As filed with the Securities and Exchange Commission on July 26, 2000
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. 27 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 26 (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
MURRAY L. SIMPSON, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[x] on August 1, 2000 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Prospectus
FRANKLIN
CALIFORNIA
TAX-FREE
INCOME FUND
CLASS A, B & C
INVESTMENT STRATEGY
TAX-FREE INCOME
AUGUST 1, 2000
[Insert Franklin Templeton Ben Head]
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
CONTENTS
THE FUND
[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
2 Goal and Strategies
4 Main Risks
7 Performance
9 Fees and Expenses
11 Management
12 Distributions and Taxes
14 Financial Highlights
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
16 Choosing a Share Class
20 Buying Shares
23 Investor Services
26 Selling Shares
28 Account Policies
31 Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]
Back Cover
THE FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The Fund's investment goal is to provide investors with as high a level of
income exempt from federal income taxes as is consistent with prudent investment
management and the preservation of shareholders' capital. 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.
MAIN INVESTMENT STRATEGIES Under normal market conditions, the Fund 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, including interest that may be subject to the federal alternative
minimum tax.
[Begin callout]
MUNICIPAL SECURITIES are issued by state and local governments, their agencies
and authorities, as well as by the District of Columbia and U.S. territories and
possessions, to borrow money for various public and private projects. Municipal
securities pay a fixed, floating or variable rate of interest, and require that
the amount borrowed (principal) be repaid at maturity.
[End callout]
The Fund only buys municipal securities rated in the top four ratings by U.S.
nationally recognized rating services (or comparable unrated securities). The
manager selects securities that it believes will provide the best balance
between risk and return within the Fund's range of allowable investments and
typically uses a buy and hold strategy. This means it holds securities in the
Fund's portfolio for income purposes, rather than trading securities for capital
gains, although the manager may sell a security at any time if it believes it
could help the Fund meet its goal.
The Fund may also invest in municipal lease obligations, which generally are
issued to finance the purchase of public property. The property is leased to a
state or local government and the lease payments are used to pay the interest on
the obligations. These differ from other municipal securities because the money
to make the lease payments must be set aside each year or the lease can be
cancelled without penalty. If this happens, investors who own the obligations
may not be paid.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unusual or unfavorable for investors, the manager may invest up to 100% of
the Fund's assets in a temporary defensive manner by holding all or a
substantial portion of its assets in cash, cash equivalents or other high
quality short-term investments. Temporary defensive investments may include
securities that pay taxable interest. The manager also may invest in these types
of securities or hold cash when securities meeting the Fund's investment
criteria are unavailable or to maintain liquidity. In these circumstances, the
Fund may be unable to achieve its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
INCOME Since the Fund can only distribute what it earns, the Fund's
distributions to shareholders may decline when interest rates fall.
CREDIT An issuer of municipal securities may be unable to make interest payments
and repay principal. Changes in an issuer's financial strength or in a
security's credit rating may affect a security's value and, thus, impact Fund
performance.
Many of the Fund's portfolio securities may be supported by credit enhancements,
which may be provided by either U.S. or foreign banks and insurance companies.
These securities have the credit risk of the entity providing the credit
support. Credit support provided by a foreign bank or insurance company may be
less certain because of the possibility of adverse foreign economic, political
or legal developments that may affect the ability of that entity to meet its
obligations. To the extent the Fund holds insured securities, a change in the
credit rating of any one or more of the municipal bond insurers that insure
securities in the Fund's portfolio may affect the value of the securities they
insure, the Fund's share price and Fund performance. The Fund might also be
adversely impacted by the inability of an insurer to meet its insurance
obligations.
[Begin callout]
Because interest rates and municipal security prices fluctuate, the amount of
the Fund's distributions, the Fund's yield, and the value of your investment in
the Fund will go up and down. This means you could lose money over short or even
extended periods.
[End callout]
INTEREST RATE When interest rates rise, municipal security prices fall. The
opposite is also true: municipal security prices rise when interest rates fall.
In general, securities with longer maturities are more sensitive to these price
changes.
CALL A municipal security may be prepaid (called) before maturity. Securities
are more likely to be called when interest rates are falling, because the issuer
can issue new securities with lower interest payments. If a security is called,
the Fund may have to replace it with a lower-yielding security. At any time, the
Fund may have a large amount of its assets invested in municipal securities
subject to call risk. A call of some or all of these securities may lower the
Fund's income and yield and its distributions to shareholders.
MARKET A security's value may be reduced by market activity or the results of
supply and demand. This is a basic risk associated with all securities. When
there are more sellers than buyers, prices tend to fall. Likewise, when there
are more buyers than sellers, prices tend to rise.
The Fund may invest more than 25% of its assets in municipal securities that
finance similar types of projects, such as hospitals, housing, industrial
development, and transportation or pollution control. A change that affects one
project, such as proposed legislation on the financing of the project, a
shortage of the materials needed for the project, or a declining need for the
project, would likely affect all similar projects, thereby increasing market
risk.
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 credit 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 past 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, or any state, are unpredictable and can
change at any time. For example, during the last decade, California was
particularly hard hit due to cuts in defense and aerospace. Currently,
California state and municipal finances are benefiting from the growth of
companies involved in the technology, computer and Internet-related industries.
A slow-down in this sector would be expected to have an adverse impact on state
and local revenues. The Fund may involve more risk than an investment in a fund
that does not focus on securities of a single state.
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.
More detailed information about the Fund, its policies and risks and about
municipal securities held by the Fund can be found in the Fund's Statement of
Additional Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not insured by the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other agency of the U.S. government. Mutual
fund shares involve investment risks, including the possible loss of principal.
[End callout]
[Insert graphic of a bull and a bear]
PERFORMANCE
This bar chart and table show the volatility of the Fund's returns, which is one
indicator of the risks of investing in the Fund. The bar chart shows changes in
the Fund's returns from year to year over the past 10 calendar years. The table
shows how the Fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
6.58% 10.97% 9.27% 9.49% -2.83% 15.04% 4.69% 8.81% 6.49% -4.39%
90 91 92 93 94 95 96 97 98 99
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, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS
---------------------------------------------------------------------------------------------------------------------------
Franklin California Tax-Free Income Fund - Class A 2 -8.46% 5.03% 5.79%
Lehman Brothers Municipal Bond Index3 -2.06% 6.91% 6.89%
</TABLE>
<TABLE>
<CAPTION>
SINCE
INCEPTION
<S> <C> <C>
1 YEAR (1/1/99))
-----------------------------------------------------------------------------------------
Franklin California Tax-Free Income Fund - Class B 2 -8.49% -8.49%
Lehman Brothers Municipal Bond Index 3 -2.06% -2.06%
SINCE
INCEPTION
1 YEAR (5/1/95)
----------------------------------------------------------------------------------------
Franklin California Tax-Free Income Fund - Class C 2 -6.60% 4.17%
Lehman Brothers Municipal Bond Index 3 -2.06% 5.84%
</TABLE>
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of June 30, 2000, the Fund's year-to-date return was 5.09% for Class A.
2. Figures reflect sales charges.
All Fund performance assumes reinvestment of dividends and capital gains. May 1,
1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's Micropal. The unmanaged Lehman Brothers Municipal
Bond Index includes investment grade bonds issued within the last five years as
part of a deal of over $50 million and with a maturity of at least two years. It
includes reinvested interest. One cannot invest directly in an index, nor is an
index representative of the Fund's portfolio.
[Insert graphic of percentage sign]
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CLASS A CLASS B CLASS C
--------------------------------------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 4.25% 4.00% 1.99%
Load imposed on purchases 4.25% None 1.00%
Maximum deferred sales charge (load) None 1 4.00% 2 0.99% 3
Please see "Choosing a Share Class" on page 16 for an explanation of how and when
these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A CLASS B CLASS C
--------------------------------------------------------------------------------------------------------
Management fees 0.44% 0.44% 0.44%
Distribution and service (12b-1) fees 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%
========================================
</TABLE>
1. Except for investments of $1 million or more (see page 16).
2. Declines to zero after six years.
3. This is equivalent to a charge of 1% based on net asset value.
EXAMPLE
This example can help you compare the cost of investing in the Fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown; o Your investment has a 5% return
each year; and o The Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------------------
If you sell your shares at the end
of the period:
CLASS A $481 1 $600 $730 $1,108
CLASS B $516 $662 $828 $1,227 2
CLASS C $314 $459 $721 $1,472
If you do not sell your shares:
CLASS B $116 $362 $628 $1,227 2
CLASS C $215 $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.
[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 $222 billion in assets.
The team responsible for the Fund's management is:
SHEILA AMOROSO, SENIOR VICE PRESIDENT OF ADVISERS
Ms. Amoroso has been an analyst or portfolio manager of the Fund since 1987. She
is the Co-Director of Franklin's Municipal Bond Department. She joined 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 Advisers a fee for managing the Fund's assets. For the fiscal year
ended March 31, 2000, the Fund paid 0.44% of its average monthly net assets to
the manager for its services.
[Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAIN DISTRIBUTIONS The Fund intends to pay a dividend at
least monthly, on or about the 15th day of the month, representing its net
investment income. Capital gains, if any, may be distributed twice a year. The
amount of these distributions will vary and there is no guarantee the Fund will
pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the Fund's distributions will vary. Please keep in mind that if
you invest in the Fund shortly before the record date of a distribution, any
distribution will lower the value of the Fund's shares by the amount of the
distribution. If you invest in the Fund shortly before the Fund deducts a
capital gains distribution from its net asset value, you will receive some of
your investment back in the form of a taxable distribution. If you would like
information on upcoming record dates for the Fund's distributions, please call
1-800/DIAL BEN(R).
TAX CONSIDERATIONS Fund distributions will consist primarily of exempt-interest
dividends from interest earned on municipal securities. In general,
exempt-interest dividends are exempt from federal income tax. The Fund, however,
may invest a portion of its assets in securities that pay income that is not
tax-exempt. Fund distributions from such income are taxable to you as ordinary
income. Any capital gains the Fund distributes are taxable to you as long-term
capital gains no matter how long you have owned your shares. Distributions of
ordinary income or capital gains are taxable whether you reinvest your
distributions in additional Fund shares or receive them in cash.
[Begin callout]
BACKUP WITHHOLDING
By law, the Fund must withhold 31% of your taxable distributions and redemption
proceeds if you do not provide your correct social security or taxpayer
identification number and certify that you are not subject to backup
withholding, or if the IRS instructs the Fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of the Fund, you may have a capital gain or loss. For
tax purposes, an exchange of your Fund shares for shares of a different Franklin
Templeton fund is the same as a sale.
Exempt-interest dividends are taken into account when determining the taxable
portion of your social security or railroad retirement benefits. The Fund may
invest a portion of its assets in private activity bonds. The income from these
bonds is a preference item when determining your alternative minimum tax.
Exempt-interest dividends from interest earned on municipal securities of the
state of California, or its political subdivisions, generally are exempt from
California's personal income tax. Investments in municipal securities of other
states generally do not qualify for tax-free treatment in California. Most
states, however, do not grant tax-free treatment to interest from municipal
securities of other states.
Distributions of ordinary income and capital gains, and gains from the sale or
exchange of your Fund shares generally will be subject to state and local taxes.
Non-U.S. investors may be subject to U.S. withholding and estate tax. You should
consult your tax advisor about the federal, state, local or foreign tax
consequences of your investment in the Fund.
[Insert graphic of a dollar bill]
FINANCIAL HIGHLIGHTS
This table presents the Fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
CLASS A YEAR ENDED MARCH 31,
--------------------------------------- ------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
2000 1999 1 1998 1997 1996 2
--------------------------------------- ------------- ------------- ------------- ------------- --------------
PER SHARE DATA5 ($)
Net asset value,
beginning of year 7.40 7.35 7.09 7.18 7.11
------------- ------------- ------------- ------------- --------------
Net investment income .38 .39 .42 .43 .44
Net realized and unrealized
gains (losses) (.53) .07 .27 (.04) .07
------------- ------------- ------------- ------------- --------------
Total from investment operations (.15) .46 .69 .39 .51
------------- ------------- ------------- ------------- --------------
Distributions from net
investment income (.36) (.39) (.42) (.43) (.44)
Distributions from net
unrealized gains (.01) (.02) (.01) (.05) --
------------- ------------- ------------- ------------- --------------
Total distributions (.37) (.41) (.43) (.48) (.44)
------------- ------------- ------------- ------------- --------------
Net asset value, end of year 6.88 7.40 7.35 7.09 7.18
------------- ------------- ------------- ------------- --------------
Total return (%) 3 (1.97) 6.43 10.10 5.67 7.40
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1 million) 12,860 15,474 14,767 13,634 13,313
Ratios to average net
assets: (%)
Expenses .57 .57 .56 .56 .55
Net investment income 5.40 5.21 5.71 6.07 6.14
Portfolio turnover rate (%) 12.10 18.66 17.29 11.96 19.24
</TABLE>
CLASS B
PER SHARE DATA5 ($)
Net asset value,
beginning of year 7.39 7.41
------------- -------------
Net investment income .34 .10
Net realized and unrealized
losses (.52) (.03)
------------- -------------
Total from investment operations (.18) .07
------------- -------------
Distributions from net
investment income (.33) (.09)
Distributions from net
realized gains (.01) --
------------- -------------
Total distributions (.34) (.09)
------------- -------------
Net asset value, end of year 6.87 7.39
------------- -------------
Total return (%) 3 (2.51) 0.88
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 110,933 43,674
Ratios to average net
assets: (%)
Expenses 1.14 1.14 4
Net investment income 4.87 4.59 4
Portfolio turnover rate (%) 12.10 18.6 6
CLASS C
<TABLE>
<CAPTION>
PER SHARE DATA5 ($)
Net asset value,
<S> <C> <C> <C> <C> <C>
beginning of year 7.39 7.35 7.09 7.18 7.09
------------- ------------- ------------- ------------- --------------
Net investment income .34 .35 .38 .39 .38
Net realized and unrealized
gains (losses) (.53) .06 .27 (.04) .08
------------- ------------- ------------- ------------- --------------
Total from investment operations (.19) .41 .65 .35 .46
Distributions from net
investment income (.32) (.35) (.38) (.39) (.37)
Distributions from net
realized gains (.01) (.02) (.01) (.05) --
------------- ------------- ------------- ------------- --------------
Total distributions (.33) (.37) (.39) (.44) (.37)
------------- ------------- ------------- ------------- --------------
Net asset value, end of year 6.87 7.39 7.35 7.09 7.18
------------- ------------- ------------- ------------- --------------
Total return (%) 3 (2.54) 5.70 9.49 5.06 6.62
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 367,874 464,535 295,976 138,509 47,685
Ratios to average net
assets: (%)
Expenses 1.14 1.14 1.14 1.14 1.14 4
Net investment income 4.82 4.61 5.13 5.47 5.55 4
Portfolio turnover rate (%) 12.10 18.66 17.29 11.96 19.24
</TABLE>
1. For the period January 1, 1999 (effective date) to March 31, 1999 for Class
B.
