and Franklin Templeton
Services, Inc.; officer and/or director or trustee, as the case may be, of
most of the other subsidiaries of Franklin Resources, Inc. and of 49 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND DIRECTOR
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.
and Franklin Investment Advisory Services, Inc.; Senior Vice President,
Franklin Advisory Services, LLC; Director, Franklin/Templeton Investor
Services, Inc.; and officer and/or director or trustee, as the case may be,
of most of the other subsidiaries of Franklin Resources, Inc. and of 52 of
the investment companies in the Franklin Templeton Group of Funds.
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
DIRECTOR
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 48 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, White River
Corporation (financial services) and Hambrecht and Quist Group (investment
banking), and President, National Association of Securities Dealers, Inc.
Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin Investment
Advisory Services, Inc. and Franklin/Templeton Investor Services, Inc.; and
officer and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 52 of the investment
companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President, Chief Financial Officer and Director, Templeton
Worldwide, Inc.; Executive Vice President, Chief Operating Officer and
Director, Templeton Investment Counsel, Inc.; Executive Vice President and
Chief Financial Officer, Franklin Advisers, Inc.; Chief Financial Officer,
Franklin Advisory Services, LLC and Franklin Investment Advisory Services,
Inc.; President and Director, Franklin Templeton Services, Inc.; officer
and/or director of some of the other subsidiaries of Franklin Resources,
Inc.; and officer and/or director or trustee, as the case may be, of 52 of
the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 53 of the investment
companies in the Franklin Templeton Group of Funds.
Thomas J. Kenny (36)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President, Franklin Advisers, Inc.; and officer of eight of
the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Brian E. Lorenz (60)
One North Lexington Avenue, White Plains, NY 10001-1700
SECRETARY
Attorney, member of the law firm of Bleakley Platt & Schmidt; and officer of
three of the investment companies in the Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal
securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
The fund pays noninterested board members $1,355 per month plus $1,345 per
meeting attended. Noninterested board members also may serve as directors or
trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The fees payable to
noninterested board members by the fund are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve
on other boards within the Franklin Templeton Group of Funds. The following
table provides the total fees paid to noninterested board members by the fund
and by the Franklin Templeton Group of Funds.
NUMBER OF BOARDS IN
TOTAL FEES THE FRANKLIN
TOTAL FEES RECEIVED FROM THE TEMPLETON GROUP OF
RECEIVED FRANKLIN TEMPLETON FUNDS ON WHICH EACH
NAME FROM THE FUND1 GROUP OF FUNDS2 SERVES3
- -------------------------------------------------------------------------------
Harris J. Ashton 25,167 361,157 48
S. Joseph Fortunato 23,758 367,835 50
Edith E. Holiday4 30,455 211,400 24
Gordon S. Macklin 25,167 361,157 48
1. For the fiscal year ended March 31, 1999. During the period from March 31,
1998, through May 31, 1998, fees at the rate of $1,200 per month plus $1,200
per board meeting attended were in effect.
2. For the calendar year ended December 31, 1998.
3. We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the board members are responsible. The Franklin Templeton Group of
Funds currently includes 54 registered investment companies, with
approximately 163 U.S. based funds or series.
4. Appointed February 1, 1998.
Noninterested board members are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or board members who are shareholders of Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February
1998, this policy was formalized through adoption of a requirement that each
board member invest one-third of fees received for serving as a director or
trustee of a Templeton fund in shares of one or more Templeton funds and
one-third of fees received for serving as a director or trustee of a Franklin
fund in shares of one or more Franklin funds until the value of such
investments equals or exceeds five times the annual fees paid such board
member. Investments in the name of family members or entities controlled by a
board member constitute fund holdings of such board member for purposes of
this policy, and a three year phase-in period applies to such investment
requirements for newly elected board members. In implementing such policy, a
board member's fund holdings existing on February 27, 1998, are valued as of
such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
- -------------------------------------------------------------------------------
MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisers, Inc.
The manager is a wholly owned subsidiary of Franklin Resources, Inc.
(Resources), a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson,
Jr. are the principal shareholders of Resources.
The manager provides investment research and portfolio management services,
and selects the securities for the fund to buy, hold or sell. The manager's
extensive research activities include, as appropriate, traveling to meet with
issuers and to review project sites. The manager also selects the brokers who
execute the fund's portfolio transactions. The manager provides periodic
reports to the board, which reviews and supervises the manager's investment
activities. To protect the fund, the manager and its officers, directors and
employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of
the other funds it manages, or for its own account, that may differ from
action taken by the manager on behalf of the fund. Similarly, with respect to
the fund, the manager is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that the manager
and access persons, as defined by applicable federal securities laws, may buy
or sell for its or their own account or for the accounts of any other fund.
The manager is not obligated to refrain from investing in securities held by
the fund or other funds it manages. Of course, any transactions for the
accounts of the manager and other access persons will be made in compliance
with the fund's code of ethics.
Under the fund's code of ethics, employees of the Franklin Templeton Group
who are access persons may engage in personal securities transactions subject
to the following general restrictions and procedures: (i) the trade must
receive advance clearance from a compliance officer and must be completed by
the close of the business day following the day clearance is granted; (ii)
copies of all brokerage confirmations and statements must be sent to a
compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) above, file
annual reports of their securities holdings each January and inform the
compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they
are recommending a security in which they have an ownership interest for
purchase or sale by a fund or other client.
MANAGEMENT FEES The fund pays the manager a fee equal to a monthly rate of:
o 5/96 of 1% of the value of net assets up to and including $100 million;
o 1/24 of 1% of the value of net assets over $100 million and not over
$250 million; and
o 9/240 of 1% of the value of net assets over $250 million and not over
$10 billion; and
o 11/300 of 1% of the value of net assets over $10 billion and not over
$12.5 billion; and
o 7/200 of 1% of the value of net assets over $12.5 billion and not over
$15 billion; and
o 1/30 of 1% of the value of net assets over $15 billion and not over
$17.5 billion; and
o 19/600 of 1% of the value of net assets over $17.5 billion and not over
$20 billion; and
o 3/100 of 1% of the value of net assets in excess of $20 billion.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of the
fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended March 31, the fund paid the following
management fees:
MANAGEMENT FEES PAID ($)
- -------------------------------------------
1999 69,665,022
1998 65,098,679
1997 60,994,984
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the fund to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by
Resources and is an affiliate of the fund's manager and principal
underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The fund pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended March 31, the manager paid FT
Services the following administration fees:
ADMINISTRATION FEES PAID ($)
------------------------------------------
1999 12,319,201
1998 11,468,541
1997 5,449,904
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is the fund's shareholder servicing agent
and acts as the fund's transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please
send all correspondence to Investor Services to P.O. Box 997151, Sacramento,
CA 95899-9983.
For its services, Investor Services receives a fixed fee per account. The
fund also will reimburse Investor Services for certain out-of-pocket
expenses, which may include payments by Investor Services to entities,
including affiliated entities, that provide sub-shareholder services,
recordkeeping and/or transfer agency services to beneficial owners of the
fund. The amount of reimbursements for these services per benefit plan
participant fund account per year will not exceed the per account fee payable
by the fund to Investor Services in connection with maintaining shareholder
accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the fund's independent auditor. The auditor gives an opinion on the
financial statements included in the fund's Annual Report to Shareholders and
reviews the fund's registration statement filed with the U.S. Securities and
Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
- -------------------------------------------------------------------------------
Since most purchases by the fund are principal transactions at net prices,
the fund incurs little or no brokerage costs. The fund deals directly with
the selling or buying principal or market maker without incurring charges for
the services of a broker on its behalf, unless it is determined that a better
price or execution may be obtained by using the services of a broker.
Purchases of portfolio securities from underwriters will include a commission
or concession paid by the issuer to the underwriter, and purchases from
dealers will include a spread between the bid and ask prices. As a general
rule, the fund does not buy securities in underwritings where it is given no
choice, or only limited choice, in the designation of dealers to receive the
commission. The fund seeks to obtain prompt execution of orders at the most
favorable net price. Transactions may be directed to dealers in return for
research and statistical information, as well as for special services
provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on
the research services the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order
to obtain additional research services allows the manager to supplement its
own research and analysis activities and to receive the views and information
of individuals and research staffs of other securities firms. As long as it
is lawful and appropriate to do so, the manager and its affiliates may use
this research and data in their investment advisory capacities with other
clients. If the fund's officers are satisfied that the best execution is
obtained, the sale of fund shares, as well as shares of other funds in the
Franklin Templeton Group of Funds, also may be considered a factor in the
selection of broker-dealers to execute the fund's portfolio transactions.
If purchases or sales of securities of the fund and one or more other
investment companies or clients supervised by the manager are considered at
or about the same time, transactions in these securities will be allocated
among the several investment companies and clients in a manner deemed
equitable to all by the manager, taking into account the respective sizes of
the funds and the amount of securities to be purchased or sold. In some cases
this procedure could have a detrimental effect on the price or volume of the
security so far as the fund is concerned. In other cases it is possible that
the ability to participate in volume transactions may improve execution and
reduce transaction costs to the fund.
During the fiscal years ended March 31, 1999, 1998, and 1997, the fund did
not pay any brokerage commissions.
As of March 31, 1999, the fund did not own securities of its regular
broker-dealers.
DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
The fund calculates dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally
due to the difference in the distribution and service (Rule 12b-1) fees of
each class. The fund does not pay "interest" or guarantee any fixed rate of
return on an investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME By meeting certain requirements of
the Code, the fund has qualified and continues to qualify to pay
"exempt-interest dividends" to you. These dividends are derived from interest
income exempt from regular federal income tax, and are not subject to regular
federal income tax when they are distributed to you. In addition, to the
extent that exempt-interest dividends are derived from interest on
obligations of California and its political subdivisions, or from interest on
qualifying U.S. Territorial obligations (including qualifying obligations of
Puerto Rico, the U.S. Virgin Islands or Guam), they will also be exempt from
California personal income taxes. California generally does not grant
tax-free treatment to interest on state and municipal obligations of other
states.
