Franklin California Intermediate-Term
Tax-Free Income Fund
Franklin California Tax-Free Trust
PROSPECTUS November 1, 1995
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin California Tax-Free Trust (the "Trust") is an open-end management
investment company, consisting of two diversified and one non-diversified
series. This Prospectus relates only to the Franklin California
Intermediate-Term Tax-Free Income Fund (the "Fund"), the non-diversified series
of the Trust. The Fund offers individual investors, corporations and other
institutions a convenient way to invest in a professionally managed portfolio of
municipal securities, primarily issued by the state of California and its
political subdivisions. The Fund's investment objective is to provide investors
with as high a level of income exempt from federal income taxes and California
personal income taxes as is consistent with prudent investment management and
the preservation of shareholders' capital. The Fund invests primarily in a
portfolio of investment grade obligations with a dollar weighted average
portfolio maturity of more than three years but not more than ten years. There
can be no assurance that the investment objective of the Fund will be realized.
This Prospectus is intended to set forth in a clear and concise manner
information about the Trust and the Fund that a prospective investor should know
before investing. After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of shares and
other items which a prospective investor will find useful to have.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
A Statement of Additional Information ("SAI") concerning the Fund, dated
November 1, 1995, as may be amended from time to time, provides a further
discussion of certain areas in this Prospectus and other matters which may be of
interest to some investors. It has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated herein by reference. A copy is available
without charge from the Fund or the Fund's principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors") at the address or
telephone number shown above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This Prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this Prospectus. Further
information may be obtained from the underwriter.
Contents Page
Expense Table.................... 2
Financial Highlights............. 4
About the Trust.................. 4
Investment Objective and
Policies of the Fund............ 4
Management of the Fund........... 9
Distributions to Shareholders.... 10
Taxation of the Fund
and Its Shareholders............ 12
How to Buy Shares of the Fund.... 13
Programs and Privileges
Available to Fund Shareholders.. 18
Exchange Privilege............... 20
How to Sell Shares of the Fund... 22
Telephone Transactions........... 26
Valuation of Fund Shares......... 27
How to Get Information Regarding
an Investment in the Fund....... 27
Performance...................... 28
General Information.............. 29
Account Registrations............ 30
Important Notice Regarding
Taxpayer IRS Certifications..... 31
Portfolio Operations............. 31
Risk Factors in California....... 31
Expense Table
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in the Fund. These figures are based on aggregate
operating expenses of the Fund before fee waivers and expense reductions for the
fiscal year ended June 30, 1995.
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)............................... 2.25%
Deferred Sales Charge.............................................. NONE*
*Investments of $1 million or more are not subject to a front-end sales charge;
however, a contingent deferred sales charge of 1% is generally imposed on
certain redemptions within a contingency period of 12 months of the calendar
month of such investment. See "How to Sell Shares of the Fund - Contingent
Deferred Sales Charge."
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees.................................................... 0.63%***
12b-1 Fees......................................................... 0.08%++
Other Expenses:
Reports to shareholders.................................... 0.02%
Shareholder servicing costs................................ 0.02%
Other...................................................... 0.08%
Total Other Expenses............................................... 0.12%
Total Fund Operating Expenses...................................... 0.83%***
***Represents the amount that would have been payable to the investment manager,
absent a fee waiver by the investment manager. The investment manager, however,
has agreed in advance to waive a portion of its management fees and assume
responsibility for making payments to offset certain operating expenses
otherwise payable by the Fund. With this waiver, management fees and total
operating expenses represented 0.13% and 0.33%, respectively, of the average net
assets of the Fund. This arrangement may be terminated by the investment manager
at any time.
++The maximum amount of Rule 12b-1 fees allowed pursuant to the Fund's
distribution plan is 0.10%. Consistent with National Association of Securities
Dealers, Inc.'s rules, it is possible that the combination of front-end sales
charges and Rule 12b-1 fees could cause long-term shareholders to pay more than
the economic equivalent of the maximum front-end sales charges permitted under
those same rules.
Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in the Fund. Rather the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.
Example
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge, that apply to a $1,000 investment
in the Fund over various time periods assuming (1) a 5% annual rate of return
and (2) redemption at the end of each time period:
1 year* 3 years 5 years 10 years
$31 $48 $68 $123
*Assumes that a contingent deferred sales charge will not apply.
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES, BEFORE FEE
WAIVERS AND EXPENSE REDUCTIONS, SHOWN ABOVE AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE
SHOWN. The operating expenses are borne by the Fund and only indirectly by
shareholders as a result of their investment in the Fund. In addition, federal
securities regulations require the example to assume an annual return of 5%, but
the Fund's actual return may be more or less than 5%. Financial Highlights
Financial Highlights
Set forth below is a table containing the financial highlights for a share of
the Fund from the effective date of the registration statement, September 21,
1992, through June 30, 1995. This information has been audited by Coopers &
Lybrand L.L.P., independent auditors, whose audit report appears in the
financial statements in the Trust's Annual Report to Shareholders dated June 30,
1995. See the discussion "Reports to Shareholders" under "General Information."
<TABLE>
<CAPTION>
Per Share Operating Performance Ratios/Supplemental Data
----------------------------------------- -----------------------
Ratio of Net
Net Asset Net Realized Distributions Net Asset Net Assets Ratio of Investment
Year Value at Net & Unrealized Total From From Net Value at End Expenses Income Portfolio
Ended Beginning Investment Gain (Loss) Investment Investment at End Total of Year to Average to Average Turnover
June 30 of Year Income on SecuritiesOperations Income of Year Return+ (in 000's) Net Assets++ Net Assets Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993** $10.00 $0.29 $0.550 $0.840 $(0.290) $10.55 10.95% $42,831 0.09%* 4.73%* 0.08%
1994 10.55 0.54 (0.360) 0.180 (0.530) 10.20 1.65 94,015 0.25 5.11 14.95
1995 10.20 0.54 0.170 0.710 (0.530) 10.38 7.19 88,785 0.33 5.34 10.90
*Annualized
**For the period September 21, 1992 (effective date of registration) to June 30,
1993.
+Total return measures the change in value of an investment over the period
indicated. It does not include the maximum front-end sales charge, and assumes
reinvestment of dividends and capital gains at net asset value.
++During the periods indicated, Franklin Advisers, Inc., the investment manager,
agreed in advance to reduce management fees and reimbursed other expenses. Had
such action not been taken, the ratio of operating expenses to average net
assets would have been .95% (annualized), .80%, and .83% for the periods ended
June 30, 1993, 1994 and 1995, respectively.
</TABLE>
About the Trust
Franklin California Tax-Free Trust is an open-end management investment company
commonly called a "mutual fund." The Trust was organized as a Massachusetts
business trust in July 1985 and registered with the SEC under the Investment
Company Act of 1940, as amended (the "1940 Act"). The Trust currently consists
of three series, each of which issues a separate series of the Trust's shares
and maintains a totally separate investment portfolio.
The Board of Trustees (the "Board") may determine, at a future date, to offer
shares of the Fund in one or more "classes" to permit the Fund to take advantage
of alternative methods of selling Fund shares. "Classes" of shares represent
proportionate interests in the same portfolio of investment securities but with
different rights, privileges and attributes, as determined by the trustees.
Certain funds in the Franklin Templeton Funds, as that term is defined under
"How to Buy Shares of the Fund," currently offer their shares in two classes,
designated "Class I" and "Class II." Because the Fund's sales charge structure
and plan of distribution are similar to those of Class I shares, shares of the
Fund may be considered Class I shares for redemption, exchange and other
purposes.
Shares of the Fund may be purchased (minimum investment of $100 initially and
$25 thereafter) at the current public offering price which is equal to the
Fund's net asset value (see "Valuation of Fund Shares") plus a sales charge
based upon a variable percentage not exceeding 2.25% of the offering price. (See
"How to Buy Shares of the Fund.")
Investment Objective and
Policies of the Fund
The Fund seeks to provide investors with as high a level of income exempt from
federal income taxes and California personal income taxes as is consistent with
prudent investment management and the preservation of shareholders' capital. The
objective is a fundamental policy of the Fund and may not be changed without the
approval of a majority of the Fund's outstanding shares. The Fund invests
primarily in a portfolio of investment grade obligations with a dollar weighted
average portfolio maturity of more than three years but not more than ten years.
There is, of course, no assurance that the Fund's objective will be achieved.
Under normal market conditions, the Fund attempts to invest 100% and, as a
matter of fundamental policy, will invest at least 80% of its total assets in
debt obligations issued by or on behalf of the state of California or any state,
territory or possession of the United States, the District of Columbia and their
respective authorities, agencies, instrumentalities and political subdivisions,
the interest on which is exempt from federal income tax. It is possible,
although not anticipated, that up to 20% of the Fund's total assets could be in
municipal securities subject to the alternative minimum tax and/or in taxable
obligations.
The Fund may invest, without percentage limitation, in securities having, at the
time of purchase, one of the four highest ratings of Moody's Investors Service
("Moody's") (Aaa, Aa, A, Baa), Standard & Poor's Corporation ("S&P") (AAA, AA,
A, BBB), or Fitch Investors Service, Inc. ("Fitch") (AAA, AA, A, BBB), or in
securities which are not rated, provided that, in the opinion of the Fund's
investment manager, such securities are comparable in quality to those within
the four highest ratings. These are considered to be "investment grade"
securities, although bonds rated in the fourth highest ratings level (Baa by
Moody's) are regarded as having an adequate capacity to pay principal and
interest but with greater vulnerability to adverse economic conditions and as
having some speculative characteristics. In the event the rating of an issue
held in the Fund's portfolio is lowered by the rating services, the change will
be considered by the Fund in its evaluation of the overall investment merits of
that security but the change will not necessarily result in an automatic sale of
the security. For a description of municipal securities ratings, see "Appendix
B" in the SAI.
In addition, under normal market conditions, the Fund will invest at least 65%
of its total assets in municipal securities and obligations issued by or on
behalf of the state of California and its local governments, municipalities,
authorities, agencies and political subdivisions which pay income exempt from
federal and California income taxes ("California Municipal Securities"). It is
possible, although not anticipated, that up to 35% of the Fund's total assets
could be in municipal securities from a state, possession or territory other
than California.
Dividends paid by the Fund which are derived from interest on tax-exempt
obligations that are not California Municipal Securities will be exempt from
federal income tax, but will be subject to California income taxes.
For temporary defensive purposes only, the Fund may invest (i) more than 20% of
its assets (which could be up to 100%) in fixed-income obligations the interest
on which is subject to federal income tax, and (ii) more than 35% of the value
of its net assets (which could be up to 100%) in instruments the interest on
which is exempt from federal income taxes but not California personal income
taxes. Any such temporary taxable investments will be limited to obligations
issued or guaranteed by the full faith and credit of the U.S. government or
commercial paper rated A-1 by S&P, P-1 by Moody's, or F-1+ by Fitch.
The Fund may borrow from banks for temporary or emergency purposes and pledge up
to 5% of its total assets for that purpose.
Municipal Securities
The term "municipal securities," as used in this Prospectus, means obligations
issued by or on behalf of the state of California or any state, territory or
possession of the U.S. and the District of Columbia, and their political
subdivisions, agencies, and instrumentalities, the interest on which is exempt
from federal income tax. An opinion as to the tax-exempt status of a municipal
security is generally rendered to the issuer by the issuer's bond counsel at the
time of issuance of the security.
Municipal securities are used to raise money for various public purposes, such
as constructing public facilities and making loans to public institutions.
Certain types of municipal bonds are issued to obtain funding for privately
operated facilities. Further information on the maturity and funding
classifications of municipal securities is included in the SAI.
It is possible, from time to time, that the Fund will invest more than 25% of
its assets in a particular segment of the municipal securities market, such as
hospital revenue bonds, housing agency bonds, industrial development revenue
bonds, transportation bonds, or pollution control revenue bonds, or in
securities the interest upon which is paid from revenues of a similar type of
project. In such circumstances, economic, business, political or other changes
affecting one bond (such as proposed legislation affecting the financing of a
project; shortages or price increases of needed materials; or declining markets
or need for the projects) might also affect other bonds in the same segment,
thereby potentially increasing market risk.
Yields on municipal securities vary, depending on a variety of factors,
including the general condition of the financial markets and of the municipal
securities market, the size of a particular offering, the maturity of the
obligation and the credit rating of the issuer. Generally, municipal securities
of longer maturities produce higher current yields than municipal securities
with shorter maturities, but are subject to greater price fluctuation due to
changes in interest rates, tax laws and other general market factors.
Lower-rated municipal securities generally produce a higher yield than
higher-rated municipal securities due to the perception of a greater degree of
risk as to the ability of the issuer to pay principal and interest obligations.
The interest on bonds issued to finance public purpose state and local
government operations is generally tax-exempt for regular federal income tax
purposes. Interest on certain "private activity bonds" (including those for
housing and student loans) issued after August 7, 1986, while still tax-exempt,
constitutes a preference item for taxpayers in determining the federal
alternative minimum tax under the Internal Revenue Code of 1986, as amended (the
"Code"), and under the income tax provisions of some states. This interest could
subject a shareholder to, or increase the shareholder's liability under, the
federal alternative minimum tax (but not under California's alternative minimum
tax), depending on the shareholder's tax situation. In addition, all
distributions derived from interest exempt from regular federal income tax may
subject a corporate shareholder to, or increase its liability under, the federal
alternative minimum tax, because such distributions are included in the
corporation's "adjusted current earnings." Consistent with the Fund's investment
objective, the Fund may acquire such private activity bonds if, in the
investment manager's opinion, such bonds represent the most attractive
investment opportunity then available to the Fund. As of June 30, 1995, the Fund
derived 1.29% of its income from bonds, the interest on which constitutes a
preference item subject to the federal alternative minimum tax for certain
investors.
The Fund may invest in variable or floating rate demand notes ("VRDNs"), which
carry a demand feature that permits the Fund to tender the obligation back to
the issuer or a third party at par value plus accrued interest prior to
maturity, according to the terms of the obligation. These obligations bear
interest at rates that are not fixed, but that vary with changes in prevailing
market rates on predesignated dates. Frequently, VRDNs are secured by letters of
credit or other credit support arrangements provided by banks. Because of the
demand feature, the prices of VRDNs may be higher and the yields lower than they
otherwise would be for obligations without a demand feature. The Fund will limit
its purchase of municipal securities that are floating rate and variable rate
obligations to those meeting the quality standards set forth in this Prospectus.
The Fund may purchase and sell municipal securities on a "when-issued" and
"delayed delivery" basis. These transactions are subject to market fluctuation,
and the value at delivery may be more or less than the purchase price. Although
the Fund will generally purchase municipal securities on a when-issued basis
with the intention of acquiring such securities, it may sell such securities
before the settlement date if it is deemed advisable. When the Fund is the buyer
in such a transaction, it will maintain, in a segregated account with its
custodian, cash or high-grade marketable securities having an aggregate value
equal to the amount of such purchase commitments, until payment is made. To the
extent the Fund engages in "when-issued" and "delayed delivery" transactions, it
will do so for the purpose of acquiring securities for the Fund's portfolio
consistent with its investment objective and policies and not for the purpose of
investment leverage.
The Fund may also invest in municipal lease obligations, primarily through
Certificates of Participation ("COPs"). COPs, which are widely used by state and
local governments to finance the purchase of property, function much like
installment purchase agreements. A COP is created when long-term lease revenue
obligations are issued by a governmental corporation to pay for the acquisition
of property or facilities which are then leased to a municipality. The payments
made by the municipality under the lease are used to repay interest and
principal on the obligations issued to purchase the property. Once these lease
payments are completed, the municipality gains ownership of the property for a
nominal sum. This lease format is generally not subject to constitutional
limitations on the issuance of state debt, and COPs may enable a governmental
issuer to increase government liabilities beyond constitutional debt limits.
A feature which distinguishes COPs from municipal debt is that the lease which
is the subject of the transaction must contain a "nonappropriation" clause. A
nonappropriation clause provides that, while the municipality will use its best
efforts to make lease payments, the municipality may terminate the lease
annually without penalty if the municipality's appropriating body does not
allocate the necessary funds. Local administrations, when faced with
increasingly tight budgets, have more discretion to curtail payments under COPs
than they do to curtail payments on traditionally funded debt obligations. If
the government lessee does not appropriate sufficient monies to make lease
payments, the lessor or its agent is typically entitled to repossess the
property. The private sector value of the property may be more or less than the
amount the government lessee was paying.
While the risk of nonappropriation is inherent to COPs financing, the Fund
believes that this risk is mitigated by its policy of investing only in COPs
rated within the four highest rating categories of Moody's, S&P or Fitch, or in
unrated COPs believed to be of comparable quality. Criteria considered by the
rating agencies and the investment manager in assessing such risk include the
issuing municipality's credit rating, evaluation of how essential the leased
property is to the municipality and the term of the lease compared to the useful
life of the leased property. The Board reviews the COPs held in the Fund's
portfolio to assure that they constitute liquid investments based on various
factors reviewed by the investment manager and monitored by the Board. Such
factors include (a) the credit quality of such securities and the extent to
which they are rated or, if unrated, comply with existing criteria and
procedures followed to ensure that they are of quality comparable to the ratings
required for Fund investment, including an assessment of the likelihood that the
leases will not be canceled; (b) the size of the municipal securities market,
both in general and with respect to COPs; and (c) the extent to which the type
of COPs held by the Fund trade on the same basis and with the same degree of
dealer participation as other municipal bonds of comparable credit rating or
quality. While there is no limit as to the amount of assets which the Fund may
invest in COPs, as of June 30, 1995, the Fund held 29.06% of its net assets in
COPs and other municipal leases.
The Fund may purchase and hold callable municipal bonds which contain a
provision in the indenture permitting the issuer to redeem the bonds prior to
their maturity dates at a specified price which typically reflects a premium
over the bonds' original issue price. These bonds generally have call protection
(that is, a period of time during which the bonds may not be called) which
usually lasts for five to ten years, after which time such bonds may be called
away. An issuer may generally be expected to call its bonds, or a portion of
them, during periods of relatively declining interest rates, when borrowings may
be replaced at lower rates than those obtained in prior years. If the proceeds
of a bond called under such circumstances are reinvested, the result may be a
lower overall yield due to lower current interest rates. If the purchase price
of such bonds included a premium related to the appreciated value of the bonds,
some or all of that premium may not be recovered by bondholders, such as the
Fund, depending on the price at which such bonds were redeemed. Notwithstanding
the call feature, any such investment would still be subject to the policy
whereby the Fund is required to maintain a dollar weighted average portfolio
maturity of between three and ten years.
Investment Risk Considerations
While an investment in the Fund is not without risk, certain policies are
followed in managing the Fund which may help to reduce the investor's risk.
There are two categories of risks to which the Fund is subject: credit risk and
market risk. Credit risk is a function of the ability of an issuer of a
municipal security to maintain timely interest payments and to pay the principal
of a security upon maturity. It is generally reflected in a security's
underlying credit rating and its stated interest rate (normally the coupon
rate). A change in the credit risk associated with a municipal security may
cause a corresponding change in the security's price. Market risk is the risk of
price fluctuation of a municipal security caused by changes in general economic
and interest rate conditions generally affecting the market as a whole. A
municipal security's maturity length also affects its price. As with other debt
instruments, the price of the securities in which the Fund invests are likely to
decrease in times of rising interest rates. Conversely, when rates fall, the
value of the Fund's debt investments may rise. Price changes of securities held
by the Fund have a direct impact on the net asset value per share of the Fund.
Since the Fund will generally invest primarily in California Municipal
Securities, there are certain specific factors and considerations concerning
California which may affect the credit and market risk of the municipal
securities that the Fund may purchase. See "Risk Factors in California" for a
discussion of these factors.
As a non-diversified investment company, the Fund is not subject to any
statutory restriction under the 1940 Act with respect to the concentration of
its investments in the assets of one or more issuers. This concentration may
present greater risks than in the case of a diversified company. (See the SAI
for the diversification requirements the Fund intends to meet in order to
qualify as a regulated investment company under the Code.)
The Fund is subject to a number of additional investment restrictions, some of
which may be changed only with the approval of shareholders, which limit its
activities to some extent. A list of these restrictions and additional
information concerning the characteristics of municipal securities is included
in the SAI.
How Shareholders Participate in the
Results of the Fund's Activities
The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
the shareholder owns will increase. If the securities owned by the Fund decrease
in value, the value of the shareholder's shares will also decline. In this way,
shareholders participate in any change in the value of the securities owned by
the Fund. In addition to the factors which affect the value of individual
securities, as described in the preceding sections, a shareholder may anticipate
that the value of Fund shares will fluctuate with movements in the broader
equity and bond markets.
In particular, changes in interest rates will affect the value of the Fund's
portfolio and thus its share price. Increased interest rates, which frequently
accompany higher inflation and/or a growing economy, are likely to have a
negative effect on the value of Fund shares. History reflects both increases and
decreases in the prevailing rate of interest and these may reoccur unpredictably
in the future.
Management of the Fund
The Board has the primary responsibility for the overall management of the Fund
and for electing the officers of the Trust who are responsible for administering
its day-to-day operations.
Franklin Advisers, Inc. ("Advisers" or "Manager"), serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin Resources,
Inc. ("Resources"), a publicly owned holding company, the principal shareholders
of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its various subsidiaries (the "Franklin Templeton Group"). Advisers acts
as investment manager or administrator to 34 U.S. registered investment
companies (116 separate series) with aggregate assets of over $76 billion,
approximately $41 billion of which are in the municipal securities market.
Pursuant to the management agreement, the Manager supervises and implements the
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct the Fund's business.
During the fiscal year ended June 30, 1995, management fees, before any advance
waiver, totaled 0.63% of the average monthly net assets of the Fund. Total
operating expenses, including management fees, before any advance waiver,
totaled 0.83% of the average monthly net assets of the Fund. Pursuant to an
advance agreement by Advisers to waive its fees, the Fund paid management fees
and operating expenses totaling 0.13% and 0.33%, respectively, of the average
monthly net assets of the Fund.
It is not anticipated that the Fund will incur a significant amount of brokerage
expenses because municipal securities are generally traded in principal
transactions which involve the receipt by the broker of a spread between the bid
and ask prices for the securities, and not the receipt of commissions. To the
extent that the Fund participates in transactions involving brokerage
commissions, it is the Manager's responsibility to select brokers through whom
these transactions will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more than one broker is
able to provide the best execution, the Manager will consider the furnishing of
quotations and of other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of shares of the Fund,
as factors in selecting a broker. Further information is included under "The
Trust's Policies Regarding Brokers Used on Portfolio Transactions" in the SAI.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent"), in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
Plan of Distribution
The Fund has adopted a distribution plan (the "Plan") pursuant to Rule 12b-1
under the 1940 Act. Under the Plan, the Fund may reimburse Distributors or
others for all expenses incurred by Distributors or others in the promotion and
distribution of the Fund's shares. Such expenses may include, but are not
limited to, the printing of prospectuses and reports used for sales purposes,
expenses of preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a prorated
portion of Distributors' overhead expenses attributable to the distribution of
Fund shares, as well as any distribution or service fees paid to securities
dealers or their firms or others who have executed a servicing agreement with
the Fund, Distributors or its affiliates. The maximum amount which the Fund may
pay to Distributors or others for such distribution expenses is 0.10% per annum
of the average daily net assets of the Fund, payable on a quarterly basis. All
expenses of distribution and marketing in excess of 0.10% per annum will be
borne by Distributors, or others who have incurred them, without reimbursement
from the Fund. The Plan also covers any payments to or by the Fund, Advisers,
Distributors, or other parties on behalf of the Fund, Advisers or Distributors,
to the extent such payments are deemed to be for the financing of any activity
primarily intended to result in the sale of shares issued by the Fund within the
context of Rule 12b-1. The payments under the Plan are included in the maximum
operating expenses which may be borne by the Fund.
For more information, please see the SAI.
Distributions to Shareholders
There are two types of distributions which the Fund may make to its
shareholders:
1. Income dividends. The Fund receives income in the form of dividends, interest
and other income derived from its investments. This income, less the expenses
incurred in the Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of dividends paid per
share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed net capital gains from the prior fiscal year. The Fund may
make more than one distribution derived from net short-term and net long-term
capital gains in any year or adjust the timing of these distributions for
operational or other reasons.
Distribution Date
Although subject to change by the Board, without prior notice to or approval by
shareholders, the Fund's current policy is to declare income dividends daily and
pay them monthly on or about the last business day of that month. The amount of
income dividend payments by the Fund is dependent upon the amount of net income
received by the Fund from its portfolio holdings, is not guaranteed and is
subject to the discretion of the Board. The Fund does not pay "interest" or
guarantee any fixed rate of return on an investment in its shares.
Dividend Reinvestment
Unless otherwise requested, income dividends and capital gain distributions, if
any, will be automatically reinvested in the shareholder's account in the form
of additional shares, valued at the closing net asset value (without a sales
charge) on the dividend reinvestment date. Dividend and capital gain
distributions are only eligible for reinvestment at net asset value in the Fund
or Class I shares of other Franklin Templeton Funds. Shareholders have the right
to change their election with respect to the receipt of distributions by
notifying the Fund, but any such change will be effective only as to
distributions for which the reinvestment date is seven or more business days
after the Fund has been notified. See the SAI for more information.
Many of the Fund's shareholders receive their distributions in the form of
additional shares. This is a convenient way to accumulate additional shares and
maintain or increase the shareholder's earnings base. Of course, any shares so
acquired remain at market risk.
Distributions in Cash
A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to
another fund in the Franklin Group of Funds(R) or the Templeton Funds, to
another person, or directly to a checking account. If the bank at which the
account is maintained is a member of the Automated Clearing House, the payments
may be made automatically by electronic funds transfer. If this last option is
requested, the shareholder should allow at least 15 days for initial processing.
Dividends which may be paid in the interim will be sent to the address of
record. Additional information regarding automated fund transfers may be
obtained from Franklin's Shareholder Services Department. See "Purchases at Net
Asset Value" under "How to Buy Shares of the Fund."
Taxation of the Fund and Its Shareholders
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For further information, see the section
entitled "Additional Information Regarding Taxation" in the SAI.
Each series of the Trust is treated as a separate entity for federal income tax
purposes. The Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code, qualified as such, and intends to continue to so
qualify. By distributing all of its income and meeting certain other
requirements relating to the sources of its income and diversification of its
assets, the Fund will not be liable for federal income or excise taxes.
The Fund intends to qualify and elect to pay exempt-interest dividends to its
shareholders. To the extent that dividends are derived from interest income from
debt obligations of California or its political subdivisions or from interest on
U.S. territorial obligations (including Puerto Rico, the U.S. Virgin Islands and
Guam) which are exempt from regular federal and California personal income tax,
they will not be subject to either federal or California personal income tax
when received by the Fund's shareholders. The pass through of exempt-interest
dividends is allowed only if the Fund meets its federal and California
requirements that at least 50% of its total assets are invested in such exempt
obligations at the end of each quarter of its fiscal year. In addition, to the
extent that exempt-interest dividends are derived from direct obligations of the
federal government, they will also be exempt from California personal income
taxes. For corporate taxpayers subject to the California franchise tax, however,
all distributions will be fully taxable.
To the extent dividends are derived from taxable income from temporary
investments (including the discount from certain stripped obligations or their
coupons or income from securities loans or other taxable transactions) or from
the excess of net short-term capital gain over net long-term capital loss or
from ordinary income derived from the sale or disposition of bonds purchased
with market discount after April 30, 1993, they are treated as ordinary income
whether the shareholder has elected to receive them in cash or in additional
shares.
From time to time, the Fund may purchase a tax-exempt obligation with market
discount, that is, for a price that is less than the principal amount of the
bond or for a price that is less than the principal amount of the bond where the
bond was issued with original issue discount and such market discount exceeds a
de minimis amount under the Code. For such obligations purchased after April 30,
1993, a portion of the gain (not to exceed the accrued portion of market
discount as of the time of sale or disposition) is treated as ordinary income
rather than capital gain. Any distribution by the Fund of such ordinary income
to its shareholders will be subject to regular income tax in the hands of Fund
shareholders. In any fiscal year, the Fund may elect not to distribute to its
shareholders its taxable ordinary income and, instead, to pay federal income or
excise taxes on this income at the Fund level.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time a shareholder has owned Fund shares and regardless of whether
such distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January, will be treated for tax purposes as if
received by the shareholder on December 31 of the calendar year in which they
are declared.
Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on the sale or
exchange of Fund shares, held for six months or less, will be treated as a
long-term capital loss to the extent of capital gain dividends received with
respect to such shares.
Since the Fund's income is derived from interest income and gain on the sale of
portfolio securities rather than dividend income, no portion of the Fund's
distributions will generally be eligible for the corporate dividends-received
deduction.
The Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid and will, promptly after the close of
each calendar year, advise them of the tax status for federal income tax
purposes of such dividends and distributions, including the portion of the
dividends on an average basis which constitutes taxable income, such as market
discount income, if any, or interest income that is a tax preference item under
the federal alternative minimum tax. Shareholders who have not held shares of
the Fund for a full calendar year may have designated as tax-exempt or as tax
preference income a percentage of income which is not equal to the actual amount
of tax-exempt or tax preference income earned during the period of their
investment in the Fund.
Exempt-interest dividends of the Fund, although exempt from regular federal
income tax in the hands of a shareholder, are includable in the tax base for
determining the extent to which a shareholder's social security or railroad
retirement benefits will be subject to federal income tax. Shareholders are
required to disclose the receipt of exempt-interest dividends on their federal
income tax returns.
Interest on indebtedness incurred (directly or indirectly) by shareholders to
purchase or carry Fund shares will not be deductible for federal income tax
purposes.
Shareholders who are not U.S. persons for purposes of federal income taxation
should consult their financial or tax advisors regarding the applicability of
U.S. withholding or other taxes on distributions received by them from the Fund
and the application of foreign tax laws to these distributions.
The foregoing description relates solely to federal income tax law and to
California personal income tax treatment to the extent indicated. Shareholders
should consult their tax advisors with respect to the applicability of other
state and local income tax laws to distributions and redemption proceeds
received from the Fund. Corporate, individual and trust shareholders should
contact their tax advisors to determine the impact of Fund dividends and capital
gain distributions under the alternative minimum tax that may be applicable to a
shareholder's particular tax situation.
How to Buy Shares of the Fund
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall include other financial
institutions which, pursuant to an agreement with Distributors (directly or
through affiliates), handle customer orders and accounts with the Fund. Such
reference, however, is for convenience only and does not indicate a legal
conclusion of capacity. The minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be waived when the shares
are purchased through plans established by the Franklin Templeton Group. The
Fund and Distributors reserve the right to refuse any order for the purchase of
shares. The Fund currently does not permit investment by market timing or
allocation services ("Timing Accounts"), which generally include accounts
administered so as to redeem or purchase shares based upon certain predetermined
market indicators.
Purchase Price of Fund Shares
Shares of the Fund are offered at the public offering price, which is determined
by adding the net asset value per share plus a front-end sales charge, next
computed (1) after the shareholder's securities dealer receives the order which
is promptly transmitted to the Fund or (2) after receipt of an order by mail
from the shareholder directly in proper form (which generally means a completed
Shareholder Application accompanied by a negotiable check). The sales charge is
a variable percentage of the offering price depending upon the amount of the
sale. The offering price will be calculated to two decimal places using standard
rounding criteria. A description of the method of calculating net asset value
per share is included under the caption "Valuation of Fund Shares."
Set forth below is a table showing front-end sales charges and dealer
concessions.
<TABLE>
<CAPTION>
Total Sales Charge
As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Offering Price Invested of Offering Price*,***
<S> <C> <C> <C>
Less than $100,000 2.25% 2.30% 2.00%
$100,000 but less than $250,000 1.75% 1.78% 1.50%
$250,000 but less than $500,000 1.25% 1.26% 1.00%
$500,000 but less than $1,000,000 1.00% 1.01% 0.85%
$1,000,000 or more none none (see below)**
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
**The following commissions will be paid by Distributors, out of its own
resources, to securities dealers who initiate and are responsible for purchases
of $1 million or more: 0.75% on sales of $1 million but less than $2 million,
plus 0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales of $50 million but
less than $100 million, plus 0.15% on sales of $100 million or more. Dealer
concession breakpoints are reset every 12 months for purposes of additional
purchases.