2. For the period May 1, 1995 (effective date) to March 31, 1996 for Class C.
3. Total return does not include sales charges and is not annualized.
4. Annualized.
5. Based on average shares outstanding effective March 31, 2000.
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.
<TABLE>
<CAPTION>
---------------------------------------- -------------------------------------- ---------------------------------
<S> <C> <C>
CLASS A CLASS B CLASS C
---------------------------------------- -------------------------------------- ---------------------------------
o Initial sales charge of 4.25% o No initial sales charge o Initial sales charge of 1%
or less
o Deferred sales charge of 1% o Deferred sales charge of 4% o Deferred sales charge of 1%
on purchases of $1 million or on shares you sell within the on shares you sell within 18
more sold within 12 months first year, declining to 1% months
within six years and eliminated
after that
o Lower annual expenses than o Higher annual expenses than o Higher annual expenses than
Class B or C due to lower Class A (same as Class C) due Class A (same as Class B) due
distribution fees to higher distribution fees. to higher distribution fees. No
Automatic conversion to Class A conversion to Class A shares,
shares after eight years, so annual expenses do not
reducing future annual expenses. decrease.
---------------------------------------- -------------------------------------- ---------------------------------
</TABLE>
SALES CHARGES - CLASS A
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING PRICE OF 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 19), 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 18).
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 THIS % IS DEDUCTED FROM
WITHIN THIS MANY YEARS AFTER 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
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 18). After
8 years, your Class B shares automatically convert to Class A shares, lowering
your annual expenses from that time on.
MAXIMUM PURCHASE AMOUNT The maximum amount you may invest in Class B shares at
one time is $249,999. We place any investment of $250,000 or more in Class A
shares, since a reduced initial sales charge is available and Class A's annual
expenses are lower.
DISTRIBUTION AND SERVICE (12B-1) FEES Class B has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows the Fund to pay distribution and other
fees of up to 0.65% per year for the sale of Class B shares and for services
provided to shareholders. Because these fees are paid out of Class B's assets on
an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
SALES CHARGES - CLASS C
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING PRICE OF 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 24
for exchange information).
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below, please
let us know at the time you make your investment to help ensure you receive the
lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases in
Franklin Templeton funds to take advantage of the lower sales charges for large
purchases of Class A shares.
[Begin callout]
FRANKLIN TEMPLETON FUNDS INCLUDE all of the U.S. registered mutual funds of
Franklin Templeton Investments, except Franklin Templeton Variable Insurance
Products Trust and Templeton Capital Accumulator Fund, Inc.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in
Franklin Templeton funds for purposes of calculating the sales charge. You
also may combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts also may be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar
amount of shares over a 13-month period and lets you receive the same sales
charge as if all shares had been purchased at one time. We will reserve a
portion of your shares to cover any additional sales charge that may apply
if you do not buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE
SECTION OF YOUR ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton fund, you may
reinvest some or all of the proceeds within 365 days without an initial sales
charge. The proceeds must be reinvested within the same share class, except
proceeds from the sale of Class B shares will be reinvested in Class A shares.
If you paid a CDSC when you sold your Class A or C shares, we will credit your
account with the amount of the CDSC paid but a new CDSC will apply. For Class B
shares reinvested in Class A, a new CDSC will not apply, although your account
will not be credited with the amount of any CDSC paid when you sold your Class B
shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD) also
may be reinvested without an initial sales charge if you reinvest them within
365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject to
a sales charge.
SALES CHARGE WAIVERS Class A shares may be purchased without an initial sales
charge or CDSC by various individuals and institutions or by investors who
reinvest certain distributions and proceeds within 365 days. Certain investors
also may buy Class C shares without an initial sales charge. The CDSC for each
class may be waived for certain redemptions and distributions. If you would like
information about available sales charge waivers, call your investment
representative or call Shareholder Services at 1-800/632-2301. A list of
available sales charge waivers also may be found in the Statement of Additional
Information (SAI).
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors to
invest as a group. For sales charge purposes, the group's investments are added
together. There are certain other requirements and the group must have a purpose
other than buying Fund shares at a discount.
[Insert graphic of paper with lines and someone writing] BUYING SHARES
MINIMUM INVESTMENTS
INITIAL ADDITIONAL
--------------------------------------------------------------------------
REGULAR ACCOUNTS $1,000 $50
--------------------------------------------------------------------------
AUTOMATIC INVESTMENT PLANS $50 $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
--------------------------------------------------------------------------
Please note that you may only buy shares of a fund eligible
for sale in your state or jurisdiction.
ACCOUNT APPLICATION If you are opening a new account, please complete and sign
the enclosed account application. Make sure you indicate the share class you
have chosen. If you do not indicate a class, we will place your purchase in
Class A shares. To save time, you can sign up now for services you may want on
your account by completing the appropriate sections of the application (see
"Investor Services" on page 23). For example, if you would like to link one of
your bank accounts to your Fund account so that you may use electronic fund
transfers to and from your bank account to buy and sell shares, please complete
the bank information section of the application. We will keep your bank
information on file for future purchases and redemptions.
BUYING SHARES
<TABLE>
<CAPTION>
------------------------------- ------------------------------------------- -------------------------------------------
<S> <C> <C>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
------------------------------- ------------------------------------------- -------------------------------------------
[Insert graphic of hands
shaking]
Contact your investment representative Contact your investment representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
------------------------------- ------------------------------------------- -------------------------------------------
[Insert graphic of phone] If you have another Franklin Templeton Before requesting a telephone purchase,
fund account with your bank account please make sure we have your bank
BY PHONE information on file, you may open a new account information on file. If we do not
account by phone. have this information, you will need to
(Up to $100,000 per day) send written instructions with your
To make a same day investment, please bank's name and address, a voided check
1-800/632-2301 call us by 1:00 p.m. Pacific time or the or savings account deposit slip, and a
close of the New York Stock Exchange, signature guarantee if the bank and Fund
whichever is earlier. accounts do not have at least one common
owner.
To make a same day investment, please
call us by 1:00 p.m. Pacific time or
the close of the New York Stock Exchange,
whichever is earlier.
------------------------------- ------------------------------------------- -------------------------------------------
Make your check payable to Franklin Make your check payable to Franklin
[Insert graphic of envelope] California Tax-Free Income Fund California Tax-Free Income Fund. Include
your account number on the check.
BY MAIL Mail the check and your signed
application to Investor Services. Fill out the deposit slip 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 three Call to receive a wire control number and Call to receive a wire control number and
lightning bolts] wire instructions. wire instructions.
Wire the funds and mail your signed To make a same day wire investment,
application to Investor Services. Please please call us by 1:00 p.m. Pacific time
BY WIRE include the wire control number or your and make sure your wire arrives by 3:00
new account number on the application. p.m.
1-800/632-2301
(or 1-650/312-2000 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 two arrows Call Shareholder Services at the number Call Shareholder Services at the number
pointing in opposite below, or send signed written below or our automated TeleFACTS system,
directions] instructions. The TeleFACTS system cannot or send signed written instructions.
be used to open a new account.
BY EXCHANGE
(Please see page 24 for information on (Please see page 24 for information on
exchanges.) exchanges.)
TeleFACTS(R)
1-800/247-1753
(around-the-clock access)
------------------------------- ------------------------------------------- -------------------------------------------
</TABLE>
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with a headset]
INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in
the Fund by automatically transferring money from your checking or savings
account each month to buy shares. To sign up, complete the appropriate section
of your account application and mail it to Investor Services. If you are opening
a new account, please include the minimum initial investment of $50 with your
application.
AUTOMATIC PAYROLL DEDUCTION You may invest in the Fund automatically by
transferring money from your paycheck to the Fund by electronic funds transfer.
If you are interested, indicate on your application that you would like to
receive an Automatic Payroll Deduction Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the Fund in
an existing account in the same share class* of the Fund or another Franklin
Templeton fund. Initial sales charges and CDSCs will not apply if you reinvest
your distributions within 365 days. You can also have your distributions
deposited in a bank account, or mailed by check. Deposits to a bank account may
be made by electronic funds transfer.
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
Fund.
*Class B and C shareholders may reinvest their distributions in Class A shares
of any Franklin Templeton money fund.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to buy,
sell or exchange your shares and make certain other changes to your account by
phone.
For accounts with more than one registered owner, telephone privileges also
allow the Fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions.
In addition, our telephone exchange privilege allows you to exchange shares by
phone from a fund account requiring two or more signatures into an identically
registered money fund account requiring only one signature for all transactions.
This type of telephone exchange is available as long as you have telephone
exchange privileges on your account.
As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests. Of course,
you can decline telephone purchase, exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton funds
within the same class*, generally without paying any additional sales charges.
If you exchange shares held for less than six months, however, you may be
charged the difference between the initial sales charge of the two funds if the
difference is more than 0.25%. If you exchange shares from a money fund, a sales
charge may apply no matter how long you have held the shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges, including minimum investment amounts. Exchanges also have the same
tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC will
continue to be calculated from the date of your initial investment and will not
be charged at the time of the exchange. The purchase price for determining a
CDSC on exchanged shares will be the price you paid for the original shares. If
you exchange shares subject to a CDSC into a Class A money fund, the time your
shares are held in the money fund will not count towards the CDSC holding
period.
If you exchange your Class B shares for the same class of shares of another
Franklin Templeton fund, the time your shares are held in that fund will count
towards the eight year period for automatic conversion to Class A shares.
Because excessive trading can hurt Fund performance, operations and
shareholders, the Fund, effective October 1, 2000, reserves the right to revise
or terminate the exchange privilege, limit the amount or number of exchanges,
reject any exchange, or restrict or refuse purchases if (i) the Fund or its
manager believes the Fund would be harmed or unable to invest effectively, or
(ii) the Fund receives or anticipates simultaneous orders that may significantly
affect the Fund (please see "Market Timers" on page 29).
*Class Z shareholders of Franklin Mutual Series Fund Inc. may exchange into
Class A without any sales charge. Advisor Class shareholders of another Franklin
Templeton fund also may exchange into Class A without any sales charge. Advisor
Class shareholders who exchange their shares for Class A shares and later decide
they would like to exchange into another fund that offers Advisor Class may do
so.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of a certificate]
SELLING SHARES
You can sell your shares at any time. Please keep in mind that a contingent
deferred sales charge (CDSC) may apply.
SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can be
made over the phone or with a simple letter. Sometimes, however, to protect you
and the Fund we will need written instructions signed by all registered owners,
with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a
signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of record,
or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the Fund
against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with a
check or draft, we may delay sending you the proceeds until your check or draft
has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days after
we receive your request in proper form. We are not able to receive or pay out
cash in the form of currency. Redemption proceeds may be delayed if we have not
yet received your signed account application.
SELLING SHARES
------------------------------------- ------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
------------------------------------- ------------------------------------------
[Insert graphic of hands shaking]
THROUGH YOUR INVESTMENT Contact your investment representative
REPRESENTATIVE
------------------------------------- ------------------------------------------
[Insert graphic of envelope] Send written instructions and endorsed
share certificates (if you hold share
certificates) to Investor Services.
BY MAIL Corporate, partnership 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 phone] As long as your transaction is for
$100,000 or less, you do not hold share
certificates and you have not changed
your address by
BY PHONE 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 three lightning You can call or write to have redemption
proceeds sent to a bank bolts] account. See the policies above for
selling shares by mail or phone.
Before requesting to have redemption
proceeds sent to a bank account, please
make sure we have your bank account
information on file If we do not have this
BY ELECTRONIC FUNDS TRANSFER (ACH) information, you will need to send
written instructions with your bank's
name and address, a voided check or
savings account deposit slip, and a
signature guarantee if the bank and Fund
accounts do not have at least one common
owner.
If we receive your request in proper form
by 1:00 p.m. Pacific time, proceeds sent
by ACH generally will be available within
two to three business days.
------------------------------------- ------------------------------------------
[Insert graphic of two arrows Obtain a current prospectus for the fund
pointing in opposite directions] you are considering.
Call Shareholder Services at the number
BY EXCHANGE below or our automated system, or send
signed written instructions. See the
policies above for selling shares by mail
or phone.
TeleFACTS(R)1-800/247-1753
(around-the-clock access) If you hold share certificates,
you will need to return them to the Fund
before your exchange can be processed.