The fund may earn taxable income on any temporary investments, on the
discount from stripped obligations or their coupons, on income from
securities loans or other taxable transactions, or on ordinary income derived
from the sale of market discount bonds. Any distributions by the fund from
such income will be taxable to you as ordinary income, whether you take them
in cash or additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net capital gains realized by the fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, in order to reduce or eliminate excise or income
taxes on the fund.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you
of the amount of your ordinary income dividends and capital gain
distributions at the time they are paid, and will shortly after the close of
each calendar year advise you of their tax status for federal income tax
purposes, including the portion of the distributions that on average comprise
taxable income or interest income that is a tax preference item under the
alternative minimum tax. If you have not held fund shares for a full year,
the fund may designate and distribute to you as taxable, tax-exempt or tax
preference income a percentage of income that is not equal to the actual
amount of such income earned during the period of your investment in the fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The fund has elected
to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. As a regulated
investment company, the fund generally pays no federal income tax on the
income and gains it distributes to you. The board reserves the right not to
maintain the qualification of the fund as a regulated investment company if
it determines such course of action to be beneficial to shareholders. In
such case, the fund will be subject to federal, and possibly state, corporate
taxes on its taxable income and gains, and distributions to you will be taxed
as ordinary dividend income to the extent of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires the fund to distribute to you by December 31
of each year, at a minimum, the following amounts: 98% of its taxable
ordinary income earned during the calendar year; 98% of its capital gain net
income earned during the twelve month period ending October 31; and 100% of
any undistributed amounts from the prior year. The fund intends to declare
and pay these amounts in December (or in January that are treated by you as
received in December) to avoid these excise taxes, but can give no assurances
that its distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. If you
redeem your fund shares, or exchange your fund shares for shares of a
different Franklin Templeton Fund, the IRS will require that you report a
gain or loss on your redemption or exchange. If you hold your shares as a
capital asset, the gain or loss that you realize will be capital gain or loss
and will be long-term or short-term, generally depending on how long you hold
your shares. Any loss incurred on the redemption or exchange of shares held
for six months or less will be disallowed to the extent of any
exempt-interest dividends distributed to you with respect to your fund shares
and any remaining loss will be treated as a long-term capital loss to the
extent of any long-term capital gains distributed to you by the fund on those
shares.
All or a portion of any loss that you realize upon the redemption of your
fund shares will be disallowed to the extent that you buy other shares in the
fund (through reinvestment of dividends or otherwise) within 30 days before
or after your share redemption. Any loss disallowed under these rules will
be added to your tax basis in the new shares you buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in the fund, and
then reinvest the sales proceeds in the fund or in another Franklin Templeton
Fund within 90 days of buying the original shares, the sales charge that
would otherwise apply to your reinvestment may be reduced or eliminated. The
IRS will require you to report gain or loss on the redemption of your
original shares in the fund. In doing so, all or a portion of the sales
charge that you paid for your original shares in the fund will be excluded
from your tax basis in the shares sold (for the purpose of determining gain
or loss upon the sale of such shares). The portion of the sales charge
excluded will equal the amount that the sales charge is reduced on your
reinvestment. Any portion of the sales charge excluded from your tax basis
in the shares sold will be added to the tax basis of the shares you acquire
from your reinvestment.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because the fund's income is
derived primarily from interest rather than dividends, no portion of its
distributions generally will be eligible for the corporate dividends-received
deduction. None of the dividends paid by the fund for the most recent fiscal
year qualified for such deduction, and it is anticipated that none of the
current year's dividends will so qualify.
TREATMENT OF PRIVATE ACTIVITY BOND INTEREST Interest on certain "private
activity bonds," while still exempt from regular federal income tax,
constitutes a preference item for taxpayers in determining their alternative
minimum tax under the Internal Revenue Code and under the income tax
provisions of several states. Private activity bond interest could subject
you to or increase your liability under federal and state alternative minimum
taxes, depending on your individual or corporate tax position. Persons who
are defined in the Internal Revenue Code as "substantial users" (or persons
related to such users) of facilities financed by private activity bonds
should consult with their tax advisors before purchasing shares in the fund.
INVESTMENT IN COMPLEX SECURITIES The fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the fund are
treated as ordinary income or capital gain, accelerate the recognition of
income to the fund or defer the fund's ability to recognize losses. In turn,
these rules may affect the amount, timing or character of the income
distributed to you by the fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- -------------------------------------------------------------------------------
The fund is a diversified open-end management investment company, commonly
called a mutual fund. The fund was organized as a Maryland Corporation on
November 28, 1977, and is registered with the SEC.
The fund currently offers three classes of shares, Class A, Class B, and
Class C. Before January 1, 1999, Class A shares were designated Class I and
Class C shares were designated Class II. The fund began offering Class B
shares on January 1, 1999. The fund may offer additional classes of shares in
the future. The full title of each class is:
o Franklin California Tax-Free Income Fund - Class A
o Franklin California Tax-Free Income Fund - Class B
o Franklin California Tax-Free Income Fund - Class C
Shares of each class represent proportionate interests in the fund's assets.
On matters that affect the fund as a whole, each class has the same voting
and other rights and preferences as any other class. On matters that affect
only one class, only shareholders of that class may vote. Each class votes
separately on matters affecting only that class, or expressly required to be
voted on separately by state or federal law.
The fund has noncumulative voting rights. For board member elections, 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. The fund may hold
special meetings, however, for matters requiring shareholder approval. A meeting
may be called by the board to consider the removal of a board member if
requested in writing by shareholders holding at least 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. A special meeting also
may be called by the board in its discretion.
From time to time, the number of fund shares held in the "street name"
accounts of various securities dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding. To the best knowledge of the fund, no other person holds
beneficially or of record more than 5% of the outstanding shares of any class.
As of May 7, 1999, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each class.
The board members may own shares in other funds in the Franklin Templeton
Group of Funds.
BUYING AND SELLING SHARES
- -------------------------------------------------------------------------------
The fund continuously offers its shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer
orders and accounts with the fund. This reference is for convenience only and
does not indicate a legal conclusion of capacity. Banks and financial
institutions that sell shares of the fund may be required by state law to
register as securities dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the fund we may impose a $10 charge against your account for each returned
item.
INITIAL SALES CHARGES The maximum initial sales charge is 4.25% for Class A
and 1% for Class C. There is no initial sales charge for Class B.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of
the lower sales charges for large purchases. The Franklin Templeton Funds
include 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., and Templeton Variable Products Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You also may combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you also may add any company accounts, including
retirement plan accounts.
LETTER OF INTENT (LOI). You may buy Class A shares at a reduced sales charge
by completing the letter of intent section of your account application. A
letter of intent is a commitment by you to invest a specified dollar amount
during a 13 month period. The amount you agree to invest determines the sales
charge you pay. By completing the letter of intent section of the
application, you acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase
in Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy Class A shares at the
sales charge applicable to the amount specified in your LOI. Sales charge
reductions based on purchases in more than one Franklin Templeton Fund will
be effective only after notification to Distributors that the investment
qualifies for a discount. Any Class A purchases you made within 90 days
before you filed your LOI also may qualify for a retroactive reduction in the
sales charge. If you file your LOI with the fund before a change in the
fund's sales charge, you may complete the LOI at the lower of the new sales
charge or the sales charge in effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days
before you filed your LOI will be counted towards the completion of the LOI,
but they will not be entitled to a retroactive reduction in the sales charge.
Any redemptions you make during the 13 month period will be subtracted from
the amount of the purchases for purposes of determining whether the terms of
the LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of
your total purchases, less redemptions, is more than the amount specified in
your LOI and is an amount that would qualify for a further sales charge
reduction, a retroactive price adjustment will be made by Distributors and
the securities dealer through whom purchases were made. The price adjustment
will be made on purchases made within 90 days before and on those made after
you filed your LOI and will be applied towards the purchase of additional
shares at the offering price applicable to a single purchase or the dollar
amount of the total purchases.
If the amount of your total purchases, less redemptions, is less than the
amount specified in your LOI, the sales charge will be adjusted upward,
depending on the actual amount purchased (less redemptions) during the
period. You will need to send Distributors an amount equal to the difference
in the actual dollar amount of sales charge paid and the amount of sales
charge that would have applied to the total purchases if the total of the
purchases had been made at one time. Upon payment of this amount, the
reserved shares held for your account will be deposited to an account in your
name or delivered to you or as you direct. If within 20 days after written
request the difference in sales charge is not paid, we will redeem an
appropriate number of reserved shares to realize the difference. If you
redeem the total amount in your account before you fulfill your LOI, we will
deduct the additional sales charge due from the sale proceeds and forward the
balance to you.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class
A shares at a reduced sales charge that applies to the group as a whole. The
sales charge is based on the combined dollar value of the group members'
existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be
purchased without an initial sales charge or contingent deferred sales charge
(CDSC) by investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton
Fund. The distributions generally must be reinvested in the same share
class. Certain exceptions apply, however, to Class C shareholders who chose
to reinvest their distributions in Class A shares of the fund before
November 17, 1997, and to Advisor Class or Class Z shareholders of a
Franklin Templeton Fund who may reinvest their distributions in the fund's
Class A shares. This waiver category also applies to Class B and C shares.
o Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option
the Franklin Valuemark Funds or the Templeton Variable Products Series
Fund. You should contact your tax advisor for information on any tax
consequences that may apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating
Rate Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or
a Franklin Templeton money fund, you may reinvest them as described above.
The proceeds must be reinvested within 365 days from the date the CD
matures, including any rollover, or the date you redeem your money fund
shares.
o Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund shares
and the CDSC holding period will begin again. We will, however, credit your
fund account with additional shares based on the CDSC you previously paid
and the amount of the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without
an initial sales charge or CDSC by various individuals and institutions due
to anticipated economies in sales efforts and expenses, including:
o Trust companies and bank trust departments 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.
o Any state or local government or any instrumentality, department,
authority or agency thereof that has determined the fund is a legally
permissible investment and that can only buy fund shares without paying
sales charges. Please consult your legal and investment advisors to
determine if an investment in the fund is permissible and suitable for you
and the effect, if any, of payments by the fund on arbitrage rebate
calculations.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
o Any investor who is currently a Class Z shareholder of Franklin Mutual
Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31,
1996, or who sold his or her shares of Mutual Series Class Z within the
past 365 days
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting
distributions from the trusts
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, the fund's shares are available to these banks' trust accounts without
a sales charge. The banks may charge service fees to their customers who
participate in the trusts. A portion of these service fees may be paid to
Distributors or one of its affiliates to help defray expenses of maintaining
a service office in Taiwan, including expenses related to local literature
fulfillment and communication facilities.
The fund's Class A shares may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class A
shares may be offered with the following schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE (%)
- ------------------------------------------------------------
Under $30,000 3.0
$30,000 but less than $100,000 2.0
$100,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION Securities dealers may at times receive the entire sales
charge. A securities dealer who receives 90% or more of the sales charge may
be deemed an underwriter under the Securities Act of 1933, as amended.
Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated in the dealer compensation table
in the fund's prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
shares of $1 million or more: 0.75% on sales of $1 million to $2 million,
plus 0.60% on sales over $2 million to $3 million, plus 0.50% on sales over
$3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
securities dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a securities dealer's sales and marketing
efforts in the Franklin Templeton Group of Funds; a securities dealer's
support of, and participation in, Distributors' marketing programs; a
securities dealer's compensation programs for its registered representatives;
and the extent of a securities dealer's marketing programs relating to the
Franklin Templeton Group of Funds. Financial support to securities dealers
may be made by payments from Distributors' resources, from Distributors'
retention of underwriting concessions and, in the case of funds that have
Rule 12b-1 plans, from payments to Distributors under such plans. In
addition, certain securities dealers may receive brokerage commissions
generated by fund portfolio transactions in accordance with the rules of the
National Association of Securities Dealers, Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity
discount or letter of intent programs, a CDSC may apply on any shares you
sell within 12 months of purchase. For Class C shares, a CDSC may apply if
you sell your shares within 18 months of purchase. The CDSC is 1% of the
value of the shares sold or the net asset value at the time of purchase,
whichever is less.