***At the discretion of Distributors, all sales charges may at times be allowed
to the securities dealer. If 90% or more of the sales commission is allowed,
such securities dealer may be deemed to be an underwriter as that term is
defined in the Securities Act of 1933, as amended.
No front-end sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of all
or a portion of investments of $1 million or more within the contingency period
of 12 months. See "How to Sell Shares of the Fund - Contingent Deferred Sales
Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of the shareholder's
current purchase plus the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of the funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds. Included for these
aggregation purposes are (a) the mutual funds in the Franklin Group of Funds
except Franklin Valuemark Funds and Franklin Government Securities Trust (the
"Franklin Funds"), (b) other investment products underwritten by Distributors or
its affiliates (although certain investments may not have the same schedule of
sales charges and/or may not be subject to reduction) and (c) the U.S.
registered mutual funds in the Templeton Group of Funds except Templeton Capital
Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton Variable
Products Series Fund (the "Templeton Funds"). (Franklin Funds and Templeton
Funds are collectively referred to as the "Franklin Templeton Funds.") Sales
charge reductions based upon aggregate holdings of (a), (b) and (c) above
("Franklin Templeton Investments") may be effective only after notification to
Distributors that the investment qualifies for a discount.
Other Payments to Securities Dealers
Either distributors or one of its affiliates may make payments, out of its own
resources, of up to 1% of the amount purchased to securities dealers who
initiate and are responsible for purchases made at net asset value by certain
trust companies and trust departments of banks. See definitions under
"Description of Special Net Asset Value Purchases" in the SAI.
Either distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with sales
of shares of the Franklin Templeton Funds. Compensation may include financial
assistance to securities dealers and payments made in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising, sales campaigns and/or shareholder services and programs
regarding one or more of the Franklin Templeton Funds, and other
dealer-sponsored programs or events. In some instances, this compensation may be
made available only to certain securities dealers whose representatives have
sold or are expected to sell significant amounts of shares of the Franklin
Templeton Funds. Compensation may include payment for travel expenses, including
lodging, incurred in connection with trips taken by invited registered
representatives and members of their families to locations within or outside of
the United States for meetings or seminars of a business nature. Securities
dealers may not use sales of the Fund's shares to qualify for this compensation
to the extent such may be prohibited by the laws of any state or any
self-regulatory agency, such as the National Association of Securities Dealers,
Inc. None of the aforementioned additional compensation is paid for by the Fund
or its shareholders.
Additional terms concerning the offering of the Fund's shares are included in
the SAI.
Certain officers and trustees of the Trust are also affiliated with
Distributors. A detailed description is included in the SAI.
Quantity Discounts in Sales Charges
Shares may be purchased under a variety of plans which provide for a reduced
sales charge. To be certain to obtain the reduction of the sales charge, the
investor or the securities dealer should notify Distributors at the time of each
purchase of shares which qualifies for the reduction. In determining whether a
purchase qualifies for a discount, an investment in any of the Franklin
Templeton Investments may be combined with those of the investor's spouse,
children under the age of 21 and grandchildren under the age of 21. The value of
Class II shares owned by the investor may also be included for this purpose.
In addition, an investment in the Fund may qualify for a reduction in the sales
charge under the following programs:
1. Rights of Accumulation. The cost or current value (whichever is higher) of
existing investments in the Franklin Templeton Investments may be combined with
the amount of the current purchase in determining the sales charge to be paid.
2. Letter of Intent. An investor may immediately qualify for a reduced sales
charge on a purchase of shares of the Fund by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which, if made at one time, would qualify for
a reduced sales charge and grants to Distributors a security interest in the
reserved shares and irrevocably appoints Distributors as attorney-in-fact with
full power of substitution to surrender for redemption any or all shares for the
purpose of paying any additional sales charge due. Purchases under the Letter
will conform with the requirements of Rule 22d-1 under the 1940 Act. The
investor or the investor's securities dealer must inform Investor Services or
Distributors that this Letter is in effect each time a purchase is made.
An investor acknowledges and agrees to the following provisions by completing
the Letter of Intent section of the Shareholder Application: Five percent (5%)
of the amount of the total intended purchase will be reserved in shares of the
Fund, registered in the investor's name, to assure that the full applicable
sales charge will be paid if the intended purchase is not completed. The
reserved shares will be included in the total shares owned as reflected on
periodic statements; income and capital gain distributions on the reserved
shares will be paid as directed by the investor. The reserved shares will not be
available for disposal by the investor until the Letter of Intent has been
completed or the higher sales charge paid. For more information, see "Additional
Information Regarding Purchases" in the SAI.
Although the sales charges on Class II shares cannot be reduced through these
programs, the value of Class II shares owned by the investor may be included in
determining a reduced sales charge to be paid on Class I shares pursuant to the
Letter of Intent and Rights of Accumulation programs.
Group Purchases
An individual who is a member of a qualified group may also purchase shares of
the Fund at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of shares previously
purchased and still owned by the members of the group, plus the amount of the
current purchase. For example, if members of the group had previously invested
and still held $80,000 of Fund shares and now were investing $25,000, the sales
charge would be 1.75%. Information concerning the current sales charge
applicable to a group may be obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, agree to include
sales and other materials related to the Fund in its publications and mailings
to members at reduced or no cost to Distributors, and seek to arrange for
payroll deduction or other bulk transmission of investments to the Fund.
If an investor selects a payroll deduction plan, subsequent investments will be
automatic and will continue until such time as the investor notifies the Fund
and the investor's employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the payroll deduction
information to the Fund, there may be a delay between the time of the payroll
deduction and the time the money reaches the Fund. The investment in the Fund
will be made at the offering price per share determined on the day that both the
check and payroll deduction data are received in required form by the Fund.
Purchases at Net Asset Value
Shares of the Fund may be purchased without the imposition of a front-end sales
charge ("net asset value") or a contingent deferred sales charge by (1)
officers, directors, trustees and full-time employees of the Trust, any of the
Franklin Templeton Funds, or of the Franklin Templeton Group, and by their
spouses and family members, including subsequent investments made by such
parties after cessation of employment; (2) companies exchanging shares or
selling assets pursuant to a merger, acquisition or exchange offer; (3) accounts
managed by the Franklin Templeton Group; (4) registered securities dealers and
their affiliates, for their investment account only, and (5) registered
personnel and employees of securities dealers and by their spouses and family
members, in accordance with the internal policies and procedures of the
employing securities dealer.
Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 365 days, their shares of the Fund or another of
the Class I Franklin Templeton Funds which were purchased with a front-end sales
charge or assessed a contingent deferred sales charge on redemption. If a
different class of shares is purchased, the full front-end sales charge must be
paid at the time of purchase of the new shares. An investor may reinvest an
amount not exceeding the redemption proceeds. While credit will be given for any
contingent deferred sales charge paid on the shares redeemed and subsequently
repurchased, a new contingency period will begin. Shares redeemed in connection
with an exchange into another of the Franklin Templeton Funds (see "Exchange
Privilege") are not considered "redeemed" for this privilege. In order to
exercise this privilege, a written order for the purchase of shares of the Fund
must be received by the Fund or the Fund's Shareholder Services Agent within 365
days after the redemption. The 365 days, however, do not begin to run on
redemption proceeds placed immediately after redemption in a Franklin Bank
Certificate of Deposit ("CD") until the CD (including any rollover) matures.
Reinvestment at net asset value may also be handled by a securities dealer or
other financial institution, who may charge the shareholder a fee for this
service. The redemption is a taxable transaction but reinvestment without a
sales charge may affect the amount of gain or loss recognized and the tax basis
of the shares reinvested. If there has been a loss on the redemption, the loss
may be disallowed if a reinvestment in the same fund is made within a 30-day
period. Information regarding the possible tax consequences of such a
reinvestment is included in the tax section of this Prospectus and the SAI.
Shares of the Fund or another of the Franklin Templeton Funds Class I shares may
be purchased at net asset value and without a contingent deferred sales charge
by persons who have received dividends and capital gains distributions in cash
from investments in the Fund within 365 days of the payment date of such
distribution. To exercise this privilege, a written request to reinvest the
distribution must accompany the purchase order. Additional information may be
obtained from Shareholder Services at 1-800/632-2301. See "Distributions in
Cash" under "Distributions to Shareholders."
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by investors who have, within
the past 60 days, redeemed an investment in a mutual fund which is not part of
the Franklin Templeton Funds and which was subject to a front-end sales charge
or a contingent deferred sales charge and which has investment objectives
similar to those of the Fund.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by broker-dealers, who have
entered into a supplemental agreement with Distributors, or by registered
investment advisors affiliated with such broker-dealers, on behalf of their
clients who are participating in a comprehensive fee program (sometimes known as
a wrap fee program).
Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or city,
or any instrumentality, department, authority or agency thereof which has
determined that the Fund is a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or its investment manager on arbitrage rebate
calculations. If an investment by an eligible governmental authority at net
asset value is made through a securities dealer who has executed a dealer
agreement with Distributors, Distributors or one of its affiliates may make a
payment, out of its own resources, to such securities dealer in an amount not to
exceed 0.25% of the amount invested. Contact the Franklin Templeton
Institutional Services Department for additional information.
Description of Special Net Asset Value Purchases
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trust companies and bank
trust departments for funds over which they exercise exclusive discretionary
investment authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity. These purchases are subject to minimum
requirements with respect to amount of purchase, which may be established by
Distributors. Currently, those criteria require that the amount invested or to
be invested during the subsequent 13-month period in this Fund or any of the
Franklin Templeton Investments must total at least $1,000,000. Orders for such
accounts will be accepted by mail accompanied by a check or by telephone or
other means of electronic data transfer directly from the bank or trust company,
with payment by federal funds received by the close of business on the next
business day following such order.
Refer to the SAI for further information regarding net asset value purchases.
General
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling Fund shares may be required to register as dealers pursuant
to state law.
Programs and Privileges
Available to Fund Shareholders
Certain of the programs and privileges described in this section may not be
available directly from the Fund to shareholders whose shares are held, of
record, by a financial institution or in a "street name" account or networked
account through the National Securities Clearing Corporation ("NSCC") (see the
section captioned "Account Registrations" in this Prospectus).
Share Certificates
Shares for an initial or a subsequent investment, including the reinvestment of
dividends and capital gain distributions, are generally credited to an account
in the name of an investor on the books of the Fund, without the issuance of a
share certificate. Maintaining shares in uncertificated form (also known as
"plan balance") minimizes the risk of loss or theft of a share certificate. A
lost, stolen or destroyed certificate cannot be replaced without obtaining a
sufficient indemnity bond. The cost of such a bond, which is generally borne by
the shareholder, can be 2% or more of the value of the lost, stolen or destroyed
certificate. A certificate will be issued if requested by the shareholder or by
the securities dealer.
Confirmations
A confirmation statement will be sent to each shareholder quarterly to reflect
the dividends reinvested during that period and after each other transaction
which affects the shareholder's account. This statement will also show the total
number of shares owned by the shareholder, including the number of shares in
"plan balance" for the account of the shareholder.
Automatic Investment Plan
Under the Automatic Investment Plan, a shareholder may be able to arrange to
make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which maintains
the account is a member of the Automated Clearing House, or by preauthorized
checks drawn on the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Automatic Investment Plan Application
included with this Prospectus contains the requirements applicable to this
program. In addition, shareholders may obtain more information concerning this
program from their securities dealers or from Distributors.
The market value of the Fund's shares is subject to fluctuation. Before
undertaking any plan for systematic investment, the investor should keep in mind
that such a program does not assure a profit or protect against a loss.
Systematic Withdrawal Plan
A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account, provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum amount
which the shareholder may withdraw is $50 per withdrawal transaction, although
this is merely the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. The plan may be established on a monthly,
quarterly, semiannual or annual basis. If the shareholder establishes a plan,
any capital gain distributions and income dividends paid by the Fund will be
reinvested for the shareholder's account in additional shares at net asset
value. Payments will then be made from the liquidation of shares at net asset
value on the day of the transaction (which is generally the first business day
of the month in which the payment is scheduled) with payment generally received
by the shareholder three to five days after the date of liquidation. By
completing the "Special Payment Instructions for Distributions" section of the
Shareholder Application included with this Prospectus, a shareholder may direct
the selected withdrawals to another of the Franklin Templeton Funds, to another
person, or directly to a checking account. If the bank at which the account is
maintained is a member of the Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If this last option is requested,
the shareholder should allow at least 15 days for initial processing. Payments
which may be paid in the interim will be sent to the address of record.
Liquidation of shares may reduce or possibly exhaust the shares in the
shareholder's account, to the extent withdrawals exceed shares earned through
dividends and distributions, particularly in the event of a market decline. If
the withdrawal amount exceeds the total plan balance, the account will be closed
and the remaining balance will be sent to the shareholder. As with other
redemptions, a liquidation to make a withdrawal payment is a sale for federal
income tax purposes. Because the amount withdrawn under the plan may be more
than the shareholder's actual yield or income, part of the payment may be a
return of the shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Fund would be disadvantageous because of the sales
charge on the additional purchases. Also, redemptions of shares may be subject
to a contingent deferred sales charge if the shares are redeemed within 12
months of the calendar month of the original purchase date. The shareholder
should ordinarily not make additional investments of less than $5,000 or three
times the annual withdrawals under the plan during the time such a plan is in
effect. The applicable contingent deferred sales charge is waived for share
redemptions of up to 1% monthly of an account's net asset value (12% annually,
6% semiannually, 3% quarterly). For example, if an account maintained an annual
balance of $1,000,000, only $120,000 could be withdrawn through a once-yearly
Systematic Withdrawal Plan free of charge; any amount over that $120,000 would
be assessed a 1% contingent deferred sales charge. A Systematic Withdrawal Plan
may be terminated on written notice by the shareholder or the Fund, and it will
terminate automatically if all shares are liquidated or withdrawn from the
account, or upon the Fund's receipt of notification of the death or incapacity
of the shareholder. Shareholders may change the amount (but not below the
specified minimum) and schedule of withdrawal payments, or suspend one such
payment, by giving written notice to Investor Services at least seven business
days prior to the end of the month preceding a scheduled payment. Share
certificates may not be issued while a Systematic Withdrawal Plan is in effect.
Institutional Accounts
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
the Franklin Templeton Institutional Services Department at 1-800/321-8563.
Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives or policies. The shares of most of these mutual funds are
offered to the public with a sales charge. If a shareholder's investment
objective or outlook for the securities markets changes, the Fund shares may be
exchanged for shares of other Franklin Templeton Funds Class I shares which are
eligible for sale in the shareholder's state of residence and in conformity with
such fund's stated eligibility requirements and investment minimums. Before
making an exchange, investors should review the prospectuses of the fund they
wish to exchange from and the fund they wish to exchange into for all specific
requirements or limitations on exercising the exchange privilege, for example,
minimum holding periods or applicable sales charges. No exchanges between
different classes of shares are allowed and, therefore, shares of the Fund may
not be exchanged for Class II shares of other Franklin Templeton Funds.
Shareholders of a Class II Franklin Templeton Fund may, however, elect to direct
their dividend and capital gain distributions to the Fund or another Class I
Franklin Templeton Fund. Shareholders may choose to redeem shares of the Fund
and purchase Class II shares of other Franklin Templeton Funds, but such
purchase will be subject to that Fund's Class II front-end and contingent
deferred sales charges for the contingency period of 18 months.
Exchanges may be made in any of the following ways:
Exchanges By Mail
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
Exchanges By Telephone
Shareholders, or their investment representative of record, if any, may exchange
shares of the Fund by telephone by calling Investor Services at 1-800/632-2301
or the automated Franklin TeleFACTS(R) system (day or night) at 1-800/247-1753.
If the shareholder does not wish this privilege extended to a particular
account, the Fund or Investor Services should be notified.
The telephone exchange privilege allows a shareholder to exchange shares from
the Fund into Class I shares of an identically registered account in one of the
other available Franklin Templeton Funds. The telephone exchange privilege is
available only for uncertificated shares or those which have previously been
deposited in the shareholder's account. The Fund and Investor Services will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. Please refer to "Telephone Transactions - Verification
Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, shareholders should follow the other
exchange procedures discussed in this section, including the procedures for
processing exchanges through securities dealers.
Exchanges Through Securities Dealers
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "Exchanges By Telephone"
above. A dealer-ordered exchange will be effective only for uncertificated
shares on deposit in the shareholder's account or for which certificates have
previously been deposited. A securities dealer may charge a fee for handling an
exchange.
Additional Information Regarding Exchanges
If the account has shares subject to a contingent deferred sales charge, the
shares will be exchanged into the new account on a "first-in, first-out" basis.
The contingency period of 12 months during which a contingent deferred sales
charge may be assessed will be tolled (or stopped) for the period such shares
are exchanged into and held in a Franklin or Templeton money market fund. See
also "How to Sell Shares of the Fund - Contingent Deferred Sales Charge."
Exchanges are made on the basis of the net asset values of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the investment on
which no sales charge was paid was transferred in from a fund on which the
investor paid a sales charge. Exchanges of shares of the Fund which were
purchased with a lower sales charge to a fund which has a higher sales charge
will be charged the difference, unless the shares were held in the Fund for at
least six months prior to executing the exchange. When an investor requests the
exchange of the total value of the Fund account, accrued but unpaid income
dividends and capital gain distributions will be reinvested in the Fund at the
net asset value on the date of the exchange, and then the entire share balance
will be exchanged into the new fund in accordance with the procedures set forth
above. Because the exchange is considered a redemption and purchase of shares,
the shareholder may realize a gain or loss for federal income tax purposes.
Backup withholding and information reporting may also apply. Information
regarding the possible tax consequences of such an exchange is included in the
tax section in this Prospectus and in the SAI.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate 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 should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing municipal
securities, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objective exist immediately. Subsequently,
this money will be withdrawn from such short-term municipal securities and
invested in portfolio securities in as orderly a manner as is possible when
attractive investment opportunities arise.
The Exchange Privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
Timing Accounts
"Timing Accounts" are not permitted to purchase shares of the Fund or to
exchange into the Fund. This policy does not affect any other types of investor.
Timing Accounts generally include market timing or allocation services; accounts
administered as to redeem or purchase shares based upon certain predetermined
market indicators; or any person whose transactions seem to follow a timing
pattern.
How to Sell Shares of the Fund
A shareholder may at any time liquidate shares owned and receive from the Fund
the value of the shares. Shares may be redeemed in any of the following ways:
Redemptions by Mail
Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from the
Fund the value of the shares based upon the net asset value per share (less the
contingent deferred sales charge, if applicable) next computed after the written
request in proper form is received by Investor Services. Redemption requests
received after the time at which the net asset value is calculated (at the
scheduled closing of the New York Stock Exchange (the "Exchange") which is
generally 1:00 p.m. Pacific time) each day that the Exchange is open for
business will receive the price calculated on the following business day.
Shareholders are requested to provide a telephone number(s) where they may be
reached during business hours, or in the evening if preferred. Investor
Services' ability to contact a shareholder promptly when necessary will speed
the processing of the redemption.
To be considered in proper form, signature(s) must be guaranteed if the
redemption request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage
firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated or
may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.
Signature(s) must be guaranteed by an "eligible guarantor institution" as
defined under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered shareholders exactly as the account is
registered, with the signature(s) guaranteed as referenced above. Shareholders
are advised, for their own protection, to send the share certificate and
assignment form in separate envelopes if they are being mailed in for
redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officer(s) of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustee(s) and
(2) a copy of the pertinent pages of the trust document listing the trustee(s)
or a Certification for Trust if the trustee(s) are not listed on the account
registration.
Custodial - Signature guaranteed letter of instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form.
Redemptions by Telephone
Shareholders who complete the Franklin Templeton Telephone Redemption
Authorization Agreement (the "Agreement"), included with this Prospectus, may
redeem shares of the Fund by telephone. Information may also be obtained by
writing to the Fund or Investor Services at the address shown on the cover or by
calling 1-800/632-2301. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions given by telephone are genuine.
Shareholders, however, bear the risk of loss in certain cases as described under
"Telephone Transactions - Verification Procedures."
For shareholder accounts with the completed Agreement on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before the scheduled close of
the Exchange (generally 1:00 p.m. Pacific time) on any business day will be
processed that same day. The redemption check will be sent within seven days,
made payable to all the registered owners on the account, and will be sent only
to the address of record. Redemption requests by telephone will not be accepted
within 30 days following an address change by telephone. In that case, a
shareholder should follow the other redemption procedures set forth in this
Prospectus. Institutional accounts (certain corporations, bank trust
departments, and government entities which qualify to purchase shares at net
asset value pursuant to the terms of this Prospectus) which wish to execute
redemptions in excess of $50,000 must complete an Institutional Telephone
Privileges Agreement which is available from the Franklin Templeton
Institutional Services Department by telephoning 1-800/321-8563.
Redeeming Shares Through Securities Dealers
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if the
shareholder redeems shares through a dealer, the redemption price will be the
net asset value next calculated after the shareholder's dealer receives the
order which is promptly transmitted to the Fund, rather than on the day the Fund
receives the shareholder's written request in proper form. The documents
described under "Redemptions by Mail" above, as well as a signed letter of
instruction, are required regardless of whether the shareholder redeems shares
directly or submits such shares to a securities dealer for repurchase. A
shareholder's letter should reference the Fund, the account number, the fact
that the repurchase was ordered by a dealer and the dealer's name. Details of
the dealer-ordered trade, such as trade date, confirmation number, and the
amount of shares or dollars, will help speed processing of the redemption. The
seven-day period within which the proceeds of the shareholder's redemption will
be sent will begin when the Fund receives all documents required to complete
("settle") the repurchase in proper form. The redemption proceeds will not earn
dividends or interest during the time between receipt of the dealer's repurchase
order and the date the redemption is processed upon receipt of all documents
necessary to settle the repurchase. Thus, it is in a shareholder's best interest
to have the required documentation completed and forwarded to the Fund as soon
as possible. The shareholder's dealer may charge a fee for handling the order.
The SAI contains more information on the redemption of shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers, investments of $1
million or more redeemed within the contingency period of 12 months of the
calendar month of such investment will be assessed a contingent deferred sales
charge, unless one of the exceptions described below applies. The charge is 1%
of the lesser of the value of the shares redeemed (exclusive of reinvested
dividends and capital gain distributions) or the net asset value at the time of
purchase of such shares, and is retained by Distributors. The contingent
deferred sales charge is waived in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation of those shares held less than the
contingency period; (ii) shares purchased with reinvested dividends and capital
gain distributions; and (iii) other shares held longer than the contingency
period. Shares subject to a contingent deferred sales charge will then be
redeemed on a "first in, first out" basis. For tax purposes, a contingent
deferred sales charge is treated as either a reduction in redemption proceeds or
an adjustment to the cost basis of the shares redeemed.
The contingent deferred sales charge is waived for: exchanges; any account fees;
redemptions through a Systematic Withdrawal Plan set up for shares prior to
February 1, 1995, and for Systematic Withdrawal Plans set up thereafter,
redemptions of up to 1% monthly of an account's net asset value (3% quarterly,
6% semiannually or 12% annually); redemptions initiated by the Fund due to a
shareholder's account falling below the minimum specified account size; and
redemptions following the death of the shareholder or the beneficial owner.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Requests for redemptions of a specified dollar amount, unless otherwise
specified, will result in additional shares being redeemed to cover any
applicable contingent deferred sales charge while requests for redemption of a
specific number of shares will result in the applicable contingent deferred
sales charge being deducted from the total dollar amount redeemed.
Additional Information Regarding Redemptions
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption. In addition, the right of redemption may be suspended or
the date of payment postponed if the Exchange is closed (other than customary
closing) or upon the determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it, by order, for the
protection of shareholders. Of course, the amount received may be more or less
than the amount invested by the shareholder, depending on fluctuations in the
market value of securities owned by the Fund.
Other Information
Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Fund nor its affiliates will be liable for any loss to the shareholder caused by
the shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the securities dealer may
call Franklin's Dealer Services Department.
Telephone Transactions
Shareholders of the Fund and their investment representative of record, if any,
may be able to execute various transactions, including the following, by calling
Investor Services at 1-800/632-2301.
Shareholders may: (i) effect a change in address, (ii) change a dividend option,
(iii) transfer Fund shares in one account to another identically registered
account in the Fund, (iv) request the issuance of certificates, to be sent to
the address of record only, and (v) exchange Fund shares as described in this
Prospectus by telephone. In addition, shareholders who complete and file an
Agreement as described under "How to Sell Shares of the Fund - Redemptions by
Telephone" will be able to redeem shares of the Fund.
Verification Procedures
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to the shareholder caused by an unauthorized transaction.
The Fund and Investor Services may be liable for any losses due to unauthorized
or fraudulent instructions in the event such reasonable procedures are not
followed. Shareholders are, of course, under no obligation to apply for or
accept telephone transaction privileges. In any instance where the Fund or
Investor Services is not reasonably satisfied that instructions received by
telephone are genuine, the requested transaction will not be executed, and
neither the Fund nor Investor Services will be liable for any losses which may
occur because of a delay in implementing a transaction.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
investment representative for assistance, or to send written instructions to the
Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.
The telephone transaction privilege may be modified or discontinued by the Fund
at any time upon 60 days' written notice to shareholders.
Valuation of Fund Shares
The net asset value per share of the Fund is determined as of the scheduled
close of the Exchange (generally 1:00 p.m. Pacific time) each day that the
Exchange is open for trading. Many newspapers carry daily quotations of the
prior trading day's closing "bid" (net asset value) and "ask" (offering price,
which includes the maximum front-end sales charge of the Fund).
The net asset value per share of the Fund is determined in the following manner:
The aggregate of all liabilities is deducted from the aggregate gross value of
all assets, and the difference is divided by the number of shares of the Fund
outstanding at the time. Assets in the Fund's portfolio are valued as described
in the SAI.
How to Get Information Regarding an Investment in the Fund
Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.
From a touch-tone phone, Franklin and Templeton shareholders may access an
automated system (day or night) which offers the following features:
By calling the Franklin TeleFACTS(R) system at 1-800/247-1753, shareholders may
obtain Class I and Class II account information, current price and, if
available, yield or other performance information specific to the Fund or any
Franklin Templeton Fund. In addition, Franklin Class I shareholders may process
an exchange, within the same class, into an identically registered Franklin
account; and request duplicate confirmation or year-end statements, money fund
checks, if applicable, and deposit slips.
Fund information may be accessed by entering Fund Code 152 followed by the #
sign. The system's automated operator will prompt the caller with easy to follow
step-by-step instructions from the main menu. Other features may be added in the
future.
To assist shareholders and securities dealers wishing to speak directly with a
representative, the following is a list of the various Franklin departments,
telephone numbers and hours of operation to call. The same numbers may be used
when calling from a rotary phone:
Hours of Operation
Department Name Telephone No. (Monday through Friday)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 5:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin or Templeton's
service departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
Performance
Advertisements, sales literature and communications to shareholders may contain
several measures of the Fund's performance, including current yield, tax
equivalent yield, various expressions of total return, current distribution rate
and taxable equivalent distribution rate. They may occasionally cite statistics
to reflect its volatility or risk.
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five- and
ten-year periods, or portion thereof, to the extent applicable, through the end
of the most recent calendar quarter, assuming reinvestment of all distributions.
The Fund may also furnish total return quotations for other periods or based on
investments at various sales charge levels or at net asset value. For such
purposes, total return equals the total of all income and capital gain paid to
shareholders, assuming reinvestment of all distributions, plus (or minus) the
change in the value of the original investment, expressed as a percentage of the
purchase price.
Current yield reflects the income per share earned by the Fund's portfolio
investments; it is calculated by dividing the Fund's net investment income per
share during a recent 30-day period by the maximum public offering price on the
last day of that period and annualizing the result. Tax equivalent yield
demonstrates the yield from a taxable investment necessary to produce an
after-tax yield equivalent to that of a fund which invests in tax-exempt
obligations. It is computed by dividing the tax-exempt portion of a fund's yield
(calculated as indicated) by one minus a stated income tax rate and adding the
product to the taxable portion (if any) of the fund's yield.
Current yield and tax equivalent yield, which are calculated according to a
formula prescribed by the SEC (see the SAI), are not indicative of the dividends
or distributions which were or will be paid to the Fund's shareholders.
Dividends or distributions paid to shareholders are reflected in the current
distribution rate or taxable equivalent distribution rate, which may be quoted
to shareholders. The current distribution rate is computed by dividing the total
amount of dividends per share paid by the Fund during the past 12 months by a
current maximum offering price. A taxable equivalent distribution rate
demonstrates the taxable distribution rate necessary to produce an after tax
distribution rate equivalent to the Fund's distribution rate (calculated as
indicated above). Under certain circumstances, such as when there has been a
change in the amount of dividend payout or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid during the
period such policies were in effect, rather than using the dividends during the
past 12 months. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as short-term capital gain, and is
calculated over a different period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against Fund income and will assume the payment of the maximum
sales charge on the purchase of shares. When there has been a change in the
sales charge structure, the historical performance figures will be restated to
reflect the new rate. The investment results of the Fund, like all other
investment companies, will fluctuate over time; thus, performance figures should
not be considered to represent what an investment may earn in the future or what
the Fund's yield, tax equivalent yield, distribution rate, taxable equivalent
distribution rate or total return may be in any future period.
General Information
Reports to Shareholders
The Fund's fiscal year ends June 30. Annual Reports containing audited financial
statements of the Trust, including the auditors' report, and Semi-Annual Reports
containing unaudited financial statements are automatically sent to
shareholders. To reduce the volume of mail sent to each household as well as to
reduce Fund expenses, Investor Services will attempt to identify related
shareholders within a household, and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to the Trust at
the telephone number or address set forth on the cover page of this Prospectus.
Additional information on Fund performance is included in the Fund's Annual
Report to Shareholders and the SAI.
Organization and Voting Rights
The Trust was organized as a Massachusetts business trust on July 18, 1985. The
Agreement and Declaration of Trust permits the trustees to issue an unlimited
number of full and fractional shares of beneficial interest without par value,
which may be issued in any number of series and classes. Shares issued will be
fully paid and non-assessable and will have no preemptive, conversion, or
sinking rights. Shares of each series have equal and exclusive rights as to
dividends and distributions as declared by such series and the net assets of
such series upon liquidation or dissolution. The Trust reserves the right to
issue additional classes of shares of the Fund, or to add additional series to
the Trust.
Shares of each series have equal rights as to voting and vote separately as to
issues affecting that series, or the Trust, unless otherwise permitted by the
1940 Act. Voting rights are noncumulative, so that in any election of trustees
the holders of more than 50% of the shares of the Trust voting can elect all of
the trustees, if they choose to do so, and in such event the holders of the
remaining shares voting will not be able to elect any person or persons to the
Board. The Trust does not intend to hold annual shareholders' meetings. The
Trust may, however, hold a special shareholders' meeting of a series for such
purposes as changing fundamental investment restrictions for the series,
approving a new management agreement or any other matters which are required to
be acted on by shareholders under the 1940 Act. A meeting may also be called by
the trustees in their discretion or by shareholders holding at least ten percent
of the outstanding shares of the Trust. Shareholders will receive assistance in
communicating with other shareholders in connection with the election or removal
of trustees as provided in Section 16(c) of the 1940 Act.
The Board may from time to time issue other funds of the Trust, the assets and
liabilities of which will likewise be separate and distinct from any other fund.
Redemptions by the Fund
The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $50, but only where the value
of such account has been reduced by the shareholder's prior voluntary redemption
of shares and has been inactive (except for the reinvestment of distributions)
for a period of at least six months, provided advance notice is given to the
shareholder. More information is included in the SAI.
Account Registrations
An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, a shareholder may transfer an account in the Fund carried
in "street" or "nominee" name by the shareholder's securities dealer to a
comparably registered Fund account maintained by another securities dealer. Both
the delivering and receiving securities dealers must have executed dealer
agreements on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not process the
transfer and will so inform the shareholder's delivering securities dealer. To
effect the transfer, a shareholder should instruct the securities dealer to
transfer the account to a receiving securities dealer and sign any documents
required by the securities dealer(s) to evidence consent to the transfer. Under
current procedures, the account transfer may be processed by the delivering
securities dealer and the Fund after the Fund receives authorization in proper
form from the shareholder's delivering securities dealer. In the future it may
be possible to effect such transfers electronically through the services of the
NSCC.
The Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of record on an
investor's account, the investor will be deemed to have authorized the use of
electronic instructions on the account, including, without limitation, those
initiated through the services of the NSCC, to have adopted as instruction and
signature any such electronic instructions received by the Fund and the
Shareholder Services Agent, and to have authorized them to execute the
instructions without further inquiry. At the present time, such services which
are available, include the NSCC's "Networking," "Fund/SERV," and "ACATS"
systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment, or by calling Franklin's Fund
Information Department.
Important Notice Regarding
Taxpayer IRS Certifications
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the Internal Revenue Service ("IRS") any taxable dividend, capital
gain distribution, or other reportable payment (including share redemption
proceeds) and withhold 31% of any such payments made to individuals and other
non-exempt shareholders who have not provided a correct taxpayer identification
number ("TIN") and made certain required certifications that appear in the
Shareholder Application. A shareholder may also be subject to backup withholding
if the IRS or a securities dealer notifies the Fund that the number furnished by
the shareholder is incorrect or that the shareholder is subject to backup
withholding for previous under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by the
shareholder is, in fact, incorrect or upon the failure of a shareholder who has
completed an "awaiting TIN" certification to provide the Fund with a certified
TIN within 60 days after opening the account.
Portfolio Operations
The following persons are primarily responsible for the day-to-day management of
the Fund's portfolio: Bernard Schroer and Andrew Jennings, Sr. since the Fund's
inception and Thomas Kenny since August 1994.
Thomas J. Kenny
Senior Vice President
Franklin Advisers, Inc.
Mr. Kenny is Senior Vice President of the investment manager and is director of
Franklin's municipal bond department. He joined Franklin in 1986. He received a
Bachelor of Arts degree in Business and Economics from the University of
California at Santa Barbara and Master of Science degree in Finance from Golden
Gate University. He is a member of several municipal securities industry-related
committees and associations.
Bernard Schroer
Vice President
Franklin Advisers, Inc.
Mr. Schroer was the manager of trading at Kidder Peabody and Company, Inc. from
1974 to 1984. He has a degree in Finance from Santa Clara University and is
currently a member of various municipal securities industry related committees
and associations. He joined Advisers in 1987.
Andrew Jennings, Sr.
Vice President
Franklin Advisers, Inc.
Mr. Jennings attended Villanova University in Philadelphia and has been in the
securities industry for over 33 years. From 1985 to 1990, Mr. Jennings was First
Vice President and Manager of the Municipal Institutional Bond Department at
Dean Witter Reynolds, Inc. He is a member of several municipal securities
industry related committees and associations.
Risk Factors in California
The following information as to certain California risk factors is given to
investors in view of the Fund's policy of investing primarily in California
state and municipal issuers. The information is based primarily upon information
derived from public documents relating to securities offerings of California
state and municipal issuers, from independent municipal credit reports and
historically reliable sources, but has not been independently verified by the
Fund.
California constitutional and other laws affect the ability of California state
and municipal issuers to obtain sufficient revenue to pay their bond
obligations. In 1978, California voters approved an amendment to the California
Constitution known as Proposition 13. Proposition 13 limits ad valorem taxes on
real property and restricts the ability of taxing entities to increase real
property taxes. Legislation passed subsequent to Proposition 13, however,
provided for the redistribution of California's General Fund surplus to local
agencies, the reallocation of revenues to local agencies and the assumption of
certain local obligations by the state so as to help California municipal
issuers to raise revenue to pay their bond obligations. It is unknown, however,
whether additional revenue redistribution legislation will be enacted in the
future and whether, if enacted, such legislation would provide sufficient
revenue for such California issuers to pay their obligations. The state is also
subject to another constitutional amendment, Article XIIIB, which may have an
adverse impact on California state and municipal issuers. Article XIIIB
restricts the state from spending certain appropriations in excess of an
appropriations limit imposed for each state and local government entity. If
revenues exceed such appropriations limit, such revenues must be returned either
as revisions in the tax rates or fee schedules.
The past four years have challenged California's resiliency, as cyclical and
structural problems have been addressed. The national recession severely
affected California and its effects have lingered. The magnitude of California's
military-industrial complex and effects of the recession has resulted in a loss
of more than 700,000 jobs. Of the approximate 700,000 jobs lost, it is estimated
240,000 have been restored. Base closures have likewise impacted state and local
economies. California's social welfare and entitlement programs have strained
finances as caseload growth has exceeded resource availability. The high
priority of public safety has resulted in the enactment of strong crime
legislation that is both capital and labor intensive. California has been
affected by natural catastrophes including earthquakes, wildfires, floods and
droughts.
By the fall of 1993 it had become apparent the California economy had reached a
trough and recovery was underway. During 1994 the state's economy paralleled the
broad-based expansion occurring on the national level. California's economy
continued to gain momentum through 1994 as revenue collections exceeded budget
projections. The state's unemployment rate opened 1994 at 10.1 percent and
declined to 7.7 percent at calendar year-end. California's unemployment rate
rose slightly in January 1995 to 8.2 percent, perhaps reflecting the effect of
seven rate increases over the past year. The number of jobless in January 1995
was approximately 1.3 million, reflecting a decrease of 300,000 from the prior
year.
In July of 1994, both S&P and Moody's lowered the general obligation bond
ratings of the state of California from A+ to A and Aa to A1, respectively.
These revisions reflected the state's heavy reliance on the short-term note
market to finance its cash imbalance and the likelihood that this exposure will
persist for at least another two years. For more information on these ratings
revisions and the state's current budget, please refer to the Fund's SAI.
On December 6, 1994, Orange County, California (the "County"), together with its
pooled investment funds (the "Orange County Funds" or "Funds") filed for
protection under Chapter 9 of the federal Bankruptcy Code, after reports that
the Orange County Funds had suffered significant market losses in their
investments, causing a liquidity crisis for the Orange County Funds and the
County. More than 180 other public entities, most of which, but not all, are
located in the County, were also depositors in the Orange County Funds. As of
mid-January, 1995, following a restructuring of most of the Orange County Funds'
assets to increase their liquidity and reduce their exposure to interest rate
increases, the County estimated the Orange County Funds' loss at about $1.69
billion, or 22% of their initial deposits of approximately $7.5 billion.
Following the bankruptcy filing many of the entities which deposited moneys in
the Orange County Funds, including the County, faced cash flow difficulties
because of the bankruptcy filing and would have been required to reduce programs
or capital projects. On May 2, 1995, the bankruptcy court approved a settlement
between the County and the participants in the Orange County Funds which
provides for participants to receive 100% of their investment balances. The
settlement provides an initial cash distribution of 77% of their aggregate
investment balance followed by a combination of recovery notes and other claims.
The initial 77% distribution was released on May 19, 1995, which will greatly
reduce the cash flow difficulties faced by depositors.
The state has no existing obligation with respect to any outstanding obligations
or securities of the County or any of the other participating entities. However,
in the event the County is unable to maintain county administered state programs
because of insufficient resources, it may be necessary for the state to
intervene, but the state cannot presently predict what, if any, action may
occur. At this time, it appears that school districts may have collectively lost
up to $230 million from the amounts they had on deposit in the Orange County
Funds. Under existing legal precedent, the state is obligated to intervene when
a school district's fiscal problems would otherwise deny its students basic
educational quality. The state is not presently able to predict whether any
school districts will face insolvency because of their participation in the
Funds, and if so, the potential amount or form of aid which the state may have
to provide. The Governor has called a special session of the Legislature which
is expected to consider various responses to the Orange County situation.
Franklin California
Tax-Free Trust
Franklin California Insured
Tax-Free Income Fund
Franklin California Tax-Exempt
Money Fund
PROSPECTUS November 1, 1995
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin California Tax-Free Trust (the "Trust") is an open-end management
investment company consisting of two diversified and one non-diversified Funds.
This Prospectus pertains only to the two diversified Funds listed above,
referred to herein as the "Insured Fund" and "Money Fund," respectively. Each
Fund in the Trust intends to concentrate its investments in California municipal
securities and seeks to provide investors with as high a level of income exempt
from federal and California personal income taxes as is consistent with prudent
investment management, while seeking preservation of shareholders' capital. The
Money Fund also seeks liquidity in its investments.
The Money Fund is a no-load money market fund offering investors a convenient
way to invest in a diversified, professionally managed portfolio of high
quality, short-term California municipal securities. Its portfolio securities
are not covered by insurance policies. AN INVESTMENT IN THE MONEY FUND IS
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THE MONEY FUND ATTEMPTS
TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE, ALTHOUGH NO ASSURANCE
CAN BE GIVEN THAT IT WILL BE ABLE TO DO SO.
The Insured Fund invests in California municipal securities which are covered by
insurance policies providing for the scheduled payment of principal and interest
in the event of non-payment by the issuer, in securities backed by the full
faith and credit of the U.S. government, in municipal securities secured by such
U.S. government obligations, and in short-term obligations of issuers with the
highest ratings from Moody's Investors Service ("Moody's"), Standard & Poor's
Corporation ("S&P") or Fitch Investors Service, Inc. ("Fitch"). All insured
securities not insured by the issuer will be insured by a qualified municipal
bond insurer. An investment in the Insured Fund is not insured by the U.S.
government or the state of California.
The Insured Fund offers two classes of shares to its investors: Insured Fund -
Class I ("Class I") and Insured Fund - Class II ("Class II"). Investors can
choose between Class I shares, which generally bear a higher front-end sales
charge and lower ongoing Rule 12b-1 distribution fees ("Rule 12b-1 fees"), and
Class II shares, which generally have a lower front-end sales charge and higher
ongoing Rule 12b-1 fees. Investors should consider the differences between the
two classes, including the impact of sales charges and Rule 12b-1 fees, in
choosing the more suitable class given their anticipated investment amount and
time horizon. See "How to Buy Shares of the Funds - Differences Between Class I
and Class II."
This Prospectus is intended to set forth in a clear and concise manner
information about the Trust and the Insured and Money Funds that a prospective
investor should know before investing. After reading the Prospectus, it should
be retained for future reference; it contains information about the purchase and
sale of shares and other items which a prospective investor will find useful to
have.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY. SHARES OF THE FUNDS INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
A Statement of Additional Information (the "SAI") concerning the Trust, dated
November 1, 1995, as may be amended from time to time, provides a further
discussion of certain areas in this Prospectus and other matters which may be of
interest to some investors. It has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated herein by reference. A copy is available
without charge from the Trust or the Trust's principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors"), at the address or
telephone number shown above.
This Prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this Prospectus. Further
information may be obtained from the underwriter.
Contents Page
Expense Table........................... 3
Financial Highlights.................... 4
About the Trust......................... 5
Investment Objective and
Policies of Each Fund.................. 6
Insurance............................... 12
Management of the Trust................. 14
Distributions to Shareholders........... 16
Taxation of the Funds
and Their Shareholders................. 18
How to Buy Shares of the Funds.......... 20
Programs and Privileges Available
to Shareholders of the Funds........... 29
Exchange Privilege...................... 31
How to Sell Shares of the Funds......... 34
Telephone Transactions.................. 39
Valuation of Shares
of Each of the Funds................... 40
How to Get Information
Regarding an Investment in the Funds... 41
Performance............................. 42
General Information..................... 43
Account Registrations................... 45
Important Notice Regarding
Taxpayer IRS Certifications............ 46
Portfolio Operations.................... 46
Risk Factors in California.............. 47
Expense Table
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in each Fund. These figures are based on aggregate
operating expenses of shares of the Money Fund, and Class I shares of the
Insured Fund for the fiscal year ended June 30, 1995.
<TABLE>
<CAPTION>
Insured Insured
Fund Fund Money
Class I Class II Fund
Shareholder Transaction Expenses
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)........................ 4.25% 1.00%+ NONE
Deferred Sales Charge....................................... NONE++ 1.00%+++ NONE
Exchange Fee (per transaction).............................. NONE NONE $5.00*
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees............................................. .47% .47% .49%
12b-1 Fees.................................................. .07%** .65%** NONE
Other Expenses:
Shareholder Servicing Costs............................... .01% .01% .07%
Reports to Shareholders................................... .02% .02% .05%
Other..................................................... .02% .02% .03%
Total Other Expenses........................................ .05% .05%*** .15%
Total Fund Operating Expenses............................... .59% 1.17% .64%
</TABLE>
+Although Class II has a lower front-end sales charge than Class I, over time
the higher Rule 12b-1 fee for Class II may cause shareholders to pay more for
Class II shares than for Class I shares. Given the maximum front-end sales
charge and the rate of Rule 12b-1 fees of each class, it is estimated that this
will take less than six years for shareholders who maintain total shares valued
at less than $100,000 in the Franklin Templeton Funds. Shareholders with larger
investments in the Franklin Templeton Funds will reach the crossover point more
quickly. (See "How to Buy Shares of the Funds - Insured Fund - Purchase Price of
Insured Fund Shares" for the definition of Franklin Templeton Funds and similar
references.)
++Class I investments of $1 million or more are not subject to a front-end sales
charge; however, a contingent deferred sales charge of 1% is generally imposed
on certain redemptions within a "contingency period" of 12 months of the
calendar month of such investments. See "How to Sell Shares of the Funds -
Contingent Deferred Sales Charge."
+++Class II shares redeemed within a "contingency period" of 18 months of the
calendar month of such investments are subject to a 1% contingent deferred sales
charge. See "How to Sell Shares of the Fund - Contingent Deferred Sales Charge."
*$5.00 fee imposed only on Timing Accounts as described under "Exchange
Privilege." All other exchanges are processed without a fee.
**The maximum amount of Rule 12b-1 fees allowed pursuant to Class I's
distribution plan is 0.10%. Consistent with National Association of Securities
Dealers, Inc.'s rules, it is possible that the combination of front-end sales
charges and Rule 12b-1 fees could cause long-term shareholders to pay more than
the economic equivalent of the maximum front-end sales charges permitted under
those same rules.
***"Other Expenses" for Class II shares are estimates based on the actual
expenses incurred by Class I shares for the fiscal year ended June 30, 1995.
Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in a Fund. Rather, the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.
Example
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge and applicable contingent deferred
sales charges for the Insured Fund, that apply to a $1,000 investment in the
Funds listed above over various time periods assuming (1) a 5% annual rate of
return and (2) redemption at the end of each time period.
One Three Five Ten
Year Years Years Years
Insured Fund-Class I....................... $48* $61 $74 $113
Insured Fund-Class II...................... $32 $47 $74 $151
Money Fund................................. $ 7 $20 $36 $ 80
*Assumes that a contingent deferred sales charge will not apply to Class I
shares.
A Shareholder would pay the following expenses on the same investment in Class
II shares, assuming no redemption.
One Three Five Ten
Year Years Years Years
Insured Fund-Class II....................... $22 $47 $74 $151
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES SHOWN ABOVE AND
SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES, WHICH MAY BE MORE
OR LESS THAN THOSE SHOWN. The operating expenses are borne by each Fund
separately and only indirectly by shareholders as a result of their investment
in each Fund. In addition, federal securities regulations require the example to
assume an annual return of 5%, but the Fund's actual return may be more or less
than 5%.
Financial Highlights
Set forth below is a table containing the financial highlights for a share of
the Money Fund and a share of each class of the Insured Fund. The information
for each of the five fiscal years in the period ended June 30, 1995 has been
audited by Coopers & Lybrand L.L.P., independent auditors, whose audit report
thereon appears in the financial statements in the Trust's Annual Report to
Shareholders. The remaining figures, which are also audited, are not covered by
the auditors' current report. See the discussion "Reports to Shareholders" under
"General Information."
<TABLE>
<CAPTION>
Per Share Operating Performance Ratio/Supplemental Data
_______________________________________________ ______________________________
Net Asset Net Realized Dividends Net Asset Net Assets Ratio of Ratio of
Year Value Net & Unrealized Total From From Net Value at End Expenses Net Income Portfolio
Ended Beginning Investment Gains (Losses) Investment Investment at End Total of Year to Average to Average Turnover
June 30 of Year Income on Securities Operations Income of Year Return** (in 000's) Net Assets Net Assets Rate
Franklin California Insured Tax-Free Income Fund:
Class I Shares
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1986* $10.00 $0.59 $ 1.040 $1.630 $(0.420) $11.21 16.18% $ 48,613 0.42% 4.79% 59.50%
1987 11.21 0.73 (0.446) 0.284 (0.815) 10.64 1.97 161,661 0.68 6.11 18.55
1988 10.64 0.72 (0.080) 0.640 (0.750) 10.53 6.06 208,291 0.62 6.91 19.33
1989 10.53 0.74 0.710 1.450 (0.710) 11.27 13.97 248,336 0.61 6.79 28.56
1990 11.27 0.74 (0.104) 0.636 (0.736) 11.17 5.59 306,531 0.59 6.63 10.41
1991 11.17 0.74 0.094 0.834 (0.744) 11.26 7.45 471,997 0.57 6.48 4.20
1992 11.26 0.70 0.457 1.157 (0.747) 11.67 10.32 967,745 0.55 6.16 3.50
1993 11.67 0.69 0.636 1.326 (0.696) 12.30 11.47 1,363,623 0.53 5.82 8.28
1994 12.30 0.68 (0.562) 0.118 (0.678) 11.74 0.67 1,450,821 0.54 5.53 6.98
1995 11.74 0.68 0.204 0.884 (0.674) 11.95 7.80 1,468,080 0.59 5.77 11.85
Class II Shares
1995*** 11.88 .11 0.103 0.213 (0.103) 11.99 1.79 507 1.17* 5.03* 11.85
Franklin California Tax-Exempt Money Fund:
1986* 1.00 0.039 - 0.039 (0.039) 1.00 4.01 140,738 0.57 3.79 -
1987 1.00 0.039 - 0.039 (0.039) 1.00 3.97 358,964 0.63 4.09 -
1988 1.00 0.046 - 0.046 (0.046) 1.00 4.67 681,095 0.58 4.56 -
1989 1.00 0.055 - 0.055 (0.055) 1.00 5.67 807,326 0.55 5.57 -
1990 1.00 0.055 - 0.055 (0.055) 1.00 5.61 1,039,389 0.55 5.36 -
1991 1.00 0.045 - 0.045 (0.045) 1.00 4.58 953,738 0.57 4.47 -
1992 1.00 0.031 - 0.031 (0.031) 1.00 3.17 759,204 0.60 3.14 -
1993 1.00 0.021 - 0.021 (0.021) 1.00 2.08 652,864 0.62 2.07 -
1994 1.00 0.018 - 0.018 (0.018) 1.00 1.83 754,121 0.61 1.82 -
1995 1.00 0.029 - 0.029 (0.029) 1.00 2.94 642,157 0.64 2.88 -
*For the period September 3, 1985 (effective date of registration) to June 30,
1986, annualized.
**Total return measures the change in value of an investment over the periods
indicated. It does not include the Insured Fund's maximum front-end sales charge
and assumes reinvestment of dividends and capital gains at net asset value.
***For the period May 1, 1995 to June 30, 1995.
</TABLE>
About the Trust
Franklin California Tax-Free Trust is an open-end management investment company,
or mutual fund, organized as a Massachusetts business trust in July 1985 and
registered with the SEC under the Investment Company Act of 1940, as amended
(the "1940 Act"). The Trust currently consists of three separate Funds: Franklin
California Insured Tax-Free Income Fund, Franklin California Tax-Exempt Money
Fund and Franklin California Intermediate-Term Tax-Free Income Fund (the
"Intermediate-Term Fund"). The Intermediate-Term Fund is non-diversified; the
Insured and Money Funds are diversified. Each of the Funds issues a separate
series of the Trust's shares and maintains a totally separate investment
portfolio. The Trust may offer other funds in the future. This Prospectus
applies only to the Insured and Money funds.
Shares of the Insured Fund may be purchased (minimum investment of $100
initially and $25 thereafter) at the current public offering price. The current
public offering price of Class I shares is equal to the net asset value (see
"Valuation of Shares of Each of the Funds"), plus a variable sales charge not
exceeding 4.25% of the offering price depending upon the amount invested. The
current public offering price of the Class II shares is equal to the net asset
value, plus a sales charge of 1% of the amount invested. (See "How to Buy Shares
of the Funds.")
Shares of the Money Fund may be purchased at net asset value, without a sales
charge, next determined after receipt of a purchase order (initial investment of
at least $500 and subsequent investment of $25 or more). The Money Fund attempts
to maintain a stable net asset value of $1 per share, although there is no
assurance that this will be achieved. A shareholder may write redemption drafts
(similar to checks) against the account; however, the purchase of shares of the
Money Fund does not create a checking or other bank account. See "How to Buy
Shares of the Funds." Shares of the Money Fund may be considered Class I shares
for purposes of the programs and privileges discussed in this Prospectus.
Investment Objective and
Policies of Each Fund
Each Fund seeks to provide investors with as high a level of income exempt from
federal income taxes and from the personal income taxes of California as is
consistent with prudent investment management and the preservation of
shareholders' capital. The Money Fund also seeks liquidity in its investments.
There is, of course, no assurance that the Funds' objectives will be achieved.
Each Fund's investment objective is a fundamental policy of that Fund and may
not be changed without the approval of a majority of the respective Fund's
outstanding shares.
While both Funds will invest primarily in California municipal securities, they
have differing policies with respect to the maturity lengths, quality ratings,
and other aspects of the securities in which they invest. Each Fund, under
normal market conditions, will attempt to invest 100% and, as a matter of
fundamental policy, will invest at least 80% of the value of its net assets in
securities the interest on which is exempt from regular federal income taxes,
including the alternative minimum tax, and from the personal income taxes of
California. Thus, it is possible, although not anticipated, that up to 20% of a
Fund's net assets could be in municipal securities from another state which are
not exempt from the personal income taxes of California, securities subject to
the alternative minimum tax and/or in taxable obligations.
For temporary defensive purposes only, each of the Funds may invest (i) more
than 20% of its assets (which could be up to 100%) in fixed-income obligations
the interest on which is subject to federal income tax and (ii) more than 20% of
the value of its net assets (which could be up to 100%) in instruments the
interest on which is exempt from federal income taxes but not California's
personal income taxes. For the Insured Fund, any such temporary taxable
investments will be limited to obligations issued or guaranteed by the full
faith and credit of the U.S. government or in the highest quality commercial
paper rated P-1, A-1 or F-1 by Moody's, S&P or Fitch. For the Money Fund, such
temporary investments in taxable obligations will be limited substantially to
U.S. government securities, commercial paper rated in the highest grade (P-1,
A-1 or F-1) by Moody's, S&P or Fitch, or in obligations of U.S. banks with
assets of $1 billion or more.
Under normal circumstances, at least 65% of the Insured Fund's total assets will
be invested in insured municipal securities. Although an insurer's quality
standards are independently determined and may vary from time to time, generally
such municipal securities that are rated at the date of purchase are in the
three highest ratings of S&P for bonds (AAA, AA, and A) or of Moody's (Aaa, Aa,
and A). Pending investment in longer-term municipal securities, the Insured Fund
also may invest up to 35% of its total net assets in short-term tax-exempt
instruments, without obtaining insurance, provided such instruments carry a P-1,
A-1 or F-1 short-term rating by Moody's, S&P or Fitch, respectively, or will
have a long-term rating of Aaa, or equivalent, by Moody's, S&P or Fitch. For a
description of such ratings, see the Appendix in the SAI. An insurer may also
insure municipal securities which are unrated or have lower S&P ratings or which
meet its own insurance standards. The Insured Fund may also invest in municipal
securities secured by an escrow or trust account of U.S. government securities.
In accordance with procedures adopted pursuant to Rule 2a-7 under the 1940 Act,
the Money Fund limits its investments to those U.S. dollar denominated
instruments which the Board of Trustees of the Trust determines present minimal
credit risks and which are, as required by the federal securities laws, rated in
one of the two highest rating categories as determined by nationally recognized
statistical rating agencies, or which are unrated and of comparable quality,
with remaining maturities of 397 calendar days or less ("Eligible Securities").
The Money Fund maintains a dollar weighted average maturity of the securities in
its portfolio of 90 days or less. These procedures are not fundamental policies
of the Fund.
Each Fund may borrow from banks for temporary or emergency purposes and pledge
up to 5% of its total assets for that purpose.
Repurchase Agreements (Money Fund Only)
The Money Fund may engage in repurchase transactions, in which the Fund
purchases a U.S. government security subject to resale to a bank or dealer at an
agreed-upon price and date. The transaction requires the collateralization of
the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Money Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller might cause the Money Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Money Fund
might also incur disposition costs in liquidating the collateral. The Money
Fund, however, intends to enter into repurchase agreements only with financial
institutions such as broker-dealers and banks which are deemed creditworthy by
the Money Fund's investment manager. A repurchase agreement is deemed to be a
loan by the Money Fund under the 1940 Act. The U.S. government security subject
to resale (the collateral) will be held on behalf of the Fund by a custodian
approved by the Money Fund's Board and will be held pursuant to a written
agreement.
Municipal Securities
The term "municipal securities," as used in this Prospectus, means obligations
issued by or on behalf of states, territories and possessions of the U.S. and
the District of Columbia and their political subdivisions, agencies, and
instrumentalities, the interest on which is exempt from federal income tax. An
opinion as to the tax-exempt status of a municipal security is generally
rendered to the issuer by the issuer's bond counsel at the time of issuance of
the security.
Municipal securities are used to raise money for various public purposes such as
constructing public facilities and making loans to public institutions. Certain
types of municipal bonds are issued to obtain funding for privately operated
facilities. There are two principal classifications of municipal securities:
notes and bonds. Municipal notes are used generally to provide for short-term
capital needs and generally have maturities of up to one year. These include tax
anticipation notes, revenue anticipation notes, bond anticipation notes,
construction loan notes, and tax-exempt commercial paper (also known as
municipal paper). Municipal bonds, which meet longer-term capital needs,
generally have maturities of more than one year and fall into one of two
categories. General obligation bonds are backed by the taxing power of the
issuing municipality and are considered the safest type of municipal bond.
Revenue bonds are payable only from the revenues of a particular project or
facility and are generally dependent solely on a specific revenue source.
Industrial development bonds are a specific type of revenue bond backed by the
credit and security of a private user. There are, of course, variations in the
security of municipal bonds, both within a particular classification and between
classifications, depending on numerous factors. In California, municipal bonds
may also be funded by property taxes in specially created districts (Mello-Roos
Bonds or Special Assessment Bonds), tax allocations based on increased property
tax assessments over a specified period frequently for redevelopment projects,
or specified redevelopment area sales tax allocations.
The SAI describes in greater detail the municipal securities in which each of
the Funds may invest.
The Insured Fund has no restrictions on the maturity of municipal securities in
which it may invest. Accordingly, that Fund will seek to invest in municipal
securities of such maturities which, in the judgment of that Fund and its
investment manager, will provide a high level of current income consistent with
prudent investment. The investment manager will also consider current market
conditions and the cost of the insurance obtainable on such securities.
It is possible that either Fund from time to time will invest more than 25% of
its assets in a particular segment of the municipal securities market, such as
hospital revenue bonds, housing agency bonds, industrial development bonds,
transportation bonds, or pollution control revenue bonds, or in securities the
interest upon which is paid from revenues of a similar type of project. In such
circumstances, economic, business, political or other changes affecting one bond
(such as proposed legislation affecting the financing of a project; shortages or
price increases of needed materials; or declining markets or need for the
projects) might also affect other bonds in the same segment, thereby potentially
increasing market risk.
The interest on bonds issued to finance state and local government operations is
generally tax-exempt. Interest on certain "private activity bonds" (including
those for housing and student loans) issued after August 7, 1986, while still
tax-exempt, constitutes a preference item for taxpayers in determining their
alternative minimum tax under the Internal Revenue Code of 1986, as amended (the
"Code"). This interest could subject a shareholder to, or increase the
shareholder's liability under, the federal alternative minimum tax (but not
under California's alternative minimum tax), depending on the shareholder's
individual tax situation. In addition, all distributions derived from interest
exempt from regular federal income tax may subject corporate shareholders to, or
increase their liability under, the alternative minimum tax because such
distributions are included in the corporation's "adjusted current earnings."
Consistent with the Funds' investment objectives, the Funds may acquire private
activity bonds if, in an investment manager's opinion, such bonds represent the
most attractive investment opportunity then available to the Funds. As of June
30, 1995, the Insured Fund and the Money Fund had invested 1.64% and 8.38%,
respectively, of their assets in such bonds, the interest on which may be a
preference item subject to the alternative minimum tax for certain investors.
Each Fund may also invest in variable or floating rate demand notes ("VRDNs")
which carry a demand feature that permits the fund to tender the obligation back
to the issuer or a third party at par value plus accrued interest prior to
maturity, according to the terms of the obligation. These obligations bear
interest at rates that are not fixed, but that vary with changes in specified
market rates or indices on predesignated dates. Frequently VRDNs are secured by
letters of credit or other credit support arrangements provided by banks.
Because of the demand feature, the prices of VRDNs may be higher and the yields
lower than they otherwise would be for obligations without a demand feature.
Although it is not a put option in the usual sense, such a demand feature is
sometimes known as a "put." With respect to 75% of the total value of each
Fund's assets, no more than 5% of such value may be in securities underlying
"puts" from the same institution, except that the Fund may invest up to 10% of
its asset value in unconditional "puts" (exercisable even in the event of a
default in the payment of principal or interest on the underlying security) and
other securities issued by the same institution.
The Money Fund may invest VRDNs carrying stated maturities in excess of one year
at the date of purchase by the Fund if such obligations carry demand features
that comply with the conditions of rules adopted by the SEC. The Money Fund will
limit its purchase of VRDNs to those meeting the quality standards set forth
above. Frequently such obligations are secured by letters of credit or other
credit support arrangements provided by banks. The quality of the underlying
creditor or of the bank, as the case may be, must, as determined by the
investment manager under the supervision of the Board of Trustees, also be
equivalent to the quality standards set forth above.
Each Fund may purchase and sell municipal securities on a "when-issued" and
"delayed delivery" basis. These transactions are subject to market fluctuation
and the value at delivery may be more or less than the purchase price. Although
the Funds will generally purchase municipal securities on a when-issued basis
with the intention of acquiring such securities, it may sell such securities
before the settlement date if it is deemed advisable. When a Fund is the buyer
in such a transaction, it will maintain, in a segregated account with its
custodian, cash or high-grade marketable securities having an aggregate value
equal to the amount of such purchase commitments until payment is made. To the
extent a Fund engages in "when-issued" and "delayed delivery" transactions, it
will do so for the purpose of acquiring securities for that Fund's portfolio
consistent with its investment objective and policies and not for the purpose of
investment leverage.
Yields on municipal securities vary, depending on a variety of factors,
including the general condition of the financial markets and of the municipal
securities market, the size of a particular offering, the maturity of the
obligation and the credit rating of the issuer. Generally, municipal securities
of longer maturities produce higher current yields than municipal securities
with shorter maturities, but are subject to greater price fluctuation due to
changes in interest rates, tax laws and other general market factors.
Lower-rated municipal securities generally produce a higher yield than
higher-rated municipal securities due to the perception of a greater degree of
risk as to the ability of the issuer to make timely payment of principal and
interest on its obligations.
Each Fund may also invest in municipal lease obligations primarily through
Certificates of Participation ("COPs"). COPs, which are widely used by state and
local governments to finance the purchase of property, function much like
installment purchase agreements. A COP is created when long-term lease revenue
obligations are issued by a governmental corporation to pay for the acquisition
of property or facilities which are then leased to a municipality. The payments
made by the municipality under the lease are used to repay interest and
principal on the obligations issued to purchase the property. Once these lease
payments are completed, the municipality gains ownership of the property for a
nominal sum. The lessor is, in effect, a lender secured by the property being
leased. This lease format is generally not subject to constitutional limitations
on the issuance of state debt, and COPs enable a governmental issuer to increase
government liabilities beyond constitutional debt limits.
A feature which distinguishes COPs from municipal debt is that the lease which
is the subject of the transaction must contain a "nonappropriation" clause. A
nonappropriation clause provides that, while the municipality will use its best
efforts to make lease payments, the municipality may terminate the lease
annually without penalty if the municipality's appropriating body does not
allocate the necessary funds. Local administrations, when faced with
increasingly tight budgets, have more discretion to curtail payments under COPs
than they do to curtail payments on traditionally funded debt obligations. If
the government lessee does not appropriate sufficient monies to make lease
payments, the lessor or its agent is typically entitled to repossess the
property. The private sector value of the property may be more or less than the
amount the government lessee was paying.