------------------------------------- ------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen]
ACCOUNT POLICIES
CALCULATING SHARE PRICE The Fund calculates the net asset value per share (NAV)
each business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. Pacific time). Each class's NAV is calculated by dividing
its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the NAV
plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
The Fund's assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value.
Requests to buy and sell shares are processed at the NAV next calculated after
we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250 ($50
for employee and UGMA/UTMA accounts) because you sell some of your shares, we
may mail you a notice asking you to bring the account back up to its applicable
minimum investment amount. If you choose not to do so within 30 days, we may
close your account and mail the proceeds to the address of record. You will not
be charged a CDSC if your account is closed for this reason.
STATEMENTS AND REPORTS You will receive quarterly account statements that show
all your account transactions during the quarter. You also will receive written
notification after each transaction affecting your account (except for
distributions and transactions made through automatic investment or withdrawal
programs, which will be reported on your quarterly statement). You also will
receive the Fund's financial reports every six months. To reduce Fund expenses,
we try to identify related shareholders in a household and send only one copy of
the financial reports. If you need additional copies, please call 1-800/DIAL
BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive copies of all notifications and statements
and other information about your account directly from the Fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have an
agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with two or
more owners are registered as "joint tenants with rights of survivorship" (shown
as "Jt Ten" on your account statement). To make any ownership changes to a joint
account, all owners must agree in writing, regardless of the law in your state.
MARKET TIMERS The Fund may restrict or refuse exchanges by market timers. You
may be considered a Market Timer if you have (i) requested an exchange out of
any of the Franklin Templeton funds within two weeks of an earlier exchange
request out of any fund, or (ii) exchanged shares out of any of the Franklin
Templeton funds more than twice within a rolling 90 day period, or (iii)
otherwise seem to follow a market timing pattern that may adversely affect the
Fund. Accounts under common ownership or control with an account that is covered
by (i), (ii), or (iii) are also subject to these limits.
Anyone, including the shareholder or the shareholder's agent, who is considered
to be a Market Timer by the Fund, its manager or shareholder services agent,
will be issued a written notice of their status and the Fund's policies.
Identified Market Timers will be required to register with the market timing
desk of Franklin Templeton Investor Services, Inc., and to place all purchase
and exchange trade requests through the desk.
ADDITIONAL POLICIES Please note that the Fund maintains additional policies and
reserves certain rights, including:
o The Fund may restrict or refuse any order to buy shares, including any
purchase under the exchange privilege.
o At any time, the Fund may change its investment minimums or waive or lower
its minimums for certain purchases.
o The Fund may modify or discontinue the exchange privilege on 60 days'
notice.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the Fund reserves the right, in the
case of an emergency, to make payments in securities or other assets of the
Fund, if the payment of cash proceeds by check, wire or electronic funds
transfer would be harmful to existing shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the Fund promptly.
DEALER COMPENSATION Qualifying dealers who sell Fund shares may receive sales
commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. from sales charges, distribution and service (12b-1) fees and
its other resources.
CLASS A CLASS B CLASS C
--------------------------------------------------------------------------------
COMMISSION (%) - 3.00 2.00
Investment under $100,000 4.00 - -
$100,000 but under $250,000 3.25 - -
$250,000 but under $500,000 2.25 - -
$500,000 but under $1 million 1.85 - -
$1 million or more up to 0.75 1 - -
12B-1 FEE TO DEALER 0.10 0.15 2 0.65 3
A dealer commission of up to 1.0% may be paid on Class C NAV purchases. A dealer
commission of up to 0.25% may be paid on Class A NAV purchases by certain trust
companies and bank trust departments, eligible governmental authorities, and
broker-dealers or others on behalf of clients participating in comprehensive fee
programs.
MARKET TIMERS Please note that for Class A NAV purchases by market timers,
including purchases of $1 million or more, dealers are not eligible to receive
the dealer commission. Dealers, however, may be eligible to receive the 12b-1
fee from the date of purchase.
1. During the first year after purchase, dealers may not be eligible to receive
the 12b-1 fee.
2. Dealers may be eligible to receive up to 0.15% from the date of purchase.
After 8 years, Class B shares convert to Class A shares and dealers may then
receive the 12b-1 fee applicable to Class A.
3. Dealers may be eligible to receive up to 0.15% during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the 13th
month.
[Insert graphic of question mark]
QUESTIONS
If you have any questions about the Fund or your account, you can write to us at
P.O. Box 997151, Sacramento, CA 95899-9983. You 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 Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Advisor Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about the Fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and Fund strategies, financial
statements, detailed performance information, portfolio holdings and the
auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the Fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
franklintempleton.com
You also can obtain information about the Fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-202/942-8090) or the EDGAR Database
on the SEC's Internet site at http://www.sec.gov. You can obtain copies of this
information, after paying a duplicating fee, by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102 or by electronic request at the
following E-mail address: [email protected].
Investment Company Act file #811-2790 112 P 08/00
FRANKLIN
CALIFORNIA TAX-FREE
INCOME FUND
CLASS A, B & C
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 1, 2000
[Insert Franklin Templeton Ben Head]
P.O. BOX 997151, SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
-------------------------------------------------------------------------------
This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the Fund's prospectus.
The Fund's prospectus, dated August 1, 2000, which we may amend from time to
time, contains the basic information you should know before investing in the
Fund. You should read this SAI together with the Fund's prospectus.
The audited financial statements and auditor's report in the Fund's Annual
Report to Shareholders, for the fiscal year ended March 31, 2000, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call
1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goal and Strategies .................. 2
Risks ................................ 7
Officers and Directors ............... 9
Management and Other Services ........ 12
Portfolio Transactions ............... 13
Distributions and Taxes .............. 13
Organization, Voting Rights
and Principal Holders ............... 15
Buying and Selling Shares ............ 15
Pricing Shares ....................... 21
The Underwriter ...................... 21
Performance .......................... 23
Miscellaneous Information ............ 25
Description of Ratings ............... 26
-------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
-------------------------------------------------------------------------------
GOAL AND STRATEGIES
-------------------------------------------------------------------------------
The Fund's investment goal is to provide investors with as high a level of
income exempt from federal income taxes as is consistent with prudent
investment management and the preservation of shareholders' capital. This
goal is fundamental, which means that it may not be changed without
shareholder approval. Of course, there is no assurance that the Fund will
meet its goal. 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 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 qualifying municipal
securities issued by U.S. territories such as Guam, Puerto Rico, the Mariana
Islands or the U.S. Virgin 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
also may invest, if consistent with its investment goal and policies.
MUNICIPAL BONDS have two principal classifications: general obligation bonds
and revenue bonds.
GENERAL OBLIGATION BONDS. Issuers of general obligation bonds include states,
counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads. The basic
security behind general obligation bonds is the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest. The
taxes that can be levied for the payment of debt service may be limited or
unlimited as to the rate or amount of special assessments.
REVENUE BONDS. The full faith, credit and taxing power of the issuer do not
secure revenue bonds. Instead, the principal security for a revenue bond
generally is the net revenue derived from a particular facility, group of
facilities, or, in some cases, the proceeds of a special excise tax or other
specific revenue source. Revenue bonds are issued to finance a wide variety
of capital projects, including: electric, gas, water and sewer systems;
highways, bridges and tunnels; port and airport facilities; colleges and
universities; and hospitals. The principal security behind these bonds may
vary. For example, housing finance authorities have a wide range of security,
including partially or fully insured mortgages, rent subsidized and/or
collateralized mortgages, and/or the net revenues from housing or other
public projects. Many bonds provide additional security in the form of a debt
service reserve fund that may be used to make principal and interest
payments. Some authorities have further security in the form of state
assurances (although without obligation) to make up deficiencies in the debt
service reserve fund.
ANTICIPATION NOTES are issued to provide interim financing of various
municipal needs in anticipation of the receipt of other sources of money for
repayment of the notes:
BOND ANTICIPATION NOTES are normally issued to provide interim financing
until a long-term bond financing can be arranged which provides the money for
the repayment of the notes.
REVENUE ANTICIPATION NOTES are issued in expectation of the receipt of
revenue sources, other than tax receipts, such as federal revenues available
under the Federal Revenue Sharing Program.
TAX ANTICIPATION NOTES are issued to finance the short-term working capital
needs of municipalities in anticipation of the receipt of various seasonal
tax revenues that are used to repay the notes. They are usually general
obligations of the issuer and are secured by the taxing power for the payment
of principal and interest.
CALLABLE BONDS The Fund may invest in callable bonds, which allow the issuer
to repay some or all of the bonds ahead of schedule. If a bond is called, the
Fund will receive the principal amount, the accrued interest, and may receive
a small additional payment as a call premium. The manager may sell a callable
bond before its call date, if it believes the bond is at its maximum premium
potential. When pricing callable bonds, the call feature is factored into the
price of the bonds and may impact the Fund's net asset value.
An issuer is more likely to call its bonds when interest rates are below the
rate at which the original bond was issued, because the issuer can issue new
bonds with lower interest payments. If a bond is called, the Fund may have to
replace it with a lower-yielding security. A call of some or all of these
securities may lower the Fund's income, its yield and its distributions to
shareholders. If the Fund originally paid a premium for the bond because it
had appreciated in value from its original issue price, the Fund also may not
be able to recover the full amount it paid for the bond. One way for the Fund
to protect itself from call risk is to buy bonds with call protection. Call
protection is an assurance that the bond will not be called for a specific
time period, typically five to 10 years from when the bond is issued.
COMMERCIAL PAPER is a promissory note issued by a corporation to finance its
short-term credit needs. The Fund may invest in taxable commercial paper only
for temporary defensive purposes.
CONVERTIBLE AND STEP COUPON BONDS The Fund may invest a portion of its assets
in convertible and step coupon bonds. Convertible bonds are zero-coupon
securities until a predetermined date, at which time they convert to a
specified coupon security. The coupon on step coupon bonds changes
periodically during the life of the security based on predetermined dates
chosen when the security is issued.
ESCROW-SECURED OR DEFEASED BONDS are created when an issuer uses the proceeds
from a new bond issue to buy high grade, interest-bearing debt securities,
generally direct obligations of the U.S. government in order to redeem (or
pre-refund), before maturity, an outstanding bond issue that is not
immediately callable. These securities are then deposited in an irrevocable
escrow account held by a trustee bank to secure all future payments of
principal and interest on the pre-refunded bond (or "defeased" bond).
Escrow-secured bonds often receive a triple A or equivalent rating. Because
pre-refunded bonds still bear the same interest rate, but have a very high
credit quality, their price may increase. However, as the original bond
approaches its call date, the bond's price will fall to its call price. The
Fund's manager attempts to manage the pre-refunded bonds in its portfolio so
that it sells them before this decline in price occurs.
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 property owner's continuing ability to
pay the real estate taxes. Various factors could negatively affect this
ability including a declining economy or the real estate market in
California.
MUNICIPAL LEASE OBLIGATIONS are created to finance the purchase of property
for public use. The property is then leased to the state or a local
government and these leases secure the Municipal lease obligations. The lease
payments are used to pay the interest on the obligations. However, Municipal
lease obligations differ from other municipal securities because each year
the lessee's governing body must appropriate (set aside) the money to make
the lease payments. If the money is not appropriated, the issuer or the
lessee can end the lease without penalty. If the lease is cancelled,
investors who own the municipal lease obligations may not be paid.
The board of directors reviews the Fund's municipal lease obligations to try
to assure that they are liquid investments based on various factors reviewed
by the Fund's manager. 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 municipal lease securities in which it may invest.
STRIPPED MUNICIPAL SECURITIES Municipal securities may be sold in "stripped"
form. Stripped municipal securities represent separate ownership of principal
and interest payments on municipal securities.
TAX-EXEMPT COMMERCIAL PAPER typically represents a short-term obligation (270
days or less) issued by a municipality to meet working capital needs.
TAX-EXEMPT INDUSTRIAL DEVELOPMENT REVENUE BONDS are issued by or on behalf of
public authorities to finance various privately operated facilities which are
expected to benefit the municipality and its residents, such as business,
manufacturing, housing, sports and pollution control, as well as public
facilities such as airports, mass transit systems, ports and parking. The
payment of principal and interest is solely dependent on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of
the facility or other property as security for payment.
U.S. GOVERNMENT SECURITIES are issued by the U.S. Treasury or by agencies and
instrumentalities of the U.S. government and are backed by the full faith and
credit of the U.S. government. They include Treasury bills, notes and bonds.
VARIABLE OR FLOATING RATE SECURITIES The Fund may invest in variable or
floating rate securities, including variable rate demand notes, which have
interest rates that change either at specific intervals (variable rate), from
daily up to monthly, or whenever a benchmark rate changes (floating rate).
The interest rate adjustments are designed to help stabilize the security's
price. While this feature helps protect against a decline in the security's
market price when interest rates rise, it lowers the Fund's income when
interest rates fall. Of course, the Fund's income from its variable rate
investments also may increase if interest rates rise.
Variable or floating rate securities may include a demand feature, which may
be unconditional. The demand feature allows the holder to demand prepayment
of the principal amount before maturity, generally on one to 30 days' notice.
The holder receives the principal amount plus any accrued interest either
from the issuer or by drawing on a bank letter of credit, a guarantee or
insurance issued with respect to the security. The Fund generally uses
variable or floating rate securities as short-term investments while waiting
for long-term investment opportunities.