For Class B shares, there is a CDSC if you sell your shares within six years,
as described in the table below. The charge is based on the value of the
shares sold or the net asset value at the time of purchase, whichever is less.
IF YOU SELL YOUR CLASS B SHARES
WITHIN THIS MANY YEARS AFTER THIS % IS DEDUCTED FROM
BUYING THEM YOUR PROCEEDS AS A CDSC
- ------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Account fees
o Redemptions of Class A shares by investors who purchased $1 million or
more without an initial sales charge if the securities dealer of record
waived its commission in connection with the purchase
o Redemptions by the fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February
1, 1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12%
annually of your account's net asset value depending on the frequency of
your plan
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, accrued but unpaid income dividends and capital gain distributions
will be reinvested in the fund at net asset value on the date of the
exchange, and then the entire share balance will be exchanged into the new
fund. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money. If this
occurs, it is the fund's general policy to initially invest this money in
short-term, tax-exempt municipal securities, unless it is believed that
attractive investment opportunities consistent with the fund's investment
goals exist immediately. This money will then be withdrawn from the
short-term, tax-exempt municipal securities and invested in portfolio
securities in as orderly a manner as is possible when attractive investment
opportunities arise.
The proceeds from the sale of shares of an investment company are generally
not available until the seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh day. The sale of fund shares to complete an exchange will
be effected at net asset value at the close of business on the day the
request for exchange is received in proper form.
SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell
your shares and receive regular payments from your account on a monthly,
quarterly, semiannual or annual basis. The value of your account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at
least $50. There are no service charges for establishing or maintaining a
systematic withdrawal plan. Once your plan is established, any distributions
paid by the fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday, we
will process the redemption on the next business day. When you sell your
shares under a systematic withdrawal plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold under the plan also
may be subject to a CDSC.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. The fund may discontinue a systematic
withdrawal plan by notifying you in writing and will automatically
discontinue a systematic withdrawal plan if all shares in your account are
withdrawn or if the fund receives notification of the shareholder's death or
incapacity.
REDEMPTIONS IN KIND The fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the U.S. Securities
and Exchange Commission (SEC). In the case of redemption requests in excess
of these amounts, the board reserves the right to make payments in whole or
in part in securities or other assets of the fund, in case of an emergency,
or if the payment of such a redemption in cash would be detrimental to the
existing shareholders of the fund. In these circumstances, the securities
distributed would be valued at the price used to compute the fund's net
assets and you may incur brokerage fees in converting the securities to cash.
Redemptions in kind are taxable transactions. The fund does not intend to
redeem illiquid securities in kind. If this happens, however, you may not be
able to recover your investment in a timely manner.
SHARE CERTIFICATES We will credit your shares to your fund account. We do
not issue share certificates unless you specifically request them. This
eliminates the costly problem of replacing lost, stolen or destroyed
certificates. If a certificate is lost, stolen or destroyed, you may have to
pay an insurance premium of up to 2% of the value of the certificate to
replace it.
Any outstanding share certificates must be returned to the fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to the fund marked
"unable to forward" by the postal service, we will consider this a request by
you to change your dividend option to reinvest all distributions. The
proceeds will be reinvested in additional shares at net asset value until we
receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the fund nor
its affiliates will be liable for any loss caused by your failure to cash
such checks. The fund is not responsible for tracking down uncashed checks,
unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to
find you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.
The wiring of redemption proceeds is a special service that we make available
whenever possible. By offering this service to you, the fund is not bound to
meet any redemption request in less than the seven day period prescribed by
law. Neither the fund nor its agents shall be liable to you or any other
person if, for any reason, a redemption request by wire is not processed as
described in the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay
certain financial institutions that maintain omnibus accounts with the fund
on behalf of numerous beneficial owners for recordkeeping operations
performed with respect to such owners. For each beneficial owner in the
omnibus account, the fund may reimburse Investor Services an amount not to
exceed the per account fee that the fund normally pays Investor Services.
These financial institutions also may charge a fee for their services
directly to their clients.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. If you sell shares
through your securities dealer, it is your dealer's responsibility to
transmit the order to the fund in a timely fashion. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
notice of levy.
PRICING SHARES
- -------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the
net asset value (NAV) per share plus any applicable sales charge, calculated
to two decimal places using standard rounding criteria. When you sell shares,
you receive the NAV minus any applicable CDSC.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of
shares outstanding.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The fund does not calculate the NAV on days the New York Stock
Exchange (NYSE) is closed for trading, which include New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued. The fund values
over-the-counter portfolio securities within the range of the most recent
quoted bid and ask prices. If portfolio securities trade both in the
over-the-counter market and on a stock exchange, the fund values them
according to the broadest and most representative market as determined by the
manager. Municipal securities generally trade in the over-the-counter market
rather than on a securities exchange. In the absence of a sale or reported
bid and ask prices, information with respect to bond and note transactions,
quotations from bond dealers, market transactions in comparable securities,
and various relationships between securities are used to determine the value
of municipal securities.
Generally, trading in U.S. government securities and money market instruments
is substantially completed each day at various times before the close of the
NYSE. The value of these securities used in computing the NAV is determined
as of such times. Occasionally, events affecting the values of these
securities may occur between the times at which they are determined and the
close of the NYSE that will not be reflected in the computation of the NAV.
If events materially affecting the values of these securities occur during
this period, the securities will be valued at their fair value as determined
in good faith by the board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the board. With the approval of
the board, the fund may use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
- -------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the fund's shares, the net
underwriting discounts and commissions Distributors retained after allowances
to dealers, and the amounts Distributors received in connection with
redemptions or repurchases of shares for the last three fiscal years ended
March 31:
AMOUNT RECEIVED IN
CONNECTION WITH
TOTAL AMOUNT RETAINED BY REDEMPTIONS AND
COMMISSIONS DISTRIBUTORS ($) REPURCHASES ($)
RECEIVED ($)
--------------------------------------------------------------------
1999 33,783,661 2,253,176 378,970
1998 36,199,627 2,357,899 66,364
1997 32,844,082 2,226,594 95,263
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Each class has a separate distribution
or "Rule 12b-1" plan. Under each plan, the fund shall pay or may 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.
The distribution and service (12b-1) fees charged to each class are based
only on the fees attributable to that particular class.
THE CLASS A PLAN. Payments by the fund under the Class A plan may not exceed
0.10% per year of Class A's average daily net assets, payable quarterly. All
distribution expenses over this amount will be borne by those who have
incurred them.
[In implementing the Class A plan, the board has determined that the annual
fees payable under the plan will be equal to the sum of: (i) the amount
obtained by multiplying 0.10% by the average daily net assets represented by
the fund's Class A shares that were acquired by investors on or after May 1,
1994, the effective date of the plan (new assets), and (ii) the amount
obtained by multiplying 0.05% by the average daily net assets represented by
the fund's Class A shares that were acquired before May 1, 1994 (old assets).
These fees will be paid to the current securities dealer of record on the
account. In addition, until such time as the maximum payment of 0.10% is
reached on a yearly basis, up to an additional 0.01% will be paid to
Distributors under the plan or, should Class A's assets fall below $4
billion, up to an additional 0.02% could be paid to Distributors under the
plan. The payments made to Distributors will be used by Distributors to
defray other marketing expenses that have been incurred in accordance with
the plan, such as advertising.
The fee is a Class A expense. This means that all Class A shareholders,
regardless of when they purchased their shares, will bear Rule 12b-1 expenses
at the same rate. The initial rate will be at least 0.06% (0.05% plus 0.01%)
of the average daily net assets of Class A and, as Class A shares are sold on
or after May 1, 1994, will increase over time. Thus, as the proportion of
Class A shares purchased on or after May 1, 1994, increases in relation to
outstanding Class A shares, the expenses attributable to payments under the
plan also will increase (but will not exceed 0.10% of average daily net
assets). While this is the currently anticipated calculation for fees payable
under the Class A plan, the plan permits the board to allow the fund to pay a
full 0.10% on all assets at any time. The approval of the board would be
required to change the calculation of the payments to be made under the Class
A plan.
The Class A plan does not permit unreimbursed expenses incurred in a
particular year to be carried over to or reimbursed in later years.
THE CLASS B AND C PLANS. Under the Class B and C plans, the fund pays
Distributors up to 0.50% per year of the class's average daily net assets,
payable quarterly, to pay Distributors or others for providing distribution
and related services and bearing certain expenses. All distribution expenses
over this amount will be borne by those who have incurred them. The fund also
may pay a servicing fee of up to 0.15% per year of the class's average daily
net assets, payable quarterly. 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 expenses relating to each of the Class B and C plans also are used to pay
Distributors for advancing the commission costs to securities dealers with
respect to the initial sale of Class B and C shares. Further, the expenses
relating to the Class B plan may be used by Distributors to pay third party
financing entities that have provided financing to Distributors in connection
with advancing commission costs to securities dealers.
THE CLASS A, B AND C PLANS. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the fund, the manager or Distributors or other parties on behalf of
the fund, the manager or Distributors make payments that are deemed to be for
the financing of any activity primarily intended to result in the sale of
fund shares within the context of Rule 12b-1 under the Investment Company Act
of 1940, as amended, then such payments shall be deemed to have been made
pursuant to the plan. The terms and provisions of each plan relating to
required reports, term, and approval are consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the National Association of Securities Dealers, Inc.
To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks will not be entitled to participate in the plans as a result of
applicable federal law prohibiting certain banks from engaging in the
distribution of mutual fund shares. These banking institutions, however, are
permitted to receive fees under the plans for administrative servicing or for
agency transactions. If you are a customer of a bank that is prohibited from
providing these services, you would be permitted to remain a shareholder of
the fund, and alternate means for continuing the servicing would be sought.
In this event, changes in the services provided might occur and you might no
longer be able to avail yourself of any automatic investment or other
services then being provided by the bank. It is not expected that you would
suffer any adverse financial consequences as a result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1.
The plans are renewable annually by a vote of the board, including a majority
vote of the board members who are not interested persons of the fund and who
have no direct or indirect financial interest in the operation of the plans,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such board members be done by the
noninterested members of the fund's board. The plans and any related
agreement may be terminated at any time, without penalty, by vote of a
majority of the noninterested board members on not more than 60 days' written
notice, by Distributors on not more than 60 days' written notice, by any act
that constitutes an assignment of the management agreement with the manager
or by vote of a majority of the outstanding shares of the class. Distributors
or any dealer or other firm also may terminate their respective distribution
or service agreement at any time upon written notice.
The plans and any related agreements may not be amended to increase
materially the amount to be spent for distribution expenses without approval
by a majority of the outstanding shares of the class, and all material
amendments to the plans or any related agreements shall be approved by a vote
of the noninterested board members, cast in person at a meeting called for
the purpose of voting on any such amendment.
Distributors is required to report in writing to the board at least quarterly
on the amounts and purpose of any payment made under the plans and any
related agreements, as well as to furnish the board with such other
information as may reasonably be requested in order to enable the board to
make an informed determination of whether the plans should be continued.