While the risk of nonappropriation is inherent to COP financing, each Fund
believes that this risk is mitigated by its policy of investing only in insured
COPs in the case of the Insured Fund, and, in the case of the Money Fund, the
two highest rating categories as determined by Moody's, S&P or Fitch, or in
unrated COPs believed to be of comparable quality. Criteria considered by the
rating agencies and the Manager in assessing such risk include the issuing
municipality's credit rating, evaluation of how essential the leased property is
to the municipality and the term of the lease compared to the useful life of the
leased property. The Board of Trustees reviews the COPs held in each Fund's
portfolio to assure that they constitute liquid investments based on various
factors reviewed by the investment manager and monitored by the Board. Such
factors include (a) the credit quality of such securities and the extent to
which they are rated or, if unrated, comply with existing criteria and
procedures followed to ensure that they are of quality comparable to the ratings
required for each Fund's investment, including an assessment of the likelihood
that the leases will not be canceled; (b) the size of the municipal securities
market, both in general and with respect to COPs; and (c) the extent to which
the type of COPs held by each Fund trade on the same basis and with the same
degree of dealer participation as other municipal bonds of comparable credit
rating or quality. While there is no limit as to the amount of assets which
either Fund may invest in COPs, as of June 30, 1995, the Insured Fund held
16.61% and the Money Fund held 4.05% of their respective net assets in COPs and
other municipal leases.
Investment Risk Considerations
While an investment in either Fund is not without risk, certain policies are
followed in managing each Fund which may help to reduce such risk. There are two
categories of risks to which a Fund is subject: credit risk and market risk.
Credit risk is a function of the ability of an issuer of a municipal security to
maintain timely interest payments and to pay the principal of a security upon
maturity. It is generally reflected in a security's underlying credit rating and
its stated interest rate (normally the coupon rate). A change in the credit risk
associated with a municipal security may cause a corresponding change in the
security's price. Market risk is the risk of price fluctuation of a municipal
security caused by changes in general economic and interest rate conditions
generally affecting the market as a whole. A municipal security's maturity
length also affects its price. The Trust attempts to minimize credit risk by
diversifying its Funds' portfolio investments and, for the Insured Fund, by
maintaining the insurance coverage discussed below. The insurance does not
guarantee the market value of the municipal securities and, except as indicated
in this Prospectus, has no effect on the net asset value, redemption price, or
dividends paid by the Fund.
When interest rates rise, the value of fixed-income securities will generally
decline. Conversely, when rates fall, the value of fixed-income securities may
rise. Since each Fund will generally invest primarily in California municipal
securities, there are certain specific factors and considerations concerning
California which may affect the credit and market risk of the municipal
securities that the Funds purchase. These factors are described below and in
Appendix A of the SAI.
As a fundamental policy, with respect to 75% of its net assets, each Fund will
not purchase a security if, as a result of the investment, more than 5% of its
assets would be in the securities of any single issuer. For this purpose, each
political subdivision, agency, or instrumentality and each multistate agency of
which a state, including California, is a member, and each public authority
which issues industrial development bonds on behalf of a private entity, will be
regarded as a separate issuer for determining the diversification of each Fund's
portfolio. A bond for which the payments of principal and interest are secured
by an escrow account of securities backed by the full faith and credit of the
U.S. government ("defeased"), in general, will not be treated as an obligation
of the original municipality for purposes of determining issuer diversification,
provided that certain conditions, as prescribed by the SEC, are followed.
The Funds may purchase or sell securities without regard to the length of time
the security has been held, and the frequency of portfolio transactions (the
turnover rate) will vary from year to year depending on market conditions.
The Funds are subject to a number of additional investment restrictions, some of
which may be changed only with the approval of shareholders, which limit their
activities to some extent. A list of these restrictions and additional
information concerning the characteristics of municipal securities is included
in the SAI.
How Shareholders Participate in the
Results of the Insured Fund's Activities
The assets of the Insured Fund are invested in portfolio securities. If the
securities owned by the Insured Fund increase in value, the value of the shares
of the Insured Fund which the shareholder owns will increase. If the securities
owned by the Insured Fund decrease in value, the value of the shareholder's
shares will also decline. In this way, shareholders participate in any change in
the value of the securities owned by the Insured Fund.
In addition to the factors which affect the value of individual securities, as
described in the preceding sections, a shareholder may anticipate that the value
of the Insured Fund's shares will fluctuate with movements in the broader bond
markets. In particular, changes in interest rates will affect the value of the
Insured Fund's portfolio and thus its share price. Increased rates of interest
which frequently accompany higher inflation and/or a growing economy are likely
to have a negative effect on the value of the Insured Fund's shares. History
reflects both increases and decreases in the prevailing rate of interest and
these may reoccur unpredictably in the future.
Insurance
(Insured Fund only)
Except as indicated, each insured municipal security in the portfolio of the
Insured Fund will be covered by either a "New Issue Insurance Policy," a
"Portfolio Insurance Policy" issued by a qualified municipal bond insurer, or a
"Secondary Insurance Policy."
Any of the policies discussed herein are intended to insure the scheduled
payment of all principal and interest on each municipal security covered by the
policy (rather than the entire portfolio of each Fund as a whole) when due. The
insurance of principal refers to the face or par value of each security and is
not affected by the price paid by the Fund or the market value thereof. Each
municipal security is secured by an insurance policy from one of several
qualified insurance companies which allows the investment manager to diversify
among credit enhancements.
New Issue Insurance Policy
New Issue Insurance Policies, if any, have been obtained by the respective
issuers of the municipal securities and all policy premiums for such securities
have been paid in advance by such issuers. Such policies are non-cancelable and
will continue in force so long as the municipal securities are outstanding and
the respective insurers remain in business. Since New Issue Insurance Policies
remain in effect as long as the securities are outstanding, the insurance may
have an effect on the resale value of securities in the Insured Fund's
portfolio. Therefore, New Issue Insurance Policies may be considered to
represent an element of market value with regard to municipal securities thus
insured, but the exact effect, if any, of this insurance on such market value
cannot be estimated. The Insured Fund will acquire portfolio securities subject
to New Issue Insurance Policies only where the claims paying ability of the
insurer thereof is rated "Aaa," or equivalent, by Moody's, S&P or Fitch. No
contract to purchase a municipal security is entered into without either
permanent insurance in place or an irrevocable commitment to insure the
municipal security by a qualified insurer.
In determining whether to insure any municipal security, the insurer has applied
its own standards, which are not necessarily the same as the criteria used in
regard to the selection of securities by the investment manager.
Portfolio Insurance Policy
The Portfolio Insurance Policy to be obtained by the Fund from a qualified
municipal bond insurer will be effective only so long as the Fund is in
existence, the insurer is still in business and meeting its obligations, and the
municipal securities described in the policy continue to be held by the Fund. In
the event of a sale of any municipal security by the Insured Fund or payment
thereof prior to maturity, the Portfolio Insurance Policy terminates as to such
municipal security.
The Portfolio Insurance Policy to be obtained by the Insured Fund may also be
canceled for failure to pay the premium. Nonpayment of premiums on such policy
obtained by the Fund will, under certain circumstances, result in the
cancellation of the Portfolio Insurance Policy and will also permit the insurer
to take action against the Insured Fund to recover premium payments due it.
Premium rates for each issue of securities covered by the Portfolio Insurance
Policy are fixed for the life of the Fund. The insurance premiums are payable
monthly by the Fund and are adjusted for purchases and sales of covered
securities during the month. The insurer cannot cancel coverage already in force
with respect to municipal securities owned by the Fund and covered by the
Portfolio Insurance Policy, except for nonpayment of premiums. In the event that
a portfolio holding which has been covered by a Portfolio Insurance Policy is
pre-refunded and irrevocably secured by a U.S. government security, the
insurance is no longer required. Any security for which insurance is canceled
other than as provided herein will be sold by the Fund as promptly thereafter as
possible.
The premium on the Insured Fund's Portfolio Insurance Policy is an item of
expense and will be reflected in the Fund's average annual expenses. The average
annual premium rate for the Portfolio Insurance Policy is determined by dividing
the amount of the Fund's annual Portfolio Insurance Policy premium by the face
amount of the insured bonds in its investment portfolio covered by that policy.
Premiums are paid from the Fund's assets and reduce the current yield on its
portfolio by the amount thereof. When the Insured Fund purchases a Secondary
Insurance Policy (see below), the single premium is added to the cost basis of
the municipal security and is not considered an item of expense of the Fund.
The Fund may also own, without insurance coverage, municipal securities for
which an escrow or trust account has been established pursuant to the documents
creating the municipal security and containing sufficient U.S. government
securities backed by the government's full faith and credit pledge in order to
ensure the payment of principal and interest on such bonds.
Secondary Insurance Policy
The Fund may at any time purchase from the provider of a Portfolio Insurance
Policy a permanent Secondary Insurance Policy on any municipal security held by
the Fund. The coverage and obligation of the Fund to pay monthly premiums under
a Portfolio Insurance Policy would cease with the purchase by the Fund of a
Secondary Insurance Policy on such security.
By purchasing a Secondary Insurance Policy, the Fund would, upon payment of a
single premium, obtain similar insurance against nonpayment of scheduled
principal and interest for the remaining term of the security. Such insurance
coverage will be noncancellable and will continue in force so long as the
securities so insured are outstanding. One of the purposes of acquiring such a
policy would be to enable the Fund to sell the portfolio security to a third
party as a AAA-rated insured security at a market price higher than what
otherwise might be obtainable if the security was sold without the insurance
coverage. (Such rating is not automatic, however, and must specifically be
requested from Moody's, S&P or Fitch for each bond.) Such a policy would likely
be purchased if, in the opinion of the investment manager, the market value or
net proceeds of a sale by the Fund would exceed the current value of the
security (without insurance) plus the cost of the policy. Any difference between
the excess of a security's market value as a AAA-rated security over its market
value without such rating, including the single premium cost thereof, would
inure to the Fund in determining the net capital gain or loss realized by the
Fund upon the sale of the portfolio security. The Fund may purchase insurance
under a Secondary Insurance Policy in lieu of a Portfolio Insurance Policy at
any time, regardless of the effect of market value on the underlying municipal
security, if the investment manager believes such insurance would best serve the
Fund's interests in meeting its objective and policies.
Since the Fund has the right to purchase a Secondary Insurance Policy even if
the security is currently in default as to any payments by the issuer, the Fund
would have the opportunity to sell such security rather than be obligated to
hold the security in its portfolio in order to continue in force the applicable
Portfolio Insurance Policy, as discussed below.
Municipal Bond Insurer
A "qualified municipal bond insurer" refers to companies whose charter limits
their risk assumption to insurance of financial obligations only. This precludes
assumption of other types of risk, such as life, medical, fire and casualty,
auto and home insurance. The bond insurance industry is a regulated industry.
All bond insurers must be licensed in each state in order to write financial
guarantees in that jurisdiction. Regulations vary from state to state; however,
most regulators require minimum standards of solvency, limitations on leverage
and investment of assets. Regulators also place restrictions on the amount an
insurer can guarantee in relation to its capital base. Neither the Fund nor its
investment manager make any representations as to the ability of any insurance
company to meet its obligation to the Fund if called upon to do so. The SAI
contains more information on municipal bond insurers. Currently, there are no
bonds in the Fund's portfolio on which an insurer is paying the principal or
interest, otherwise payable by the issuer of the Fund's portfolio obligations.
Management of the Trust
The Board of Trustees (the "Board") has the primary responsibility for the
overall management of the Trust and for electing the officers of the Trust who
are responsible for administering its day-to-day operations.
The Board has carefully reviewed the multiclass structure to ensure that no
material conflict exists between the two classes of Insured Fund shares.
Although the Board does not expect to encounter material conflicts in the
future, the Board will continue to monitor the Insured Fund and will take
appropriate action to resolve such conflicts if any should later arise.
In developing the multiclass structure the Insured Fund has retained the
authority to establish additional classes of shares. It is the Insured Fund's
present intention to offer only two classes of shares, but new classes may be
offered in the future.
Franklin Advisers, Inc. ("Advisers" or "Manager") serves as the Trust's
investment manager. Advisers is a wholly-owned subsidiary of Franklin Resources,
Inc. ("Resources"), a publicly-owned holding company, the principal shareholders
of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in numerous aspects of the financial services industry
through its various subsidiaries (the "Franklin Templeton Group"). Advisers acts
as investment manager or administrator to 34 U.S. registered investment
companies (116 separate series) with aggregate assets of over $76 billion,
approximately $41 billion of which are in the municipal securities market.
Pursuant to the management agreement, the Manager supervises and implements the
Trust's investment activities and provides certain administrative services and
facilities which are necessary to conduct the Trust's business. Under the
management agreement, each Fund of the Trust is obligated to pay the Manager a
fee for its services based upon the respective Fund's net assets. During the
fiscal year ended June 30, 1995, fees totaling 0.47% of the average monthly net
assets of the Insured Fund and 0.49% of the average daily net assets of the
Money Fund were paid to Advisers.
It is not anticipated that the Funds will incur a significant amount of
brokerage expenses because municipal securities are generally traded in
principal transactions which involve the receipt by the broker of a spread
between the bid and ask prices for the securities, and not the receipt of
commissions. In the event that a Fund participates in transactions involving
brokerage commissions, it is the Manager's responsibility to select brokers
through whom such transactions will be effected. The Manager seeks to obtain the
best execution on all such transactions. If it is felt that more than one broker
would be able to provide the best execution, the Manager will consider the
furnishing of quotations and of other market services, research, statistical and
other data for the Manager and its affiliates, as well as the sale of shares of
the Funds as factors in selecting a broker. Further information is included
under "The Trust's Policies Regarding Brokers Used on Portfolio Transactions" in
the SAI.
Shareholder accounting and many of the clerical functions for the Trust are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent"), in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
During the fiscal year ended June 30, 1995, the expenses borne by the Trust,
including fees paid to Advisers and to Investor Services, totaled 0.59% of the
average monthly net assets of Class I of the Insured Fund, 1.17% of the average
monthly net assets of Class II of the Insured Fund, and 0.64% of the average
daily net assets of the Money Fund.
Plans of Distribution
(Insured Fund)
A separate plan of distribution has been approved and adopted for each class of
the Insured Fund ("Class I Plan" and "Class II Plan," respectively, or "Plans")
pursuant to Rule 12b-1 under the 1940 Act. The Rule 12b-1 fees paid by each
class will be based solely on the distribution and servicing fees attributable
to that particular class. Under each Plan the class may reimburse Distributors
for routine ongoing promotion and distribution expenses incurred with respect to
such class. Such expenses may include, but are not limited to, the printing of
prospectuses and reports used for sales purposes, expenses of preparing and
distributing sales literature and related expenses, advertisements, and other
distribution-related expenses, including a prorated portion of Distributors'
overhead expenses attributable to the distribution of a class' shares, as well
as any distribution or service fees paid to securities dealers or their firms or
others who have executed a servicing agreement with the Trust on behalf of a
class, Distributors or its affiliates.
The maximum amount which the Fund may pay to Distributors or others under the
Class I Plan for such distribution expenses is 0.10% per annum of Class I's
average daily net assets, payable on a quarterly basis. All expenses of
distribution in excess of 0.10% per annum will be borne by Distributors, or
others who have incurred them, without reimbursement from the Fund.
Under the Class II Plan, the Fund pays to Distributors distribution and related
expenses up to 0.50% per annum of Class II's daily net assets, payable
quarterly. Such fees may be used in order to compensate Distributors or others
for providing distribution and related services and bearing certain expenses of
the class. All expenses of distribution, marketing and related services over
that amount will be borne by Distributors or others who have incurred them,
without reimbursement by the Fund. In addition, the Class II Plan provides for
an additional payment by the Fund of up to 0.15% per annum of Class II's average
daily net assets as a servicing fee, payable quarterly. This fee will be used to
pay securities dealers or others for, among other things, assisting in
establishing and maintaining customer accounts and records; assisting with
purchase and redemption requests; receiving and answering correspondence;
monitoring dividend payments from the Fund on behalf of customers, or similar
activities related to furnishing personal services and/or maintaining
shareholder accounts.
During the first year following the purchase of Class II shares, Distributors
will retain under the Class II Plan 0.50% per annum of Class II's average daily
net assets to partially recoup fees Distributors pays to securities dealers. In
connection with the initial purchase of Class II shares, either Distributors or
one of its affiliates may pay, from its own resources, a commission of up to 1%
of the amount invested to securities dealers who initiate and are responsible
for shareholders' purchases of Class II shares.
Both Plans also cover any payments to or by the Fund, Advisers, Distributors, or
other parties on behalf of the Fund, Advisers or Distributors, to the extent
such payments are deemed to be for the financing of any activity primarily
intended to result in the sale of shares issued by the Fund within the context
of Rule 12b-1. The payments under the Plans are included in the maximum
operating expenses which may be borne by each class of the Fund. For more
information, including a discussion of the Board's policies with regard to the
amount of each Plan's fees, please see the SAI.
Distributions to Shareholders
INSURED FUND
There are two types of distributions which the Insured Fund may make to its
shareholders. Further information on the tax treatment of distributions to
shareholders of each Fund is included under "Taxation of the Funds and Their
Shareholders" and in the SAI under "Additional Information Regarding Taxation."
1. Income Dividends. The Fund receives income in the form of dividends, interest
and other income derived from its investments. This income, less the expenses
incurred in the Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of dividends paid per
share may vary with each distribution.
2. Capital gain distributions. The Insured Fund may derive capital gains or
losses in connection with sales or other dispositions of its portfolio
securities. Distributions by the Insured Fund derived from net short-term and
net long-term capital gains (after taking into account any net capital loss
carryovers) may generally be made once a year in December to reflect any net
short-term and net long-term capital gains realized by the Fund as of October 31
of the current fiscal year and any undistributed net capital gains from the
prior fiscal year. These distributions, when made, will generally be fully
taxable to the Fund's shareholders. The Insured Fund may make more than one
distribution derived from net short-term and net long-term capital gain in any
year or adjust the timing of these distributions for operational or other
reasons.
Distributions To Each Class Of Shares
According to the requirements of the Code, dividends and capital gains will be
calculated and distributed in the same manner for Class I and Class II shares of
the Insured Fund. The per share amount of any income dividends will generally
differ only to the extent that each class is subject to different Rule 12b-1
fees.
Distribution Date
Although subject to change by the Board, without prior notice to or approval by
shareholders, the Fund's current policy is to declare income dividends daily,
payable on or about the last business day of the month. The amount of income
dividend payments by the Insured Fund is dependent upon the amount of net income
received by the Insured Fund from its portfolio holdings, is not guaranteed and
is subject to the discretion of the Board. The Insured Fund does not pay
"interest" or guarantee any fixed rate of return on an investment in its shares.
Dividend Reinvestment
Unless otherwise requested, income dividends and capital gain distributions, if
any, will be automatically reinvested in the shareholder's account in the form
of additional shares, valued at the closing net asset value (without a sales
charge) on the dividend reinvestment date. Except as otherwise noted, dividend
and capital gain distributions are only eligible for reinvestment at net asset
value in the same class of shares of the Fund or the same class of another of
the Franklin Templeton Funds. Shareholders in Class II funds may direct their
dividends and capital gain distributions for investment at net asset value to
any Class I Franklin Templeton Fund. Shareholders have the right to change their
election with respect to the receipt of distributions by notifying the Insured
Fund, but any such change will be effective only as to distributions for which
the reinvestment date is seven or more business days after the Insured Fund has
been notified. See the SAI for more information.
Many of the Fund's shareholders receive their distributions in the form of
additional shares. This is a convenient way to accumulate additional shares and
maintain or increase the shareholder's earnings base. Of course, any shares so
acquired remain at market risk.
Distributions in Cash
A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to the
same class of another fund in the Franklin Templeton Funds, to another person,
or directly to a checking account. If the bank at which the account is
maintained is a member of the Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If this last option is requested,
the shareholder should allow at least 15 days for initial processing. Dividends
which may be paid in the interim will be sent to the address of record.
Additional information regarding automated fund transfers may be obtained from
Franklin's Shareholder Services Department.
MONEY FUND
The Money Fund declares dividends for each day that the Money Fund's net asset
value is calculated, payable to shareholders of record as of the close of
business the preceding day. The amount of dividends may fluctuate from day to
day and dividends may be omitted on some days, depending on changes in the
factors that comprise the Money Fund's net investment income. The Money Fund
does not pay "interest" to its shareholders, nor is any amount of dividends or
return guaranteed in any way.
Dividends are automatically reinvested daily in the form of additional shares of
the Money Fund at the net asset value per share at the close of business each
day.
The daily dividend includes accrued interest and any original issue and market
discount, plus or minus any gain or loss on the sale of portfolio securities and
changes in unrealized appreciation or depreciation in portfolio securities (to
the extent required to maintain a stable net asset value per share) less the
estimated expenses of the Fund.
The Fund's portfolio is composed of short-term securities and thus, under normal
circumstances, the Fund does not expect to realize any long-term capital gain.
The federal income tax treatment of dividends and distributions is the same
whether received in cash or reinvested in Fund shares.
The SAI includes an additional discussion of distributions.
Dividends in Cash
Shareholders may request to have their dividends paid out monthly in cash. For
such shareholders, the shares reinvested and credited to their account during
the month will be redeemed as of the close of business on the last banking
business day of the month and the proceeds will be paid to them in cash. By
completing the "Special Payment Instructions for Dividends" section of the
Shareholder Application included in this Prospectus, a shareholder may direct
the selected distributions to another fund in the Franklin Templeton Funds, to
another person, or directly to a checking account. If the bank at which the
account is maintained is a member of the Automated Clearing House, the payments
may be made automatically by electronic funds transfer. If this last option is
requested, the shareholder should allow at least 15 days for initial processing.
Dividends which may be paid in the interim will be sent to the address of
record. Additional information regarding automated fund transfers may be
obtained from Franklin's Shareholder Services Department.
Taxation of the Funds
and Their Shareholders
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Funds and their shareholders is included in the section entitled
"Additional Information Regarding Taxation" in the SAI.
Each Fund is treated as a separate entity for federal income tax purposes. Each
Fund has elected to be treated as a regulated investment company under
Subchapter M of the Code, qualified as such and intends to continue to so
qualify. By distributing all of its exempt-interest income, taxable ordinary
income, and net realized short-term and long-term capital gains, if any, for a
fiscal year in accordance with the timing requirements imposed by the Code and
by meeting certain other requirements relating to the sources of its income and
diversification of its assets, each Fund will not be liable for federal income
or excise taxes.
By meeting certain requirements of the Code, each Fund has qualified and
continues to qualify to pay exempt-interest dividends to its shareholders. To
the extent that dividends are derived from interest income from debt obligations
of California or its political subdivisions or from interest on U.S. territorial
obligations (including Puerto Rico, the U.S. Virgin Islands and Guam) which are
exempt from regular federal and California personal income tax, they will not be
subject to either federal or California personal income tax when received by a
Fund's shareholders. The pass through of exempt-interest dividends is allowed
only if a Fund meets its federal and California requirements that at least 50%
of its total assets are invested in such exempt obligations at the end of each
quarter of its fiscal year. To the extent that dividends are derived from direct
obligations of the federal government, they will be exempt from California
personal income taxes (but not from federal income tax). However, for corporate
taxpayers subject to the California franchise tax, all distributions will be
fully taxable.
To the extent dividends are derived from taxable income from temporary
investments (including the discount from certain stripped obligations or their
coupons or income from securities loans or other taxable transactions) or from
the excess of net short-term capital gain over net long-term capital loss or
from ordinary income derived from the sale or disposition of bonds purchased
with market discount after April 30, 1993, they are treated as ordinary income
whether the shareholder has elected to receive them in cash or in additional
shares.
From time to time, a Fund may purchase a tax-exempt obligation with market
discount; that is, for a price that is less than the principal amount of the
bond or for a price that is less than the principal amount of the bond where the
bond has issued with original discount and such market discount exceeds a de
minimis amount under the Code. For such obligations purchased after April 30,
1993, a portion of the gain (not to exceed the accrued portion of market
discount as of the time of sale or disposition) is treated as ordinary income
rather than capital gain. Any distribution by a Fund of such ordinary income to
its shareholders will be subject to regular income tax in the hands of Fund
shareholders. In any fiscal year, each Fund may elect not to distribute to its
shareholders its taxable ordinary income and, instead, to pay federal income or
excise taxes on this income at the Fund level. The amount of such distributions,
if any, is expected to be small.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January, will be treated, for tax purposes, as
if received by the shareholder on December 31 of the calendar year in which they
are declared.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time the shareholder has owned Fund shares and regardless of whether
such distributions are received in cash or in additional shares.
Redemptions and exchanges of each Fund's shares are taxable events on which a
shareholder may realize a gain or loss (although no gain or loss is anticipated
with respect to shares of the Money Fund because the Fund seeks to maintain a
net asset value per share of $1.00). Any loss incurred on sale or exchange of
each Fund's shares, held for six months or less, will be treated as a long-term
capital loss to the extent of net long-term capital gain dividends received with
respect to such shares. All or a portion of the sales charge incurred in
purchasing shares of the Insured Fund will not be included in the federal tax
basis of such shares sold or exchanged within 90 days of their purchase (for
purposes of determining gain or loss with respect to such shares) if the sales
proceeds are reinvested in the Insured Fund or in another fund in the
Franklin/Templeton Group of Funds (defined under "How to Buy Shares of the
Fund") and a sales charge which would otherwise apply to the reinvestment is
reduced or eliminated. Any portion of such sales charge excluded from the tax
basis of the shares sold will be added to the tax basis of the shares acquired
in the reinvestment.
Since each Fund's income is primarily interest income and gain on the sale of
portfolio securities rather than dividend income, no portion of either Fund's
distributions has been or is expected to be eligible for the corporate
dividends-received deduction.
Each Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid and will, promptly after the close of
each calendar year, advise them of the tax status for federal income tax
purposes of such dividends and distributions, including the portion of the
dividends on an average basis which constitutes taxable income or interest
income that is a tax preference item under the alternative minimum tax.
Exempt-interest dividends of the Funds, although exempt from regular federal
income tax in the hands of a shareholder, are includable in the tax base for
determining the extent to which a shareholder's social security or railroad
retirement benefits will be subject to federal income tax. Shareholders are
required to disclose their receipt of tax-exempt interest on their federal
income tax returns.
Interest on indebtedness incurred (directly or indirectly) by shareholders to
purchase or carry Fund shares will not be deductible for federal or California
income tax purposes.
Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding or other taxes on distributions received by them from a Fund
and the application of foreign tax laws to these distributions.
The foregoing description relates solely to federal income tax law and to
California personal income tax treatment to the extent indicated. Shareholders
should consult their tax advisors with respect to the applicability of other
state and local income tax laws to distributions and redemption proceeds
received from a Fund. Corporate, individual and trust shareholders should
contact their tax advisors to determine the impact of Fund dividends and capital
gain distributions under the alternative minimum tax that may be applicable to a
shareholder's particular tax situation.
How to Buy Shares of the Funds
INSURED FUND
Shares of the Insured Fund are continuously offered through securities dealers
which execute an agreement with Distributors, the principal underwriter of the
Insured Fund's shares. The use of the term "securities dealer" shall include
other financial institutions which, pursuant to an agreement with Distributors
(directly or through affiliates), handle customer orders and accounts with the
Fund. Such reference, however, is for convenience only and does not indicate a
legal conclusion of capacity. The minimum initial investment is $100 and
subsequent investments must be $25 or more. These minimums may be waived when
the shares are purchased through plans established by the Franklin Templeton
Group. The Trust and Distributors reserve the right to refuse any order for the
purchase of shares. The Insured Fund currently does not permit investment by
market timing or allocation services ("Timing Accounts"), which generally
include accounts administered so as to redeem or purchase shares based upon
certain predetermined market indicators.
Differences Between Class I and Class II. Class I and Class II shares differ in
the amount of their front-end sales charges and Rule 12b-1 fees as well as the
circumstances under which the contingent deferred sales charges apply.
Generally, Class I shares have higher front-end sales charges than Class II
shares and lower Rule 12b-1 fees. The voting rights of each class will be the
same on matters affecting the Fund as a whole, but each class will vote
separately on matters affecting only shareholders of that class. (See "General
Information - Organization of Voting Rights.")
Class I. All Fund shares outstanding before the implementation of the multiclass
structure have been redesignated as Class I shares, and will retain their
previous rights and privileges. Class I shares are generally subject to a
variable sales charge upon purchase and not subject to any sales charge upon
redemption. Class I shares are subject to Rule 12b-1 fees of up to an annual
maximum of 0.10% of average daily net assets of the class. Class I shares may be
purchased at a reduced front-end sales charge or at net asset value if certain
conditions are met. In most circumstances, contingent deferred sales charges
will not be assessed against redemptions of Class I shares. See "Management of
the Trust," and "How to Sell Shares of the Funds" for more information.
Class II. Class II shares are subject to a front-end sales charge of 1% of the
amount invested and a contingent deferred sales charge of 1% if shares are
redeemed within 18 months of the calendar month of purchase. In addition, Class
II shares are subject to Rule 12b-1 fees of up to a maximum of 0.65% per annum
of the average daily net assets of Class II shares, 0.50% of which will be
retained by Distributors during the first year of investment. See "Contingent
Deferred Sales Charge" under "How to Sell Shares of the Funds."
Purchases of Class II shares are limited to purchases below $1 million. Any
purchases of $1 million or more will automatically be invested in Class I
shares, since that is more beneficial to investors. Such purchases, however, may
be subject to a contingent deferred sales charge. Investors may exceed $1
million in Class II shares by cumulative purchases over a period of time.
Investors who intend to make investments exceeding $1 million, however, should
consider purchasing Class I shares through a Letter of Intent instead of
purchasing Class II shares.
Deciding Which Class to Purchase. Investors should carefully evaluate their
anticipated investment amount and time horizon prior to determining which class
of shares to purchase. Generally, an investor who expects to invest less than
$100,000 in the Franklin Templeton Funds and who expects to make substantial
redemptions within approximately six years or less of investment should consider
purchasing Class II shares. However, the higher annual Rule 12b-1 fees on the
Class II shares will result in higher operating expenses (which will accumulate
over time to outweigh the difference in front-end sales charges) and lower
income dividends for Class II shares. For this reason, Class I shares may be
more attractive to long-term investors even if no sales charge reductions are
available to them.
Investors who qualify to purchase Class I shares at reduced sales charges should
seriously consider purchasing Class I shares, especially if they intend to hold
their shares approximately six years or more. Investors who qualify to purchase
Class I shares at reduced sales charges but who intend to hold their shares less
than approximately six years should evaluate whether it is more economical to
purchase Class I shares through a Letter of Intent or under Rights of
Accumulation or other means, rather than purchasing Class II shares. Investors
investing $1 million or more in a single payment and other investors who qualify
to purchase Class I shares at net asset value may not purchase Class II shares.
See "Purchases at Net Asset Value" and "Description of Special Net Asset Value
Purchases" below for a discussion of when shares may be purchased at net asset
value.
Each class represents the same interest in the investment portfolio of the
Insured Fund and has the same rights, except that each class has a different
front-end sales charge, bears the separate expenses of its Rule 12b-1
distribution plan, and has exclusive voting rights with respect to such plan.
The two classes also have separate exchange privileges.
Each class also has a separate schedule for compensating securities dealers for
selling Insured Fund shares. Investors should take all of the factors regarding
an investment in each class into account before deciding which class of shares
to purchase. Their are no conversion features attached to either class of
shares.
Purchase Price of Insured Fund Shares
When placing purchase orders, investors should clearly indicate which class of
shares they intend to purchase. A purchase order that fails to specify a class
will automatically be invested in Class I shares.
Shares of both classes of the Insured Fund are offered at their respective
public offering prices, which are determined by adding the net asset value per
share plus a front-end sales charge, next computed (1) after the shareholder's
securities dealer receives the order which is promptly transmitted to the Fund,
or (2) after receipt of an order by mail from the shareholder directly in proper
form (which generally means a completed Shareholder Application accompanied by a
negotiable check).
CLASS I. The sales charge for Class I shares is a variable percentage of the
offering price depending upon the amount of the sale. The offering price will be
calculated to two decimal places using standard rounding criteria. A description
of the method of calculating net asset value per share is included under the
caption "Valuation of Shares of Each of the Funds."
Set forth below is a table showing front-end sales charges and dealer
concessions for Class I shares.