ZERO-COUPON AND DELAYED INTEREST SECURITIES The Fund may invest in
zero-coupon and delayed interest securities. Zero-coupon securities make no
periodic interest payments, but are sold at a deep discount from their face
value. The buyer recognizes a rate of return determined by the gradual
appreciation of the security, which is redeemed at face value on a specified
maturity date. The discount varies depending on the time remaining until
maturity, as well as market interest rates, liquidity of the security, and
the issuer's perceived credit quality. The discount, in the absence of
financial difficulties of the issuer, typically decreases as the final
maturity date approaches. If the issuer defaults, the Fund may not receive
any return on its investment.
Because zero-coupon securities bear no interest and compound semiannually at
the rate fixed at the time of issuance, their value generally is more
volatile than the value of other fixed-income securities. Since zero-coupon
bondholders do not receive interest payments, when interest rates rise,
zero-coupon securities fall more dramatically in value than bonds paying
interest on a current basis. When interest rates fall, zero-coupon securities
rise more rapidly in value because the bonds reflect a fixed rate of return.
An investment in zero-coupon and delayed interest securities may cause the
Fund to recognize income and make distributions to shareholders before it
receives any cash payments on its investment. To generate cash to satisfy
distribution requirements, the Fund may have to sell portfolio securities
that it otherwise would have continued to hold or to use cash flows from
other sources such as the sale of Fund shares.
In addition to standard purchases and sales of various municipal securities,
the Fund may also engage in other strategies, which are described below.
Should other strategies, not specifically described below, become available
or attractive, the manager may engage in them so long as they are consistent
with the Fund's goals and objectives.
CREDIT QUALITY All things being equal, the lower a security's credit quality,
the higher the risk and the higher the yield the security generally must pay
as compensation to investors for the higher risk.
A security's credit quality depends on the issuer's ability to pay interest
on the security and, ultimately, to repay the principal. Independent rating
agencies, such as Fitch Investors Service Inc. (Fitch), Moody's Investors
Service, Inc. (Moody's), and Standard & Poor's Ratings Group (S&P(R)), often
rate municipal securities based on their analysis of the issuer's credit
quality. Most rating agencies use a descending alphabet scale to rate
long-term securities, and a descending numerical scale to rate short-term
securities. Securities in the top four ratings are "investment grade,"
although securities in the fourth highest rating may have some speculative
features. These ratings are described at the end of this SAI under
"Description of Ratings."
An insurance company, bank or other foreign or domestic entity may provide
credit support for a municipal security and enhance its credit quality. For
example, some municipal securities are insured, which means they are covered
by an insurance policy that guarantees the timely payment of principal and
interest. Other municipal securities may be backed by letters of credit,
guarantees, or escrow or trust accounts that contain securities backed by the
full faith and credit of the U.S. government to secure the payment of
principal and interest.
As discussed in the prospectus, the Fund has limitations on the credit
quality of the securities it may buy. These limitations generally are applied
when the Fund makes an investment so that the Fund is not required to sell a
security because of a later change in circumstances.
In addition to considering ratings in its selection of the Fund's portfolio
securities, the manager may consider, among other things, information about
the financial history and condition of the issuer, revenue and expense
prospects and, in the case of revenue bonds, the financial history and
condition of the source of revenue to service the bonds. Securities that
depend on the credit of the U.S. government are regarded as having a triple A
or equivalent rating.
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 investment issued or guaranteed by the U.S. government or its
instrumentalities. For this purpose, each political subdivision, agency, or
instrumentality, each multi-state agency of which a state is a member, and
each public authority that issues private activity bonds on behalf of a
private entity, is considered a separate issuer. Escrow-secured or defeased
bonds are not generally considered an obligation of the original municipality
when determining diversification. For securities backed only by the assets or
revenues of a particular instrumentality, facility or subdivision, the entity
is considered the issuer.
The Fund intends to meet certain diversification requirements for tax
purposes. Generally, to meet federal tax requirements at the close of each
quarter, the Fund may not invest more than 25% of its total assets in any one
issuer and, with respect to 50% of total assets, may not invest more than 5%
of its total assets in any one issuer. These limitations do not apply to U.S.
government securities and may be revised if applicable federal income tax
requirements are revised.
ILLIQUID INVESTMENTS The Fund may invest up to 10% of its net assets in
illiquid securities. Illiquid securities generally are securities that cannot
be sold within seven days in the normal course of business at approximately
the amount at which the Fund has valued them.
MATURITY Municipal securities are issued with a specific maturity date - the
date when the issuer must repay the amount borrowed. Maturities typically
range from the less than one-year (short term) to 30 years (long term). In
general, securities with longer maturities are more sensitive to price
changes, although they may provide higher yields. The Fund has no
restrictions on the maturity of the securities it may buy or on its average
portfolio maturity.
PORTFOLIO TURNOVER The frequency of portfolio transactions, usually referred
to as the portfolio turnover rate, varies for the Fund from year to year,
depending on market conditions. Short-term trading increases portfolio
turnover and may increase costs. However, the execution costs for municipal
securities are substantially less than for equivalent dollar values of equity
securities.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unusual or unfavorable for investors, the manager may invest up to 100%
of the Fund's assets in a temporary defensive manner or hold a substantial
portion of its portfolio in cash, cash equivalents or other high quality
short-term investments. Unfavorable market or economic conditions may include
excessive volatility or a prolonged general decline in the securities
markets, the securities in which the Fund normally invests, or the economies
of the state and territories where the Fund invests.
Temporary defensive investments may include 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, the Mariana Islands or the U.S. Virgin Islands. The manager
also may invest in these types of securities or hold cash when securities
meeting the Fund's investment criteria are unavailable or to maintain
liquidity.
WHEN-ISSUED TRANSACTIONS Municipal securities are frequently offered on a
"when-issued" basis. When so offered, the price, which is generally expressed
in yield terms, is fixed at the time the commitment to buy is made, but
delivery and payment take place at a later date. During the time between
purchase and settlement, no payment is made by the Fund to the issuer and no
interest accrues to the Fund. If the other party to the transaction fails to
deliver or pay for the security, the Fund could miss a favorable price or
yield opportunity, or could experience a loss.
When the Fund makes the commitment to buy a municipal security on a
when-issued basis, it records the transaction and includes the value of the
security in the calculation of its net asset value. The Fund does not believe
that its net asset value or income will be negatively affected by its
purchase of municipal securities on a when-issued basis. The Fund will not
engage in when-issued transactions for investment leverage purposes.
Although the Fund generally will buy municipal securities on a when-issued
basis with the intention of acquiring the securities, it may sell the
securities before the settlement date if it is considered advisable. When the
Fund is the buyer, it will set aside on its books cash or liquid securities,
with an aggregate value equal to the amount of its purchase commitments,
until payment is made. If assets of the Fund are held in cash pending the
settlement of a purchase of securities, the Fund will not earn income on
those assets.
INVESTMENT RESTRICTIONS The Fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the Fund's outstanding shares or (ii) 67% or
more of the Fund's shares present at a shareholder meeting if more than 50%
of the Fund's outstanding shares are represented at the meeting in person or
by proxy, whichever is less.
The Fund may not:
1. Borrow money or mortgage or pledge any of its assets, except that
borrowings for temporary or emergency purposes may be made in an amount up to
5% of the total asset value.
2. Buy any securities on "margin" or sell any securities "short."
3. Lend any 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 Franklin Templeton 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 trying to
maximize the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the Fund makes an investment. In most cases, the Fund
is not required to sell a security because circumstances change and the
security no longer meets one or more of the Fund's policies or restrictions.
If a percentage restriction or limitation is met at the time of investment, a
later increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities will not be considered a violation of the
restriction or limitation.
RISKS
-------------------------------------------------------------------------------
In addition to the risk factors discussed in the prospectus, the following
risks should be considered.
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 municipal 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 retain 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 this recession resulted from
cutbacks in defense spending and from 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 construction, entertainment, tourism and computer services sectors. The
state's diverse employment base has reached prerecession levels with
manufacturing accounting for 13.8% of employment (based on 1999 state
figures), trade 22.8%, services 31.3%, and government 16.0%. As a result of
strong employment growth, California's unemployment rate (5.2% for 1999) has
improved substantially since the recessionary years. However, it still
remains 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. However this
hasn't markedly affected the state's overall growth due to growth in
services, construction and tourism. A 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 1999, general fund balances were a positive $2.3
billion or 4.4% of expenditures on a GAAP basis. The state is predicting a
$12 billion surplus for FY00 which ends 6/30/00.
The state has experienced strong growth in personal income. In 1999,
personal income grew 6.6%. The state is projecting 5.4% growth in 2000, but
S&P thinks that is somewhat conservative given 1999 results. Over the last
twenty years, the state's personal income as compared to the nation has lost
ground. The state's personal income was 118% of the national level in 1980
and has dropped to 104% as of 1999. The level seems to have stabilized at
104%.
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 1999, debt per capita
had risen to $654, above the $540 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.
In August 1999, S&P raised the state's general obligation bond rating to AA-
from A+ and, in February 2000, Fitch raised the state's rating to AA from
AA-. Moody's currently has a positive outlook on the state's bond rating.
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.
PUERTO RICO. In recent years, Puerto Rico's financial performance has
improved. Overall, as of March 2000, Moody's considered Puerto Rico's outlook
to be positive. Relatively strong revenue growth and more aggressive tax
collection procedures resulted in a general fund surplus for fiscal 1999
(audited) of $497 million, including an unreserved balance of $185.4 million.
Between fiscal years 1993 and 1999, Puerto Rico has experienced a 4.3% drop
in the unemployment rate, a 54% increase in hotel registrations, a 31% in
retail sales, a 76% increase in exports, and a 22% decrease in welfare
recipients.
While Puerto Rico's debt per capita levels are at the higher end of the
spectrum compared to American states that is partly explained by the fact
that Puerto Rico generally centralizes its debt issuance at the state level.
Going forward, these debt levels may increase as Puerto Rico attempts to
finance significant capital and infrastructure improvements. Puerto Rico also
will need to address its large unfunded pension liability of more than $6
billion. S&P rates Puerto Rico's general obligation debt at A, with a stable
outlook.
Puerto Rico also faces challenges from 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 are being 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. In the fifth year of this phase-out period,
business continues to show interest in Puerto Rico as manufacturing and
services/commerce continue to represent the largest sector of employment.
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.
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 1.8% 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. For fiscal 1998, however,
Guam incurred a $21 million deficit and ended the year with a negative
unreserved general fund balance of $158.9 million. Another deficit is
expected in 1999.
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, as of May 18, 2000, S&P's outlook for Guam was negative due to
Guam's continued weak financial position and inability to meet the goals of
the financial plan.
MARIANA ISLANDS. The Mariana Islands became a U.S. territory 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 emigrated 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 $2.575 billion in 1997. By
sector, the breakdown was garment manufacturing 33%, tourism 23%, retail
trade 18%, services 17% and other 9%. Gross business revenue tax collections
totaled $68.6 million in fiscal year 1998. Also in fiscal year 1998, general
fund revenues totaled $234 million while expenditures totaled $238 million.
The population of all the islands combined was 67,212 at fiscal year end 1996
and average earnings per capita totaled $9,702. At fiscal year end 1995, the
most recent year available, unemployment among eligible labor force
participants stood at 2.3%.
U.S. VIRGIN ISLANDS. The U.S. Virgin Islands has suffered numerous years of
budget imbalances. Since fiscal 1989, the Virgin Islands has incurred budget
deficits in all but four fiscal years. As of June 30, 1999, the accumulated
deficit was close to $341 million. To help finance this deficit, the
government issued a $300 million bond, which allowed it to meet a $13 million
payroll payment and to begin to pay off the backlog of payments to vendors.
The Virgin Islands' large public sector payroll (approximately 32.8% of
employment), relatively small private sector that is dependent on tourism and
related services (21% of employment), and heavy reliance on taxes as a
revenue source (close to 97% of all revenues), together with the effects of
three major hurricanes in the past ten years, have contributed to its
financial problems.
The U.S. Virgin Islands are not experiencing the record economic boom that
the mainland is. In 1999, employment decreased 1.7% following two years of
minimal growth. The unemployment rate for 1999 was 4.8%, which is the lowest
level since 1993. The Virgin Islands are highly dependent on tourism, which
contracted in 1999. While the islands have experienced an increase in hotel
occupancy, the majority of visitors come via cruise ships. The number of
cruse ship passengers decreased 12% in 1999, which resulted in an overall
decline of 8% for the year. A significant reason for the decrease in cruise
ships was due to the damage suffered to the docks from recent hurricanes.
After Hurricane Jose in October 1999, only 39 ships were able to dock in
October compared to 65 in October 1998.
In September 1998, the Department of Interior Office of Inspector General
issued an audit report on the Virgin Islands. It noted that while the Virgin
Islands had made improvements in its financial situation, problems remained
in the areas of overall financial management, expenditure control and revenue
collections. To help improve its financial position, the Virgin Islands has
developed a five-year economic recovery plan. Central to this plan is a
reduction in government spending. In June 1999, the governor implemented a
strict hiring freeze and mandated a 5% reduction in personnel expenditures
each year through fiscal 2004, a 50% reduction in overtime expenses, and
various other cost saving initiatives. In October, the government and the
Department of Interior entered into a Memorandum of Understanding stipulating
that federal grants will be awarded contingent on several financial
performance and accountability standards being met that will demonstrate
improvement in the economic and financial condition of the islands. Since the
plan is new, it is not yet certain whether or to what extent the plan will be
successful in helping the Virgin Islands improve its financial condition.
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 (68)
191 Clapboard Ridge Road, Greenwich, CT 06830
DIRECTOR
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 48 of the
investment companies in Franklin Templeton Investments; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers) (until 1998).
S. Joseph Fortunato (68)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
DIRECTOR
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or
trustee, as the case may be, of 50 of the investment companies in Franklin
Templeton Investments.