For the fiscal year ended March 31, 1999, Distributors' eligible expenditures
for advertising, printing, and payments to underwriters and broker-dealers
pursuant to the plans and the amounts the fund paid Distributors under the
plans were:
DISTRIBUTORS'
ELIGIBLE AMOUNT PAID
EXPENSES ($) BY THE FUND ($)
- -----------------------------------------------------------
Class A 13,457,657 11,404,296
Class B 333,000 3,038
Class C 3,802,031 2,309,762
PERFORMANCE
- -------------------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return and current yield quotations used by the
fund are based on the standardized methods of computing performance mandated
by the SEC. Performance figures reflect Rule 12b-1 fees from the date of the
plan's implementation. An explanation of these and other methods used by the
fund to compute or express performance follows. Regardless of the method
used, past performance does not guarantee future results, and is an
indication of the return to shareholders only for the limited historical
period used.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum initial sales charge is
deducted from the initial $1,000 purchase, and income dividends and capital
gain distributions are reinvested at net asset value. The quotation assumes
the account was completely redeemed at the end of each period and the
deduction of all applicable charges and fees. If a change is made to the
sales charge structure, historical performance information will be restated
to reflect the maximum initial sales charge currently in effect.
When considering the average annual total return quotations for Class A and C
shares, you should keep in mind that the maximum initial sales charge
reflected in each quotation is a one time fee charged on all direct
purchases, which will have its greatest impact during the early stages of
your investment. This charge will affect actual performance less the longer
you retain your investment in the fund. The average annual total returns for
the indicated periods ended March 31, 1999, were:
1 YEAR 5 YEARS 10 YEARS
- ------------------------------------------------------------------
Class A 1.86% 6.25% 7.23%
1 YEAR SINCE INCEPTION
(5/1/95)
- ----------------------------------------------------
Class C 3.71% 6.59%
The following SEC formula was used to calculate these figures:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at net asset value. Cumulative total return, however, is based on
the actual return for a specified period rather than on the average return
over the periods indicated above. The cumulative total returns for the
indicated periods ended March 31, 1999, were:
1 YEAR 5 YEARS 10 YEARS
- ------------------------------------------------------------------
Class A 1.86% 35.41% 101.08%
1 YEAR SINCE INCEPTION
(5/1/95)
- ----------------------------------------------------
Class C 3.71% 28.41%
CURRENT YIELD Current yield shows the income per share earned by the fund.
It is calculated by dividing the net investment income per share earned
during a 30-day base period by the applicable maximum offering price per
share on the last day of the period and annualizing the result. Expenses
accrued for the period include any fees charged to all shareholders of the
class during the base period. The yields for the 30-day period ended March
31, 1999, were:
CLASS A CLASS B CLASS C
- --------------------------------
4.09% 3.71% 3.66%
The following SEC formula was used to calculate these figures:
6
Yield = 2 [(A-B + 1) - 1]
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
TAXABLE-EQUIVALENT YIELD The fund also may quote a taxable-equivalent
yield that shows the before-tax yield that would have to be earned from a
taxable investment to equal the yield. Taxable-equivalent yield is
computed by dividing the portion of the yield that is tax-exempt by one
minus the highest applicable combined federal and state income tax rate
and adding the product to the portion of the yield that is not tax-exempt,
if any. The taxable-equivalent yields for the 30-day period ended March
31, 1999, were:
CLASS A CLASS B CLASS C
- --------------------------------
7.47% 6.77% 6.68%
As of March 31, 1999, the combined federal and state income tax rate upon which
the taxable-equivalent yield quotations were based was 45.2%. From time to time,
as any changes to the rate become effective, taxable-equivalent yield quotations
advertised by the fund will be updated to reflect these changes. The fund
expects updates may be necessary as tax rates are changed by federal and state
governments. The advantage of tax-free investments, like the fund, will be
enhanced by any tax rate increases. Therefore, the details of specific tax
increases may be used in sales material for the fund.
CURRENT DISTRIBUTION RATE Current yield and taxable-equivalent yield, which
are calculated according to a formula prescribed by the SEC, are not
indicative of the amounts which were or will be paid to shareholders. Amounts
paid to shareholders are reflected in the quoted current distribution rate or
taxable-equivalent distribution rate. The current distribution rate is
usually computed by annualizing the dividends paid per share by a class
during a certain period and dividing that amount by the current maximum
offering price. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than interest, if any short-term capital gains, and is calculated over
a different period of time. The current distribution rates for the 30-day
period ended March 31, 1999, were:
CLASS A CLASS B CLASS C
- --------------------------------
4.58% 4.34% 4.15%
A taxable-equivalent distribution rate shows the taxable distribution rate
equivalent to the current distribution rate. The advertised
taxable-equivalent distribution rate will reflect the most current federal
and state tax rates available to the fund. The taxable-equivalent
distribution rates for the 30-day period ended March 31, 1999, were:
CLASS A CLASS B CLASS C
- --------------------------------
8.36% 7.92% 7.58%
VOLATILITY Occasionally statistics may be used to show the fund's volatility
or risk. Measures of volatility or risk are generally used to compare the
fund's net asset value or performance to a market index. One measure of
volatility is beta. Beta is the volatility of a fund relative to the total
market, as represented by an index considered representative of the types of
securities in which the fund invests. A beta of more than 1.00 indicates
volatility greater than the market and a beta of less than 1.00 indicates
volatility less than the market. Another measure of volatility or risk is
standard deviation. Standard deviation is used to measure variability of net
asset value or total return around an average over a specified period of
time. The idea is that greater volatility means greater risk undertaken in
achieving performance.
OTHER PERFORMANCE QUOTATIONS The fund also may quote the performance of
shares without a sales charge. Sales literature and advertising may quote a
cumulative total return, average annual total return and other measures of
performance with the substitution of net asset value for the public offering
price.
The fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. is the parent
company of the advisors and underwriter of the Franklin Templeton Group of
Funds.
COMPARISONS To help you better evaluate how an investment in the fund may
satisfy your investment goal, advertisements and other materials about the
fund may discuss certain measures of fund performance as reported by various
financial publications. Materials also may compare performance (as calculated
above) to performance as reported by other investments, indices, and
averages. These comparisons may include, but are not limited to, the
following examples:
o Salomon Brothers Broad Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate and
mortgage bonds.
o Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage
and Yankee bonds.
o Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.
o Bond Buyer 20 Index - an index of municipal bond yields based upon
yields of 20 general obligation bonds maturing in 20 years.
o Bond Buyer 40 Index - an index composed of the yield to maturity of 40
bonds. The index attempts to track the new-issue market as closely as
possible, so it changes bonds twice a month, adding all new bonds that
meet certain requirements and deleting an equivalent number according
to their secondary market trading activity. As a result, the average
par call date, average maturity date, and average coupon rate can and
have changed over time. The average maturity generally has been about
29-30 years.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK,
FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines - provide
performance statistics over specified time periods.
o Salomon Brothers Composite High Yield Index or its component indices -
measures yield, price and total return for the Long-Term High-Yield
Index, Intermediate-Term High-Yield Index, and Long-Term Utility
High-Yield Index.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill
Lynch, Lehman Brothers and Bloomberg L.P.
Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its
category.
Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield
for the mutual fund industry and rank individual mutual fund
performance over specified time periods, assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
Merrill Lynch California Municipal Bond Index - based upon yields from
revenue and general obligation bonds weighted in accordance with their
respective importance to the California municipal market. The index is
published weekly in the LOS ANGELES TIMES and the SAN FRANCISCO
CHRONICLE.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment
in the fund. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or sales material issued by the fund also may discuss or be
based upon information in a recent issue of the Special Report on Tax Freedom
Day published by the Tax Foundation, a Washington, D.C. based nonprofit
research and public education organization. The report illustrates, among
other things, the annual amount of time the average taxpayer works to satisfy
his or her tax obligations to the federal, state and local taxing authorities.
Advertisements or information also may compare the fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of
fluctuation of principal value, a risk generally not present in an investment
in a CD issued by a bank. For example, as the general level of interest rates
rise, the value of the fund's fixed-income investments, as well as the value
of its shares that are based upon the value of such portfolio investments,
can be expected to decrease. Conversely, when interest rates decrease, the
value of the fund's shares can be expected to increase. CDs are frequently
insured by an agency of the U.S. government. An investment in the fund is not
insured by any federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the fund to calculate its figures. In
addition, there can be no assurance that the fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
- -------------------------------------------------------------------------------
The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to
have a projected amount available in the future to fund a child's college
education. (Projected college cost estimates are based upon current costs
published by the College Board.) The Franklin Retirement Planning Guide leads
you through the steps to start a retirement savings program. Of course, an
investment in the fund cannot guarantee that these goals will be met.
The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of
the oldest mutual fund organizations and now services more than 4 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined
forces with Templeton, a pioneer in international investing. The Mutual
Series team, known for its value-driven approach to domestic equity
investing, became part of the organization four years later. Together, the
Franklin Templeton Group has over $227 billion in assets under management for
more than 7 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 113 U.S. based open-end
investment companies to the public. The fund may identify itself by its
NASDAQ symbol or CUSIP number.
Franklin is a leader in the tax-free mutual fund industry and manages more
than $51 billion in municipal security assets for over three quarters of a
million investors. According to Research and Ratings Review, Franklin had one
of the largest staffs of municipal securities analysts in the industry, as of
June 30, 1998.
Under current tax laws, municipal securities remain one of the few
investments offering the potential for tax-free income. In 1999, taxes could
cost almost $47 on every $100 earned from a fully taxable investment (based
on the maximum combined 39.6% federal tax rate and the highest state tax rate
of 12% for 1999). Franklin tax-free funds, however, offer tax relief through
a professionally managed portfolio of tax-free securities selected based on
their yield, quality and maturity. An investment in a Franklin tax-free fund
can provide you with the potential to earn income free of federal taxes and,
depending on the fund, state and local taxes as well, while supporting state
and local public projects. Franklin tax-free funds also may provide tax-free
compounding, when dividends are reinvested. An investment in Franklin's
tax-free funds can grow more rapidly than similar taxable investments.
Municipal securities are generally considered to be creditworthy, second in
quality only to securities issued or guaranteed by the U.S. government and
its agencies. The market price of municipal securities, however, may
fluctuate. This fluctuation will have a direct impact on the net asset value
of the fund's shares.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the fund are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has
already begun making necessary software changes to help the computer systems
that service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues
to seek reasonable assurances from all major hardware, software or
data-services suppliers that they will be Year 2000 compliant on a timely
basis. Resources is also beginning to develop a contingency plan, including
identification of those mission critical systems for which it is practical to
develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use of
normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
DESCRIPTION OF RATINGS
- -------------------------------------------------------------------------------
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present that make the long-term
risks appear somewhat larger.
A: Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered medium-grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. These bonds lack outstanding investment characteristics and, in fact,
have speculative characteristics as well.
Ba: Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and, thereby, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca: Bonds rated Ca represent obligations that are speculative to a high
degree. These issues are often in default or have other marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S CORPORATION (S&P)
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating also may reflect the
filing of a bankruptcy petition under circumstances where debt service
payments are continuing. The C1 rating is reserved for income bonds on which
no interest is being paid.