<TABLE>
<CAPTION>
Total Sales Charge
As a Dealer Concession
Size of Transaction As a Percentage Percentage of Net As a Percentage
at Offering Price of Offering Price Amount Invested of Offering Price*,***
<S> <C> <C> <C>
Less than $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more NONE NONE (see below)**
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
**The following commissions will be paid by Distributors, out of its own
resources, to securities dealers who initiate and are responsible for purchases
of $1 million or more: 0.75% on sales of $1 million but less than $2 million,
plus 0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales of $50 million but
less than $100 million, plus 0.15% on sales of $100 million or more. Dealer
concession breakpoints are reset every 12 months for purposes of additional
purchases.
***At the discretion of Distributors, all sales charges may at times be allowed
to the securities dealer. If 90% or more of the sales commission is allowed,
such securities dealer may be deemed to be an underwriter as that term is
defined in the Securities Act of 1933, as amended.
No front-end sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of all
or a portion of investments of $1 million or more within the contingency period.
See "How to Sell Shares of the Funds- Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Class I shares is determined by adding the amount of the
shareholder's current purchase plus the cost or current value (whichever is
higher) of a shareholder's existing investment in one or more of the funds in
the Franklin Group of Funds(R) and the Templeton Group of Funds. Included for
these aggregation purposes are (a) the mutual funds in the Franklin Group of
Funds except Franklin Valuemark Funds and Franklin Government Securities Trust)
(the "Franklin Funds"), (b) other investment products underwritten by
Distributors or its affiliates (although certain investments may not have the
same schedule of sales charges and/or may not be subject to reduction) and (c)
the U.S. registered mutual funds in the Templeton Group of Funds except
Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and
Templeton Variable Products Series Fund (the "Templeton Funds"). (Franklin Funds
and Templeton Funds are collectively referred to as the "Franklin Templeton
Funds.") Sales charge reductions based upon aggregate holdings of (a), (b) and
(c) above ("Franklin Templeton Investments") may be effective only after
notification to Distributors that the investment qualifies for a discount.
Other Payments to Securities Dealers. Either Distributors or one of its
affiliates may make payments, out of its own resources, of up to 1.00% of the
amount purchased to securities dealers who initiate and are responsible for
purchases made at net asset value by certain trust companies and trust
departments of banks. See "Description of Special Net Asset Value Purchases" and
the SAI.
Class II. Unlike Class I shares, the front-end sales charges and dealer
concessions for Class II shares do not vary depending on the amount of purchase.
As indicated in the table below:
<TABLE>
<CAPTION>
Insured Fund - Class II Shares - Total Sales Charge
As a As a Dealer Concession
Size of Transaction Percentage of Percentage of Net As a Percentage
at Offering Price Net Offering Price Amount Invested of Offering Price*
<S> <C> <C> <C>
Any amount (less than $1 million) 1.00% 1.01% 1.00%
</TABLE>
*Distributors, or one of its affiliates, may make additional payments to
securities dealers, from its own resources, of up to 1% of the amount invested.
During the first year following a purchase of Class II shares, Distributors will
keep a portion of the Rule 12b-1 fees attributable to those shares to partially
recoup fees Distributors pays to securities dealers.
Class II shares redeemed within the contingency period of 18 months of their
purchase will be assessed a contingent deferred sales charge of 1.0% on the
lesser of the then-current net asset value or the net asset value of such shares
at the time of purchase, unless such charge is waived as described under "How to
Sell Shares of the Funds - Contingent Deferred Sales Charge."
Either Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with sales
of shares of the Franklin Templeton Funds. Compensation may include financial
assistance to securities dealers and payments made in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising, sales campaigns and/or shareholder services and programs
regarding one or more of the Franklin Templeton Funds and other dealer-sponsored
programs or events. In some instances, this compensation may be made available
only to certain securities dealers whose representatives have sold or are
expected to sell significant amounts of shares of the Franklin Templeton Funds.
Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. Securities dealers may not
use sales of the Insured Fund's shares to qualify for this compensation to the
extent such may be prohibited by the laws of any state or any self-regulatory
agency, such as the National Association of Securities Dealers, Inc. None of the
aforementioned additional compensation is paid for by the Insured Fund or its
shareholders.
Additional terms concerning the offering of the Fund's shares are included in
the SAI.
Certain officers and trustees of the Trust are also affiliated with
Distributors. A detailed description is included in the SAI.
Quantity Discounts in Sales Charges -
Class I Shares Only
Class I shares of the Insured Fund may be purchased under a variety of plans
which provide for a reduced sales charge. To be certain to obtain the reduction
of the sales charge, the investor or the securities dealer should notify
Distributors at the time of each purchase of shares which qualifies for the
reduction. In determining whether a purchase qualifies for a discount, an
investment in any of the Franklin Templeton Investments may be combined with
those of the investor's spouse, children under the age of 21 and grandchildren
under the age of 21. The value of Class II shares owned by the investor may also
be included for this purpose.
In addition, an investment in Class I shares may qualify for a reduction in the
sales charge under the following programs:
1. Rights Of Accumulation. The cost or current value (whichever is higher) of
existing investments in the Franklin Templeton Investments may be combined with
the amount of the current purchase in determining the sales charge to be paid.
2. Letter Of Intent. An investor may immediately qualify for a reduced sales
charge on a purchase of Class I shares by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which, if made at one time, would qualify for
a reduced sales charge and grants to Distributors a security interest in the
reserved shares and irrevocably appoints Distributors as attorney-in-fact with
full power of substitution to surrender for redemption any or all shares for the
purpose of paying any additional sales charge due. Purchases under the Letter
will conform with the requirements of Rule 22d-1 under the 1940 Act. The
investor or the investor's securities dealer must inform Investor Services or
Distributors that this Letter is in effect each time a purchase is made.
AN INVESTOR ACKNOWLEDGES AND AGREES TO THE FOLLOWING PROVISIONS BY COMPLETING
THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION: Five percent (5%)
of the amount of the total intended purchase will be reserved in Class I shares
registered in the investor's name, to assure that the full applicable sales
charge will be paid if the intended purchase is not completed. The reserved
shares will be included in the total shares owned as reflected on periodic
statements; income and capital gain distributions on the reserved shares will be
paid as directed by the investor. The reserved shares will not be available for
disposal by the investor until the Letter of Intent has been completed or the
higher sales charge paid. For more information, see "Additional Information
Regarding Purchases" in the SAI.
Although the sales charges on Class II shares cannot be reduced through these
programs, the value of Class II shares owned by the investor may be included in
determining the reduced sales charge to be paid on Class I shares pursuant to
the Letter of Intent and Rights of Accumulation programs.
Group Purchases of Class I Shares
An individual who is a member of a qualified group may also purchase Class I
shares of the Insured Fund at the reduced sales charge applicable to the group
as a whole. The sales charge is based upon the aggregate dollar value of shares
previously purchased and still owned by the members of the group, plus the
amount of the current purchase. For example, if members of the group had
previously invested and still held $80,000 of the Insured Fund's shares and now
were investing $25,000, the sales charge would be 3.50%. Information concerning
the current sales charge applicable to a group may be obtained by contacting
Distributors.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring the Insured Fund's shares at a
discount and (iii) satisfies uniform criteria which enable Distributors to
realize economies of scale in its costs of distributing shares. A qualified
group must have more than 10 members, be available to arrange for group meetings
between representatives of the Fund or Distributors and the members, agree to
include sales and other materials related to the Insured Fund in its
publications and mailings to members at reduced or no cost to Distributors, and
seek to arrange for payroll deduction or other bulk transmission of investments
to the Insured Fund.
If an investor selects a payroll deduction plan, subsequent investments will be
automatic and will continue until such time as the investor notifies the Insured
Fund and the investor's employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the payroll deduction
information to the Insured Fund, there may be a delay between the time of the
payroll deduction and the time the money reaches the Insured Fund. The
investment in the Fund will be made at the offering price per share determined
on the day that both the check and payroll deduction data are received in
required form by the Insured Fund.
Purchases At Net Asset Value
Class I shares of the Insured Fund may be purchased without the imposition of a
front-end sales charge ("net asset value") or a contingent deferred sales charge
by (1) officers, trustees, directors, and full-time employees of the Trust, any
of the Franklin Templeton Funds, or of the Franklin Templeton Group, and by
their spouses and family members, including subsequent investments made by such
parties after cessation of employment; (2) companies exchanging shares or
selling assets pursuant to a merger, acquisition or exchange offer; (3) accounts
managed by the Franklin Templeton Group; (4) registered securities dealers and
their affiliates, for their investment account only, and (5) registered
personnel and employees of securities dealers and by their spouses and family
members, in accordance with the internal policies and procedures of the
employing securities dealer.
For either Class I or Class II, the same class of shares of the Fund may be
purchased at net asset value by persons who have redeemed, within the previous
365 days, their shares of the Fund or another of the Franklin Templeton Funds
which were purchased with a front-end sales charge or assessed a contingent
deferred sales charge on redemption. If a different class of shares is
purchased, the full front-end sales charge must be paid at the time of purchase
of the new shares. An investor may reinvest an amount not exceeding the
redemption proceeds. While credit will be given for any contingent deferred
sales charge paid on the shares redeemed and subsequently repurchased, a new
contingency period will begin. Matured shares will be reinvested at net asset
value and will not be subject to a new contingent deferred sales charge. Shares
of the Fund redeemed in connection with an exchange into another fund (see
"Exchange Privilege") are not considered "redeemed" for this privilege. In order
to exercise this privilege, a written order for the purchase of shares of the
Fund must be received by the Fund or the Fund's Shareholder Services Agent
within 365 days after the redemption. The 365 days, however, do not begin to run
on redemption proceeds placed immediately after redemption in a Franklin Bank
Certificate of Deposit ("CD") until the CD (including any rollover) matures.
Reinvestment at net asset value may also be handled by a securities dealer or
other financial institution, who may charge the shareholder a fee for this
service. The redemption is a taxable transaction but reinvestment without a
sales charge may affect the amount of gain or loss recognized and the tax basis
of the shares reinvested. If there has been a loss on the redemption, the loss
may be disallowed if a reinvestment in the same fund is made within a 30-day
period. Information regarding the possible tax consequences of such a
reinvestment is included in the tax section of this Prospectus and the SAI.
For either Class I or Class II, the same class of shares of the Fund or of
another of the Franklin Templeton Funds may be purchased at net asset value and
without a contingent deferred sales charge by persons who have received
dividends and capital gains distributions in cash from investments in that class
of shares of the Fund within 365 days of the payment date of such distribution.
Class II shareholders may direct such distributions for investment at net asset
value in a Class I Franklin Templeton Fund. To exercise this privilege, a
written request to reinvest the distribution must accompany the purchase order.
Additional information may be obtained from Shareholder Services at
1-800/632-2301. See "Distributions in Cash" under "Distributions to
Shareholders."
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by investors who have, within the past 60
days, redeemed an investment in a mutual fund which is not part of the Franklin
Templeton Funds and which was subject to a front-end sales charge or a
contingent deferred sales charge and which has investment objectives similar to
those of the Fund.
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by broker dealers who have entered into a
supplemental agreement with Distributors, or by registered investment advisors
affiliated with such broker-dealers, on behalf of their clients who are
participating in a comprehensive fee program (sometimes known as a wrap fee
program).
Class I shares may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or city,
or any instrumentality, department, authority or agency thereof which has
determined that the Fund is a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE INSURED FUND CONSTITUTE LEGAL INVESTMENTS FOR
THEM. Municipal investors considering investment of proceeds of bond offerings
into either Fund should consult with expert counsel to determine the effect, if
any, of various payments made by the Fund or its investment manager on arbitrage
rebate calculations. If an investment by an eligible governmental authority at
net asset value is made through a securities dealer who has executed a dealer
agreement with Distributors, Distributors or one of its affiliates may make a
payment, out of its own resources, to such securities dealer in an amount not to
exceed 0.25% of the amount invested. Contact the Franklin Templeton
Institutional Services Department for additional information.
Description Of Special
Net Asset Value Purchases
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by trust companies and bank trust departments
for funds over which they exercise exclusive discretionary investment authority
and which are held in a fiduciary, agency, advisory, custodial or similar
capacity. Such purchases are subject to minimum requirements with respect to
amount of purchase, which may be established by Distributors. Currently, those
criteria require that the amount invested or to be invested during the
subsequent 13-month period in this Fund or any of the Franklin Templeton
Investments must total at least $1,000,000. Orders for such accounts will be
accepted by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with payment
by federal funds received by the close of business on the next business day
following such order.
Refer to the SAI for further information regarding net asset value purchases of
Class I shares.
MONEY FUND
Shares of the Money Fund are continuously offered through securities dealers
which execute an agreement with Distributors, the principal underwriter of the
Fund's shares, and by the Fund directly. The use of the term "securities
dealers" shall include other financial institutions which, pursuant to an
agreement with Distributors (directly or through affiliates), handle customer
orders and accounts with the Fund. Such reference, however, is for convenience
only and does not indicate a legal conclusion of capacity. All shares of the
Fund are purchased at the net asset value, without a sales charge, next
determined after receipt of a purchase order in proper form. The minimum initial
investment is $500 and subsequent investments must be $25 or more. These
minimums may be waived when the shares are purchased through plans established
by the Franklin Templeton Group providing for regular periodic investments.
Purchases in proper form received by the Fund prior to 3:00 p.m. Pacific time
will be credited to the shareholder's account on that business day. If received
after 3:00 p.m., the purchase will be credited the following business day. Many
of the types of instruments in which the Fund invests must be paid for in
federal funds, which are monies held by its custodian bank on deposit at the
Federal Reserve Bank of San Francisco and elsewhere. Therefore, the monies paid
by an investor for shares of the Fund generally cannot be invested by the Fund
until they are converted into and are available to the Fund in federal funds,
which may take up to two days. In such cases, purchases by investors may not be
considered in proper form and effective until such conversion and availability.
In the event the Fund is able to make investments immediately (within one
business day), it may accept a purchase order with payment other than in federal
funds; in such event, shares of the Money Fund will be purchased at the net
asset value next determined after receipt of the order and payment.
Shares may be purchased in any of the following ways.
By Mail:
(1) For an initial investment, include the completed Shareholder Application.
For subsequent investments, the deposit slips which are included with the
shareholder's monthly statement or checkbook (if one has been requested) may be
used, or the shareholder should reference the account number on the check.
(2) Make the check, Federal Reserve draft or negotiable bank draft payable to
Franklin California Tax-Exempt Money Fund. Instruments drawn on other investment
companies may not be accepted.
(3) Send the check, Federal Reserve draft or negotiable bank draft to Franklin
California Tax-Exempt Money Fund, 777 Mariners Island Blvd., P.O. Box 7777, San
Mateo, California 94403-7777.
By Wire:
(1) Call Franklin's Shareholder Services Department at 1-800/632-2301. If that
line is busy, call 415/312-2000 collect, to advise that funds will be wired for
investment. The Fund will supply a wire control number for the investment. It is
necessary to obtain a new wire control number every time money is wired into an
account in the Fund. Wire control numbers are effective for one transaction only
and may not be used more than once.Wired money which is not properly identified
with a currently effective wire control number will be returned to the bank from
which it was wired and will not be credited to the shareholder's account.
(2) Wire funds to Bank of America, ABA routing number 121000358, for credit to
Franklin California Tax-Exempt Money Fund, A/C 1493-3-04779. The wire control
number and shareholder's name must be included. Wired funds received by the Bank
and reported by the Bank to the Fund by 3:00 p.m. Pacific time are normally
credited on that day. Later wires are credited the following business day.
(3) If the purchase is not to an existing account, a completed Shareholder
Application must be sent to Franklin California Tax-Exempt Money Fund at 777
Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777, to
assure proper credit for the wire.
Through Securities Dealers:
Investors may, if they wish, invest in the Fund by purchasing shares through a
securities dealer. Securities dealers who process orders on behalf of their
customers may charge a reasonable fee for their services. Investments made
directly, without the assistance of a securities dealer, are without charge. In
certain states, shares of the Fund may be purchased only through registered
securities dealers.
General
The Trust and the Manager reserve the right to reject any order for the purchase
of shares of either Fund and to waive any minimum investment requirements. In
addition, the offering of shares of either Fund may be suspended by such Fund at
any time and resumed at any time thereafter.
Securities laws of states in which the Funds' shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling the Funds' shares may be required to register as dealers
pursuant to state law.
A shareholder's investment in the Money Fund will be included for purposes of
determining the sales charge discount to which the shareholder may be entitled
as set forth in Rights of Accumulation and Letter of Intent under "Quantity
Discounts in Sales Charges."
Programs and Privileges Available
to Shareholders of the Funds
Certain of the programs and privileges described in this section may not be
available directly from the Funds to shareholders whose shares are held, of
record, by a financial institution or in a "street name" account or networked
account through the National Securities Clearing Corporation ("NSCC") (see the
section captioned "Account Registrations" in this Prospectus).
Share Certificates
Shares for an initial or a subsequent investment, including the reinvestment of
dividends and capital gain distributions, are generally credited to an account
in the name of an investor on the books of a Fund, without the issuance of a
share certificate. Maintaining shares in uncertificated form (also known as
"plan balance") minimizes the risk of loss or theft of a share certificate. A
lost, stolen or destroyed certificate cannot be replaced without obtaining a
sufficient indemnity bond. The cost of such a bond, which is generally borne by
the shareholder, can be 2% or more of the value of the lost, stolen or destroyed
certificate. A certificate will be issued if requested by the shareholder or by
the securities dealer.
Confirmations
A confirmation statement will be sent to each shareholder quarterly to reflect
the dividends reinvested during that period and after each other transaction
which affects the shareholder's account. A confirmation statement will be sent
monthly to shareholders in the Money Fund to confirm the daily dividends
reinvested as well as after each transaction which affects an account, except a
redemption effected by a check. These statements will also show the total number
of shares owned by the shareholder, including the number of shares in "plan
balance" for the account of the shareholder.
Automatic Investment Plan
Under the Automatic Investment Plan, a shareholder may be able to arrange to
make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which maintains
the account is a member of the Automated Clearing House, or by preauthorized
checks drawn on the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Automatic Investment Plan Application
included with this Prospectus contains the requirements applicable to this
program. In addition, shareholders may obtain more information concerning this
program from their securities dealers or from Distributors.
The market value of each class of the Insured Fund's shares is subject to
fluctuation. Before undertaking any plan for systematic investment, the investor
should keep in mind that such a program does not assure a profit or protect
against a loss.
Systematic Withdrawal Plan
A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account, provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum amount
which the shareholder may withdraw is $50 per withdrawal transaction, although
this is merely the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. The plan may be established on a monthly,
quarterly, semiannual or annual basis. If the shareholder establishes a plan,
any capital gain distributions and income dividends paid by the Fund will be
reinvested for the shareholder's account in additional shares at net asset
value. Payments will then be made from the liquidation of shares at net asset
value on the day of the transaction (which is generally the first business day
of the month in which the payment is scheduled) with payment generally received
by the shareholder three to five days after the date of liquidation. By
completing the "Special Payment Instructions for Distributions" (Insured Fund)
or "Special Payment Instructions for Dividends" (Money Fund) section of the
Shareholder Application included with this Prospectus, a shareholder may direct
the selected withdrawals to another of the Franklin Templeton Funds, to another
person, or directly to a checking account. If the bank at which the account is
maintained is a member of the Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If this last option is requested,
the shareholder should allow at least 15 days for initial processing. Payments
which may be paid in the interim will be sent to the address of record.
Liquidation of shares may reduce or possibly exhaust the shares in the
shareholder's account, to the extent withdrawals exceed shares earned through
dividends and distributions, particularly in the event of a market decline. If
the withdrawal amount exceeds the total plan balance, the account will be closed
and the remaining balance will be sent to the shareholder. As with other
redemptions, a liquidation to make a withdrawal payment is a sale for federal
income tax purposes. Because the amount withdrawn under the plan may be more
than the shareholder's actual yield or income, part of the payment may be a
return of the shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Insured Fund would be disadvantageous because of the
sales charge on the additional purchases. Also, redemptions of Class I and Class
II shares may be subject to a contingent deferred sales charge if the shares are
redeemed within the contingency period of the class. The shareholder should
ordinarily not make additional investments of less than $5,000 or three times
the annual withdrawals under the plan during the time such a plan is in effect.
With respect to Class I shares, the contingent deferred sales charge is waived
for redemptions through a Systematic Withdrawal Plan set up prior to February 1,
1995. With respect to Systematic Withdrawal Plans set up on or after February 1,
1995, however, the applicable contingent deferred sales charge is waived for
Class I and Class II share redemptions of up to 1% monthly of an account's net
asset value (12% annually, 6% semiannually, 3% quarterly). For example, if a
Class I account maintained an annual balance of $1,000,000, only $120,000 could
be withdrawn through a once-yearly Systematic Withdrawal Plan free of charge;
any amount over that $120,000 would be assessed a 1% contingent deferred sales
charge. Likewise, if a Class II account maintained an annual balance of $10,000,
only $1,200 could be withdrawn through a once-yearly Systematic Withdrawal Plan
free of charge.
A Systematic Withdrawal Plan may be terminated on written notice by the
shareholder or the Funds, and it will terminate automatically if all shares are
liquidated or withdrawn from the account, or upon the Funds' receipt of
notification of the death or incapacity of the shareholder. Shareholders may
change the amount (but not below the specified minimum) and schedule of
withdrawal payments, or suspend one such payment by giving written notice to
Investor Services at least seven business days prior to the end of the month
preceding a scheduled payment. Share certificates may not be issued while a
Systematic Withdrawal Plan is in effect.
Multiple Accounts for Fiduciaries
(Money Fund Only)
Special procedures have been designed for banks and other institutions wishing
to open multiple accounts in the Money Fund. Further information is included in
the SAI.
Institutional Accounts
There may be additional methods of purchasing, redeeming or exchanging shares of
the Funds available to institutional accounts. For further information, contact
the Franklin Templeton Institutional Services Department at 1-800/321-8563.
Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives or policies. The shares of most of these mutual funds are
offered to the public with a sales charge. If a shareholder's investment
objective or outlook for the securities markets changes, a Fund's shares may be
exchanged for the same class of shares of other Franklin Templeton Funds which
are eligible for sale in the shareholder's state of residence and in conformity
with such fund's stated eligibility requirements and investment minimums. Some
funds, including the Money Fund, however, may not offer Class II shares. Class I
shares may be exchanged for Class I shares of any Franklin Templeton Funds.
Class II shares may be exchanged for Class II shares of any Franklin Templeton
Funds. No exchanges between different classes of shares will be allowed. A
contingent deferred sales charge will not be imposed on exchanges. If, however,
the exchanged shares were subject to a contingent deferred sales charge in the
original fund purchased and shares are subsequently redeemed within the
contingency period of the class, a contingent deferred sales charge will be
imposed. Before making an exchange, investors should review the prospectus of
the fund they wish to exchange from and the fund they wish to exchange into for
all specific requirements or limitations on exercising the exchange privilege,
for example, minimum holding periods or applicable sales charges.
Exchanges may be made in any of the following ways:
Exchanges By Mail
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
Exchanges By Telephone
Shareholders, or their investment representative of record, if any, may exchange
shares of the Fund by telephone by calling investor Services at 1-800/632-2301
or the automated Franklin TeleFACTS(R) system (day or night) at 1-800/247-1753.
If the shareholder does not wish this privilege extended to a particular
account, the Fund or Investor Services should be notified.
The telephone exchange privilege allows a shareholder to effect exchanges from a
Fund into an identically registered account of the same class of shares in one
of the other available Franklin Templeton Funds. The telephone exchange
privilege is available only for uncertificated shares or those which have
previously been deposited in the shareholder's account. The Funds and Investor
Services will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. Please refer to "Telephone Transactions -
Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, shareholders should follow the other
exchange procedures discussed in this section, including the procedures for
processing exchanges through securities dealers.
Exchanges Through Securities Dealers
As is the case with all purchases and redemptions of the Funds' shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "Exchanges By Telephone"
above. Such a dealer-ordered exchange will be effective only for uncertificated
shares on deposit in the shareholder's account or for which certificates have
previously been deposited. A securities dealer may charge a fee for handling an
exchange.
Additional Information Regarding Exchanges
Exchanges of the same class of shares are made on the basis of the net asset
values of the class involved, except as set forth below. Exchanges of shares of
a class which were purchased without a sales charge will be charged a sales
charge in accordance with the terms of the prospectus of the fund and the class
of shares being purchased, unless the investment on which no sales charge was
paid originated from a fund on which the investor paid or was subject to a
front-end or contingent deferred sales charge. Exchanges of Class I shares of
the Insured Fund which were purchased with a lower sales charge into a fund
which has a higher sales charge will be charged the difference in sales charges,
unless the shares were held in the Fund for at least six months prior to
executing the exchange.
When an investor requests the exchange of the total value of a Fund account,
accrued but unpaid income dividends and capital gain distributions will be
reinvested in the Fund at the net asset value on the date of the exchange, and
then the entire share balance will be exchanged into the new fund in accordance
with the procedures set forth above. Because the exchange is considered a
redemption and purchase of shares, the shareholder may realize a gain or loss
for federal income tax purposes. Backup withholding and information reporting
may also apply. Information regarding the possible tax consequences of such an
exchange is included in the tax section in this Prospectus and in the SAI.
If a substantial portion of the Insured Fund's shareholders should, within a
short period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate 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 should occur, it is the general policy of the
Insured Fund to initially invest this money in short-term, interest-bearing,
tax-exempt municipal securities, unless it is felt that attractive investment
opportunities consistent with the Fund's investment objective exist immediately.
Subsequently, this money will be withdrawn from such short-term taxexempt
municipal securities and invested in portfolio securities in as orderly a manner
as is possible when attractive investment opportunities arise.
The Exchange Privilege may be modified or discontinued by the Funds at any time
upon 60 days' written notice to shareholders.
Exchanges Of Class I Shares
The contingency period of 12 months during which a contingent deferred sales
charge may be assessed for Class I shares will be tolled (or stopped) for the
period such shares are exchanged into and held in a Franklin or Templeton Class
I money market fund. If a Class I account has shares subject to a contingent
deferred sales charge, Class I shares will be exchanged into the new account on
a "first-in, first-out" basis. See also "How to Sell Shares of the Funds -
Contingent Deferred Sales Charge."
Exchanges Of Class II Shares
When an account is composed of Class II shares subject to the 18 month
contingent deferred sales charge, and Class II shares that are not, the shares
will be transferred proportionately into the new fund. Shares received from
reinvestment of dividends and capital gains are referred to as "free shares,"
shares which were originally subject to a contingent deferred sales charge but
to which the contingent deferred sales charge no longer applies are called
"matured shares," and shares still subject to the contingent deferred sales
charge are referred to as "CDSC liable shares." CDSC liable shares held for
different periods of time are considered different types of CDSC liable shares.
For instance, if a shareholder has $1,000 in free shares, $2,000 in matured
shares, and $3,000 in CDSC liable shares, and the shareholder exchanges $3,000
into a new fund, $500 will be exchanged from free shares, $1,000 from matured
shares, and $1,500 from CDSC liable shares. Similarly, if CDSC liable shares
have been purchased at different periods, a proportionate amount will be taken
from shares held for each period. If, for example, a shareholder holds $1,000 in
shares bought 3 months ago, $1,000 bought 6 months ago, and $1,000 bought 9
months ago, and the shareholder exchanges $1,500 into the new fund, $500 from
each of these shares will be deemed exchanged into the new fund.
To the extent shares are exchanged proportionately, as opposed to another
method, such as first-in first-out, or free-shares followed by CDSC liable
shares, the exchanged shares may, in some instances, be CDSC liable even though
a redemption of such shares, as discussed elsewhere herein, may no longer be
subject to a CDSC. The proportional method is believed by management to more
closely meet and reflect the expectations of Class II shareholders in the event
shares are redeemed during the contingency period. For federal income tax
purposes, the cost basis of shares redeemed or exchanged is determined under the
Code without regard to the method of transferring shares chosen by the Fund.
The only money market fund exchange option available to Class II shareholders is
the Franklin Templeton Money Fund II ("Money Fund II"), a series of the Franklin
Templeton Money Fund Trust. No drafts (checks) may be written on Money Fund II
accounts, nor may shareholders purchase shares of Money Fund II directly. Class
II shares exchanged for shares of Money Fund II will continue to age and a
contingent deferred sales charge will be assessed if CDSC liable shares are
redeemed. No other money market funds, including the Money Fund, are available
for Class II shareholders for exchange purposes. Class I shares may be exchanged
for shares of any of the money market funds in the Franklin Templeton Funds,
including the Money Fund, except Money Fund II. Draft writing privileges and
direct purchases are allowed on these other money market funds as described in
their respective prospectuses.
Timing Accounts
"Timing Accounts" are not permitted to purchase shares of the Insured Fund or to
exchange into the Insured Fund. This policy does not affect any other type of
investor. "Timing Accounts" generally include market timing or allocation
services; accounts administered as to redeem or purchase shares based upon
certain predetermined market indicators; or any person whose transactions seem
to follow a timing pattern.
Timing Accounts will be charged a $5.00 administrative service fee per each such
exchange involving the Money Fund; all other exchanges are processed without a
fee.
Restrictions on Exchanges
In accordance with the terms of their respective prospectuses, certain funds do
not accept or may place differing limitations than those below on exchanges by
Timing Accounts.
The Money Fund reserves the right to temporarily or permanently terminate the
exchange privilege or reject any specific purchase order for any Timing Account
or any person whose transactions seem to follow a timing pattern who: (i) makes
an exchange request out of a Fund within two weeks of an earlier exchange
request out of the Fund, or (ii) makes more than two exchanges out of a Fund per
calendar quarter, or (iii) exchanges shares equal in value to at least $5
million, or more than 1% of a Fund's net assets. Accounts under common ownership
or control, including accounts administered so as to redeem or purchase shares
based upon certain predetermined market indicators, will be aggregated for
purposes of the exchange limits.
The Money Fund reserves the right to refuse the purchase side of exchange
requests by any Timing Account, person, or group if, in the Manager's judgment,
the Fund would be unable to invest effectively in accordance with its investment
objectives and policies, or would otherwise potentially be adversely affected. A
shareholder's purchase exchanges may be restricted or refused if the Fund
receives or anticipates simultaneous orders affecting significant portions of
the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to the Fund and therefore may be
refused.
The Funds and Distributors also, as indicated under "How to Buy Shares of the
Fund," reserve the right to refuse any order for the purchase of shares.
Transfers
Transfers between identically registered accounts in the same fund and class are
treated as non-monetary and non-taxable events, and are not subject to a
contingent deferred sales charge. The transferred shares will continue to age
from the date of original purchase. Shares of each class will be transferred on
the same basis as described above for exchanges.
Conversion Rights
It is not presently anticipated that Class II shares will be convertible to
Class I shares. A shareholder may, however, sell his Class II shares and use the
proceeds to purchase Class I shares, subject to all applicable sales charges.
How to Sell Shares of the Funds
A shareholder may at any time liquidate shares owned and receive from a Fund the
value of the shares. Shares may be redeemed in any of the following ways:
1. Regular Redemptions by Mail
(Insured Fund and Money Fund)
Send a written request, signed by all registered owners, to Investor Services at
the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from the
Fund the value of the class of shares redeemed based upon the net asset value
per share (less a contingent deferred sales charge, if applicable) next computed
after the written request in proper form is received by Investor Services.
Redemption requests received after the time at which the net asset value is
calculated (at 1:00 p.m. Pacific time for the Insured Fund and at 3:00 p.m.
Pacific time for the Money Fund) each day that the New York Stock Exchange (the
"Exchange") is open for business will receive the price calculated on the
following business day. Shareholders are requested to provide a telephone
number(s) where they may be reached during business hours, or in the evening if
preferred. Investor Services' ability to contact a shareholder promptly when
necessary will speed the processing of the redemption.
To be considered in proper form, signature(s) must be guaranteed if the
redemption request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage firm
account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Funds or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions, including,
for example, when (a) the current address of one or more joint owners of an
account cannot be confirmed, (b) multiple owners have a dispute or give
inconsistent instructions to the Funds, (c) the Funds have been notified of an
adverse claim, (d) the instructions received by the Funds are given by an agent,
not the actual registered owner, (e) the Funds determine that joint owners who
are married to each other are separated or may be the subject of divorce
proceedings, or (f) the authority of a representative of a corporation,
partnership, association, or other entity has not been established to the
satisfaction of the Funds.