Edith E. Holiday (48)
3239 38th Street, N.W., Washington, DC 20016
DIRECTOR
Director, Amerada Hess Corporation (exploration and refining of oil and gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present), H.J.
Heinz Company (processed foods and allied products) (1994-present) and RTI
International Metals, Inc. (manufacture and distribution of titanium) (July
1999-present); director or trustee, as the case may be, of 25 of the
investment companies in Franklin Templeton Investments; and FORMERLY,
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 (67)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND DIRECTOR
Chairman of the Board, Chief Executive Officer, Member - Office of the
Chairman and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Investment Advisory Services, Inc.; Chairman of the Board,
Franklin Advisers, Inc.; Vice President, Franklin Templeton Distributors,
Inc.; Director, Franklin/Templeton Investor Services, Inc. and Franklin
Templeton Services, Inc.; officer and/or director or trustee, as the case may
be, of most of the other subsidiaries of Franklin Resources, Inc. and of 49
of the investment companies in Franklin Templeton Investments.
*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND DIRECTOR
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Executive Vice President and Director, Franklin Templeton
Distributors, Inc.; Director, Franklin Advisers, Inc., Franklin Investment
Advisory Services, Inc. and Franklin/Templeton Investor Services, Inc.;
Senior Vice President, Franklin Advisory Services, LLC; and officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 52 of the investment companies in Franklin
Templeton Investments.
Gordon S. Macklin (72)
8212 Burning Tree Road, Bethesda, MD 20817
DIRECTOR
Director, Martek Biosciences Corporation, MCI WorldCom, Inc. (information
services), MedImmune, Inc. (biotechnology), Overstock.com (internet
services), White Mountains Insurance Group, Ltd. (holding company) and
Spacehab, Inc. (aerospace services); director or trustee, as the case may be,
of 48 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Chairman, White River Corporation (financial services) (until 1998)
and Hambrecht & Quist Group (investment banking) (until 1992), and President,
National Association of Securities Dealers, Inc. (until 1987).
Sheila Amoroso (40)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the
investment companies in Franklin Templeton Investments.
Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Executive Vice President and Director, Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.;
Director, Franklin Investment Advisory Services, Inc., Franklin/Templeton
Investor Services, Inc. and Franklin Templeton Services, Inc.; and officer
and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 52 of the investment
companies in Franklin Templeton Investments.
Rafael R. Costas, Jr. (35)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the
investment companies in Franklin Templeton Investments.
Martin L. Flanagan (40)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
President, Member - Office of the President, Chief Financial Officer and
Chief Operating Officer, Franklin Resources, Inc.; Senior Vice President,
Chief Financial Officer and Director, Franklin/Templeton Investor Services,
Inc.; Senior Vice President and Chief Financial Officer, Franklin Mutual
Advisers, LLC; Executive Vice President, Chief Financial Officer and
Director, Templeton Worldwide, Inc.; Executive Vice President, Chief
Operating Officer and Director, Templeton Investment Counsel, Inc.; Executive
Vice President and Chief Financial Officer, Franklin Advisers, Inc.; Chief
Financial Officer, Franklin Advisory Services, LLC and Franklin Investment
Advisory Services, Inc.; Chairman and Director, Franklin Templeton Services,
Inc.; officer and/or director of some of the other subsidiaries of Franklin
Resources, Inc.; and officer and/or director or trustee, as the case may be,
of 52 of the investment companies in Franklin Templeton Investments.
David P. Goss (53)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Counsel, Franklin Resources, Inc.; President, Chief Executive Officer and
Director, Franklin Select Realty Trust, Property Resources, Inc., Property
Resources Equity Trust, Franklin Real Estate Management, Inc. and Franklin
Properties, Inc.; officer and director of some of the other subsidiaries of
Franklin Resources, Inc.; officer of 53 of the investment companies in
Franklin Templeton Investments; and FORMERLY, President, Chief Executive
Officer and Director, Franklin Real Estate Income Fund and Franklin Advantage
Real Estate Income Fund (until 1996).
Barbara J. Green (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior
Vice President, Templeton Worldwide, Inc. and Templeton Global Investors,
Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc.
and of 53 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Deputy Director, Division of Investment Management, Executive
Assistant and Senior Advisor to the Chairman, Counselor to the Chairman,
Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission
(1986-1995), Attorney, Rogers & Wells (until 1986), and Judicial Clerk, U.S.
District Court (District of Massachusetts) (until 1979).
Kimberley Monasterio (36)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 33
of the investment companies in Franklin Templeton Investments.
Murray L. Simpson (63)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND SECRETARY
Executive Vice President and General Counsel, Franklin Resources, Inc.;
officer and/or director of some of the subsidiaries of Franklin Resources,
Inc.; officer of 53 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Chief Executive Officer and Managing Director,
Templeton Franklin Investment Services (Asia) Limited (until January 2000)
and Director, Templeton Asset Management Ltd. (until 1999).
Thomas Walsh (38)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President, Franklin Advisers, Inc.; and officer of eight of the
investment companies in Franklin Templeton Investments.
*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 $1,345 per
meeting attended. Noninterested board members also may serve as directors or
trustees of other funds in Franklin Templeton Investments and may receive
fees from these funds for their services. The fees payable to noninterested
board members by the Fund are subject to reductions resulting from fee caps
limiting the amount of fees payable to board members who serve on other
boards within Franklin Templeton Investments. The following table provides
the total fees paid to noninterested board members by the Fund and by
Franklin Templeton Investments.
NUMBER OF
BOARDS IN
TOTAL FEES FRANKLIN
TOTAL FEES RECEIVED FROM TEMPLETON
RECEIVED FRANKLIN INVESTMENTS
FROM THE TEMPLETON ON WHICH
NAME FUND INVESTMENTS EACH
($) 1 ($) 2 SERVES 3
-------------------------------------------------------------------
Harris J. Ashton 24,726 363,165 48
S. Joseph Fortunato 23,033 363,238 50
Edith E. Holiday 31,055 237,265 25
Gordon S. Macklin 24,726 363,165 48
1. For the fiscal year ended March 31, 2000.
2. For the calendar year ended December 31, 1999.
3. We base the number of boards on the number of registered investment
companies in Franklin Templeton Investments. This number does not include the
total number of series or funds within each investment company for which the
board members are responsible. Franklin Templeton Investments currently
includes 52 registered investment companies, with approximately 157 U.S.
based funds or series.
Noninterested board members are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in
Franklin Templeton Investments for which they serve as director or trustee.
No officer or board member received any other compensation, including pension
or retirement benefits, directly or indirectly from the Fund or other funds
in Franklin Templeton Investments. Certain officers or board members who are
shareholders of Franklin Resources, Inc. may be deemed to receive indirect
remuneration by virtue of their participation, if any, in the fees paid to
its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in Franklin Templeton Investments, as
is consistent with their individual financial goals. In February 1998, this
policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee
of a Templeton fund in shares of one or more Templeton funds and one-third of
fees received for serving as a director or trustee of a Franklin fund in
shares of one or more Franklin funds until the value of such investments
equals or exceeds five times the annual fees paid such board member.
Investments in the name of family members or entities controlled by a board
member constitute fund holdings of such board member for purposes of this
policy, and a three year phase-in period applies to such investment
requirements for newly elected board members. In implementing such policy, a
board member's fund holdings existing on February 27, 1998, are valued as of
such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
-------------------------------------------------------------------------------
MANAGER AND SERVICES PROVIDED The Fund's manager is Franklin Advisers, Inc.
The manager is a wholly owned subsidiary of Franklin Resources, Inc.
(Resources), a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson,
Jr. are the principal shareholders of Resources.
The manager provides investment research and portfolio management services,
and selects the securities for the Fund to buy, hold or sell. The manager's
extensive research activities include, as appropriate, traveling to meet with
issuers and to review project sites. The manager also selects the brokers who
execute the Fund's portfolio transactions. The manager provides periodic
reports to the board, which reviews and supervises the manager's investment
activities. To protect the Fund, the manager and its officers, directors and
employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of
the other funds it manages, or for its own account, that may differ from
action taken by the manager on behalf of the Fund. Similarly, with respect to
the Fund, the manager is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that the manager
and access persons, as defined by applicable federal securities laws, may buy
or sell for its or their own account or for the accounts of any other fund.
The manager is not obligated to refrain from investing in securities held by
the Fund or other funds it manages.
The Fund, its manager and principal underwriter have each adopted a code of
ethics, as required by federal securities laws. Under the code of ethics,
employees who are designated as access persons may engage in personal
securities transactions, including transactions involving securities that are
being considered for the Fund or that are currently held by the Fund, subject
to certain general restrictions and procedures. The personal securities
transactions of access persons of the Fund, its manager and principal
underwriter will be governed by the code of ethics. The code of ethics is on
file with, and available from, the U.S. Securities and Exchange Commission
(SEC).
MANAGEMENT FEES The Fund pays the manager a fee equal to a monthly rate of:
o 5/96 of 1% of the value of net assets up to and including $100 million;
and
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 $20 billion.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of the
Fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended March 31, the Fund paid the following
management fees:
MANAGEMENT
FEES PAID ($)
------------------------------------------------------------------
2000 63,791,060
1999 69,665,022
1998 65,098,679
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the Fund. FT Services is wholly owned by
Resources and is an affiliate of the Fund's manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the Fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended March 31, the manager paid FT
Services the following administration fees:
ADMINISTRATION
FEES PAID ($)
------------------------------------------------------------------
2000 11,355,304
1999 12,319,201
1998 11,468,541
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is the Fund's shareholder servicing agent
and acts as the Fund's transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please
send all correspondence to Investor Services to P.O. Box 997151, Sacramento,
CA 95899-9983.
For its services, Investor Services receives a fixed fee per account. The
Fund also will reimburse Investor Services for certain out-of-pocket
expenses, which may include payments by Investor Services to entities,
including affiliated entities, that provide sub-shareholder services,
recordkeeping and/or transfer agency services to beneficial owners of the
Fund. The amount of reimbursements for these services per benefit plan
participant Fund account per year will not exceed the per account fee payable
by the Fund to Investor Services in connection with maintaining shareholder
accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the Fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the Fund's independent auditor. The auditor gives an opinion on the
financial statements included in the Fund's Annual Report to Shareholders and
reviews the Fund's registration statement filed with the SEC.
PORTFOLIO TRANSACTIONS
-------------------------------------------------------------------------------
Since most purchases by the Fund are principal transactions at net prices,
the Fund incurs little or no brokerage costs. The Fund deals directly with
the selling or buying principal or market maker without incurring charges for
the services of a broker on its behalf, unless it is determined that a better
price or execution may be obtained by using the services of a broker.
Purchases of portfolio securities from underwriters will include a commission
or concession paid by the issuer to the underwriter, and purchases from
dealers will include a spread between the bid and ask prices. As a general
rule, the Fund does not buy securities in underwritings where it is given no
choice, or only limited choice, in the designation of dealers to receive the
commission. The Fund seeks to obtain prompt execution of orders at the most
favorable net price. Transactions may be directed to dealers in return for
research and statistical information, as well as for special services
provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on
the research services the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions to
obtain additional research services allows the manager to supplement its own
research and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, the manager and its affiliates may use this
research and data in their investment advisory capacities with other clients.
If the Fund's officers are satisfied that the best execution is obtained, the
sale of Fund shares, as well as shares of other funds in Franklin Templeton
Investments, also may be considered a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
If purchases or sales of securities of the Fund and one or more other
investment companies or clients supervised by the manager are considered at
or about the same time, transactions in these securities will be allocated
among the several investment companies and clients in a manner deemed
equitable to all by the manager, taking into account the respective sizes of
the funds and the amount of securities to be purchased or sold. In some cases
this procedure could have a detrimental effect on the price or volume of the
security so far as the Fund is concerned. In other cases it is possible that
the ability to participate in volume transactions may improve execution and
reduce transaction costs to the Fund.
During the fiscal years ended March 31, 2000, 1999, and 1998, the Fund did
not pay any brokerage commissions.
As of March 31, 2000, the Fund did not own securities of its regular
broker-dealers.
DISTRIBUTIONS AND TAXES
-------------------------------------------------------------------------------
The Fund calculates dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally
due to the difference in the distribution and service (Rule 12b-1) fees of
each class. Distributions are subject to approval by the board. The Fund does
not pay "interest" or guarantee any fixed rate of return on an investment in
its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The Fund receives income generally in
the form of interest on its investments. This income, less expenses incurred
in the operation of the Fund, constitutes the Fund's net investment income
from which dividends may be paid to you.
By meeting certain requirements of the Internal Revenue Code (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 or its
political subdivisions, or from interest on qualifying U.S. territorial
obligations (including qualifying obligations of Puerto Rico, the U.S. Virgin
Islands or Guam), they also may be exempt California's personal income taxes.
California generally does not grant tax-free treatment to interest on state
and municipal securities of other states.
The Fund may earn taxable income from many sources, including on any
temporary investments, the discount from stripped obligations or their
coupons, income from securities loans or other taxable transactions, or
ordinary income derived from the sale of market discount bonds. Any
distributions by the Fund from such income will be taxable to you as ordinary
income, whether you receive them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The Fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the Fund. Any net capital gains realized by the Fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, to reduce or eliminate excise or income taxes on
the Fund.