D: Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MUNICIPAL BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa: Municipal bonds rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Municipal bonds rated Aa are judged to be high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present that make the
long-term risks appear somewhat larger.
A: Municipal bonds rated A possess many favorable investment attributes and
are considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa: Municipal bonds rated Baa are considered medium-grade obligations. They
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. These bonds lack outstanding investment characteristics
and, in fact, have speculative characteristics as well.
Ba: Municipal bonds rated Ba are judged to have predominantly speculative
elements and their future cannot be considered well assured. Often the
protection of interest and principal payments may be very moderate and,
thereby, not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Municipal bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Municipal bonds rated Caa are of poor standing. These issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Municipal bonds rated Ca represent obligations that are speculative to a
high degree. These issues are often in default or have other marked
shortcomings.
C: Municipal bonds rated C are the lowest-rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Con.(-): Municipal bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned in operation experience, (c) rentals that
begin when facilities are completed, or (d) payments to which some other
limiting condition attaches. Parenthetical rating denotes probable credit
stature upon the completion of construction or the elimination of the basis
of the condition.
STANDARD & POOR'S CORPORATION (S&P)
AAA: Municipal bonds rated AAA are the highest-grade obligations. They
possess the ultimate degree of protection as to principal and interest. In
the market, they move with interest rates and, hence, provide the maximum
safety on all counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations, and in
the majority of instances differ from AAA issues only in a small degree.
Here, too, prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium-grade. They have
considerable investment strength but are not entirely free from adverse
effects of changes in economic and trade conditions. Interest and principal
are regarded as safe. They predominantly reflect money rates in their market
behavior but also, to some extent, economic conditions.
BBB: Municipal bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
BB, B, CCC, CC: Municipal bonds rated BB, B, CCC and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and CC the highest
degree of speculation. While these bonds will likely have some quality and
protective characteristics, they are outweighed by large uncertainties or
major risk exposures to adverse conditions.
C: This rating is reserved for income bonds on which no interest is being
paid.
D: Debt rated "D" is in default and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
FITCH INVESTORS SERVICE, INC. (FITCH)
AAA: Municipal bonds rated AAA are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal that is unlikely to be affected by
reasonably foreseeable events.
AA: Municipal bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong although not quite as strong as bonds rated AAA and
not significantly vulnerable to foreseeable future developments.
A: Municipal bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Municipal bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB: Municipal bonds rated BB are considered speculative. The obligor's
ability to pay interest and repay principal may be affected over time by
adverse economic changes. Business and financial alternatives can be
identified, however, that could assist the obligor in satisfying its debt
service requirements.
B: Municipal bonds rated B are considered highly speculative. While bonds in
this class are currently meeting debt service requirements, the probability
of continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Municipal bonds rated CCC have certain identifiable characteristics
which, if not remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC: Municipal bonds rated CC are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C: Municipal bonds rated C are in imminent default in the payment of interest
or principal.
DDD, DD and D: Municipal bonds rated DDD, DD and D are in default on interest
and/or principal payments. Such bonds are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential for
recovery while D represents the lowest potential for recovery.
Plus (+) or minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus or minus signs
are not used with the AAA, DDD, DD or D categories.
MUNICIPAL NOTE RATINGS
MOODY'S
Moody's ratings for state, municipal and other short-term obligations will be
designated Moody's Investment Grade (MIG). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing; factors of the first importance in long-term borrowing
risk are of lesser importance in the short run. Symbols used will be as
follows:
MIG 1: Notes are of the best quality enjoying strong protection from
established cash flows of funds for their servicing or from established and
broad-based access to the market for refinancing, or both.
MIG 2: Notes are of high quality, with margins of protection ample, although
not so large as in the preceding group.
MIG 3: Notes are of favorable quality, with all security elements accounted
for, but lacking the undeniable strength of the preceding grades. Market
access for refinancing, in particular, is likely to be less well established.
MIG 4: Notes are of adequate quality, carrying specific risk but having
protection and not distinctly or predominantly speculative.
S&P
Until June 29, 1984, S&P used the same rating symbols for notes and bonds.
After June 29, 1984, for new municipal note issues due in three years or
less, the ratings below will usually be assigned. Notes maturing beyond three
years will most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong capacity
to pay principal and interest. Issues determined to possess overwhelming
safety characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's commercial
paper ratings, which are also applicable to municipal paper investments, are
opinions of the ability of issuers to repay punctually their promissory
obligations not having an original maturity in excess of nine months. Moody's
employs the following designations for both short-term debt and commercial
paper, all judged to be investment grade, to indicate the relative repayment
capacity of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FITCH
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal
and investment notes. The short-term rating places greater emphasis than a
long-term rating on the existence of liquidity necessary to meet the issuer's
obligations in a timely manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. Reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues assigned F-1+
and F-1 ratings.
F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-5: Weak credit quality. Have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D: Default. Actual or imminent payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
File Nos. 2-60470 &
811-2790
FORM N-1A
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS. The following exhibits are incorporated by reference to
the previously filed document indicated below, except as noted:
(A) ARTICLES OF INCORPORATION
(i) Articles of Incorporation dated November 23, 1977
Filing: Post-Effective Amendment No. 20 to Registration
Statement on Form N-1A
File No. 2-60470
Filing Date: June 1, 1995
(ii) Articles of Amendment dated July 16, 1982
Filing: Post-Effective Amendment No. 20 to Registration
Statement on Form N-1A
File No. 2-60470
Filing Date: June 1, 1995
(iii)Articles of Amendment dated August 7, 1986
Filing: Post-Effective Amendment No. 20 to Registration
Statement on Form N-1A
File No. 2-60470
Filing Date: June 1, 1995
(iv) Articles of Amendment to Articles of Incorporation dated March
21, 1995
Filing: Post-Effective Amendment No. 20 to Registration
Statement on Form N-1A
File No. 2-60470
Filing Date: June 1, 1995
(v) Articles Supplementary to Articles of Incorporation dated
December 15, 1998
(B) BY-LAWS
(i) By-Laws
Filing: Post-Effective Amendment No. 20 to Registration
Statement on Form N-1A
File No. 2-60470
Filing Date: June 1, 1995
(ii) Amendment to By-Laws dated April 25, 1988
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-60470
Filing Date: July 19, 1996
(C) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS
Not Applicable
(D) INVESTMENT ADVISORY CONTRACTS
(i) Management Agreement between Registrant and Franklin Advisers,
Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 20 to Registration
Statement on Form N-1A
File No. 2-60470
Filing Date: June 1, 1995
(E) UNDERWRITING CONTRACTS
(i) Amended and Restated Distribution Agreement between Registrant
and Franklin/Templeton Distributors, Inc. dated March 30, 1995
Filing: Post-Effective Amendment No. 20 to Registration
Statement on Form N-1A
File No. 2-60470
Filing Date: June 1, 1995
(ii) Forms of Dealer Agreements between Franklin/Templeton
Distributors, Inc. and Securities Dealers
Filing: Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A
File No. 2-60470
Filing Date: October 30, 1998
(iii) Amendment of Amended and Restated Distribution Agreement dated
January 12, 1999
(F) BONUS OR PROFIT SHARING CONTRACTS
Not Applicable
(G) CUSTODIAN AGREEMENTS
(i) Master Custody Agreement between Registrant and Bank of New
York dated February 16, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-60470
Filing Date: July 19, 1996
(ii) Terminal Link Agreement between Registrant and Bank of New
York dated February 16, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 2-60470
Filing Date: July 19, 1996
(iii)Amendment dated May 7, 1997 to Master Custody Agreement
between the Registrant and Bank of New York dated February 16,
1996
Filing: Post-Effective Amendment No. 23 to Registration
Statement on Form N-1A
File No. 2-60470
Filing Date: May 21, 1998
(iv) Amendment dated February 27, 1998, to Exhibit A of the Master
Custody Agreement between Registrant and Bank of New York
dated February 16, 1996
Filing: Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A
File No. 2-60470
Filing Date: October 30, 1998
(H) OTHER MATERIAL CONTRACTS
(i) Subcontract for Fund Administrative Services dated October 1,
1996 and Amendment thereto dated April 30, 1998 between
Franklin Advisers, Inc. and Franklin Templeton Services, Inc.
Registration Statement on Form N-1A
File No. 2-60470
Filing Date: December 23, 1998
(I) LEGAL OPINION
(i) Opinion and Consent of Counsel dated May 15, 1998
Filing: Post-Effective Amendment No. 23 to Registration
Statement on Form N-1A
File No. 2-60470
Filing Date: May 21, 1998
(J) OTHER OPINIONS
(i) Consent of Independent Auditors
(K) OMITTED FINANCIAL STATEMENTS
Not Applicable
(L) INITIAL CAPITAL AGREEMENTS
(i) Letter of Understanding for Class II shares dated April 12,
1995
Filing: Post-Effective Amendment No. 20 to Registration
Statement on Form N-1A
File No. 2-60470
Filing Date: June 1, 1995
(M) RULE 12B-1 PLAN
(i) Distribution Plan pursuant to Rule 12b-1 dated May 1, 1994
between Franklin California Tax-Free Income Fund and
Franklin/Templeton Distributors, Inc.
Filing: Post-Effective Amendment No. 20 to Registration
Statement on Form N-1A
File No. 2-60470
Filing Date: June 1, 1995
(ii) Distribution Plan pursuant to Rule 12b-1 between Registrant,
on behalf of Franklin California Tax-Free Income Fund - Class
II, and Franklin/Templeton Distributors, Inc. dated March 30,
1995
Filing: Post-Effective Amendment No. 20 to Registration
Statement on Form N-1A
File No. 2-60470
Filing Date: June 1, 1995
(iii) Distribution Plan pursuant to Rule 12b-1 between Registrant,
on behalf of Franklin California Tax-Free Income Fund - Class
B, and Franklin/Templeton Distributors, Inc.
(N) (EX-27) FINANCIAL DATA SCHEDULE
(O) RULE 18F-3 PLAN
(i) Form of Multiple Class Plan for Franklin California Tax-Free
Income Fund, Inc.
(P) POWER OF ATTORNEY
(i) Power of Attorney dated April 15, 1999
(27) FINANCIAL DATA SCHEDULE
(i) Financial Data Schedule for Franklin California Tax-Free
Income Fund, Inc. - Class A
(ii) Financial Data Schedule for Franklin California Tax-Free
Income Fund, Inc. - Class B
(iii) Financial Data Schedule for Franklin California Tax-Free
Income Fund, Inc. - Class C
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
None
ITEM 25. INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
a) Franklin Advisers, Inc.
The officers and Directors of the Registrant's manager also serve as officers
and/or directors for (1) the manager's corporate parent, Franklin Resources,
Inc., and/or (2) other investment companies in the Franklin Templeton Group
of Funds. In addition, Mr. Charles B. Johnson was formerly a director of
General Host Corporation.