Signature(s) must be guaranteed by an "eligible guarantor institution" as
defined under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Share Certificates - Where shares to be redeemed are represented by share
certificates, the request for redemption must be accompanied by the share
certificate and a share assignment form signed by the registered shareholders
exactly as the account is registered, with the signature(s) guaranteed as
referenced above. Shareholders are advised, for their own protection, to send
the share certificate and assignment form in separate envelopes if they are
being mailed in for redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officer(s) of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustee(s) and
(2) a copy of the pertinent pages of the trust document listing the trustee(s)
or a Certification for Trust if the trustee(s) are not listed on the account
registration.
Custodial - Signature guaranteed letter of instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form.
2. By Check (Money Fund Only):
The Money Fund will supply redemption drafts (which are similar to checks and
are referred to as checks throughout this Prospectus) to shareholders who have
requested them on the Shareholder Application. The election of the check
redemption procedure does not create a checking account or other bank account
relationship between a shareholder and the Money Fund or any bank. These checks
are drawn through the Fund's Custodian, Bank of America NT & SA (the "Custodian"
or "Bank"). Shareholders will generally not be able to convert a check drawn on
a Fund account into a certified or cashier's check by presentation at the Fund's
Custodian. The shareholder may make checks payable to the order of any person in
any amount not less than $100. There is no charge to the shareholder for this
check redemption procedure.
When such a check is presented for payment, the Money Fund will redeem a
sufficient number of full and fractional shares in the shareholder's account to
cover the amount of the check. This enables the shareholder to continue earning
daily income dividends until the check has cleared. Shares will be redeemed at
their net asset value next determined after receipt of a check which does not
exceed the collected balance of the account. Only shareholders having accounts
in which no stock certificates have been issued will be permitted to redeem
shares by check.
Because the Fund is not a bank, no assurance can be given that stop payment
orders on checks written by shareholders will be effective. However, the Fund
will use its best efforts to see that such orders are carried out.
Shareholders will be subject to the right of the Bank to return unpaid checks in
amounts exceeding the collected balance of their account at the time the check
is presented for payment. Checks should not be used to close a Money Fund
account because when the check is written, the shareholder will not know the
exact total value of the account on the day the check clears. The Bank reserves
the right to terminate this service at any time upon notice to shareholders.
3. Redemptions By Telephone
Insured Fund
Shareholders who complete the Franklin Templeton Telephone Redemption
Authorization Agreement (the "Agreement"), included with this Prospectus may
redeem shares of the Insured Fund by telephone. Information may also be obtained
by writing to the Fund or Investor Services at the address shown on the cover or
by calling 1-800/632-2301. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions given by telephone are genuine.
Shareholders, however, bear the risk of loss in certain cases as described under
"Telephone Transactions - Verification Procedures."
For shareholder accounts with the completed Agreement on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before the scheduled close of
the Exchange (generally 1:00 p.m. Pacific time) on any business day will be
processed that same day.
Money Fund
A shareholder may redeem shares by telephoning the Money Fund at 1-800/632-2301.
Payment of redemption requests of $1,000 or less (once per business day) will be
sent by mail to the shareholder's address as reflected on the Fund's records.
For payments over $1,000, the shareholder must complete the "Wire Redemptions
Privilege" section of the Shareholder Application. Proceeds will then be wired
directly to the commercial bank or brokerage firm designated by the shareholder.
Wires will not be sent for redemption requests of $1,000 or less. Shareholders
may have redemption proceeds in excess of $1,000, up to $50,000 per day per Fund
account, sent directly to their address of record by filing a completed
Franklin/Templeton Telephone Redemption Authorization Agreement.
Telephone redemption requests received before 3:00 p.m. Pacific time on any
business day will be processed that same day. Wire payments will be transmitted
the next business day following receipt prior to 3:00 p.m. Pacific time of a
request for redemption in proper form. Shareholders may wish to allow for longer
processing time if they want to assure that redemption proceeds will be
available at a specific time for a specific transaction. Shareholders may be
able to have redemption proceeds wired to an escrow account the same day,
provided that the request is received prior to 9:00 a.m. Pacific time.
General
The redemption check will be sent within seven days, made payable to all the
registered owners on the account, and will be sent only to the address of
record. Redemption requests by telephone will not be accepted within 30 days
following an address change by telephone. In that case, a shareholder should
follow the other redemption procedures set forth in this Prospectus.
Institutional accounts (certain corporations, bank trust departments and
government entities which qualify to purchase shares at net asset value pursuant
to the terms of this Prospectus) which wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which is
available from the Franklin Templeton Institutional Services Department by
telephoning 1-800/321-8563. The requirements for telephone transactions extend
to transactions transmitted by facsimile or computer, as well as those
communicated directly to a customer representative. Payment may be made by wire
directly to any commercial bank previously designated by the shareholder in a
Shareholder Account Application or Revision.
Redemption instructions must include the shareholder's name and account number
and be called to the Fund. No shares for which share certificates have been
issued may be redeemed by telephone instructions. The telephone redemption
privilege may be modified or discontinued by either Fund at any time upon 60
days' notice to shareholders.
4. Through a Securities Dealer
(Insured Fund only):
The Insured Fund will accept redemption orders from securities dealers who have
entered into an agreement with Distributors. This is known as a repurchase. The
only difference between a normal redemption and a repurchase is that if the
shareholder redeems shares through a dealer, the redemption price will be at the
net asset value next calculated after the shareholder's dealer receives the
order which is promptly transmitted to the Insured Fund, rather than on the day
the Fund receives the shareholder's written request in proper form. The
documents described under "Redemptions by Mail" above, as well as a signed
letter of instruction, are required regardless of whether the shareholder
redeems shares directly or submits such shares to a securities dealer for
repurchase. A shareholder's letter should reference the Insured Fund and the
class, the account number, the fact that the repurchase was ordered by a dealer
and the dealer's name. Details of the dealer-ordered trade, such as trade date,
confirmation number, and the amount of shares or dollars, will help speed
processing of the redemption. The seven-day period within which the proceeds of
the shareholder's redemption will be sent will begin when the Insured Fund
receives all documents required to complete ("settle") the repurchase in proper
form. The redemption proceeds will not earn dividends or interest during the
time between receipt of the dealer's repurchase order and the date the
redemption is processed upon receipt of all documents necessary to settle the
repurchase. Thus, it is in a shareholder's best interest to have the required
documentation completed and forwarded to the Fund as soon as possible. The
shareholder's dealer may charge a fee for handling the order. The SAI contains
more information on the redemption of shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers, Class I investments
of $1 million or more and any Class II investments redeemed within the
contingency period (12 months for Class I and 18 months for Class II) will be
assessed a contingent deferred sales charge, unless one of the exceptions
described below applies. The charge is 1% of the lesser of the value of the
shares redeemed (exclusive of reinvested dividends and capital gain
distributions) or the net asset value at the time of purchase of such shares,
and is retained by Distributors. The contingent deferred sales charge is waived
in certain instances.
The Money Fund does not impose either a front-end sales charge or a contingent
deferred sales charge. If, however, the shares redeemed were shares acquired by
exchange from another of the Franklin Templeton Funds which would have assessed
a contingent deferred sales charge upon redemption, such charge will be made by
the Money Fund, as described below. The 12-month contingency period for will be
tolled (or stopped) for the period such shares are exchanged into and held in
the Money Fund.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) A calculated number of shares representing amounts
attributable to capital appreciation of those shares held less than the
contingency period of the class; (ii) shares purchased with reinvested dividends
and capital gain distributions; and (iii) other shares held longer than the
contingency period. Shares subject to a contigent deferred sales charge will
then be redeemed on a "first-in, first-out" basis. For tax purposes, a
contingent deferred sales charge is treated as either a reduction in redemption
proceeds or an adjustment to the cost basis of the shares redeemed.
The contingent deferred sales charge on each class of shares is waived, as
applicable, for: exchanges; any account fees; redemptions through a Systematic
Withdrawal Plan set up for shares prior to February 1, 1995, and for Systematic
Withdrawal Plans set up thereafter, redemptions of up to 1% monthly of an
account's net asset value (3% quarterly, 6% semiannually or 12% annually);
redemptions initiated by the Fund due to a shareholder's account falling below
the minimum specified account size; and redemptions following the death of the
shareholder or the beneficial owner.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Requests for redemptions of a specified dollar amount, unless otherwise
specified, will result in additional shares being redeemed to cover any
applicable contingent deferred sales charge, while requests for redemption of a
specific number of shares will result in the applicable contingent deferred
sales charge being deducted from the total dollar amount redeemed.
Additional Information Regarding Redemptions
The Funds may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption. In addition, the right of redemption may be suspended or
the date of payment postponed if the Exchange is closed (other than customary
closing) or upon the determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it, by order, for the
protection of shareholders. Of course, the amount received may be more or less
than the amount invested by the shareholder, depending on fluctuations in the
market value of securities owned by the Funds.
Other Information
Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Funds nor their affiliates will be liable for any loss to the shareholder caused
by the shareholder's failure to cash such check(s).
"Cash" payments to or from each Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the securities dealer may
call Franklin's Dealer Services Department.
Telephone Transactions
Shareholders of the Funds and their investment representative of record, if any,
may be able to execute various transactions, including the following, by calling
Investor Services at 1-800/632-2301.
Shareholders may: (i) effect a change in address, (ii) change a dividend option,
(iii) transfer Fund shares in one account to another identically registered
account in the Fund, (iv) request the issuance of certificates (to be sent to
the shareholder's address of record only) and (v) exchange Fund shares as
described in this Prospectus by telephone. In addition, shareholders who
complete and file an Agreement as described under "How to Sell Shares of the
Fund - Redemptions by Telephone" will be able to redeem shares of the Funds.
Verification Procedures
The Funds and Investor Services will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and by sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Funds and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to the shareholder caused by an unauthorized transaction. A
Fund and Investor Services may be liable for any losses due to unauthorized or
fraudulent instructions in the event such reasonable procedures are not
followed. Shareholders are, of course, under no obligation to apply for or
accept telephone transaction privileges. In any instance where the Funds or
Investor Services is not reasonably satisfied that instructions received by
telephone are genuine, the requested transaction will not be executed, and
neither the Funds nor Investor Services will be liable for any losses which may
occur because of a delay in implementing a transaction.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
investment representative for assistance, or to send written instructions to a
Fund as detailed elsewhere in this Prospectus.
Neither the Funds nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.
The telephone transaction privilege may be modified or discontinued by the Funds
at any time upon 60 days' written notice to shareholders.
Valuation of Shares of Each of the Funds
The net asset value per share for each class of the Insured Fund is determined
as of the scheduled close of the Exchange (generally 1:00 p.m. Pacific time)
each day that the Exchange is open for trading. The net asset value per share of
the Money Fund is determined as of 3:00 Pacific time each day that the Exchange
is open for trading. Many newspapers carry daily quotations of the prior trading
day's closing "bid" (net asset value) and "ask" (offering price, which includes
the maximum front-end sales charge of each class of shares of the Insured Fund).
The net asset value per share of the Money Fund and each class of the Insured
Fund is determined in the following manner: The aggregate of all liabilities, is
deducted from the aggregate gross value of all assets, and the difference is
divided by the number of shares of the respective class outstanding at that
time. Assets in each Fund's portfolio are value as described in the SAI.
Each of the Insured Fund's classes will bear, pro rata, all of the common
expenses of the Insured Fund, except that each class will bear the Rule 12b-1
expenses payable under its respective plan. The net asset value of all
outstanding shares of each class of the Insured Fund will be computed on a pro
rata basis for each outstanding share based on the proportionate participation
in the Insured Fund represented by the value of shares of such classes. Due to
the specific distribution expenses and other costs that will be allocable to
each class, the dividends paid to each class of the Insured Fund may vary.
The valuation of the Money Fund's portfolio securities is based upon their
amortized cost value, which does not take into account unrealized capital gain
or loss. This involves valuing an instrument at its cost and thereafter assuming
a constant amortization to maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the instrument.
The Fund's use of amortized cost which facilitates the maintenance of the Fund's
per share net asset value of $1.00 is permitted by Rule 2a-7. Further
information is included under "Determination of Net Asset Value" in the SAI.
How to Get Information Regarding an Investment in the Funds
Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.
From a touch-tone phone, Franklin and Templeton shareholders may access an
automated system (day or night) which offers the following features.
By calling the Franklin TeleFACTS(R) system at 1-800/247-1753, shareholders may
obtain Class I and Class II account information, current price and, if
available, yield or other performance information specific to a Fund or any
Franklin Templeton Fund. In addition, Franklin Class I shareholders, including
the Money Fund, may process an exchange, within the same class, into an
identically registered Franklin account; and request duplicate confirmation or
year-end statements, money fund checks, if applicable, and deposit slips.
Franklin Class I and Class II share codes for the Insured Fund, and for the
Money Fund, which will be needed to access system information are 124, 224, and
125, respectively. The system's automated operator will prompt the caller with
easy to follow step-by-step instructions from the main menu.
Other features may be added in the future.
To assist shareholders and securities dealers wishing to speak directly with a
representative, the following is a list of the various Franklin departments,
telephone numbers and hours of operation to call. The same numbers may be used
when calling from a rotary phone:
Hours of Operation
Department Name Telephone No. (Monday Through Friday)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 5:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
Performance
Advertisements, sales literature and communications to shareholders may contain
several measures of the Funds' or classes' performance, including current yield,
tax equivalent yield, various expressions of total return, current distribution
rate and taxable equivalent distribution rate. They may occasionally cite
statistics to reflect its volatility or risk.
Insured Fund
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five- and
ten-year periods, or portion thereof, to the extent applicable, through the end
of the most recent calendar quarter, assuming reinvestment of all distributions.
The Fund may also furnish total return quotations for each class for other
periods or based on investments at various sales charge levels or at net asset
value. For such purposes, total return equals the total of all income and
capital gain paid to shareholders, assuming reinvestment of all distributions,
plus (or minus) the change in the value of the original investment, expressed as
a percentage of the purchase price.
Current yield for each class reflects the income per share earned by the Fund's
portfolio investments; it is calculated for each class by dividing that classes'
net investment income per share during a recent 30-day period by the maximum
public offering price for that class of shares on the last day of that period
and annualizing the result. Tax equivalent yield demonstrates the yield from a
taxable investment necessary to produce an after-tax yield equivalent to that of
a fund which invests in tax-exempt obligations. It is computed by dividing the
tax-exempt portion of each class' yield (calculated as indicated) by one minus a
stated income tax rate and adding the product to the taxable portion (if any) of
the class' yield.
Current yield and tax equivalent yield for each class which are calculated
according to a formula prescribed by the SEC (see the SAI), are not indicative
of the dividends or distributions which were or will be paid to the Fund's
shareholders. Dividends or distributions paid to shareholders of a class are
reflected in the current distribution rate or taxable equivalent distribution
rate, which may be quoted to shareholders. The current distribution rate is
computed by dividing the total amount of dividends per share paid by a class
during the past 12 months by a current maximum offering price for that class of
shares. A taxable equivalent distribution rate demonstrates the taxable
distribution rate necessary to produce an after tax distribution rate equivalent
to the class' distribution rate (calculated as indicated above). The state,
federal and the combined state and federal income tax rates upon which the
Trust's tax equivalent quotations are based are 11.0%, 39.6% and 46.24%,
respectively. The tax equivalent yield and distribution rate for shareholders in
the highest California tax brackets will be higher. More information regarding
tax equivalent yield and distribution rate is included in the SAI. From time to
time, as any changes to such rates become effective, tax equivalent yield and
distribution rate quotations published by the Trust will be updated to reflect
such changes. Under certain circumstances, such as when there has been a change
in the amount of dividend payout, or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid during the
period such policies were in effect, rather than using the dividends during the
past 12 months. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as short-term capital gain, and is
calculated over a different period of time.
Money Fund
Current yield, as prescribed by the SEC, is an annualized percentage rate which
reflects the change in value of a hypothetical account based on the income
received from the Money Fund during a seven-day period. It is computed by
determining the net change, excluding capital changes, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the period. A hypothetical charge reflecting deductions from shareholder
accounts for management fees or shareholder services fees, for example, is
subtracted from the value of the account at the end of the period, and the
difference is divided by the value of the account at the beginning of the base
period to obtain the base period return. The result is then annualized.
Effective yield is computed in the same manner except that the annualization of
the return for the seven-day period reflects the results of compounding (that
is, the effect of reinvesting dividends paid on both the original share and
those acquired from the reinvestment of such dividends). The Fund may also quote
tax equivalent yield and tax equivalent effective yield, which demonstrate the
taxable yield necessary to produce an after-tax yield equivalent to that of a
fund which invests in tax-exempt obligations. It is computed by dividing the
tax-exempt portion of a fund's yield (calculated as indicated) by one minus a
stated income tax rate and adding the product to the taxable portion (if any) of
the fund's yield.
Insured Fund and Money Fund
Tax equivalent effective yield demonstrates the effective yield from a taxable
investment necessary to produce an after-tax effective yield equivalent to that
of a fund which invests in tax-exempt obligations. It is computed in the same
manner as is the fund's tax equivalent yield, except that it is based on the tax
exempt portion of the fund's effective, rather than its current, yield. The
figure is calculated by dividing the tax-exempt portion of a fund's effective
yield by one minus a stated income tax rate and adding the product to the
taxable portion (if any) of the fund's effective yield.
In each case, performance figures are based upon past performance, reflect all
recurring charges against a class' income and for the Insured Fund will assume
the payment of the maximum sales charge on the purchase of that class of shares.
When there has been a change in the sales charge structure, the historical
performance figures will be restated to reflect the new rate. For the Money
Fund, such quotations will reflect the value of any additional shares purchased
with dividends from the original share and any dividends declared on both the
original share and such additional shares. The investment results of the Funds,
and classes, like all other investment companies, will fluctuate over time;
thus, performance figures should not be considered to represent what an
investment may earn in the future or what a class' yield, tax equivalent yield,
distribution rate, taxable equivalent distribution rate or total return may be
in any future period.
Because Insured Fund Class II shares were not offered prior to May 1, 1995, not
all performance data is available for these shares. After a sufficient period of
time has passed, Class II performance data will be available.
General Information
Reports to Shareholders
Each Fund's fiscal year ends June 30. Annual Reports containing audited
financial statements of the Trust, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to each household as
well as to reduce Fund expenses, Investor Services will attempt to identify
related shareholders within a household, and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to the Trust at
the telephone number or address set forth on the cover page of this Prospectus.
Additional information on each Fund's performance is included in the Trust's
Annual Report to Shareholders and the SAI.
Organization and Voting Rights
The Trust was organized as a Massachusetts business trust on July 18, 1985. The
Agreement and Declaration of Trust permits the trustees to issue an unlimited
number of full and fractional shares of beneficial interest without par value,
which may be issued in any number of series and classes. Shares issued will be
fully paid and non-assessable and will have no preemptive, conversion, or
sinking rights. Shares of each series have equal and exclusive rights as to
dividends and distributions as declared by such series and the net assets of
such series upon liquidation or dissolution. Additional series may be added in
the future by the Board of Trustees.
Shares of each series have equal rights as to voting and vote separately as to
issues affecting that series or the Trust unless otherwise permitted by the 1940
Act. Voting rights are noncumulative, so that in any election of trustees the
holders of more than 50% of the shares voting can elect all of the trustees, if
they choose to do so, and in such event, the holders of the remaining shares
voting will not be able to elect any person or persons to the Board of Trustees.
The Trust does not intend to hold annual shareholders' meetings. The Trust may,
however, hold a special meeting of a series for such purposes as changing
fundamental investment restrictions for the series, approving a new management
agreement or any other matters which are required to be acted on by shareholders
under the 1940 Act. A meeting may also be called by the Board in their
discretion or by shareholders holding at least ten percent of the outstanding
shares of the Trust. Shareholders will receive assistance in communicating with
other shareholders in connection with the election or removal of trustees as is
provided in Section 16(c) of the 1940 Act.
Shares of each class of a Fund represent proportionate interests in the assets
of the Fund and have the same voting and other rights and preferences as the
other classes and series of the Trust for matters that affect the Trust as a
whole. For matters that only affect a certain class of a Fund's shares, however,
only shareholders of that class will be entitled to vote. Therefore each class
of shares of a Fund will vote separately on matters (1) affecting only that
class of such Fund, (2) expressly required to be voted on separately by each
class by state business trust law, or (3) required to be voted on separately by
each class by the 1940 Act, or the rules adopted thereunder. For instance, if a
change to the Rule 12b-1 plan relating to Class I shares of a Fund requires
shareholder approval, only shareholders of Class I of that Fund may vote on the
change to the Rule 12b-1 plan affecting that class. Similarly, if a change to
the Rule 12b-1 plan relating to Class II shares requires approval, only
shareholders of Class II of such Fund may vote on changes to such plan. On the
other hand, if there is a proposed change to the investment objective of a Fund,
this affects all shareholders of that Fund, regardless of which class of shares
they hold and, therefore, each share has the same voting rights.
Redemptions by the Funds
Each Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $50 in the Insured Fund and
$250 in the Money Fund, but only where the value of such account has been
reduced by the shareholder's prior voluntary redemption of shares and has been
inactive (except for the reinvestment of distributions) for a period of at least
six months, provided advance notice is given to the shareholder. More
information is included in the SAI.
Account Registrations
An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, a shareholder may transfer an account in a Fund carried in
"street" or "nominee" name by the shareholder's securities dealer to a
comparably registered Fund account maintained by another securities dealer. Both
the delivering and receiving securities dealers must have executed dealer
agreements on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not process the
transfer and will so inform the shareholder's delivering securities dealer. To
effect the transfer, a shareholder should instruct the securities dealer to
transfer the account to a receiving securities dealer and sign any documents
required by the securities dealer(s) to evidence consent to the transfer. Under
current procedures the account transfer may be processed by the delivering
securities dealer and the Fund after the Fund receives authorization in proper
form from the shareholder's delivering securities dealer. In the future it may
be possible to effect such transfers electronically through the services of the
NSCC.
Each Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of record on an
investor's account, the investor will be deemed to have authorized the use of
electronic instructions on the account, including, without limitation, those
initiated through the services of the NSCC, to have adopted as instruction and
signature any such electronic instructions received by the Fund and the
Shareholder Services Agent, and to have authorized them to execute the
instructions without further inquiry. At the present time, such services which
are available include the NSCC's "Networking," "Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment, or by calling Franklin's Fund
Information Department.
Important Notice Regarding
Taxpayer IRS Certifications
Pursuant to the Code and U.S. Treasury regulations, each Fund may be required to
report to the IRS any taxable dividend, capital gain distribution or other
reportable payment (including share redemption proceeds) and withhold 31% of any
such payments made to individuals and other non-exempt shareholders who have not
provided a correct taxpayer identification number ("TIN") and made certain
required certifications that appear in the Shareholder Application. A
shareholder may also be subject to backup withholding if the IRS or a securities
dealer notifies the Funds that the number furnished by the shareholder is
incorrect or that the shareholder is subject to backup withholding for previous
under-reporting of interest or dividend income.
Each Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a shareholder who has
completed an "awaiting TIN" certification to provide the Fund with a certified
TIN within 60 days after opening the account.
Portfolio Operations
The following persons are primarily responsible for the day-to-day management of
the Funds' portfolios. Don Duerson, John Pomeroy and Stella Wong since 1986,
Thomas Kenny since 1994, and Bernard Schroer since 1987.
Don Duerson
Vice President and Senior Portfolio Manager
Franklin Advisers, Inc.
Mr. Duerson has been responsible for portfolio recommendations and decisions of
the Franklin California Insured Tax-Free Income Fund since he joined Advisers in
1986. He has a Bachelor of Science degree in Business and Public Administration
from the University of Arizona and experience in the portfolio management
business dating back to 1956. He is a member of various industry-related
committees and associations.
Thomas Kenny
Senior Vice President and Portfolio Manager
Franklin Advisers, Inc.
Mr. Kenny is Director of Franklin's Municipal Bond Department. He joined
Franklin in 1986 and has been responsible for making portfolio recommendations
and decisions for the Funds since August 1994. He received a Bachelor of Arts
degree in Business and Economics from the University of California at Santa
Barbara and Master of Science degree in Finance from Golden Gate University. He
is a member of several municipal securities industry-related committees and
associations.
John Pomeroy
Portfolio Manager
Franklin Advisers, Inc.
Mr. Pomeroy has been responsible for portfolio recommendations and decisions for
the Franklin California Tax-Exempt Money Fund since he joined Advisers in 1986.
He received a Bachelor of Arts degree in Business Administration from San
Francisco State University in 1986 and is a member of various industry-related
committees and associations.
Bernard Schroer
Vice President and Senior Portfolio Manager
Franklin Advisers, Inc.
Mr. Schroer has been responsible for portfolio recommendations and decisions of
the Franklin California Insured Tax-Free Income Fund since he joined Advisers in
1987. From 1974 to 1984, he was the manager of trading at Kidder, Peabody and
Company, Inc. He has a degree in Finance from Santa Clara University and is a
member of various municipal securities industry-related committees and
associations.
Stella Wong
Senior Portfolio Manager
Franklin Advisers, Inc.
Ms. Wong has been responsible for portfolio recommendations and decisions for
the Franklin California Tax-Exempt Money Fund since 1986, when she joined
Advisers. She holds a Bachelor of Science degree in Business Administration from
San Francisco State University and a Master's degree in Financial Planning from
Golden Gate University. She is a member of various industry-related committees
and associations.
Risk Factors in California
The following information as to certain California risk factors is given to
investors in view of the Fund's policy of investing primarily in California
state and municipal issuers. The information is based primarily upon information
derived from public documents relating to securities offerings of California
state and municipal issuers, from independent municipal credit reports and
historically reliable sources, but has not been independently verified by the
Fund.
California constitutional and other laws affect the ability of California state
and municipal issuers to obtain sufficient revenue to pay their bond
obligations. In 1978, California voters approved an amendment to the California
Constitution known as Proposition 13. Proposition 13 limits ad valorem taxes on
real property and restricts the ability of taxing entities to increase real
property taxes. Legislation passed subsequent to Proposition 13, however,
provided for the redistribution of California's General Fund surplus to local
agencies, the reallocation of revenues to local agencies and the assumption of
certain local obligations by the state so as to help California municipal
issuers to raise revenue to pay their bond obligations. It is unknown, however,
whether additional revenue redistribution legislation will be enacted in the
future and whether, if enacted, such legislation would provide sufficient
revenue for such California issuers to pay their obligations. The state is also
subject to another constitutional amendment, Article XIIIB, which may have an
adverse impact on California state and municipal issuers. Article XIIIB
restricts the state from spending certain appropriations in excess of an
appropriations limit imposed for each state and local government entity. If
revenues exceed such appropriations limit, such revenues must be returned either
as revisions in the tax rates or fee schedules.
The past four years have challenged California's resiliency, as cyclical and
structural problems have been addressed. The national recession severely
affected California and its effects have lingered. The magnitude of California's
military-industrial complex and effects of the recession has resulted in a loss
of more than 700,000 jobs. Of the approximate 700,000 jobs lost, it is estimated
240,000 have been restored. Base closures have likewise impacted state and local
economies. California's social welfare and entitlement programs have strained
finances as caseload growth has exceeded resource availability. The high
priority of public safety has resulted in the enactment of strong crime
legislation that is both capital and labor intensive. California has been
affected by natural catastrophes including earthquakes, wildfires, floods and
droughts.
By the fall of 1993 it had become apparent the California economy had reached a
trough and recovery was underway. During 1994 the state's economy paralleled the
broad-based expansion occurring on the national level. California's economy
continued to gain momentum through 1994 as revenue collections exceeded budget
projections. The state's unemployment rate opened 1994 at 10.1 percent and
declined to 7.7 percent at calendar year-end. California's unemployment rate
rose slightly in January 1995 to 8.2 percent, perhaps reflecting the effect of
seven rate increases over the past year. The number of jobless in January 1995
was approximately 1.3 million, reflecting a decrease of 300,000 from the prior
year.
In July of 1994, both S&P and Moody's lowered the general obligation bond
ratings of the state of California from A+ to A and Aa to A1, respectively.
These revisions reflected the state's heavy reliance on the short-term note
market to finance its cash imbalance and the likelihood that this exposure will
persist for at least another two years. For more information on these ratings
revisions and the state's current budget, please refer to the Trust's SAI.
On December 6, 1994, Orange County, California (the "County"), together with its
pooled investment funds (the "Orange County Funds" or "Funds") filed for
protection under Chapter 9 of the federal Bankruptcy Code, after reports that
the Orange County Funds had suffered significant market losses in their
investments, causing a liquidity crisis for the Orange County Funds and the
County. More than 180 other public entities, most of which, but not all, are
located in the County, were also depositors in the Orange County Funds. As of
mid-January, 1995, following a restructuring of most of the Orange County Funds'
assets to increase their liquidity and reduce their exposure to interest rate
increases, the County estimated the Orange County Funds' loss at about $1.69
billion, or 22% of their initial deposits of approximately $7.5 billion.
Following the bankruptcy filing many of the entities which deposited moneys in
the Orange County Funds, including the County, faced cash flow difficulties
because of the bankruptcy filing and would have been required to reduce programs
or capital projects. On May 2, 1995, the bankruptcy court approved a settlement
between the County and the participants in the Orange County Funds which
provides for participants to receive 100% of their investment balances. The
settlement provides an initial cash distribution of 77% of their aggregate
investment balance followed by a combination of recovery notes and other claims.
The initial 77% distribution was released on May 19, 1995, which will greatly
reduce the cash flow difficulties faced by depositors.
The state has no existing obligation with respect to any outstanding obligations
or securities of the County or any of the other participating entities. However,
in the event the County is unable to maintain county administered state programs
because of insufficient resources, it may be necessary for the state to
intervene, but the state cannot presently predict what, if any, action may
occur. At this time, it appears that school districts may have collectively lost
up to $230 million from the amounts they had on deposit in the Orange County
Funds. Under existing legal precedent, the state is obligated to intervene when
a school district's fiscal problems would otherwise deny its students basic
educational quality. The state is not presently able to predict whether any
school districts will face insolvency because of their participation in the
Funds, and if so, the potential amount or form of aid which the state may have
to provide. The Governor has called a special session of the Legislature which
is expected to consider various responses to the Orange County situation.
FRANKLIN
CALIFORNIA
TAX-FREE TRUST
STATEMENT OF ADDITIONAL INFORMATION
777 Mariners Island Blvd.,
P.O. Box 7777
San Mateo, CA 94403-7777
1-800/DIAL BEN
NOVEMBER 1, 1995
Contents Page
About the Trust................................... 2
The Funds' Investment
Objectives and Policies.......................... 2
Description of Municipal
and Other Securities............................. 3
Insurance......................................... 6
Investment Restrictions........................... 7
Trustees and Officers............................. 8
Investment Advisory
and Other Services............................... 11
The Trust's Policies Regarding
Brokers Used on Portfolio Transactions........... 12
Additional Information Regarding
the Funds' Shares................................ 13
Additional Information
Regarding Taxation............................... 17
The Trust's Underwriter........................... 18
General Information............................... 21
Miscellaneous Information......................... 26
Financial Statements.............................. 28
Appendices........................................ 28
Franklin California Tax-Free Trust (the "Trust") is an open-end management
investment company consisting of three separate series: Franklin California
Intermediate-Term Tax-Free Income Fund (the "Intermediate-Term Fund"), Franklin
California Insured Tax-Free Income Fund (the "Insured Fund") and Franklin
California Tax-Exempt Money Fund (the "Money Fund"). The Intermediate-Term Fund
is nondiversified; the Insured and Money Funds are diversified. The series may
separately or collectively be referred to hereafter as the "Fund," "Funds" or
individually by the policy included as part of its name.
Each Fund intends to concentrate its investments in California municipal
securities and seeks to provide investors with as high a level of income exempt
from federal and California personal income taxes as is consistent with prudent
investment management and the preservation of shareholders' capital. The Money
Fund also seeks liquidity in its investments.
The Intermediate-Term Fund seeks to accomplish its objective by investing
primarily in a portfolio of investment grade obligations with a dollar-weighted
average portfolio maturity of more than three years but not more than ten years.
The Insured Fund invests in California municipal securities which are covered by
insurance guaranteeing the scheduled payment of principal and interest, in
securities backed by the full faith and credit of the U.S. government, in
municipal securities secured by such U.S. government obligations and in
short-term obligations of issuers with the highest ratings from Moody's
Investors Service ("Moody's"), Standard & Poor's Corporation ("S&P") or Fitch
Investors Service, Inc. ("Fitch"). All insured securities not insured by the
issuer will be insured by a qualified municipal bond insurer.