Beginning in the year 2001 for shareholders in the 15% federal income tax
bracket (or in the year 2006 for shareholders in the 28% or higher bracket),
capital gain distributions from the Fund's sale of securities held for more
than five years may be subject to a reduced tax rate.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The Fund will inform you
of the amount of your ordinary income dividends and capital gain
distributions at the time they are paid, and will advise you of their tax
status for federal income tax purposes shortly after the close of each
calendar year, including the portion of the distributions that on average
comprise taxable income or interest income that is a tax preference item
under the alternative minimum tax. If you have not held Fund shares for a
full year, the Fund may designate and distribute to you, as taxable,
tax-exempt or tax preference income, a percentage of income that is not equal
to the actual amount of such income earned during the period of your
investment in the Fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The Fund has elected
to be treated as a regulated investment company under Subchapter M of the
Code. The Fund has qualified as a regulated investment company for its most
recent fiscal year, and intends to continue to qualify during the current
fiscal year. As a regulated investment company, the Fund generally pays no
federal income tax on the income and gains it distributes to you. The board
reserves the right not to maintain the qualification of the Fund as a
regulated investment company if it determines such course of action to be
beneficial to shareholders. In such case, the Fund will be subject to
federal, and possibly state, corporate taxes on its taxable income and gains,
and distributions to you will be taxed as ordinary dividend income to the
extent of the Fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Code
requires the Fund to distribute to you by December 31 of each year, at a
minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during
the twelve month period ending October 31; and 100% of any undistributed
amounts from the prior year. The Fund intends to declare and pay these
distributions in December (or to pay them in January, in which case you must
treat them as received in December) but can give no assurances that its
distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions (including redemptions in kind) and
exchanges of Fund shares are taxable transactions for federal and state
income tax purposes. If you redeem your Fund shares, or exchange your Fund
shares for shares of a different Franklin Templeton fund, the IRS will
require that you report any gain or loss on your redemption or exchange. If
you hold your shares as a capital asset, the gain or loss that you realize
will be capital gain or loss and will be long-term or short-term, generally
depending on how long you hold your shares.
Beginning in the year 2001 for shareholders in the 15% federal income tax
bracket (or in the year 2006 for shareholders in the 28% or higher bracket),
gain from the sale of Fund shares held for more than five years may be
subject to a reduced tax rate.
Any loss incurred on the redemption or exchange of shares held for six months
or less will be disallowed to the extent of any exempt-interest dividends
distributed to you with respect to your Fund shares, and any remaining loss
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by the Fund on those shares. All or a
portion of any loss that you realize upon the redemption of your Fund shares
will be disallowed to the extent that you buy other shares in the Fund
(through reinvestment of dividends or otherwise) within 30 days before or
after your share redemption. Any loss disallowed under these rules will be
added to your tax basis in the new shares you buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in the Fund, and
then reinvest the sales proceeds in the Fund or in another Franklin Templeton
fund within 90 days of buying the original shares, the sales charge that
would otherwise apply to your reinvestment may be reduced or eliminated. The
IRS will require you to report any gain or loss on the redemption of your
original shares in the Fund. In doing so, all or a portion of the sales
charge that you paid for your original shares in the Fund will be excluded
from your tax basis in the shares sold (for the purpose of determining gain
or loss upon the sale of such shares). The portion of the sales charge
excluded will equal the amount that the sales charge is reduced on your
reinvestment. Any portion of the sales charge excluded from your tax basis in
the shares sold will be added to the tax basis of the shares you acquire from
your reinvestment.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because the Fund's income is
derived primarily from interest rather than dividends, none of its
distributions will be eligible for the corporate dividends-received
deduction.
INVESTMENT IN COMPLEX SECURITIES The Fund may invest in complex securities,
including zero coupon and step-up bonds. These investments may be subject to
special tax rules that could accelerate the recognition of income to the Fund
(possibly causing the Fund to sell securities to raise the cash for necessary
distributions). These rules may affect the amount, timing or character of the
income distributed to you by the Fund.
TREATMENT OF PRIVATE ACTIVITY BOND INTEREST Interest on certain private
activity bonds, while exempt from regular federal income tax, is a preference
item for taxpayers when determining their alternative minimum tax under the
Code and under the income tax provisions of several states. Private activity
bond interest could subject you to or increase your liability under federal
and state alternative minimum taxes, depending on your individual or
corporate tax position. Persons who are defined in the Code as substantial
users (or persons related to such users) of facilities financed by private
activity bonds should consult with their tax advisors before buying Fund
shares.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
-------------------------------------------------------------------------------
The Fund is an open-end management investment company, commonly called a
mutual fund. The Fund was organized as a 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. 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 July 3, 2000, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each class.
The board members may own shares in other funds in Franklin Templeton
Investments.
BUYING AND SELLING SHARES
-------------------------------------------------------------------------------
The Fund continuously offers its shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer
orders and accounts with the Fund. This reference is for convenience only and
does not indicate a legal conclusion of capacity. Banks and financial
institutions that sell shares of the Fund may be required by state law to
register as securities dealers.
For investors outside the U.S., the offering of Fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the Fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the Fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank. We may deduct any applicable banking
charges imposed by the bank from your account.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the Fund we may impose a $10 charge against your account for each returned
item.
If you buy shares through the reinvestment of dividends, the shares will be
purchased at the net asset value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The
processing date for the reinvestment of dividends may vary and does not
affect the amount or value of the shares acquired.
INITIAL SALES CHARGES The maximum initial sales charge is 4.25% for Class A
and 1% for Class C. There is no initial sales charge for Class B.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in Franklin Templeton funds to take advantage of the
lower sales charges for large purchases. Franklin Templeton funds include the
U.S. registered mutual funds in Franklin Templeton Investments except
Franklin Templeton Variable Insurance Products Trust and Templeton Capital
Accumulator Fund, Inc.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in
Franklin Templeton funds. You also may combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you also may add any company accounts, including
retirement plan accounts.
LETTER OF INTENT (LOI). You may buy Class A shares at a reduced sales charge
by completing the letter of intent section of your account application. A
letter of intent is a commitment by you to invest a specified dollar amount
during a 13-month period. The amount you agree to invest determines the sales
charge you pay. By completing the letter of intent section of the
application, you acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase
in Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the Fund, you may buy Class A shares at the
sales charge applicable to the amount specified in your LOI. Sales charge
reductions based on purchases in more than one Franklin Templeton fund will
be effective only after notification to Distributors that the investment
qualifies for a discount. Any Class A purchases you made within 90 days
before you filed your LOI also may qualify for a retroactive reduction in the
sales charge. If you file your LOI with the Fund before a change in the
Fund's sales charge, you may complete the LOI at the lower of the new sales
charge or the sales charge in effect when the LOI was filed.
Your holdings in Franklin Templeton funds acquired more than 90 days before
you filed your LOI will be counted towards the completion of the LOI, but
they will not be entitled to a retroactive reduction in the sales charge. Any
redemptions you make during the 13 month period will be subtracted from the
amount of the purchases for purposes of determining whether the terms of the
LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of
your total purchases, less redemptions, is more than the amount specified in
your LOI and is an amount that would qualify for a further sales charge
reduction, a retroactive price adjustment will be made by Distributors and
the securities dealer through whom purchases were made. The price adjustment
will be made on purchases made within 90 days before and on those made after
you filed your LOI and will be applied towards the purchase of additional
shares at the offering price applicable to a single purchase or the dollar
amount of the total purchases.
If the amount of your total purchases, less redemptions, is less than the
amount specified in your LOI, the sales charge will be adjusted upward,
depending on the actual amount purchased (less redemptions) during the
period. You will need to send Distributors an amount equal to the difference
in the actual dollar amount of sales charge paid and the amount of sales
charge that would have applied to the total purchases if the total of the
purchases had been made at one time. Upon payment of this amount, the
reserved shares held for your account will be deposited to an account in your
name or delivered to you or as you direct. If within 20 days after written
request the difference in sales charge is not paid, we will redeem an
appropriate number of reserved shares to realize the difference. If you
redeem the total amount in your account before you fulfill your LOI, we will
deduct the additional sales charge due from the sale proceeds and forward the
balance to you.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class
A shares at a reduced sales charge that applies to the group as a whole. The
sales charge is based on the combined dollar value of the group members'
existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be
purchased without an initial sales charge or contingent deferred sales charge
(CDSC) by investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton
fund. The distributions generally must be reinvested in the same share
class. Certain exceptions apply, however, to Class C shareholders who chose
to reinvest their distributions in Class A shares of the Fund before
November 17, 1997, and to Advisor Class or Class Z shareholders of a
Franklin Templeton fund who may reinvest their distributions in the Fund's
Class A shares. This waiver category also applies to Class B and C shares.
o Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option
the Franklin Templeton Variable Insurance Products Trust. You should
contact your tax advisor for information on any tax consequences that may
apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating
Rate Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or
a Franklin Templeton money fund, you may reinvest them as described above.
The proceeds must be reinvested within 365 days from the date the CD
matures, including any rollover, or the date you redeem your money fund
shares.
o Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of Fund shares
and the CDSC holding period will begin again. We will, however, credit your
Fund account with additional shares based on the CDSC you previously paid
and the amount of the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without
an initial sales charge or CDSC by various individuals and institutions due
to anticipated economies in sales efforts and expenses, including:
o Trust companies and bank trust departments investing assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which
the trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We may accept orders for these accounts by telephone
or other means of electronic data transfer directly from the bank or trust
company, with payment by federal funds received by the close of business on
the next business day following the order.
o Any state or local government or any instrumentality, department,
authority or agency thereof that has determined the Fund is a legally
permissible investment and that can only buy Fund shares without paying
sales charges. Please consult your legal and investment advisors to
determine if an investment in the Fund is permissible and suitable for you
and the effect, if any, of payments by the Fund on arbitrage rebate
calculations.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o Officers, trustees, directors and full-time employees of Franklin
Templeton Investments, and their family members, consistent with our
then-current policies
o Any investor who is currently a Class Z shareholder of Franklin Mutual
Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31,
1996, or who sold his or her shares of Mutual Series Class Z within the
past 365 days
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by Franklin Templeton Investments
o Certain unit investment trusts and their holders reinvesting
distributions from the trusts
In addition, Class C shares may be purchased without an initial sales charge
by any investor who buys Class C shares through an omnibus account with
Merrill Lynch Pierce Fenner & Smith, Inc. A CDSC may apply, however, if the
shares are sold within 18 months of purchase.
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, the Fund's shares are available to these banks' trust accounts without
a sales charge. The banks may charge service fees to their customers who
participate in the trusts. A portion of these service fees may be paid to
Distributors or one of its affiliates to help defray expenses of maintaining
a service office in Taiwan, including expenses related to local literature
fulfillment and communication facilities.
The Fund's Class A shares may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class A
shares may be offered with the following schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE (%)
Under $30,000 3.0
$30,000 but less than $100,000 2.0
$100,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION Securities dealers may at times receive the entire sales
charge. A securities dealer who receives 90% or more of the sales charge may
be deemed an underwriter under the Securities Act of 1933, as amended.
Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated in the dealer compensation table
in the Fund's prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
shares of $1 million or more: 0.75% on sales of $1 million to $2 million,
plus 0.60% on sales over $2 million to $3 million, plus 0.50% on sales over
$3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million.
These breakpoints are reset every 12 months for purposes of additional
purchases.
In addition to the payments above, Distributors and/or its affiliates may
provide financial support to securities dealers that sell shares of Franklin
Templeton Investments. This support is based primarily on the amount of sales
of fund shares and/or total assets with Franklin Templeton Investments. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a securities dealer's sales and marketing
efforts in Franklin Templeton Investments; a securities dealer's support of,
and participation in, Distributors' marketing programs; a securities dealer's
compensation programs for its registered representatives; and the extent of a
securities dealer's marketing programs relating to Franklin Templeton
Investments. Financial support to securities dealers may be made by payments
from Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from
payments to Distributors under such plans. In addition, certain securities
dealers may receive brokerage commissions generated by fund portfolio
transactions in accordance with the rules of the National Association of
Securities Dealers, Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. Those who have shown an interest in Franklin
Templeton funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity
discount or letter of intent programs, a CDSC may apply on any shares you
sell within 12 months of purchase. For Class C shares, a CDSC may apply if
you sell your shares within 18 months of purchase. The CDSC is 1% of the
value of the shares sold or the net asset value at the time of purchase,
whichever is less.
For Class B shares, there is a CDSC if you sell your shares within six years,
as described in the table below. The charge is based on the value of the
shares sold or the net asset value at the time of purchase, whichever is less.
IF YOU SELL YOUR CLASS B SHARES WITHIN THIS % IS DEDUCTED
FROM
THIS MANY YEARS AFTER 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, declared but unpaid income dividends and capital gain distributions
will be reinvested in the Fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their Fund shares under the exchange privilege, the Fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money. If this
occurs, it is the Fund's general policy to initially invest this money in
short-term, tax-exempt municipal securities, unless it is believed that
attractive investment opportunities consistent with the Fund's investment
goal exist immediately. This money will then be withdrawn from the
short-term, tax-exempt municipal securities and invested in portfolio
securities in as orderly a manner as is possible when attractive investment
opportunities arise.
The proceeds from the sale of shares of an investment company generally are
not available until the seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh day. The sale of Fund shares to complete an exchange will
be effected at net asset value at the close of business on the day the
request for exchange is received in proper form.
SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell
your shares and receive regular payments from your account on a monthly,
quarterly, semiannual or annual basis. The value of your account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at
least $50. There are no service charges for establishing or maintaining a
systematic withdrawal plan.
Each month in which a payment is scheduled, we will redeem an equivalent
amount of shares in your account on the day of the month you have indicated
on your account application or, if no day is indicated, on the 20th day of
the month. If that day falls on a weekend or holiday, we will process the
redemption on the next business day. For plans set up before June 1, 2000, we
will continue to process redemptions on the 25th day of the month (or the
next business day) unless you instruct us to change the processing date.