For additional information please see Part B and Schedules A and D of Form
ADV of the Fund's Investment Manager (SEC File 801-26292), incorporated
herein by reference, which sets forth the officers and directors of the
investment manager and information as to any business, profession, vocation
or employment of a substantial nature engaged in by those officers and
directors during the past two years.
ITEM 27. PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Franklin Valuemark Funds
Institutional Fiduciary Trust
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
b) The information required by this Item 29 with respect to each director
and officer of Distributors is incorporated by reference to Part B of this
N-1A and Schedule A of Form BD filed by Distributors with the Securities and
Exchange Commission pursuant to the Securities Act of 1934 (SEC File No.
8-5889):
c) Not Applicable. Registrant's principal underwriter is an affiliated
person of an affiliated person of the Registrant.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section
31 (a) of the Investment Company Act of 1940 are kept by the Fund or its
shareholder services agent, Franklin/Templeton Investor Services, Inc., both
of whose address is 777 Mariners Island Blvd., San Mateo, CA 94404.
ITEM 29. MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 32. UNDERTAKINGS
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Amendment to its
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of San Mateo and the State of
California, on the 26th day of May, 1999.
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
(Registrant)
By: /S/ LEIANN NUZUM
Leiann Nuzum
Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
and on the dates indicated.
CHARLES B. JOHNSON* Director and Principal
Charles B. Johnson Executive Officer
Dated: May 26, 1999
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: May 26, 1999
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: May 26, 1999
HARRIS J. ASHTON* Director
Harris J. Ashton Dated: May 26, 1999
S. JOSEPH FORTUNATO* Director
S. Joseph Fortunato Dated: May 26, 1999
EDITH E. HOLIDAY* Director
Edith E. Holiday Dated: May 26, 1999
RUPERT H. JOHNSON, JR.* Director
Rupert H. Johnson, Jr. Dated: May 26, 1999
GORDON S. MACKLIN* Director
Gordon S. Macklin Dated: May 26, 1999
*By /S/ LEIANN NUZUM
Leiann Nuzum
Attorney-in-Fact
(Pursuant to Power of Attorney filed herewith)
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
REGISTRATION STATEMENT
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.(a)(i) Articles of Incorporation dated *
November 23, 1977
EX-99.(a)(ii) Articles of Amendment dated July 16, *
1982
EX-99.(a)(iii) Articles of Amendment dated August *
7, 1986
EX-99.(a)(iv) Articles of Amendment to Articles of *
Incorporation dated March 21, 1995
EX-99.(a)(v) Articles Supplementary to Articles Attached
of Incorporation dated December 15,
1998
EX-99.(b)(i) By-Laws *
EX-99.(b)(ii) Amendment to By-Laws dated April 25, *
1988
EX-99.B(d)(i) Management Agreement between *
Registrant and Franklin Advisers,
Inc. dated May 1, 1994
EX-99.(e)(i) Amended and Restated Distribution *
Agreement between Registrant and
Franklin/Templeton Distribution,
Inc. dated March 30, 1995
EX-99.(e)(ii) Forms of Dealer Agreements between *
Franklin/Templeton Distributors,
Inc. and Securities Dealers
EX-99.(e)(iii) Amendment of Amended and Restated Attached
Distribution Agreement dated January
12, 1999
EX-99.(g)(i) Master Custody Agreement between *
Registrant and Bank of New York
dated February 16, 1996
EX-99.(g)(ii) Terminal Link Agreement between *
Registrant and Bank of New York
dated February 16, 1996
EX-99.(g)(iii) Amendment dated May 7, 1997 to *
Master Custody Agreement between the
Registrant and Bank of New York
dated February 16, 1996
EX-99.(g)(iv) Amendment dated February 27, 1998, *
to Exhibit A of the Master Custody
Agreement between Registrant and
Bank of New York dated February 16,
1996
EX-99.(h)(i) Subcontract for Fund Administrative
Services dated October 1, 1996 and
Amendment thereto dated April 30,
1998 between Franklin Advisers, Inc.
and Franklin Templeton Services, Inc.
EX-99.B(i)(i) Opinion and Consent of Counsel dated *
May 15, 1998
EX-99.B(j)(i) Consent of Independent Auditors Attached
EX-99.B(l)(i) Letter of Understanding for Class II *
shares dated April 12, 1995
EX-99.(m)(i) Distribution Plan pursuant to 12b-1 *
Rule dated May 1, 1994 between
Franklin California Tax-Free Income
Fund, Inc. and Franklin/Templeton
Distributors, Inc.
EX-99.(m)(ii) Distribution Plan pursuant to Rule *
12b-1 between Franklin/Templeton
Distributors, Inc. and the
Registrant on behalf of Franklin
California Tax-Free Income Fund -
Class II dated March 30, 1995
EX-99.(m)(iii) Distribution Plan pursuant to Rule Attached
12b-1 between Registrant, on behalf
of Franklin California Tax-Free
Income Fund - Class B, and
Franklin/Templeton Distributors, Inc.
EX-99.(n)(See
EX-27)
EX-99.(p)(i) Power of Attorney dated April 15, Attached
1999
EX-99.(o)(i) Form of Multiple Class Plan for
Franklin California Tax-Free Income
Fund, Inc.
Ex-27.(i) Financial Data Schedule for Franklin Attached
California Tax-Free Income Fund,
Inc. - Class A
Ex-27.(ii) Financial Data Schedule for Franklin Attached
California Tax-Free Income Fund,
Inc. - Class B
Ex-27.(iii) Financial Data Schedule for Franklin Attached
California Tax-Free Income Fund,
Inc. - Class C
* Incorporated by Reference
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
FRANKLIN CALOIFORNIA TAX-FREE INCOME FUND, INC., a Maryland corporation
having its principal office in Baltimore, Maryland, hereby certifies to the
State Department of Assessments and Taxation of Maryland, that:
FIRST: The Corporation heretofore had authority to issue a total of tem
billion (10,000,000,000) shares of stock, with a par value of one cent ($.01)
per share, and an aggregate par value of $100,000,000, classified as follows:
CLASS DESIGNATION NUMBER OF SHARES
Franklin California Tax-Free Income Fund Series
Franklin California Tax-Free Income Fund
Class A 5,000,000,000
Franklin California Tax-Free Income Fund
Class C 5,000,000,000
10,000,000,000
SECOND: The Board of Directors of the Corporation, in accordance with
Section 2-195(C) of the Maryland General Corporation Law, has adopted a
resolution increasing the aggregate number of authorized shares of stock of the
Corporation by five billion (5,000,000,000) shares so that the Corporation has
authority to issue fifteen billion (15,000,000,000) shares.
THIRD: The Board of Directors has classified the additional five billion
(5,000,000,000) shares of capital stock as five billion shares of Franklin
California Tax-Free Income Fund Class B shares of the Franklin California
Tax-Free Income Fund Series of the Corporation.
FOURTH: As increased hereby, the total number of shares of capital stock
that the Corporation is authorized to issue is fifteen billion (15,000,000,000)
shares, with a par value of one cent ($.01) per share, and an aggregate par
value of $150,000,000, classified as follows:
CLASS DESIGNATION NUMBER OF SHARES
Franklin California Tax-Free Income Fund Series
Franklin California Tax-Free Income Fund
Class A 5,000,000,000
Franklin California Tax-Free Income Fund
Class B 5,000,000,000
Franklin California Tax-Free Income Fund
Class C 15,000,000,000
FIFTH: The Corporation is registered as an open end company under the
Investment Company Act of 1940. The total number of shares that the Corporation
has authority to issue has been increased in accordance with section 2-105(c) of
the Corporations and Associations Article of the Annotated Code of Maryland.
Thje shares of the Corporation classified pursuant to Article THIRD of these
Articles Supplementary have been classified by the Board of Directors under
authority contained in the Charter of the Corporation.
SIXTH: The Franklin California Tax-Free Income Fund Class B shares of the
Franklin California Tax-Free Income Fund Series of the Corporation (each
referred to herein as "Class B share" or, collectively, as the "Class B
shares"), shall represent interests in the same portfolio of investments as the
existing classes of capital stock of the Corporation. Each Class B share of the
Franklin California Tax-Free Income Fund Series (the "Series") of the
Corporation shall have the same preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of the existing classes of shares of the Series, all as
set forth in the Corporation's Charter, except for the differences therein or
hereinafter set forth:
(1) Dividends and distributions paid to holders of the Class B shares of
the Corporation shall be in such amounts as may be declared from time to time by
the Board of Directors, and such dividends and distributions may vary with
respect to the Class B shares from the dividends and distributions with respect
to the other classes of capital stock of the Series and the Corporation to
reflect differing allocations of the expenses of the Series and the Corporation
among the classes, which may include, without limitation, reductions for
payments of fees under any 12b-1 Plan adopted for, or relating to, the Class B
shares of the Series in accordance with the Investment Company Act of 1940 ("the
1940 Act"), and any resultant difference among the net asset values per share as
the Board of Directors may deem appropriate.
(2) Except as otherwise provided by law, Class B shares of the Series (I)
shall have exclusive voting rights with respect to any matter submitted to a
vote of stockholders that affects only holders of Class B shares of the Series,
including, without limitation, the provisions of any 12b-1 Plan adopted for, or
relating to the Class B shares; and (ii) shall not have voting rights with
respect to the provisions of any distribution plan adopted pursuant to Rule
12b-1 under the 1940 Act applicable to any other class of the Series Corporation
or with regard to any other matter submitted to a vote of stockholders which
does not now or in the future affect the holders of the Class B shares of the
Series.
(3) Class B shares of the Series may be subject to an initial sales charge
and to a service and/or distribution fee pursuant to the terms of the issuance
of the shares, and the proceeds of the redemption of the Class B shares of the
Corporation may be reduced by the amount of any contingent deferred sales charge
or other charge payable on such redemption pursuant to the terms of the issuance
of the shares, as set forth in the Corporation's registration statement on Form
N-1A pursuant to the Securities Act of 1933 and the 1940 Act (the "Registration
Statement") and determined in accordance with the applicable provisions of the
1940 Act and the rules and regulations of the National Association of Securities
Dealers, Inc. (the 'NASD').
(4) The allocation of investment income and losses, realized and unrealized
capital gains and losses, and expenses and liabilities of the Corporation among
and between the classes of capital stock of the Series and the Corporation and
the determination of their respective net asset values and rights upon
liquidation or dissolution of the Corporation or liquidation of the Series shall
be determined conclusively by the Board of Directors in a manner that is
consistent with Rule 18f-3 of the 1940 Act that modifies, is an authorized
alternative to, or supersedes that rule (the "Rule").
(5) At such times as may be determined by the Board of Directors (or with
the authorization of the Board of Directors, the officers of the Corporation) in
accordance with the Rule, the 1940 Act and applicable rules and regulations of
the NASD, and reflected in the Registration Statement with respect to the
Series, Class B shares of the Series may be converted automatically into Class A
shares of the Series based on the relative net asset values of those classes of
the Series at the time of conversion, subject, however, to any conditions of
conversion that may be imposed by the Board of Directors (or with the
authorization of the Board of Directors, the officers of the Corporation) and
reflected in the Registration Statement with respect to the Series.