The Money Fund is a no-load money market fund offering investors a convenient
way to invest in a diversified, professionally managed portfolio of high
quality, short-term California municipal securities. The Money Fund attempts to
maintain a stable net asset value of $1.00 per share (although no assurances can
be given that this will be achieved) and offers shareholders the convenience of
redemption drafts (similar to checks) as one of the means of redeeming their
shares.
A Prospectus for the Intermediate-Term Fund and a Prospectus for the Insured and
Money Funds, both dated November 1, 1995, as may be amended from time to time,
provide the basic information a prospective investor should know before
investing in any Fund of the Trust and may be obtained without charge from the
Trust or from the Trust's principal underwriter, Franklin/Templeton
Distributors, Inc. ("Distributors"), at the address shown above.
As explained in the Insured Fund's Prospectus, the Insured Fund offers two
classes of shares to its investors ("multiclass"): Franklin California Insured
Tax-Free Income Fund - Class I ("Class I") and Franklin California Insured
Tax-Free Income Fund - Class II ("Class II"). The new multiclass structure
allows investors to choose, among other features, the differing front-end sales
charges and ongoing distribution fees ("Rule 12b-1 fees") on their investments
in the Insured Fund.
THIS STATEMENT OF ADDITIONAL INFORMATION (THE "SAI") IS NOT A PROSPECTUS. IT
CONTAINS INFORMATION IN ADDITION TO AND IN MORE DETAIL THAN SET FORTH IN THE
PROSPECTUSES. THIS SAI IS INTENDED TO PROVIDE A PROSPECTIVE INVESTOR WITH
ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE TRUST AND
EACH FUND AND SHOULD BE READ IN CONJUNCTION WITH THE FUNDS' PROSPECTUSES.
About The Trust
The Trust is an open-end management investment company, commonly called a
"mutual fund," and registered with the Securities and Exchange Commission (the
"SEC") under the Investment Company Act of 1940, as amended (the "1940 Act").
The Trust was organized as a Massachusetts business trust on July 18, 1985. The
Trust issues its shares of beneficial interest with no par value in three
series, each of which maintains a totally separate investment portfolio.
The Funds' Investment
Objectives and Policies
As noted in the Prospectuses, each Fund seeks to provide investors with as high
a level of income exempt from federal income taxes and from the personal income
taxes of California as is consistent with prudent investment management and the
preservation of shareholders' capital. The Money Fund also seeks liquidity in
its investments. The Intermediate-Term Fund seeks to accomplish its objective by
investing primarily in a portfolio of investment grade obligations with a
dollar-weighted average portfolio maturity of more than three years but not more
than ten years. Under California law, a mutual fund must have at least 50% of
its total assets invested in California state and local municipal securities or
in other obligations exempt from taxation by the laws of California (including
U.S. territorial obligations) at the end of each quarter of its taxable year in
order to be eligible to pay dividends to California residents which will be
exempt from California personal income taxes. Federal tax law also requires
that, in order to be eligible to pay "exempt-interest dividends," a mutual fund
must have at least 50% of its total assets invested in state and local municipal
obligations (defined to include all U.S. territorial obligations) at the end of
each quarter of its taxable year. Accordingly, as described in each Prospectus,
under normal market conditions, each Fund will attempt to invest 100% and, as a
matter of fundamental policy, will invest at least 80% of the value of its net
assets in securities the interest on which is exempt from federal income taxes,
including the alternative minimum tax, and, in the case of the Insured and Money
Funds, the personal income taxes of California. The Intermediate-Term Fund will
invest, under normal market conditions, at least 65% of its net assets in
securities the interest on which is exempt from the personal income taxes of
California. Thus, it is possible, although not anticipated, that up to 20% of a
Fund's net assets could be invested in municipal securities subject to the
alternative minimum tax and/or in taxable obligations and, with respect to the
Insured and Money Funds, municipal securities from another state, and up to 35%
of the Intermediate-Term Fund's net assets could be in municipal securities from
a state other than California.
Although each Fund seeks to invest all of its assets in a manner designed to
accomplish its objective, there may be times when market conditions limit the
availability of appropriate municipal securities or, in the investment manager's
opinion, there exist uncertain economic, market, political, or legal conditions
which may jeopardize the value of municipal securities. For temporary defensive
purposes only, when the investment manager believes that market conditions, such
as rising interest rates or other adverse factors, would cause serious erosion
of portfolio value, a Fund may invest more than 20% and up to 100% of the value
of its net assets in fixed-income obligations, the interest on which is subject
to federal income tax, and each Fund may invest more than 20%, or more than 35%
for the Intermediate-Term Fund, and up to 100% of its net assets in instruments
the interest on which is exempt from federal income taxes only.
The municipal securities in the Money Fund's portfolio will be invested in
securities which have been rated, at the time of purchase, not lower than Aa
(applicable to municipal bonds), MIG-2 (applicable to municipal notes), or
Prime-2 (applicable to commercial paper) by Moody's, or AA (bonds), SP-1
(notes), or A-1 (commercial paper) by S&P or which are unrated, but only if the
investment manager believes that the financial condition of the issuer of such
securities limits the risks of the Money Fund to a degree comparable to
securities rated at least within the two highest grades by Moody's or S&P. Any
municipal security which depends on the credit of the federal government will be
regarded as having a rating of Aaa (Moody's) or AAA (S&P). (See the Appendix at
the end of this SAI for more information concerning Moody's and S&P ratings.)
Subsequent to its purchase by the Money Fund, a municipal security may be
assigned a lower rating or cease to be rated. Such an event would not require
the elimination of the issue from the portfolio, but the investment manager will
consider such an event in determining whether the Fund should continue to hold
the security in its portfolio. In addition to considering ratings assigned by
the rating services in its selection of portfolio securities for the Money Fund,
the investment manager will consider, among other things, information concerning
the financial history and condition of the issuer and its revenue and expense
prospects and, in the case of revenue bonds, the financial history and condition
of the source of revenue to service the debt securities.
Generally, all of the instruments held by the Money Fund are offered on the
basis of a quoted yield to maturity, and the price of the security is adjusted
so that, relative to the stated rate of interest, it will return the quoted rate
to the purchaser. The maturities of these instruments held by the Money Fund at
the time of issuance will generally range between three months and one year.
The Intermediate-Term Fund is non-diversified and not subject to any statutory
restriction under the 1940 Act with respect to the investment of its assets in
one or relatively few issuers. This concentration may present greater risks than
in the case of a diversified company. The Intermediate Term Fund does, however,
intend to comply with tax diversification requirements under Subchapter M of the
Code applicable to all three funds for qualification as a regulated investment
company. As a fundamental policy, with respect to 75% of their net assets, the
Insured and Money Funds, the two diversified series of the Trust, will not
purchase a security if, as a result of the investment, more than 5% of each
Fund's assets would be in the securities of any single issuer. For this purpose,
each political subdivision, agency, or instrumentality and each multistate
agency of which a state, including California, is a member, and each public
authority which issues industrial development bonds on behalf of a private
entity, will be regarded as a separate issuer for determining the
diversification of each Fund's portfolio. Furthermore, for purposes of
determining issuer diversification, an escrow-secured or defeased bond,
discussed under "Description of Municipal and Other Securities", will generally
not be treated as an obligation of the original municipality provided certain
conditions, as prescribed by the SEC, are followed.
The investment objectives and policies of the Funds, as set forth above, are
fundamental, unless otherwise noted, and may not be changed without the approval
of a majority of the respective Fund's outstanding shares.
General
To assure compliance with adopted procedures pursuant to Rule 2a-7 under the
1940 Act, the Money Fund will limit its investments to those U.S. dollar
denominated instruments which the Board of Trustees of the Trust determines
present minimal credit risks and which are, as required by the federal
securities laws, rated in one of the two highest rating categories as determined
by nationally recognized statistical rating agencies, or which are unrated and
of comparable quality, with remaining maturities of 397 calendar days or less.
The Money Fund will maintain a dollar weighted average maturity of the
securities in its portfolio of 90 days or less. These procedures are not
fundamental policies of the Money Fund.
Description of Municipal
and Other Securities
The Prospectuses describe the general categories and nature of municipal
securities. Discussed below are the major attributes of the various municipal
and other securities in which each Fund may invest.
Tax Anticipation Notes are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues
which will be used to pay the notes. They are usually general obligations of the
issuer, secured by the taxing power for the payment of principal and interest.
Revenue Anticipation Notes are issued in expectation of other kinds of revenue,
such as federal revenues available under the Federal Revenue Sharing Program.
They, also, are usually general obligations of the issuer.
Bond Anticipation Notes are normally issued to provide interim financing until
long-term financing can be arranged. Long-term bonds then provide the money for
the repayment of the notes.
Construction Loan Notes are sold to provide construction financing for specific
projects. After successful completion and acceptance, many projects receive
permanent financing through the Federal Housing Administration under the Federal
National Mortgage Association or the Government National Mortgage Association.
Tax-Exempt Commercial Paper typically represents a short-term obligation (270
days or less) issued by a municipality to meet working capital needs.
Municipal Bonds, which meet longer term capital needs and generally have
maturities of more than one year when issued, have two principal
classifications: general obligation bonds and revenue bonds.
1. 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, roads, and water and sewer
systems. 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.
2. Revenue Bonds. A revenue bond is not secured by the full faith, credit and
taxing power of an issuer. Rather, the principal security for a revenue bond is
generally the net revenue derived from a particular facility, group of
facilities, or, in some cases, the proceeds of a special excise 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. 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 which may be used to make
principal and interest payments on the issuer's obligations. Some authorities
are provided further security in the form of a state's assurance (although
without obligation) to make up deficiencies in the debt service reserve fund.
Industrial Development Revenue Bonds which pay tax-exempt interest are in most
cases revenue bonds and are issued by or on behalf of public authorities to
raise money to finance various privately operated facilities for business,
manufacturing, housing, sports, and pollution control. These bonds are also used
to finance public facilities such as airports, mass transit systems, ports and
parking. The payment of the principal and interest on such bonds is solely
dependent on the ability of the facility's user to meet its financial
obligations and the pledge, if any, of the real and personal property so
financed as security for such payments.
When-Issued Purchases. Municipal bonds 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 purchase is made, but delivery and
payment for the when-issued securities take place at a later date. During the
period between purchase and settlement, no payment is made by a Fund to the
issuer and no interest accrues to a Fund. To the extent that assets of a Fund
are held in cash pending the settlement of a purchase of securities, the Fund
would earn no income; however, it is the Funds' intention to be fully invested
to the extent practicable and subject to the policies stated above. While
when-issued securities may be sold prior to the settlement date, the Funds
intend to purchase such securities with the purpose of actually acquiring them,
unless a sale appears desirable for investment reasons. At the time a Fund makes
the commitment to purchase a municipal bond on a when-issued basis, it will
record the transaction and reflect the value of the security in determining its
net asset value. The Funds believe that their net asset value or income will not
be adversely affected by their purchase of municipal bonds on a when-issued
basis. Each Fund will establish a segregated account in which it will maintain
cash and marketable securities equal in value to commitments for when-issued
securities.
Callable Bonds. There are municipal bonds which are issued with provisions which
prevent them from being called, typically for periods of 5 to 10 years. During
times of generally declining interest rates, if the call-protection on callable
bonds expires, there is an increased likelihood that a number of such bonds may,
in fact, be called away by the issuers. Based on a number of factors, including
certain portfolio management strategies used by the Funds' investment manager,
the Funds believe they have reduced the risk of adverse impact on net asset
value based on calls of callable bonds. The investment manager may dispose of
such bonds in the years prior to their call dates, if the investment manager
believes such bonds are at their maximum premium potential. In pricing such
bonds in each Fund's portfolio, each callable bond is marked-to-market daily
based on the bond's call date. Thus, the call of some or all of a Fund's
callable bonds may have an impact on such Fund's net asset value. In light of
each Fund's pricing policies and because each Fund follows certain amortization
procedures required by the Internal Revenue Service, the Funds are not expected
to suffer any material adverse impact related to the value at which each Fund
has carried the bonds in connection with calls of bonds purchased at a premium.
Notwithstanding such policies, however, the re-investment of the proceeds of any
called bond may be in bonds which pay a higher or lower rate of return than the
called bonds; and, as with any investment strategy, there is no guarantee that a
call may not have a more substantial impact than anticipated or that each Fund's
objective will be achieved.
Escrow-Secured Bonds or Defeased Bonds are created when an issuer refunds in
advance of maturity (or pre-refunds) an outstanding bond issue which is not
immediately callable, and it becomes necessary or desirable to set aside funds
for redemption of the bonds at a future date. In an advance refunding, the
issuer will use the proceeds of a new bond issue to purchase high grade,
interest bearing debt securities which are then deposited in an irrevocable
escrow account held by a trustee bank to secure all future payments of principal
and interest of the advance refunded bond. Escrow-secured bonds will often
receive a triple-A rating from S&P and Moody's.
Stripped Municipal Securities. Municipal securities may also be sold in
"stripped" form. Stripped municipal securities represent separate ownership of
interest and principal payments on municipal obligations.
Variable or Floating Rate Demand Notes ("VRDNs") are tax-exempt obligations
which contain a floating or variable interest rate and a right of demand, which
may be unconditional, to receive payment of the unpaid principal balance plus
accrued interest upon a short notice period (generally up to 30 days) prior to
specified dates, either from the issuer or by drawing on a bank letter of
credit, a guarantee or insurance issued with respect to such instrument. The
interest rates are adjustable at intervals ranging from daily up to monthly, and
are calculated to maintain the market value of the VRDN at approximately the par
value upon the adjustment date.
Certificates of Participation. As stated in each Prospectus, a Fund may also
invest in municipal lease obligations primarily through Certificates of
Participation ("COPs"). COPs are distinguishable from municipal debt in that the
lease which is the subject of the transaction typically contains a
"non-appropriation" clause. A nonappropriation clause provides that, while the
municipality will use its best efforts to make lease payments, the municipality
may terminate the lease annually without penalty if the municipality's
appropriating body does not allocate the necessary funds.
U.S. Government Obligations which may be owned by a Fund are issued by the U.S.
Treasury and include bills, certificates of indebtedness, notes and bonds, or
are issued by agencies and instrumentalities of the U.S. government and backed
by the full faith and credit of the U.S. government.
Commercial Paper refers to promissory notes issued by corporations in order to
finance their short-term credit needs.
Certificates of Deposit are certificates issued against funds deposited in a
commercial bank, are for a definite period of time, earn a specified rate of
return, and are normally negotiable.
Bankers' Acceptances are short-term credit instruments used to finance the
import, export, transfer, or storage of goods. They are termed "accepted" when a
bank guarantees their payment at maturity.
Repurchase Agreements. The Money Fund may engage in repurchase transactions, in
which the Fund purchases a U.S. government security subject to resale to a bank
or dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Fund in each agreement, with the value of the
underlying security marked-to-market daily to maintain coverage of at least
100%. A default by the seller might cause the Fund to experience a loss or delay
in the liquidation of the collateral securing the repurchase agreement. The Fund
might also incur disposition costs in liquidating the collateral. The Fund,
however, intends to enter into repurchase agreements only with government
securities dealers recognized by the Federal Reserve Board or with member banks
of the Federal Reserve System. Under the 1940 Act, a repurchase agreement is
deemed to be the loan of money by the Fund to the seller, collateralized by the
underlying security. The U.S. government security subject to resale (the
collateral) will be held pursuant to a written agreement and the Fund's
custodian will take title to, or actual delivery of, the security. The period of
these repurchase agreements will usually be short, from overnight to one week,
and at no time will the Money Fund invest in repurchase agreements with a term
of more than one year. The securities which are subject to repurchase
agreements, however, may have maturity dates in excess of one year from the
effective date of the repurchase agreement. The Money Fund may not enter into a
repurchase agreement with more than seven days to maturity if, as a result, more
than 10% of the market value of the Fund's total assets would be invested in
such repurchase agreements.
Lending Portfolio Securities. Each Fund may lend its portfolio securities to
nonaffiliated brokers, dealers and financial institutions provided that cash
equal to 102% of the market value of the securities loaned is deposited by the
borrower with the lending Fund and is maintained each business day. While such
securities are on loan, the borrower will pay a Fund any income accruing
thereon, and the Fund may invest the cash collateral in portfolio securities,
thereby earning additional income. Each Fund will not lend its portfolio
securities if such loans are not permitted by the laws or regulations of any
state in which its shares are qualified for sale and will not lend more than 10%
of the value of its total assets. Loans are typically subject to termination by
the Fund in the normal settlement time, currently five business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to the
lending Fund and its shareholders. A Fund may pay reasonable finder's,
borrowers', administrative, and custodial fees in connection with a loan of its
securities.
Income derived by a Fund from securities lending transactions, repurchase
transactions, and investments in commercial paper, bankers' acceptances and
certificates of deposit will be taxable for federal and California personal
income tax purposes when distributed to shareholders. Income derived by a Fund
from interest on direct obligations of the U.S. government will be taxable for
federal income tax purposes when distributed to shareholders. If the Fund,
however, meets the 50% asset investment requirement of California law described
above and properly designates such distributions, they will be excludable from
income for California personal income tax purposes.
There may, of course, be other types of municipal securities that become
available which are similar to the foregoing described municipal securities, in
which each Fund may also invest, to the extent the investments would be
consistent with the foregoing objectives and policies.
Timing of Securities Transactions
Each Fund may purchase or sell securities without regard to the length of time
the security has been held to take advantage of short-term differentials in bond
yields consistent with the Fund's objective of seeking interest income while
conserving capital. While short-term trading increases portfolio turnover, the
execution costs for municipal bonds are substantially less than for equivalent
dollar values of equity securities. Portfolio turnover rates for the Insured and
Intermediate-Term Funds are in the Financial Highlights table in their
respective prospectuses. No calculation of turnover rate is shown for the Money
Fund because the short-term securities which compose its portfolio are excluded
in making such a calculation.
Insurance (Insured Fund Only)
Except for certain temporary short-term investments or U.S. government
guaranteed securities, the investment in municipal securities by the Insured
Fund is covered by insurance guaranteeing the scheduled payment of principal and
interest thereon. Depending on market conditions, and under current portfolio
insurance restrictions, it is expected that California municipal securities will
compose a major portion of the portfolio of the Insured Fund.
As described in its Prospectus, the Insured Fund will receive payments of
insurance for any installment of interest and principal due for payment but
which shall be unpaid by reason of nonpayment by the issuer. The term "due for
payment," in reference to the principal of a security, means its stated maturity
date or the date on which it should have been called for mandatory sinking fund
redemption and does not refer to any earlier date on which payment is due by
reason of call for redemption (other than by mandatory sinking fund redemption),
acceleration or other advancement of maturity; when referring to interest on a
security, the term means the stated date for payment of interest. When, however,
the interest on the security has been determined, as provided in the underlying
documentation relating to such security, to be subject to federal income
taxation, due for payment, when referring to the principal of such security,
also means the date on which it has been called for mandatory redemption as a
result of such determination of taxability; when referring to interest on such
security, the term means the accrued interest at the rate provided in such
documentation to the date on which it has been called for such mandatory
redemption, together with any applicable redemption premium. The insurance
feature insures the scheduled payment of interest and principal and does not
guarantee the market value of the insured municipal securities nor the value of
the shares of the Insured Fund.
As stated in the Insured Fund's prospectus, each insured municipal security in
the Insured Fund's portfolio will be covered by either a "New Issue Insurance
Policy" obtained by the issuer of the security at the time of its original
issuance or a "Secondary Insurance Policy" or a "Portfolio Insurance Policy"
issued by a qualified municipal bond insurer.
Under the provisions of the Portfolio Insurance Policy, the insurer
unconditionally and irrevocably agrees to pay to the appointed trustee or its
successor and its agent (the "Trustee") that portion of the principal and
interest on the securities which shall become due for payment but shall be
unpaid by reason of nonpayment by the issuer. The insurer will make such
payments to the Trustee on the date the principal or interest becomes due for
payment or on the business day next following the day on which the insurer
received notice of nonpayment, whichever is later. The Trustee will disburse to
the Insured Fund the face amount of principal and interest which is then due for
payment but is unpaid by reason of nonpayment by the issuer but only upon
receipt by the Trustee of (i) evidence of the Insured Fund's right to receive
payment of the principal or interest due for payment and (ii) evidence,
including any appropriate instruments of assignment, that all of the rights to
payment of such principal or interest due for payment shall thereupon vest in
the insurer. Upon such disbursement, the insurer shall become the owner of the
security, appurtenant coupon or right to payment of principal or interest on
such security and shall be fully subrogated to all of the Insured Fund's rights
thereunder, including the right to payment thereof.
Bond insurers are often referred to as "monolines" in that they only write
financial guarantees as opposed to "multiline" insurers who write several
different types of insurance policies, such as life, auto and home insurance,
and are exposed to many types of risk. Additionally, bond insurers are not
exposed to "run risk" (which occurs when too many policyholders rush to cash in
their policies), because they only guarantee payment when due. Also, in order to
maintain triple-A status by the recognized national securities rating agencies
(which is required by the Insured Fund), the bond insurers invest their assets
mainly in high quality municipal and corporate bonds rated double-A or better
and U.S. government obligations.
Neither the Insured Fund nor its investment manager make any representations as
to the ability of any insurance company to meet its obligation to the Insured
Fund if called upon to do so.
Investment Restrictions
The Trust has adopted the following restrictions as additional fundamental
policies of each Fund. These policies may not be changed, with respect to a
Fund, without the approval of a majority of the outstanding voting securities of
that Fund. Under the 1940 Act, a "vote of a majority of the outstanding voting
securities" of the Trust or of a Fund means the affirmative vote of the lesser
of (1) more than 50% of the outstanding shares of the Trust or of a Fund or (2)
67% or more of the shares of the Trust or of a Fund present at a shareholders'
meeting if more than 50% of the outstanding shares of the Trust or of a Fund are
represented at the meeting in person or by proxy. Each Fund may not:
1. Borrow money or mortgage or pledge any of its assets, except that borrowings
(and a pledge of assets therefor) for temporary or emergency purposes may be
made from banks in any amount up to 5% of the total asset value. Secured
temporary borrowings may take the form of a reverse repurchase agreement,
pursuant to which a Fund would sell portfolio securities for cash and
simultaneously agree to repurchase them at a specified date for the same amount
of cash plus an interest component.
2. Buy any securities on "margin" or sell any securities "short," except that
it may use such short-term credits as are necessary for the clearance of
transactions.
3. Make loans, except through the purchase of debt securities which are either
publicly distributed or customarily purchased by institutional investors, 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 a Fund
from loaning portfolio securities to broker-dealers or other institutional
investors if at least 102% cash collateral is pledged and maintained by the
borrower; provided such portfolio security loans may not be made if, as a
result, the aggregate of such loans exceeds 10% of the value of the Fund's total
assets at the time of the most recent loan.
4. Act as underwriter of securities issued by other persons, except insofar as
the Fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
5. Purchase the securities of any issuer which would result in owning more than
10% of the voting securities of such issuer.
6. Purchase securities from or sell to the Trust's officers and trustees, or
any firm of which any officer or trustee is a member, as principal, or retain
securities of any issuer if, to the knowledge of the Trust, one or more of the
Trust's officers, trustees, or investment adviser own beneficially more than 1/2
of 1% of the securities of such issuer and all such officers and trustees
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 and provided that this limitation
shall not prohibit the purchase of municipal and other debt securities secured
by real estate or interests therein.
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, except that it may purchase, hold, and
dispose of "obligations with puts attached" in accordance with its investment
policies.
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
Insured and Intermediate-Term Funds invest their uninvested daily cash balances
in shares of the Money Fund and other tax-exempt money market funds in the
Franklin Group of Funds provided i) their purchases and redemptions of such
money market fund shares may not be subject to any purchase or redemption fees,
ii) their investments may not be subject to duplication of management fees, nor
to any charge related to the expense of distributing their shares (as determined
under Rule 12b-1, as amended under federal securities laws), and iii) aggregate
investments in any such money market fund do not exceed (A) the greater of (i)
5% of their 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 its 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.
Trustees and Officers
The Board of Trustees (the "Board") has the responsibility for the overall
management of the Trust, including general supervision and review of its
investment activities. The trustees, in turn, elect the officers of the Trust
who are responsible for administering the day-to-day operations of the Trust.
The affiliations of the officers and trustees and their principal occupations
for the past five years are listed below. Trustees who are deemed to be
"interested persons" of the Trust, as defined in the 1940 Act, are indicated by
an asterisk (*).
Positions and Offices
Name, Address and Age with the Trust Principal Occupations
During Past Five Years
Frank H. Abbott, III (74) Trustee
1045 Sansome St.
San Francisco, CA 94111
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 31 of the
investment companies in the Franklin Group of Funds.
Harris J. Ashton (63) Trustee
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 56 of the investment companies in the Franklin
Templeton Group of Funds.
* Harmon E. Burns (50) Vice President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 43 of the investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (63) Trustee
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 58 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (80) Trustee
111 New Montgomery St., 402
San Francisco, CA 94105
Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director, trustee or managing
general partner, as the case may be, of 30 of the investment companies in the
Franklin Group of Funds.
* Charles B. Johnson (62) Chairman
777 Mariners Island Blvd. of the Board
San Mateo, CA 94404 and Trustee
President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general partner,
as the case may be, of most other subsidiaries of Franklin Resources, Inc. and
of 57 of the investment companies in the Franklin Templeton Group of Funds.
* Rupert H. Johnson, Jr. (55) President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director, trustee or managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 43 of the investment companies
in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (66) Trustee
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or trustee, as the case may
be, of 26 of the investment companies in the Franklin Group of Funds.
Gordon S. Macklin (67) Trustee
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI
Communications Corporation, MedImmune, Inc. (biotechnology), InfoVest
Corporation (information services), and Fusion Systems Corporation (industrial
technology); and director, trustee or managing general partner, as the case may
be, of 53 of the investment companies in the Franklin Templeton Group of Funds;
and formerly held the following positions: Chairman, Hambrecht and Quist Group;
Director, H & Q Healthcare Investors; and President, National Association of
Securities Dealers, Inc.
Kenneth V. Domingues (63) Vice President -
777 Mariners Island Blvd. Financial Reporting
San Mateo, CA 94404 and Accounting
Standards
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and
Franklin Templeton Distributors, Inc.; officer and/or director, as the case may
be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of 37 of the investment companies
in the Franklin Group of Funds.
Martin L. Flanagan (35) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and
officer of 61 of the investment companies in the Franklin Templeton Group of
Funds.
Deborah R. Gatzek (46) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President - Legal, Franklin Resources, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and officer of 37 of
the investment companies in the Franklin Group of Funds.
Thomas J. Kenny (32) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President, Franklin Advisers, Inc. and officer of eight of the
investment companies in the Franklin Group of Funds.
Diomedes Loo-Tam (56) Treasurer
777 Mariners Island Blvd. and Principal
San Mateo, CA 94404 Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey (58) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 32 of the investment companies in the Franklin Group of
Funds.
Trustees not affiliated with the investment manager ("nonafilliated trustees")
are currently paid fees of $640 per month plus $640 per meeting attended. As
indicated above, certain of the Trust's nonaffiliated trustees also serve as
directors, trustees or managing general partners of other investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds ("Franklin
Templeton Group of Funds") from which they receive fees for their services. The
following table indicates the fees paid by the Trust to its nonaffiliated
trustees and the total fees paid to nonaffiliated trustees by the Trust and by
other funds in the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
Total
Compensation
Aggregate Number of Franklin from Franklin
Compensation Templeton Funds Boards Templeton Funds,
Name from Trust* on Which Each Serves*** including the Trust**
<S> <C> <C> <C>
Frank H. Abbott, III.............................. $15,360.00 31 $176,870
Harris J. Ashton.................................. $15,360.00 56 $318,125
S. Joseph Fortunato............................... $15,360.00 58 $334,265
David Garbellano.................................. $15,360.00 30 $153,300
Frank W.T. LaHaye................................. $14,720.00 26 $150,817
Gordon Macklin.................................... $15,360.00 53 $301,885
</TABLE>
*For the fiscal year ended June 30, 1995.
**For the year ended December 31, 1994.
***The number of boards is based on the number of registered investment
companies in the Franklin Templeton Group of Funds and does not include the
total number of series or funds within each investment company for which the
directors are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, consisting of more than 162 U.S.
based mutual funds or series.
Nonaffiliated trustees are also reimbursed for expenses incurred in connection
with attending board meetings, paid pro rata by each Franklin Templeton Fund for
which they serve as directors, trustees or managing general partners. No officer
or trustee received any other compensation directly from the Trust. Certain
officers or trustees 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. For additional information concerning
director compensation and expenses, please see the Trust's Annual Report to
Shareholders.
As of August 8, 1995, the officers and trustees, as a group, owned of record and
beneficially approximately 11,776,029.54 shares of the total outstanding shares
of the Money Fund. In addition, many of the Trust's trustees own shares in
various of the other funds in the Franklin Templeton Funds. Charles B. Johnson
and Rupert H. Johnson, Jr. are brothers.
Investment Advisory and Other Services
The investment manager of the Trust is Franklin Advisers, Inc. ("Advisers" or
"Manager"). Advisers is a wholly-owned subsidiary of Franklin Resources, Inc.
("Resources"), a publicly owned holding company whose shares are listed on the
New York Stock Exchange ("Exchange"). Resources owns several other subsidiaries
which are involved in investment management and shareholder services.
Pursuant to separate management agreements, the Manager provides investment
research and portfolio management services, including the selection of
securities for each Fund to purchase, hold or sell and the selection of brokers
through whom each Fund's portfolio transactions are executed. The Manager's
extensive research activities include, as appropriate, traveling to meet with
issuers and to review project sites. The Manager's activities are subject to the
review and supervision of the Board to whom the Manager renders periodic reports
of each Fund's investment activities. Under the terms of the management
agreement, the Manager provides office space and office furnishings, facilities
and equipment required for managing the business affairs of the Trust; maintains
all internal bookkeeping, clerical, secretarial and administrative personnel and
services; and provides certain telephone and other mechanical services. The
Manager is covered by fidelity insurance on its officers, directors and
employees for the protection of the Trust.
See the Statement of Operations in the financial statements included in the
Trust's Annual Report to Shareholders dated June 30, 1995, for additional
details of these expenses.
Pursuant to the management agreements, the Intermediate-Term and Insured Funds
are obligated to pay the Manager a fee computed at the close of business on the
last business day of each month equal to a monthly rate of 5/96 of 1%
(approximately 5/8 of 1% per year) for the first $100 million of net assets of
the Fund; 1/24 of 1% (approximately 1/2 of 1% per year) on net assets of the
Fund in excess of $100 million up to $250 million; and 9/240 of 1%
(approximately 45/100 of 1% per year) of net assets of the Fund in excess of
$250 million. The Money Fund pays a daily fee (payable at the request of the
Manager) computed at the rate of 1/584 of 1% (approximately 5/8 of 1% per year)
of the net assets of the Fund at the close of each business day on net assets up
to and including $100 million; plus 1/730 of 1% (approximately 1/2 of 1% per
year) of net assets over $100 million up to and including $250 million; and
1/811 of 1% (approximately 45/100 of 1% per year) of net assets over $250
million.
The Manager has agreed in advance to waive a portion of its management fees and
make certain payments to reduce expenses of the Intermediate-Term Fund. This
arrangement may be terminated by the Manager at any time upon notice to the
Board. The management agreements specify that the management fee will be reduced
to the extent necessary to comply with the most stringent limits on the expenses
which may be borne by each Fund as prescribed by any state in which each Fund's
shares are offered for sale. The most stringent current limit requires the
Manager to reduce or eliminate its fee to the extent that aggregate operating
expenses of each Fund (excluding interest, taxes, brokerage commissions and
extraordinary expenses such as litigation costs) would otherwise exceed in any
fiscal year 2.5% of the first $30 million of average net assets of each Fund, 2%
of the next $70 million of average net assets of each Fund and 1.5% of average
net assets of each Fund in excess of $100 million. Expense reductions have not
been necessary based on state requirements.
The tables below set forth the management fees each Fund was contractually
obligated to pay the Manager and the management fees actually paid by each Fund,
for the fiscal years ended June 30, 1993, 1994 and 1995.