Available processing dates currently are the 1st, 5th, 10th, 15th, 20th and
25th days of the month. When you sell your shares under a systematic
withdrawal plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold under the plan also
may be subject to a CDSC.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
Fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
To discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment, we must receive instructions
from you at least three business days before a scheduled payment. The Fund
may discontinue a systematic withdrawal plan by notifying you in writing and
will discontinue a systematic withdrawal plan automatically if all shares in
your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
REDEMPTIONS IN KIND The Fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the Fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the U.S. Securities
and Exchange Commission (SEC). In the case of redemption requests in excess
of these amounts, the board reserves the right to make payments in whole or
in part in securities or other assets of the Fund, in case of an emergency,
or if the payment of such a redemption in cash would be detrimental to the
existing shareholders of the Fund. In these circumstances, the securities
distributed would be valued at the price used to compute the Fund's net
assets and you may incur brokerage fees in converting the securities to cash.
The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
SHARE CERTIFICATES We will credit your shares to your Fund account. We do not
issue share certificates unless you specifically request them. This
eliminates the costly problem of replacing lost, stolen or destroyed
certificates. If a certificate is lost, stolen or destroyed, you may have to
pay an insurance premium of up to 2% of the value of the certificate to
replace it.
Any outstanding share certificates must be returned to the Fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to the Fund marked
"unable to forward" by the postal service, we will consider this a request by
you to change your dividend option to reinvest all distributions. The
proceeds will be reinvested in additional shares at net asset value until we
receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the Fund nor
its affiliates will be liable for any loss caused by your failure to cash
such checks. The Fund is not responsible for tracking down uncashed checks,
unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to
find you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.
Sending redemption proceeds by wire or electronic funds transfer (ACH) is a
special service that we make available whenever possible. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven-day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire or ACH is not processed as described in the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay
certain financial institutions that maintain omnibus accounts with the Fund
on behalf of numerous beneficial owners for recordkeeping operations
performed with respect to such owners. For each beneficial owner in the
omnibus account, the Fund may reimburse Investor Services an amount not to
exceed the per account fee that the Fund normally pays Investor Services.
These financial institutions also may charge a fee for their services
directly to their clients.
There are special procedures for banks and other institutions that wish to
open multiple accounts. An institution may open a single master account by
filing one application form with the Fund, signed by personnel authorized to
act for the institution. Individual sub-accounts may be opened when the
master account is opened by listing them on the application, or by providing
instructions to the Fund at a later date. These sub-accounts may be
registered either by name or number. The Fund's investment minimums apply to
each sub-account. The Fund will send confirmation and account statements for
the sub-accounts to the institution.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the Fund. If you sell shares
through your securities dealer, it is your dealer's responsibility to
transmit the order to the Fund in a timely fashion. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the Fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling Fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the Fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the Fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
notice of levy.
PRICING SHARES
-------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the
net asset value (NAV) per share plus any applicable sales charge, calculated
to two decimal places using standard rounding criteria. When you sell shares,
you receive the NAV minus any applicable CDSC.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of
shares outstanding.
The Fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. Pacific
time). The Fund does not calculate the NAV on days the New York Stock
Exchange (NYSE) is closed for trading, which include New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the Fund values cash and receivables at their
realizable amounts, and records interest as accrued. The Fund values
over-the-counter portfolio securities within the range of the most recent
quoted bid and ask prices. If portfolio securities trade both in the
over-the-counter market and on a stock exchange, the Fund values them
according to the broadest and most representative market as determined by the
manager.
Municipal securities generally trade in the over-the-counter market
rather than on a securities exchange. In the absence of a sale or reported
bid and ask prices, information with respect to bond and note transactions,
quotations from bond dealers, market transactions in comparable securities,
and various relationships between securities are used to determine the value
of municipal securities.
Generally, trading in U.S. government securities and money market instruments
is substantially completed each day at various times before the close of the
NYSE. The value of these securities used in computing the NAV is determined
as of such times. Occasionally, events affecting the values of these
securities may occur between the times at which they are determined and the
close of the NYSE that will not be reflected in the computation
of the NAV. If events materially affecting the values of these securities
occur during this period, the securities will be valued at their fair value
as determined in good faith by the board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the board. With the approval of
the board, the Fund may use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
-------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the Fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The Fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the Fund's shares, the net
underwriting discounts and commissions Distributors retained after allowances
to dealers, and the amounts Distributors received in connection with
redemptions or repurchases of shares for the last three fiscal years ended
March 31:
AMOUNT
RECEIVED IN
CONNECTION
WITH
TOTAL AMOUNT REDEMPTIONS
COMMISSIONS RETAINED BY AND
RECEIVED DISTRIBUTORS REPURCHASES
($) ($) ($)
------------------------------------------------------------
2000 14,615,887 926,518 1,110,191
1999 33,783,661 2,253,176 378,970
1998 36,199,627 2,357,899 66,364
Distributors may be entitled to payments from the Fund under the Rule 12b-1
plans, as discussed below. Except as noted, Distributors received no other
compensation from the Fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES The board has adopted a separate plan
pursuant to Rule 12b-1 for each class. Although the plans differ in some ways
for each class, each plan is designed to benefit the Fund and its
shareholders. The plans are expected to, among other things, increase
advertising of the Fund, encourage sales of the Fund and service to its
shareholders, and increase or maintain assets of the Fund so that certain
fixed expenses may be spread over a broader asset base, resulting in lower
per share expense ratios. In addition, a positive cash flow into the Fund is
useful in managing the Fund because the manager has more flexibility in
taking advantage of new investment opportunities and handling shareholder
redemptions.
Under each plan, the Fund pays Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses also may include service fees paid to securities dealers or others
who have executed a servicing agreement with the Fund, Distributors or its
affiliates and who provide service or account maintenance to shareholders
(service fees); the expenses of printing prospectuses and reports used for
sales purposes, and of preparing and distributing sales literature and
advertisements; and a prorated portion of Distributors' overhead expenses
related to these activities. Together, these expenses, including the service
fees, are "eligible expenses." The 12b-1 fees charged to each class are based
only on the fees attributable to that particular class.
THE CLASS A PLAN. The Fund may pay up to 0.10% per year of Class A's average
daily net assets. The Class A plan is a reimbursement plan. It allows the
Fund to reimburse Distributors for eligible expenses that Distributors has
shown it has incurred. The Fund will not reimburse more than the maximum
amount allowed under the plan. Any unreimbursed expenses from one year may
not be carried over to or reimbursed in later years.
For the fiscal year ended March 31, 2000, the amounts paid by the Fund,
pursuant to the plan were:
($)
-----------------------------------------------
Advertising 329,281
Printing and mailing
prospectuses
other than to current
shareholders 223,320
Payments to underwriters 126,723
Payments to broker-dealers 9,674,202
Other 752,766
-------------
Total 11,106,292
=============
THE CLASS B AND C PLANS. The Fund pays Distributors up to 0.65% per year of
the class's average daily net assets, out of which 0.15% may be paid for
services to the shareholders (service fees). The Class B and C plans also may
be used to pay Distributors for advancing commissions to securities dealers
with respect to the initial sale of Class B and C shares. Class B plan fees
payable to Distributors are used by Distributors to pay third party financing
entities that have provided financing to Distributors in connection with
advancing commissions to securities dealers. Franklin Resources owns a
minority interest in one of the third party financing entities.
The Class B and C plans are compensation plans. They allow the Fund to pay a
fee to Distributors that may be more than the eligible expenses Distributors
has incurred at the time of the payment. Distributors must, however,
demonstrate to the board that it has spent or has near-term plans to spend
the amount received on eligible expenses. The Fund will not pay more than the
maximum amount allowed under the plans.
Under the Class B plan, the amounts paid by the Fund pursuant to the plan for
the fiscal year ended March 31, 2000, were:
($)
----------------------------------------------
Advertising 8,465
Printing and mailing
prospectuses
other than to current
shareholders 494
Payments to underwriters 7,200
Payments to broker-dealers 467,778
Other 9,147
------------
Total 493,084
============
Under the Class C plan, the amounts paid by the Fund pursuant to the plan for
the fiscal year ended March 31, 2000, were:
($)
----------------------------------------------
Advertising 62,047
Printing and mailing
prospectuses
other than to current
shareholders 18,165
Payments to underwriters 37,554
Payments to broker-dealers 2,596,483
Other 114,825
------------
Total 2,829,074
============
THE CLASS A , B AND C PLANS. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the Fund, the manager or Distributors or other parties on behalf of
the Fund, the manager or Distributors make payments that are deemed to be for
the financing of any activity primarily intended to result in the sale of
Fund shares within the context of Rule 12b-1 under the Investment Company Act
of 1940, as amended, then such payments shall be deemed to have been made
pursuant to the plan.
To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks may not participate in the plans because of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banks, however, are allowed to receive fees under the plans for
administrative servicing or for agency transactions.
Distributors must provide written reports to the board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, and furnish the board with such other information as the board
may reasonably request to enable it to make an informed determination of
whether the plans should be continued.
Each plan has been approved according to the provisions of Rule 12b-1. The
terms and provisions of each plan also are consistent with Rule 12b-1.
PERFORMANCE
-------------------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return and current yield quotations used by the
Fund are based on the standardized methods of computing performance mandated
by the SEC. Performance figures reflect Rule 12b-1 fees from the date of the
plan's implementation. An explanation of these and other methods used by the
Fund to compute or express performance follows. Regardless of the method
used, past performance does not guarantee future results, and is an
indication of the return to shareholders only for the limited historical
period used.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum initial sales charge is
deducted from the initial $1,000 purchase, and income dividends and capital
gain distributions are reinvested at net asset value. The quotation assumes
the account was completely redeemed at the end of each period and the
deduction of all applicable charges and fees. If a change is made to the
sales charge structure, historical performance information will be restated
to reflect the maximum initial sales charge currently in effect.
When considering the average annual total return quotations for Class A and C
shares, you should keep in mind that the maximum initial sales charge
reflected in each quotation is a one time fee charged on all direct
purchases, which will have its greatest impact during the early stages of
your investment. This charge will affect actual performance less the longer
you retain your investment in the Fund. The average annual total returns for
the indicated periods ended March 31, 2000, were:
1 YEAR (%) 5 YEARS (%) 10 YEARS (%)
-----------------------------------------------------------------
Class A -6.15 4.52 6.08
SINCE
INCEPTION
1 YEAR (%) (1/1/99) (%)
-----------------------------------------------------------------
Class B -6.23 -4.32
SINCE
INCEPTION
1 YEAR (%) (5/1/95) (%)
-----------------------------------------------------------------
Class C -4.37 4.66
The following SEC formula was used to calculate these figures:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial sales charge is deducted from the initial
$1,000 purchase, income dividends and capital gain distributions are
reinvested at net asset value, the account was completely redeemed at the end
of each period and the deduction of all applicable charges and fees.
Cumulative total return, however, is based on the actual return for a
specified period rather than on the average return over the periods indicated
above. The cumulative total returns for the indicated periods ended March 31,
2000, were:
1 YEAR (%) 5 YEARS (%) 10 YEARS (%)
-----------------------------------------------------------------
Class A -6.15 24.76 80.44
SINCE
INCEPTION
1 YEAR (%) (1/1/99) (%)
-----------------------------------------------------------------
Class B -6.23 -5.36
SINCE
INCEPTION
1 YEAR (%) (5/1/95) (%)
-----------------------------------------------------------------
Class C -4.37 25.11
CURRENT YIELD Current yield shows the income per share earned by the Fund. It
is calculated by dividing the net investment income per share earned during a
30-day base period by the applicable maximum offering price per share on the
last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders of the class during the
base period. The yields for the 30-day period ended March 31, 2000, were:
CLASS A (%) CLASS B (%) CLASS C (%)
-----------------------------------------------------------------
5.03 4.69 4.65
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, 2000, were:
CLASS A (%) CLASS B (%) CLASS C (%)
---------------------------------------------------------------
9.18 8.56 8.49
As of March 31, 2000, 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 that were or will be paid to shareholders. Amounts
paid to shareholders are reflected in the quoted current distribution rate or
taxable-equivalent distribution rate. The current distribution rate is
usually computed by annualizing the dividends paid per share by a class
during a certain period and dividing that amount by the current maximum
offering price. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than interest, if any, and is calculated over a different period of
time. The current distribution rates for the 30-day period ended March 31,
2000, were:
CLASS A (%) CLASS B (%) CLASS C (%)
---------------------------------------------------------------
5.17 4.86 4.86
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, 2000, were:
CLASS A (%) CLASS B (%) CLASS C (%)
---------------------------------------------------------------
9.44 8.87 8.87
VOLATILITY Occasionally statistics may be used to show the Fund's volatility
or risk. Measures of volatility or risk are generally used to compare the
Fund's net asset value or performance to a market index. One measure of
volatility is beta. Beta is the volatility of a fund relative to the total
market, as represented by an index considered representative of the types of
securities in which the fund invests. A beta of more than 1.00 indicates
volatility greater than the market and a beta of less than 1.00 indicates
volatility less than the market. Another measure of volatility or risk is
standard deviation. Standard deviation is used to measure variability of net
asset value or total return around an average over a specified period of
time. The idea is that greater volatility means greater risk undertaken in
achieving performance.
OTHER PERFORMANCE QUOTATIONS The Fund also may quote the performance of
shares without a sales charge. Sales literature and advertising may quote a
cumulative total return, average annual total return and other measures of
performance with the substitution of net asset value for the public offering
price.
The Fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
Franklin Templeton Investments. Franklin Resources, Inc. is the parent
company of the advisors and underwriter of Franklin Templeton funds.