IN WITNESS WHEREOF, the Corporation has caused these Articles Supplementary
to be signed in its name and on its behalf by its undersigned authorized
officers who acknowledge that these Articles Supplementary are the act of the
Corporation, that to the best of their knowledge, information and belied, the
matters and facts set forth herein relating to the authorization and approval of
these Articles Supplementary are true in all material respects, and that this
statement is made under the penalties of perjury.
Presented and witnessed on this 15TH day of DECEMBER, 1998.
FRANKLIN CALIFORNIA TAX-
FREE INCOME FUND, INC.
By: /S/ C. B. JOHNSON
Charles B. Johnson, President
WITNESSED: /S/ BRIAN E. LORENZ
Brian E. Lorenz, Secretary
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
777 Mariners Island Blvd.
San Mateo, California 94404
Franklin/Templeton Distributors, Inc
777 Mariners Island Blvd.
San Mateo, CA 94404
Re: Amendment of Amended and Restated Distribution Agreement
Gentlemen:
We (the "Fund") are a corporation or business trust operating as an open-end
management investment company or "mutual fund," which is registered under the
Investment Company Act of 1940, as amended (the "1940 Act") and whose shares are
registered under the Securities Act of 1933, as amended (the "1933 Act"). You
have informed us that your company is registered as a broker-dealer under the
provisions of the Securities Exchange Act of 1934, as amended (the "1934 Act")
and that your company is a member of the National Association of Securities
Dealers, Inc.
This agreement is an amendment (the "Amendment") of the Amended and Restated
Distribution Agreement (the "Agreement") currently in effect between you and us.
As used herein all capitalized terms herein have the meanings set forth in the
Agreement. We have been authorized to execute and deliver the Amendment to you
by a resolution of our Board passed at a meeting at which a majority of Board
members, including a majority who are not otherwise interested persons of the
Fund and who are not interested persons of our investment adviser, its related
organizations or of you or your related organizations, were present and voted in
favor of such resolution approving the Amendment.
To the extent that any provision of the Amendment conflicts with any provision
of the Agreement, the Amendment provision supersedes the Agreement provision.
The Agreement and the Amendment together constitute the entire agreement between
the parties hereto and supersede all prior oral or written agreements between
the parties hereto.
Section 4. entitled "Compensation" is amended by adding the following sentences
at the end of Subsection 4.B:
The compensation provided in the Class B Distribution Plan applicable to
Class B Shares (the "Class B Plan") is divided into a distribution fee and
a service fee, each of which fees is in compensation for different services
to be rendered to the Fund. Subject to the termination provisions in the
Class B Plan, the distribution fee with respect to the sale of a Class B
Share shall be earned when such Class B Share is sold and shall be payable
from time to time as provided in the Class B Plan. The distribution fee
payable to you as provided in the Class B Plan shall be payable without
offset, defense or counterclaim (it being understood by the parties hereto
that nothing in this sentence shall be deemed a waiver by the Fund of any
claim the Fund may have against you). You may direct the Fund to cause our
custodian to pay such distribution fee to Lightning Finance Company Limited
("LFL") or other persons providing funds to you to cover expenses referred
to in Section 2(a) of the Class B Plan and to cause our custodian to pay
the service fee to you for payment to dealers or others or directly to
others to cover expenses referred to in Section 2(b) of the Class B Plan.
We understand that you intend to assign your right to receive certain
distribution fees with respect to Class B Shares to LFL in exchange for
funds that you will use to cover expenses referred to in Section 2(a) of
the Class B Plan. In recognition that we will benefit from your arrangement
with LFL, we agree that, in addition to the provisions of Section 7 (iii)
of the Class B Plan, we will not pay to any person or entity, other than
LFL, any such assigned distribution fees related to Class B Shares sold by
you prior to the termination of either the Agreement or the Class B Plan.
We agree that the preceding sentence shall survive termination of the
Agreement.
Section 4. entitled "Compensation" is amended by adding the following Subsection
4.C. after Subsection 4.B.:
C. With respect to the sales commission on the redemption of Shares of each
series and class of the Fund as provided in Subsection 4.A. above, we will
cause our shareholder services agent (the "Transfer Agent") to withhold
from redemption proceeds payable to holders of the Shares all contingent
deferred sales charges properly payable by such holders in accordance with
the terms of our then current prospectuses and statements of additional
information (each such sales charge, a "CDSC"). Upon receipt of an order
for redemption, the Transfer Agent shall direct our custodian to transfer
such redemption proceeds to a general trust account. We shall then cause
the Transfer Agent to pay over to you or your assigns from the general
trust account such CDSCs properly payable by such holders as promptly as
possible after the settlement date for each such redemption of Shares.
CDSCs shall be payable without offset, defense or counterclaim (it being
understood that nothing in this sentence shall be deemed a waiver by us of
any claim we may have against you.) You may direct that the CDSCs payable
to you be paid to any other person.
Section 11. entitled "Conduct of Business" is amended by replacing the reference
in the second paragraph to "Rules of Fair Practice" with a reference to the
"Conduct Rules".
Section 16. entitled "Miscellaneous" is amended in the first paragraph by
changing the first letter of each of the words in each of the terms in
quotations marks, except "Parent," to the lower case and giving to the term
"assignment" the meaning as set forth only in the 1940 Act and the Rules and
Regulations thereunder (and not as set forth in the 1933 Act and the Rules and
Regulations thereunder.)
If the foregoing meets with your approval, please acknowledge your acceptance by
signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.
Very truly yours,
FRANKLIN CALIFORNIA TAX-FREE
INCOME FUND,INC.
By: /s/ D. R. Gatzek
--------------
Deborah R. Gatzek
Vice President &
Assistant Secretary
Accepted:
Franklin/Templeton Distributors, Inc.
By: /s/ H. E. Burns
---------------
Harmon E. Burns
Executive Vice President
Dated: January 12, 1999
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No. 26
to the Registration Statement of Franklin California Tax-Free Income Fund, Inc.
on Form N-1A (File No. 2-60470) of our report dated May 5, 1999 on our audit of
the financial statements and financial highlights of Franklin California
Tax-Free Income Fund, Inc., which report is included in the Annual Report to
Shareholders for the year ended March 31, 1999 filed with the Securities and
Exchange Commission pursuant to section 30(d) of the Investment Company Act of
1940, which is incorporated by reference in the Registration Statement. We also
consent to the reference to our firm under the captions "Financial Highlights"
and "Auditor."
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Francisco, California
May 25, 1999
CLASS B DISTRIBUTION PLAN
I. Investment Company: FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
II. Fund: FRANKLIN CALIFORNIA TAX-FREE INCOME
FUND - CLASS B
III. Maximum Per Annum Rule 12b-1 Fees for Class B Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.50%
B. Service Fee: 0.15%
PREAMBLE TO CLASS B DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class B shares
(the "Class") of the Fund named above ("Fund"), which Plan shall take effect as
of the date Class B shares are first offered (the "Effective Date of the Plan").
The Plan has been approved by a majority of the Board of Directors of the
Investment Company (the "Board"), including a majority of the Board members who
are not interested persons of the Investment Company and who have no direct, or
indirect financial interest in the operation of the Plan (the "non-interested
Board members"), cast in person at a meeting called for the purpose of voting on
such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Management Agreement between the Investment Company
and Franklin Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Investment Company and Franklin/Templeton Distributors,
Inc. ("Distributors"). The Board concluded that the compensation of Advisers,
under the Management Agreement, and of Distributors, under the Underwriting
Agreement, was fair and not excessive. The approval of the Plan included a
determination that in the exercise of their reasonable business judgment and in
light of their fiduciary duties, there is a reasonable likelihood that the Plan
will benefit the Fund and its shareholders.
The Board recognizes that Distributors has entered into an arrangement with
a third party in order to finance the distribution activities of the Class
pursuant to which Distributors may assign its rights to the fees payable
hereunder to such third party. The Board further recognizes that it has an
obligation to act in good faith and in the best interests of the Fund and its
shareholders when considering the continuation or termination of the Plan and
any payments to be made thereunder.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a monthly fee not to exceed the
above-stated maximum distribution fee per annum of the Class' average daily net
assets represented by shares of the Class, as may be determined by the Board
from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall pay
(i) to Distributors for payment to dealers or others, or (ii) directly to
others, an amount not to exceed the above-stated maximum service fee per annum
of the Class' average daily net assets represented by shares of the Class, as
may be determined by the Investment Company's Board from time to time, as a
service fee pursuant to servicing agreements which have been approved from time
to time by the Board, including the non-interested Board members.
2. (a) The monies paid to Distributors pursuant to Paragraph 1(a) above
shall be treated as compensation for Distributors' distribution-related services
including compensation for amounts advanced to securities dealers or their firms
or others selling shares of the Class who have executed an agreement with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Board, including the non-interested Board
members, with respect to the sale of Class shares. In addition, such monies may
be used to compensate Distributors for other expenses incurred to assist in the
distribution and promotion of shares of the Class. Payments made to Distributors
under the Plan may be used for, among other things, the printing of prospectuses
and reports used for sales purposes, expenses of preparing and distributing
sales literature and related expenses, advertisements, and other
distribution-related expenses, including a pro-rated portion of Distributors'
overhead expenses attributable to the distribution of Class shares, as well as
for additional distribution fees paid to securities dealers or their firms or
others who have executed agreements with the Investment Company, Distributors or
its affiliates, or for certain promotional distribution charges paid to
broker-dealer firms or others, or for participation in certain distribution
channels. None of such payments are the legal obligation of Distributors or its
designee.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be used to
pay dealers or others for, among other things, furnishing personal services and
maintaining shareholder accounts, which services include, among other things,
assisting in establishing and maintaining customer accounts and records;
assisting with purchase and redemption requests; arranging for bank wires;
monitoring dividend payments from the Fund on behalf of customers; forwarding
certain shareholder communications from the Fund to customers; receiving and
answering correspondence; and aiding in maintaining the investment of their
respective customers in the Class. Any amounts paid under this paragraph 2(b)
shall be paid pursuant to a servicing or other agreement, which form of
agreement has been approved from time to time by the Board. None of such
payments are the legal obligation of Distributors or its designee.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of Class shares issued by
the Fund within the context of Rule 12b-1 under the Act, then such payments
shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to Rule 2830(d) of the Conduct Rules of the National
Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies paid to it and to others under the Plan,
and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. (a) Distributors may assign, transfer or pledge ("Transfer") to one or
more designees (each an "Assignee"), its rights to all or a designated portion
of the fees to which it is entitled under paragraph 1 of this Plan from time to
time (but not Distributors' duties and obligations pursuant hereto or pursuant
to any distribution agreement in effect from time to time, if any, between
Distributors and the Fund), free and clear of any offsets or claims the Fund may
have against Distributors. Each such Assignee's ownership interest in a Transfer
of a specific designated portion of the fees to which Distributors is entitled
is hereafter referred to as an "Assignee's 12b-1 Portion." A Transfer pursuant
to this Section 5(a) shall not reduce or extinguish any claims of the Fund
against Distributors.
(b) Distributors shall promptly notify the Fund in writing of each such
Transfer by providing the Fund with the name and address of each such Assignee.
(c) Distributors may direct the Fund to pay any Assignee's 12b-1 Portion
directly to each Assignee. In such event, Distributors shall provide the Fund
with a monthly calculation of the amount to which each Assignee is entitled (the
"Monthly Calculation"). In such event, the Fund shall, upon receipt of such
notice and Monthly Calculation from Distributors, make all payments required
directly to the Assignee in accordance with the information provided in such
notice and Monthly Calculation upon the same terms and conditions as if such
payments were to be paid to Distributors.
(d) Alternatively, in connection with a Transfer, Distributors may direct
the Fund to pay all or a portion of the fees to which Distributors is entitled
from time to time to a depository or collection agent designated by any
Assignee, which depository or collection agent may be delegated the duty of
dividing such fees between the Assignee's 12b-1 Portion and the balance (such
balance, when distributed to Distributors by the depository or collection agent,
the "Distributors' 12b-1 Portion"), in which case only Distributors' 12b-1
Portion may be subject to offsets or claims the Fund may have against
Distributors.
6. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Board, including the non-interested Board members, cast in person at a
meeting called for the purpose of voting on the Plan. In determining whether
there is a reasonable likelihood that the continuation of the Plan will benefit
the Fund and its shareholders, the Board may, but is not obligated to, consider
that Distributors has incurred substantial cost and has entered into an
arrangement with a third party in order to finance the distribution activities
for the Class.
7. This Plan and any agreements entered into pursuant to this Plan may be
terminated with respect to the shares of the Class, without penalty, at any time
by vote of a majority of the non-interested Board members of the Investment
Company, or by vote of a majority of outstanding Shares of such Class. Upon
termination of this Plan with respect to the Class, the obligation of the Fund
to make payments pursuant to this Plan with respect to such Class shall
terminate, and the Fund shall not be required to make payments hereunder beyond
such termination date with respect to expenses incurred in connection with Class
shares sold prior to such termination date, provided, in each case that each of
the requirements of a Complete Termination of this Plan in respect of such
Class, as defined below, are met. For purposes of this Section 7, a "Complete
Termination" of this Plan in respect of the Class shall mean a termination of
this Plan in respect of such Class, provided that: (i) the non-interested Board
members of the Investment Company shall have acted in good faith and shall have
determined that such termination is in the best interest of the Investment
Company and the shareholders of the Fund and the Class; (ii) and the Investment
Company does not alter the terms of the contingent deferred sales charges
applicable to Class shares outstanding at the time of such termination; and
(iii) unless Distributors at the time of such termination was in material breach
under the distribution agreement in respect of the Fund, the Fund shall not, in
respect of such Fund, pay to any person or entity, other than Distributors or
its designee, either the payments described in paragraph 1(a) or 1(b) or in
respect of the Class shares sold by Distributors prior to such termination.
8. The Plan, and any agreements entered into pursuant to this Plan, may not
be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 1 hereof without approval by a majority of the outstanding
voting securities of the Class of the Fund.
9. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
10. So long as the Plan is in effect, the selection and nomination of the
Fund's non-interested Board members shall be committed to the discretion of such
non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: October 16, 1998
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
By: /S/ D. R. GATZEK
Deborah R. Gatzek
Vice President & Assistant Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By: H. E. BURNS
Harmon E. Burns
Executive Vice President
POWER OF ATTORNEY
The undersigned officers and directors of FRANKLIN CALIFORNIA TAX-FREE
INCOME FUND, INC. (the "Registrant") hereby appoint BRIAN E. LORENZ, HARMON E.
BURNS, DEBORAH R. GATZEK, KAREN L. SKIDMORE AND LEIANN NUZUM (with full power to
each of them to act alone) his attorney-in-fact and agent, in all capacities, to
execute, file or withdraw any of the documents referred to below relating to
Post-Effective Amendments to the Registrant's registration statement on Form
N-1A under the Investment Company Act of 1940, as amended, and under the
Securities Act of 1933 covering the sale of shares by the Registrant under
prospectuses becoming effective after this date, including any amendment or
amendments increasing or decreasing the amount of securities for which
registration is being sought, with all exhibits and any and all documents
required to be filed with respect thereto with any regulatory authority. Each of
the undersigned grants to each of said attorneys, full authority to do every act
necessary to be done in order to effectuate the same as fully, to all intents
and purposes as he could do if personally present, thereby ratifying all that
said attorneys-in-fact and agents, may lawfully do or cause to be done by virtue
hereof.
The undersigned officers and directors hereby execute this Power of
Attorney as of this 15th day of April, 1999.
/s/Charles B. Johnson, /s/Harris J. Ashton,
Principal Executive Officer Director
and Director
/s/S. Joseph Fortunato, /s/Edith E. Holiday,
Director Director
/s/Rupert H. Johnson, Jr., /s/Gordon S. Macklin,
Director Director
/s/Martin L. Flanagan, /s/Diomedes Loo-Tam,
Principal Financial Officer Principal Accounting Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND MARCH 31, 1999 ANNUAL REPORT AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 011
<NAME> FRANKLIN CALIFORNIA TAX-FREE INCOME FUND - CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<INVESTMENTS-AT-COST> 14,932,231,653
<INVESTMENTS-AT-VALUE> 16,040,761,278
<RECEIVABLES> 227,918,325
<ASSETS-OTHER> 6,704,461
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 16,275,384,064
<PAYABLE-FOR-SECURITIES> 250,850,527
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 42,611,565
<TOTAL-LIABILITIES> 293,462,092
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 14,861,189,134
<SHARES-COMMON-STOCK> 2,090,940,996
<SHARES-COMMON-PRIOR> 2,008,858,232
<ACCUMULATED-NII-CURRENT> 1,496,555
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10,706,658
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,108,529,625
<NET-ASSETS> 15,981,921,972
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 904,341,495
<OTHER-INCOME> 0
<EXPENSES-NET> (90,587,206)
<NET-INVESTMENT-INCOME> 813,754,289
<REALIZED-GAINS-CURRENT> 46,041,024
<APPREC-INCREASE-CURRENT> 112,383,811
<NET-CHANGE-FROM-OPS> 972,179,124
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (797,790,042)
<DISTRIBUTIONS-OF-GAINS> (49,417,902)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 474,619,393
<NUMBER-OF-SHARES-REDEEMED> (441,485,023)
<SHARES-REINVESTED> 48,948,394
<NET-CHANGE-IN-ASSETS> 918,638,421
<ACCUMULATED-NII-PRIOR> 3,268,754
<ACCUMULATED-GAINS-PRIOR> 15,334,548
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (69,665,022)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (90,587,206)
<AVERAGE-NET-ASSETS> 15,657,216,590
<PER-SHARE-NAV-BEGIN> 7.350
<PER-SHARE-NII> .390
<PER-SHARE-GAIN-APPREC> .070
<PER-SHARE-DIVIDEND> (.390)
<PER-SHARE-DISTRIBUTIONS> (.020)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.40
<EXPENSE-RATIO> .570
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] .000
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND MARCH 31, 1999 ANNUAL REPORT AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 012
<NAME> FRANKLIN CALIFORNIA TAX-FREE INCOME FUND - CLASS B
<S> <C>
<PERIOD-TYPE> YEAR <F1>
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<INVESTMENTS-AT-COST> 14,932,231,653
<INVESTMENTS-AT-VALUE> 16,040,761,278
<RECEIVABLES> 227,918,325
<ASSETS-OTHER> 6,704,461
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 16,275,384,064
<PAYABLE-FOR-SECURITIES> 250,850,527
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 42,611,565
<TOTAL-LIABILITIES> 293,462,092
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 14,861,189,134
<SHARES-COMMON-STOCK> 5,906,718
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1,496,555
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10,706,658
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,108,529,625
<NET-ASSETS> 15,981,921,972
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 904,341,495
<OTHER-INCOME> 0
<EXPENSES-NET> (90,587,206)
<NET-INVESTMENT-INCOME> 813,754,289
<REALIZED-GAINS-CURRENT> 46,041,024
<APPREC-INCREASE-CURRENT> 112,383,811
<NET-CHANGE-FROM-OPS> 972,179,124
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (158,483)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,987,954
<NUMBER-OF-SHARES-REDEEMED> (96,126)
<SHARES-REINVESTED> 14,890
<NET-CHANGE-IN-ASSETS> 918,638,421
<ACCUMULATED-NII-PRIOR> 3,268,754
<ACCUMULATED-GAINS-PRIOR> 15,334,548
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (69,665,022)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (90,587,206)
<AVERAGE-NET-ASSETS> 15,657,216,590
<PER-SHARE-NAV-BEGIN> 7.410
<PER-SHARE-NII> .100
<PER-SHARE-GAIN-APPREC> (.030)
<PER-SHARE-DIVIDEND> (.090)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.39
<EXPENSE-RATIO> 1.14 <F2>
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] .000
<FN>
<F1> FOR THE PERIOD JANUARY 1, 1999 (EFFECTIVE DATE) TO MARCH 31, 1999
<F2> ANNUALIZED
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND MARCH 31, 1999 ANNUAL REPORT AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 013
<NAME> FRANKLIN CALIFORNIA TAX-FREE INCOME FUND - CLASS C
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<INVESTMENTS-AT-COST> 14,932,231,653
<INVESTMENTS-AT-VALUE> 16,040,761,278
<RECEIVABLES> 227,918,325
<ASSETS-OTHER> 6,704,461
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 16,275,384,064
<PAYABLE-FOR-SECURITIES> 250,850,527
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 42,611,565
<TOTAL-LIABILITIES> 293,462,092
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 14,861,189,134
<SHARES-COMMON-STOCK> 62,836,474
<SHARES-COMMON-PRIOR> 40,296,061
<ACCUMULATED-NII-CURRENT> 1,496,555
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10,706,658
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,108,529,625
<NET-ASSETS> 15,981,921,972
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 904,341,495
<OTHER-INCOME> 0
<EXPENSES-NET> (90,587,206)
<NET-INVESTMENT-INCOME> 813,754,289
<REALIZED-GAINS-CURRENT> 46,041,024
<APPREC-INCREASE-CURRENT> 112,383,811
<NET-CHANGE-FROM-OPS> 972,179,124
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (17,577,963)
<DISTRIBUTIONS-OF-GAINS> (1,251,012)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 28,413,185
<NUMBER-OF-SHARES-REDEEMED> (7,568,825)
<SHARES-REINVESTED> 1,696,053
<NET-CHANGE-IN-ASSETS> 918,638,421
<ACCUMULATED-NII-PRIOR> 3,268,754
<ACCUMULATED-GAINS-PRIOR> 15,334,548
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (69,665,022)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (90,587,206)
<AVERAGE-NET-ASSETS> 15,657,216,590
<PER-SHARE-NAV-BEGIN> 7.350
<PER-SHARE-NII> .350
<PER-SHARE-GAIN-APPREC> .060
<PER-SHARE-DIVIDEND> (.350)
<PER-SHARE-DISTRIBUTIONS> (.020)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.39
<EXPENSE-RATIO> 1.14
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] .000
</TABLE>