COMPARISONS To help you better evaluate how an investment in the Fund may
satisfy your investment goal, advertisements and other materials about the
Fund may discuss certain measures of Fund performance as reported by various
financial publications. Materials also may compare performance (as calculated
above) to performance as reported by other investments, indices, and
averages. These comparisons may include, but are not limited to, the
following examples:
o Salomon Smith Barney Broad Bond Index or its component indices -
measures yield, price and total return for Treasury, agency, corporate and
mortgage bonds.
o Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
o Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.
o Bond Buyer 20 Index - an index of municipal bond yields based upon
yields of 20 general obligation bonds maturing in 20 years.
o Bond Buyer 40 Index - an index composed of the yield to maturity of 40
bonds. The index attempts to track the new-issue market as closely as
possible, so it changes bonds twice a month, adding all new bonds that meet
certain requirements and deleting an equivalent number according to their
secondary market trading activity. As a result, the average par call date,
average maturity date, and average coupon rate can and have changed over
time. The average maturity generally has been about 29-30 years.
o Financial publications: THE WALL STREET JOURNAL, and BUSINESS WEEK,
FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines - provide performance
statistics over specified time periods.
o Salomon Smith Barney Composite High Yield Index or its component indices
- measures yield, price and total return for the Long-Term High-Yield
Index, Intermediate-Term High-Yield Index and Long-Term Utility High-Yield
Index.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J.P. Morgan(R) companies, Salomon Smith Barney Inc.,
Merrill Lynch, Lehman Brothers(R) and Bloomberg(R) L.P.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its
category.
o Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o 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.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes
price, yield, risk, and total return for mutual funds.
o Merrill Lynch Corporate Master Index - reflects investment grade
corporate securities.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment
in the Fund. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or sales material issued by the Fund also may discuss or be
based upon information in a recent issue of the Special Report on Tax Freedom
Day published by the Tax Foundation, a Washington, D.C. based nonprofit
research and public education organization. The report illustrates, among
other things, the annual amount of time the average taxpayer works to satisfy
his or her tax obligations to the federal, state and local taxing authorities.
Advertisements or information also may compare the Fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the Fund involves the risk of
fluctuation of principal value, a risk generally not present in an investment
in a CD issued by a bank. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the Fund to calculate its figures. In
addition, there can be no assurance that the Fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
-------------------------------------------------------------------------------
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis to have a
projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by
the College Board.) The Franklin Retirement Planning Guide leads you through
the steps to start a retirement savings program. Of course, an investment in
the Fund cannot guarantee that these goals will be met.
The Fund is a member of Franklin Templeton Investments, one of the largest
mutual fund organizations in the U.S., and may be considered in a program for
diversification of assets. Founded in 1947, Franklin is one of the oldest
mutual fund organizations and now services approximately 3 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined
forces with Templeton, a pioneer in international investing. The Mutual
Series team, known for its value-driven approach to domestic equity
investing, became part of the organization four years later. Together,
Franklin Templeton Investments has over $222 billion in assets under
management for more than 5 million U.S. based mutual fund shareholder and
other accounts. Franklin Templeton Investments offers 107 U.S. based open-end
investment companies to the public. The Fund may identify itself by its
Nasdaq symbol or CUSIP number.
Franklin is a leader in the tax-free mutual fund industry and manages more
than $43 billion in municipal security assets for over three quarters of a
million investors.
Under current tax laws, municipal securities remain one of the few
investments offering the potential for tax-free income. In 2000, taxes could
cost almost $47 on every $100 earned from a fully taxable investment (based
on the maximum combined 39.6% federal tax rate and the highest state tax rate
of 12% for 2000). Franklin tax-free funds, however, offer tax relief through
a professionally managed portfolio of tax-free securities selected based on
their yield, quality and maturity. An investment in a Franklin tax-free fund
can provide you with the potential to earn income free of federal taxes and,
depending on the fund, state and local taxes as well, while supporting state
and local public projects. Franklin tax-free funds also may provide tax-free
compounding, when dividends are reinvested. An investment in Franklin's
tax-free funds can grow more rapidly than similar taxable investments.
Municipal securities are generally considered to be creditworthy, second in
quality only to securities issued or guaranteed by the U.S. government and
its agencies. The market price of municipal securities, however, may
fluctuate. This fluctuation will have a direct impact on the net asset value
of the Fund's shares.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the Fund are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
DESCRIPTION OF RATINGS
-------------------------------------------------------------------------------
MUNICIPAL BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
INVESTMENT GRADE
Aaa: Municipal bonds rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Municipal bonds rated Aa are judged to be high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present that make the
long-term risks appear somewhat larger.
A: Municipal bonds rated A possess many favorable investment attributes and
are considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa: Municipal bonds rated Baa are considered medium-grade obligations. They
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. These bonds lack outstanding investment characteristics
and, in fact, have speculative characteristics as well.
BELOW INVESTMENT GRADE
Ba: Municipal bonds rated Ba are judged to have predominantly speculative
elements and their future cannot be considered well assured. Often the
protection of interest and principal payments may be very moderate and,
thereby, not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Municipal bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Municipal bonds rated Caa are of poor standing. These issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Municipal bonds rated Ca represent obligations that are speculative to a
high degree. These issues are often in default or have other marked
shortcomings.
C: Municipal bonds rated C are the lowest-rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Con.(-): Municipal bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned in operation experience, (c) rentals that
begin when facilities are completed, or (d) payments to which some other
limiting condition attaches. Parenthetical rating denotes probable credit
stature upon the completion of construction or the elimination of the basis
of the condition.
STANDARD & POOR'S RATINGS GROUP (S&P(R))
INVESTMENT GRADE
AAA: Municipal bonds rated AAA are the highest-grade obligations. They
possess the ultimate degree of protection as to principal and interest. In
the market, they move with interest rates and, hence, provide the maximum
safety on all counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations, and in
the majority of instances differ from AAA issues only in a small degree.
Here, too, prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium-grade. They have
considerable investment strength but are not entirely free from adverse
effects of changes in economic and trade conditions. Interest and principal
are regarded as safe. They predominantly reflect money rates in their market
behavior but also, to some extent, economic conditions.
BBB: Municipal bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
BELOW INVESTMENT GRADE
BB, B, CCC, CC: Municipal bonds rated BB, B, CCC and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and CC the highest
degree of speculation. While these bonds will likely have some quality and
protective characteristics, they are outweighed by large uncertainties or
major risk exposures to adverse conditions.
C: This rating is reserved for income bonds on which no interest is being
paid.
D: Debt rated "D" is in default and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
FITCH INVESTORS SERVICE, INC. (FITCH)
INVESTMENT GRADE
AAA: Municipal bonds rated AAA are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal that is unlikely to be affected by
reasonably foreseeable events.
AA: Municipal bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong although not quite as strong as bonds rated AAA and
not significantly vulnerable to foreseeable future developments.
A: Municipal bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Municipal bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BELOW INVESTMENT GRADE
BB: Municipal bonds rated BB are considered speculative. The obligor's
ability to pay interest and repay principal may be affected over time by
adverse economic changes. Business and financial alternatives can be
identified, however, that could assist the obligor in satisfying its debt
service requirements.
B: Municipal bonds rated B are considered highly speculative. While bonds in
this class are currently meeting debt service requirements, the probability
of continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Municipal bonds rated CCC have certain identifiable characteristics
which, if not remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC: Municipal bonds rated CC are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C: Municipal bonds rated C are in imminent default in the payment of interest
or principal.
DDD, DD and D: Municipal bonds rated DDD, DD and D are in default on interest
and/or principal payments. Such bonds are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential for
recovery while D represents the lowest potential for recovery.
Plus (+) or minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus or minus signs
are not used with the AAA, DDD, DD or D categories.
MUNICIPAL NOTE RATINGS
MOODY'S
Moody's ratings for state, municipal and other short-term obligations will be
designated Moody's Investment Grade (MIG). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing; factors of the first importance in long-term borrowing
risk are of lesser importance in the short run. Symbols used will be as
follows:
MIG 1: Notes are of the best quality enjoying strong protection from
established cash flows of funds for their servicing or from established and
broad-based access to the market for refinancing, or both.
MIG 2: Notes are of high quality, with margins of protection ample, although
not so large as in the preceding group.
MIG 3: Notes are of favorable quality, with all security elements accounted
for, but lacking the undeniable strength of the preceding grades. Market
access for refinancing, in particular, is likely to be less well established.
MIG 4: Notes are of adequate quality, carrying specific risk but having
protection and not distinctly or predominantly speculative.
S&P
Until June 29, 1984, S&P used the same rating symbols for notes and bonds.
After June 29, 1984, for new municipal note issues due in three years or
less, the ratings below will usually be assigned. Notes maturing beyond three
years will most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong capacity
to pay principal and interest. Issues determined to possess overwhelming
safety characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
SHORT-TERM DEBT & COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's commercial
paper ratings, which are also applicable to municipal paper investments, are
opinions of the ability of issuers to repay punctually their promissory
obligations not having an original maturity in excess of nine months. Moody's
employs the following designations for both short-term debt and commercial
paper, all judged to be investment grade, to indicate the relative repayment
capacity of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FITCH
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal
and investment notes. The short-term rating places greater emphasis than a
long-term rating on the existence of liquidity necessary to meet the issuer's
obligations in a timely manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. Reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues assigned F-1+
and F-1 ratings.
F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-5: Weak credit quality. Have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D: Default. Actual or imminent payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
FRANKLIN 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
Filing: Post-Effective Amendment No. 26 to Registration
Statement on Form N-1A
File No. 2-60470
Filing Date: May 26, 1999
(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
Filing: Post-Effective Amendment No. 26 to Registration
Statement on Form N-1A
File No. 2-60470
Filing Date: May 26, 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 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
(v) Amendment dated March 21, 2000, to Exhibit A of the Master
Custody Agreement between Registrant and Bank of New York
dated February 16, 1996
(h) Other Material Contracts
(i) Subcontract for Fund Administrative Services dated October 1,
1996 and Amendment thereto dated 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 C 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
C, 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.
Filing: Post-Effective Amendment No. 26 to Registration
Statement on Form N-1A
File No. 2-60470
Filing Date: May 26, 1999
(n) Rule 18f-3 Plan
(i) Multiple Class Plan for Franklin California Tax-Free Income
Fund, Inc. dated March 19, 1998
Filing: Post-Effective Amendment No. 26 to Registration
Statement on Form N-1A
File No. 2-60470
Filing Date: May 26, 1999
(p) Code of Ethics
(i) Code of Ethics
(q) Power of Attorney
(i) Power of Attorney dated May 16, 2000
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE 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 Master Trust
Franklin Floating Rate Trust
Franklin Gold and Precious Metals Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Franklin Templeton Variable Insurance Products Trust
Institutional Fiduciary Trust
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
b) The information required by this Item 29 with respect to each director
and officer of Distributors is incorporated by reference to Part B of this
N-1A and Schedule A of Form BD filed by Distributors with the Securities and
Exchange Commission pursuant to the Securities Act of 1934 (SEC File No.
8-5889):
c) Not Applicable. Registrant's principal underwriter is an affiliated
person of an affiliated person of the Registrant.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section
31 (a) of the Investment Company Act of 1940 are kept by the Fund or its
shareholder services agent, Franklin/Templeton Investor Services, Inc., both
of whose address is 777 Mariners Island Blvd., San Mateo, CA 94404.
ITEM 29. MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 32. UNDERTAKINGS
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of San Mateo and the State of
California, on the 25th day of July, 2000.
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
(Registrant)
By: /S/ DAVID P. GOSS
David P. Goss
Vice President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
and on the dates indicated.
CHARLES B. JOHNSON* Director and Principal
Charles B. Johnson Executive Officer
Dated: July 25, 2000
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: July 25, 2000
KIMBERLEY H. MONASTERIO* Principal Accounting Officer
Kimberley H. Monasterio Dated: July 25, 2000
HARRIS J. ASHTON* Director
Harris J. Ashton Dated: July 25, 2000
S. JOSEPH FORTUNATO* Director
S. Joseph Fortunato Dated: July 25, 2000
EDITH E. HOLIDAY* Director
Edith E. Holiday Dated: July 25, 2000
RUPERT H. JOHNSON, JR.* Director
Rupert H. Johnson, Jr. Dated: July 25, 2000
GORDON S. MACKLIN* Director
Gordon S. Macklin Dated: July 25, 2000
*By /S/ DAVID P. GOSS
David P. Goss
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 *
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.(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 *
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 the Master Custody Agreement
between Registrant and Bank of New
York dated February 16, 1996
EX-99.(g)(v) Amendment dated March 21, 2000, to Attached
Exhibit A of the Master Custody
Agreement between Registrant and
Bank of New York dated February 16,
1996
EX-99.(h)(i) Subcontract for Fund Administrative *
Services dated October 1, 1996 and
Amendment thereto dated April 30,
1998 between Franklin Advisers, Inc.
and Franklin Templeton Services, Inc.
EX-99.(i)(i) Opinion and Consent of Counsel dated *
May 15, 1998
EX-99.(j)(i) Consent of Independent Auditors Attached
EX-99.(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 *
12b-1 between Registrant, on behalf
of Franklin California Tax-Free
Income Fund - Class B, and
Franklin/Templeton Distributors, Inc.
EX-99.(n)(i) Multiple Class Plan for Franklin Attached
California Tax-Free Income Fund,
Inc. dated March 19, 1998
EX-99.(p)(i) Code of Ethics Attached
EX-99.(q)(i) Power of Attorney dated May 16, 2000 Attached
* Incorporated by Reference