Fiscal Year Ended June 30, 1995:
Contractual Management
Management Fees Paid
Fees By the Fund
Money Fund.................. $3,419,037 $3,419,037
Insured Fund................ $6,703,306 $6,703,306
Intermediate-
Term Fund.................. $ 587,796 $ 119,684
Fiscal Year Ended June 30, 1994:
Contractual Management
Management Fees Paid
Fees By the Fund
Money Fund.................. $3,529,248 $3,529,248
Insured Fund................ $6,959,870 $6,959,870
Intermediate-
Term Fund.................. $ 504,656 $ 83,062
Fiscal Year Ended June 30, 1993:
Contractual Management
Management Fees Paid
Fees By the Fund
Money Fund.................. $3,547,759 $3,547,759
Insured Fund................ $5,492,526 $5,492,526
Intermediate-
Term Fund*................. $ 76,166 $ 0
*For the period September 21, 1992 (effective date of registration) to June 30,
1993.
The management agreements are in effect until March 31, 1996. Thereafter, they
may continue in effect for successive annual periods, providing such continuance
is specifically approved at least annually by a vote of the Board or by a vote
of the holders of a majority of the Trust's outstanding voting securities, and
in either event by a majority vote of the Trust's trustees who are not parties
to the management agreements or interested persons of any such party (other than
as trustees of the Trust), cast in person at a meeting called for that purpose.
The management agreements may be terminated without penalty at any time by the
Trust or by the Manager on 30 days' written notice and will automatically
terminate in the event of their assignment, as defined in the 1940 Act.
Franklin/Templeton Investor Services, Inc. ("Investor Services" or "Shareholder
Services Agent"), a wholly-owned subsidiary of Resources, is the shareholder
servicing agent for the Trust and acts as the Trust's transfer agent and
dividend paying agent. Investor Services is compensated on the basis of a fixed
fee per account.
Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian of the securities and other assets of the
Trust. Citibank Delaware, One Penn's Way, New Castle, Delaware 19720, acts as
custodian in connection with transfer services through bank automated clearing
houses. The custodians do not participate in decisions relating to the purchase
and sale of portfolio securities.
Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California 94105,
are the Trust's independent auditors. During the fiscal year ended June 30,
1995, their auditing services consisted of rendering an opinion on the financial
statements of the Trust included in the Trust's Annual Report to Shareholders
dated June 30, 1995.
The Trust's Policies Regarding
Brokers Used on Portfolio Transactions
Since most purchases made by the Funds are principal transactions at net prices,
the Funds incur little or no brokerage costs. Each Fund deals directly with the
selling or purchasing 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 utilizing 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 price. As a general rule, the
Funds do not purchase bonds in underwritings where they are not given any
choice, or only limited choice, in the designation of dealers to receive the
commission. Each 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 rendered
by such dealers in the execution of orders. It is not possible to place a dollar
value on the special executions or on the research services received by Advisers
from dealers effecting transactions in portfolio securities. The allocations of
transactions in order to obtain additional research services permits Advisers to
supplement its own research and analysis activities and to receive the views and
information of individuals and research staff 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. Provided that the Trust's officers are satisfied that the best
execution is obtained, the sale of a Fund's shares may also be considered as a
factor in the selection of broker-dealers to execute a Fund's portfolio
transactions.
If purchases or sales of securities of a Fund and one or more other investment
companies or clients supervised by the Manager are considered at or about the
same time, transactions in such 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. It is recognized that in some cases this
procedure could possibly have a detrimental effect on the price or volume of the
security so far as a Fund is concerned. In other cases it is possible that the
ability to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Fund.
During the past three fiscal years ended June 30, 1993, 1994, and 1995 the Funds
paid no brokerage commissions. As of June 30, 1995, the Funds did not own
securities of their regular broker-dealers.
Additional Information
Regarding the Funds' Shares
All checks, drafts, wires and other payment mediums used for purchasing or
redeeming shares of each Fund must be denominated in U.S. dollars. The Trust
reserves the right, in its sole discretion, to either (a) reject any order for
the purchase or sale of shares denominated in any other currency, or (b) honor
the transaction or make adjustments to a shareholder's account for the
transaction as of a date and with a foreign currency exchange factor determined
by the drawee bank.
In connection with exchanges (see the Prospectus "Exchange Privilege"), it
should be noted that since the proceeds from the sale of shares of an investment
company generally are not available until the fifth business day following the
redemption, the funds into which the Funds' shareholders are seeking to exchange
reserve the right to delay issuing shares pursuant to an exchange until said
fifth business day. The redemption of shares of the Funds to complete an
exchange for shares of any of the investment companies will be effected at the
close of business on the day the request for exchange is received in proper form
at the net asset value then effective.
A Fund may impose a $10 charge for each returned item, against any shareholder
account which, in connection with the purchase of a Fund's shares, submits a
check or a draft which is returned unpaid to such Fund.
Shares of the Money Fund are eligible to receive dividends beginning on the
first business day following settlement of the purchase transaction, through the
date on which the Fund writes a check or sends a wire on redemption
transactions.
Dividend checks which are returned to the Trust marked "unable to forward" by
the postal service will be deemed to be a request by the shareholder to change
the dividend option and the proceeds will be reinvested in additional shares at
net asset value until new instructions are received.
The Trust may deduct from a shareholder's account the costs of its efforts to
locate a shareholder if mail is returned as undeliverable or the Trust is
otherwise unable to locate the shareholder or verify the current mailing
address. These costs may include a percentage of the account when a search
company charges a percentage fee in exchange for its location services.
Under agreements with certain banks in Taiwan, Republic of China, shares of the
Intermediate-Term and Class I of the Insured Fund are available to such banks'
discretionary trust funds at net asset value. The banks may charge service fees
to their customers who participate in the discretionary trusts. Pursuant to
agreements, a portion of such service fees may be paid to Distributors, or an
affiliate of Distributors, to help defray expenses of maintaining a service
office in Taiwan, including expenses related to local literature fulfillment and
communication facilities.
Shares of the Intermediate-Term Fund and Class I shares of the Insured Fund may
be offered to investors in Taiwan through securities firms known locally as
Securities Investment Consulting Enterprises. In conformity with local business
practices in Taiwan, shares of either Fund will be offered with the following
schedule of sales charges:
Sales
Size of Purchase Charge
Up to U.S. $100,000.......................... 3%
U.S. $100,000 to U.S. $1,000,000............. 2%
Over U.S. $1,000,000......................... 1%
Purchases and Redemptions
Through Securities Dealers
Orders for the purchase of shares of the Intermediate-Term Fund and each class
of the Insured Fund received in proper form prior to the scheduled close of the
Exchange (generally 1:00 p.m. Pacific time) any business day that the Exchange
is open for trading and promptly transmitted to the Fund will be based upon the
public offering price determined that day. Purchase orders received by
securities dealers or other financial institutions after the scheduled close of
the Exchange will be effected at the Intermediate-Term and Insured Funds' public
offering price on the day it is next calculated. The use of the term "securities
dealer" herein shall include other financial institutions which, pursuant to an
agreement with Distributors (directly or through affiliates), handle customer
orders and accounts with a Fund. Such reference, however, is for convenience
only and does not indicate a legal conclusion of capacity. Orders for the
redemption of shares are effected at net asset value subject to the same
conditions concerning time of receipt in proper form. It is the securities
dealer's responsibility to transmit the order in a timely fashion and any loss
to the customer resulting from failure to do so must be settled between the
customer and the securities dealer.
Effectiveness of Purchase Orders
(Money Fund)
The purchase price for shares of the Money Fund is the net asset value of such
shares next determined after receipt and acceptance of a purchase order in
proper form. Many of the types of instruments in which the Fund invests must be
paid for in federal funds which are monies held by the custodian on deposit at
the Federal Reserve Bank of San Francisco and elsewhere. Therefore, the monies
paid by an investor for shares of the Money Fund generally cannot be invested by
the Fund until they are converted into and are available to the Fund in federal
funds, which may take up to two days. In such cases, purchases by investors may
not be considered in proper form and effective until such conversion and
availability. In the event the Money Fund is able to make investments
immediately (within one business day), however, it may accept a purchase order
with payment other than in federal funds; in such event, shares of the Money
Fund will be purchased at the net asset value next determined after receipt of
the order and payment. Once shares of the Money Fund are purchased, they begin
earning income immediately, and income dividends will start being credited to
the investor's account on the day following the effective date of purchase and
continue through the day all shares in the account are redeemed.
Payments transmitted by wire and received by the custodian and reported by the
custodian to the Money Fund prior to 3:00 p.m. Pacific time on any business day
are normally effective on the same day as received. Wire payments received or
reported by the custodian to the Fund after that time will normally be effective
on the next business day. Payments transmitted by check or other negotiable bank
draft will normally be effective within two business days for checks drawn on a
member bank of the Federal Reserve System and longer for most other checks. All
checks are accepted subject to collection at full face value in United States
funds and must be drawn in United States dollars on a United States bank. Checks
drawn in United States funds on foreign banks will not be credited to the
shareholder's account and dividends will not begin accruing until the proceeds
are collected, which can take a long period of time. The Money Fund reserves the
right, in its sole discretion, to either (a) reject any order for the purchase
or sale of shares denominated in any other currency, or (b) honor the
transaction or make adjustments to the shareholder's account for the transaction
as of a date and with a foreign currency exchange factor determined by the
drawee bank.
Special Net Asset Value Purchases
(Intermediate-Term Fund
and Class I of the Insured Fund)
As discussed in the Prospectuses for the Intermediate-Term Fund and the Insured
Fund under "How to Buy Shares of the Fund - Description of Special Net Asset
Value Purchases," certain categories of investors may purchase shares of the
Intermediate-Term Fund and Class I of the Insured Fund without a front-end sales
charge (net asset value) or a contingent deferred sales charge. Distributors or
one of its affiliates may make payments, out of its own resources, to securities
dealers who initiate and are responsible for such purchases as indicated below.
Distributors may make these payments in the form of contingent advance payments,
which may be recovered from the securities dealer, or set off against other
payments due to the securities dealer, in the event of investor redemptions made
within 12 months of the calendar month of purchase. Other conditions may apply.
All terms and conditions may be imposed by an agreement between Distributors, or
its affiliates, and the securities dealer. For purchases made at net asset value
by certain trust companies and trust departments of banks, Distributors or one
of its affiliates, out of its own resources, may pay up to 1% of the amount
invested.
Letter of Intent
(Intermediate-Term Fund
and Class I Shares of the Insured Fund)
An investor may qualify for a reduced sales charge on the purchase of shares of
the Intermediate-Term Fund and Class I shares of the Insured Fund, as described
in their Prospectuses. At any time within 90 days after the first investment
which the investor wants to qualify for a reduced sales charge, a signed
Shareholder Application, with the Letter of Intent section completed, may be
filed with the respective Fund. After the Letter of Intent is filed, each
additional investment will be entitled to the sales charge applicable to the
level of investment indicated on the Letter of Intent. Sales charge reductions
based upon purchases in more than one of the Franklin Templeton Funds will be
effective only after notification to Distributors that the investment qualifies
for a discount. The shareholder's holdings in the Franklin Templeton Funds,
including Class II shares, acquired more than 90 days before the Letter of
Intent is filed will be counted towards completion of the Letter of Intent but
will not be entitled to a retroactive downward adjustment in the sales charge.
Any redemptions made by the shareholder during the 13-month period will be
subtracted from the amount of the purchases for purposes of determining whether
the terms of the Letter of Intent have been completed. If the Letter of Intent
is not completed within the 13-month period, there will be an upward adjustment
of the sales charge, depending upon the amount actually purchased (less
redemptions) during the period. An investor who executes a Letter of Intent
prior to a change in the sales charge structure for the Insured Fund or the
Intermediate-Term Fund will be entitled to complete the Letter of Intent at the
lower of the new sales charge structure or the sales charge structure in effect
at the time the Letter of Intent was filed with the respective Fund.
As mentioned in the Prospectuses of the Insured Fund and the Intermediate-Term
Fund, five percent (5%) of the amount of the total intended purchase will be
reserved in shares of the respective Fund registered in the investor's name. If
the total purchases, less redemptions, equal the amount specified under the
Letter of Intent, the reserved shares will be deposited to an account in the
name of the investor or delivered to the investor or the investor's order. If
the total purchases, less redemptions, exceed the amount specified under the
Letter of Intent and is an amount which would qualify for a further quantity
discount, a retroactive price adjustment will be made by Distributors and the
securities dealer through whom purchases were made pursuant to the Letter of
Intent (to reflect such further quantity discount) on purchases made within 90
days before and on those made after filing the Letter of Intent. The resulting
difference in offering price will be applied to the purchase of additional
shares at the offering price applicable to a single purchase or the dollar
amount of the total purchases. If the total purchases, less redemptions, are
less than the amount specified under the Letter of Intent, the investor will
remit to Distributors an amount equal to the difference in the dollar amount of
sales charge actually paid and the amount of sales charge which would have
applied to the aggregate purchases if the total of such purchases had been made
at a single time. The shareholder will receive a written notification from
Distributors requesting the remittance. Upon such remittance, the reserved
shares held for the investor's account will be deposited to an account in the
name of the investor or delivered to the investor or to the investor's order. If
within 20 days after written request such difference in sales charge is not
paid, the redemption of an appropriate number of reserved shares to realize such
difference will be made. In the event of a total redemption of the account prior
to fulfillment of the Letter of Intent, the additional sales charge due will be
deducted from the proceeds of the redemption, and the balance will be forwarded
to the investor.
Redemptions in Kind
Each 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 applicable
Fund's net assets at the beginning of such period. This commitment is
irrevocable without the prior approval of the SEC. In the case of requests for
redemption in excess of such amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund from
which the shareholder is redeeming, in case of an emergency, or if the payment
of such a redemption in cash would be detrimental to the existing shareholders
of that Fund. In such circumstances, the securities distributed would be valued
at the price used to compute such Fund's net assets. Should a Fund do so, a
shareholder may incur brokerage fees in converting the securities to cash. The
Fund does not intend to redeem illiquid securities in kind; however, should it
happen, shareholders may not be able to timely recover their investment and may
also incur brokerage costs in selling such securities.
Redemptions by the Trust
Due to the relatively high cost of handling small investments, the Trust
reserves the right to redeem, involuntarily, at net asset value, the shares of
any shareholder whose account has a value of less than one-half of the initial
minimum investment required for that shareholder, but only where the value of
such account has been reduced by the shareholder's prior voluntary redemption of
shares. Until further notice, it is the present policy of the Trust not to
exercise this right with respect to any shareholder whose account has a value of
$50 or more in the Intermediate-Term and Insured Funds and $250 or more in the
Money Fund. In any event, before the Trust redeems such shares and sends the
proceeds to the shareholder, it will notify the shareholder that the value of
the shares in the account is less than the minimum amount and allow the
shareholder 30 days to make an additional investment in an amount which will
increase the value of the account to at least $100 in the Insured and
Intermediate-Term Funds and $500 in the Money Fund.
Calculation of Net Asset Value
As noted in the Prospectuses, the Intermediate-Term Fund and each class of the
Insured Fund generally calculate net asset value as of the scheduled close of
the the Exchange (generally 1:00 p.m. Pacific time) and the Money Fund generally
calculates net asset value as of 3:00 p.m. Pacific time each day that the
Exchange is open for trading. As of the date of this SAI, the Trust is informed
that the Exchange observes the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
The valuation of the Money Fund's portfolio securities (including any securities
held in the separate account maintained for when-issued securities) is based
upon their amortized cost, which does not take into account unrealized capital
gains or losses. This involves valuing an instrument at its cost and thereafter
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in calculation, it may
result in periods during which value, as determined by amortized cost, is higher
or lower than the price the Money Fund would receive if it sold the instrument.
During periods of declining interest rates, the daily yield on shares of the
Money Fund computed as described above may tend to be higher than a like
computation made by a fund with identical investments utilizing a method of
valuation based upon market prices and estimates of market prices for all of its
portfolio instruments. Thus, if the use of amortized cost by the Money Fund
resulted in a lower aggregate portfolio value on a particular day, a prospective
investor in the Money Fund would be able to obtain a somewhat higher yield than
would result from investment in a fund utilizing solely market values, and
existing investors in the Money Fund would receive less investment income. The
converse would apply in a period of rising interest rates.
The Money Fund's use of amortized cost, which facilitates the maintenance of the
Money Fund's per share net asset value of $1.00 is permitted by a rule adopted
by the SEC. Pursuant to this rule, the Money Fund must adhere to certain
conditions. The Money Fund must maintain a dollar-weighted average portfolio
maturity of 90 days or less, only purchase instruments having remaining
maturities of 397 calendar days or less, and invest only in those United States
dollar-denominated instruments that the Board of Trustees determines present
minimal credit risks and which are, as required by the federal securities laws,
rated in one of the two highest rating categories as determined by nationally
recognized statistical rating agencies, instruments deemed comparable in quality
to such rated instruments, or instruments, the issuers of which, with respect to
an outstanding issue of short-term debt that is comparable in priority and
protection, have received a rating within the two highest categories of
nationally recognized statistical rating agencies. As discussed in the
Prospectus, securities subject to floating or variable interest rates with
demand features in compliance with applicable rules of the SEC may have stated
maturities in excess of one year. The trustees have agreed to establish
procedures designed to stabilize, to the extent reasonably possible, the Money
Fund's price per share as computed for the purpose of sales and redemptions at
$1.00. Such procedures will include review of the Money Fund's portfolio
holdings by the trustees, at such intervals as they may deem appropriate, to
determine whether the Money Fund's net asset value calculated by using available
market quotations deviates from $1.00 per share based on amortized cost. The
extent of any deviation will be examined by the trustees. If such deviation
exceeds 1/2 of 1%, the trustees will promptly consider what action, if any, will
be initiated. In the event the trustees determine that a deviation exists which
may result in material dilution or other unfair results to investors or existing
shareholders, they will take such corrective action as they regard as necessary
and appropriate, which may include the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity, withholding dividends, redemptions of shares in kind, or establishing
a net asset value per share by using available market quotations.
The Intermediate-Term and Insured Funds' portfolio securities are valued as
stated in their Prospectuses. Generally, trading in U.S. government securities
and money market instruments is substantially completed each day at various
times prior to the close of the Exchange. The values of such securities used in
computing the net asset value of the Intermediate-Term Fund's shares and each
class of the Insured Fund's shares are determined as of such times.
Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and 1:00 p.m. Pacific time which will not
be reflected in the computation of the Intermediate-Term and Insured Funds' net
asset value. If events materially affecting the value of such securities occur
during such period, then these securities will be valued at their fair value as
determined in good faith by the Board.
For the purpose of determining the aggregate net assets of the Intermediate-Term
Fund, and each class of the Insured Fund, cash and receivables are valued at
their realizable amounts. Interest is recorded as accrued and dividends are
recorded on the ex-dividend date. Over-the-counter portfolio securities are
valued within the range of the most current bid and ask prices. Portfolio
securities which are traded both in the over-the-counter market and on a stock
exchange are valued 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. 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 Insured and
Intermediate Funds may utilize a pricing service, bank or securities dealer to
perform any of the above described functions.
Reports to Shareholders
The Trust sends annual and semiannual reports to its shareholders regarding each
Fund's performance and portfolio holdings. Shareholders who would like to
receive an interim quarterly report may phone Fund Information at 1-800/DIAL
BEN.
Special Services
The Franklin Templeton Institutional Services Department provides specialized
services, including recordkeeping, for institutional investors of the Funds. The
cost of these services is not borne by the Funds.
Investor Services may pay certain financial institutions which maintain omnibus
accounts with the Funds on behalf of numerous beneficial owners for
recordkeeping operations performed with respect to such beneficial owners. For
each beneficial owner in the omnibus account, the Funds may reimburse Investor
Services an amount not to exceed the per account fee which the Funds normally
pay Investor Services. Such financial institutions may also charge a fee for
their services directly to their clients.
Multiple Accounts for Fiduciaries
(Money Fund Only)
As noted in the Prospectus, special procedures have been designed for banks and
other institutions wishing to open multiple accounts in the Money Fund. The
institution may open a single master account by filing one application form with
the Money Fund, signed by personnel authorized to act for the institution.
Individual sub-accounts may be opened at the time the master account is filed by
listing them or they may be added at a later date by written advice or by filing
forms supplied by the Money Fund. These sub-accounts may be established by the
institution with registration either by name or number. The investment minimums
applicable to the Money Fund are applicable to each subaccount. The Money Fund
will provide each institution with a written confirmation for each transaction
in a sub-account and arrangements may be made at no additional charge for the
transmittal of duplicate confirmations to the beneficial owner of the
sub-account. Further, the Money Fund will provide to each institution, on a
quarterly basis, or more frequently as requested, a statement which will set
forth for each sub-account's share balance, income earned for the period, income
earned for the year to date, and total current market value.
Additional Information Regarding Taxation
As stated in the Prospectuses, each Fund has elected and qualified to be treated
as a regulated investment company under Subchapter M of the Code. The trustees
reserve the right not to maintain the qualification of each Fund as a regulated
investment company if they determine such course of action to be beneficial to
shareholders. In such case, such Fund will be subject to federal and possibly
state corporate taxes on its taxable income and gains, to the alternative
minimum tax on its taxable and tax-exempt income, and finally, distributions of
each Fund's income (including its tax-exempt income) will be taxable dividend
income to shareholders to the extent of the Fund's available earnings and
profits.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve-month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed, nor
taxed to the Funds) to shareholders by December 31 of each year in order to
avoid the imposition of a federal excise tax. Under these rules, certain
distributions which are declared in October, November or December but which, for
operational reasons, may not be paid to the shareholder until the following
January, will be treated for tax purposes as if paid by the Funds and received
by the shareholder on December 31 of the calendar year in which they are
declared. Each Fund intends as a matter of policy to declare and pay such
dividends, if any, in December to avoid the imposition of this tax, but does not
guarantee that its distributions will be sufficient to avoid any or all federal
excise taxes.
Many states grant tax-free status to dividends paid to shareholders of mutual
funds from interest income earned by a Fund from direct obligations of the U.S.
government, subject in some states to minimum investment requirements that must
be met by the fund. Investments in GNMA/FNMA securities and repurchase
agreements collateralized by U.S. government securities do not generally qualify
for tax-free treatment. While it is not the primary investment objective of each
Fund to invest in such obligations, each Fund is authorized to so invest for
temporary or defensive purposes. To the extent that such investments are made, a
Fund will provide shareholders with the percentage of any dividends paid which
may qualify for such tax-free treatment at the end of each calendar year.
Shareholders should then consult with their own tax advisors with respect to the
application of their state and local laws to these distributions and on the
application of other state and local laws on distributions and redemption
proceeds received from a Fund.
Persons who are defined in the Code as "substantial users" (or related persons)
of facilities financed by private activity bonds should consult with their tax
advisors before purchasing shares of a Fund.
The following information on redemptions and share basis reporting primarily
concerns shareholders in the Insured and Intermediate-Term Funds.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For shareholders subject to taxation, gain or
loss will be recognized in an amount equal to the difference between the
shareholder's basis and the amount received, subject to the rules described
below. If such shares are a capital asset in the hands of the shareholder, gain
or loss will be capital gain or loss and will be long-term for federal income
tax purposes if the shares have been held for more than one year.
All or a portion of the sales charge incurred in purchasing shares of the Fund
will not be included in the federal tax basis of such shares sold or exchanged
within ninety (90) days of their purchase (for purposes of determining gain or
loss with respect to such shares) if the sales proceeds are reinvested in the
Fund or in another fund in the Franklin/Templeton Group of Funds(R) (defined in
the Prospectus under "How to Buy Shares of a Fund") and a sales charge which
would otherwise apply to the reinvestment is reduced or eliminated. Any portion
of such sales charge excluded from the tax basis of the shares sold will be
added to the tax basis of the shares acquired in the reinvestment. Shareholders
should consult their tax advisors concerning the tax rules applicable to the
redemption or exchange of Fund shares.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of such Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or 30 days after
such redemption. Any loss disallowed under these rules will be added to the tax
basis of the shares purchased. Any loss realized upon the redemption of shares
within six months from the date of their purchase will be treated as a long-term
capital loss to the extent of amounts treated as distributions of net long-term
capital gain during such six-month period and will be disallowed to the extent
of exempt-interest dividends paid with respect to such shares.
The Trust's Underwriter
Pursuant to underwriting agreements, Distributors acts as principal underwriter
in a continuous public offering for shares of the Funds. The underwriting
agreements are in effect until March 31, 1996 and will continue in effect for
successive annual periods, provided that their continuance is specifically
approved at least annually by a vote of the Board, or by a vote of the holders
of a majority of the Trust's outstanding voting securities, and in either event
by a majority vote of the Trust's trustees who are not parties to the
underwriting agreements or interested persons of any such party (other than as
trustees of the Trust), cast in person at a meeting called for that purpose. The
underwriting agreements terminate automatically in the event of their assignment
and may be terminated by either party on 90 days' written notice.
Distributors pays the expenses of distribution of the Funds' shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. Each 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.
In connection with the offering of Class I and Class II shares of the Insured
Fund, aggregate underwriting commissions for the fiscal years ended June 30,
1993, 1994, and 1995 were $11,369,559, $9,120,224, and 3,795,114 respectively.
After allowances to dealers, Distributors retained $354,780, $363,640 and
$254,497 in net underwriting discounts and commissions for the respective years.
For the Intermediate-Term Fund, aggregate underwriting commissions for the
period September 21, 1992 (effective date of registration) to June 30, 1993 and
the fiscal years ended June 30, 1994, and 1995 were $468,834, $623,133, and
$177,913 respectively. After allowances to dealers, Distributors retained
$39,257, $81,979 and $22,737 in net underwriting discounts and commissions for
the respective years. Distributors may be entitled to reimbursement under the
distribution plans of the Funds as discussed below. Except as noted,
Distributors received no other compensation from either Fund for acting as
underwriter.
Distribution Plans
(Intermediate-Term Fund and Insured Fund)
Each class of the Insured Fund has adopted a distribution plan ("Class I Plan"
and "Class II Plan", respectively) pursuant to Rule 12b-1 under the 1940 Act.
The Intermediate-Term Fund has also adopted a distribution plan pursuant to Rule
12b-1 (the "Intermediate-Term Plan"). The distribution plans for each Fund and
class may be collectively referred to as the "Plans".
In implementing the Class I Plan, the Board determined that the annual fees
payable thereunder will be equal to the sum of: (i) the amount obtained by
multiplying 0.10% by the average daily net assets represented by Class I shares
of the Insured Fund that were acquired by investors on or after the Effective
Date of the Class I Plan ("New Assets"), and (ii) the amount obtained by
multiplying 0.05% by the average daily net assets represented by Class I shares
of the Insured Fund that were acquired before the Effective Date of the Class I
Plan ("Old Assets"). Such fees will be paid to the current securities dealer of
record on the shareholder's account. In addition, until such time as the maximum
payment of 0.10% is reached on a yearly basis, up to an additional 0.02% will be
paid to Distributors under the Class I Plan. The payments to be made to
Distributors will be used by Distributors to defray other marketing expenses
that have been incurred in accordance with the Class I Plan, such as
advertising.
The fee related to the Class I Plan is an expense of Class I as a whole, so that
all Class I shareholders regardless of when they purchased their shares will
bear Rule 12b-1 expenses at the same rate. That rate initially will be at least
0.07% (0.05% plus 0.02%) of Class I's average daily net assets and, as Class I
shares are sold on or after the Effective Date, will increase over time. Thus,
as the proportion of Class I shares purchased on or after the Effective Date
increases in relation to outstanding Fund shares, the expenses attributable to
payments under the Class I Plan will also increase (but will not exceed 0.10% of
average daily net assets). While this is the currently anticipated calculation
for fees payable under the Class I Plan, the Class I Plan permits the Trust's
trustees to allow the Fund to pay a full 0.10% on all assets at any time. The
approval of the Trust's Board of Trustees would be required to change the
calculation of the payments to be made under the Class I Plan.
The Class II Plan. Under the Class II Plan, the Insured Fund is permitted to pay
to Distributors or others annual distribution fees, payable quarterly, of 0.50%
of Class II's average daily net assets, in order to compensate Distributors or
others for providing distribution and related services and bearing certain
expenses of the Class. All expenses of distribution and marketing over that
amount will be borne by Distributors, or others who have incurred them, without
reimbursement by the Insured Fund. In addition to this amount, under the Class
II Plan, the Insured Fund shall pay 0.15% per annum, payable quarterly, of the
Class' average daily net assets as a servicing fee. This fee will be used to pay
dealers or others for, among other things, assisting in establishing and
maintaining customer accounts and records; assisting with purchase and
redemption requests; receiving and answering correspondence; monitoring dividend
payments from the Insured Fund on behalf of customers, and similar activities
related to furnishing personal services and maintaining shareholder accounts.
Distributors may pay the securities dealer, from its own resources, a commission
of up to 1% of the amount invested.
In General. Pursuant to each Plan, Distributors or others will be entitled to be
reimbursed each quarter (up to the maximum as stated above) for actual expenses
incurred in the distribution and promotion of each Fund's shares, including, but
not limited to, the printing of prospectuses and reports used for sales
purposes, expenses of preparation and distribution of sales literature and
related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of Distributors' overhead expenses attributable to
the distribution of each Fund's shares, as well as any distribution or service
fees paid to securities dealers or their firms or others who have executed a
servicing agreement with the Fund, Distributors or its affiliates.
In addition to the payments to which Distributors or others are entitled under
the Plans, each Plan also provides that to the extent a Fund, the Manager or
Distributors or other parties on behalf of a Fund, the Manager or Distributors,
make payments that are deemed to be payments for the financing of any activity
primarily intended to result in the sale of shares of a Fund within the context
of Rule 12b-1 under the 1940 Act, then such payments shall be deemed to have
been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include payments
made under the Plans, plus any other payments deemed to be made pursuant to the
Plans, exceed the amount permitted to be paid pursuant to the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., Article III,
Section 26(d)4.
The terms and provisions of the Plans relating to required reports, term, and
approval are consistent with Rule 12b-1. The Plans do not permit unreimbursed
expenses incurred in a particular year to be carried over to or reimbursed in
subsequent years.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the Plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. Such banking institutions, however, are permitted to receive fees under
the Plans for administrative servicing or for agency transactions. If a bank
were prohibited from providing such services, its customers who are shareholders
would be permitted to remain shareholders of the Funds, and alternate means for
continuing the servicing of such shareholders would be sought. In such an event,
changes in the services provided might occur and such shareholders might no
longer be able to avail themselves of any automatic investment or other services
then being provided by the bank. It is not expected that shareholders would
suffer any adverse financial consequences as a result of any of these changes.
Securities laws of states in which each Fund's shares are offered for sale may
differ from the interpretations of federal law expressed herein, and banks and
financial institutions selling shares of the Fund may be required to register as
dealers pursuant to state law.
The Plans have been approved in accordance with the provisions of Rule 12b-1.
The Class II Plan became effective on May 1, 1995. The Plans are effective
through March 31, 1996 and renewable annually by a vote of the Board, including
a majority vote of the trustees who are non-interested persons of the Trust and
who have no direct or indirect financial interest in the operation of the Plans,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such trustees be done by the non-interested
trustees. The Plans and any related agreement may be terminated at any time,
without any penalty, by vote of a majority of the non-interested trustees on not
more than 60 days' written notice, by Distributors on not more than 60 days'
written notice, by any act that constitutes an assignment of the management
agreements between the Trust on behalf of the Intermediate-Term and Insured
Funds and the Manager or the underwriting agreement between the Trust on behalf
of the Intermediate-Term and Insured Funds and Distributors, or by vote of a
majority of a Fund's outstanding shares. Distributors or any dealer or other
firm may also terminate their respective distribution or service agreement at
any time upon written notice.
The Plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the Intermediate-Term and Insured Funds' outstanding shares, and all material
amendments to the Plans or any related agreements shall be approved by a vote of
the non-interested trustees, cast in person at a meeting called for the purpose
of voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the Plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the Plans should be continued.
For the fiscal year ended June 30, 1995, the total amounts paid by the
Intermediate-Term Fund and Class I and Class II of the Insured Fund pursuant to
their respective Plans were $73,015, $1,010,395, and $261 respectively, which
were used for the following purposes.
Intermediate- Insured
Term Fund Fund
Advertising................... $195,155
Printing and mailing of pro-
spectuses to other than
current shareholders......... $ 33,414
Payments to
underwriters................. $ 48,685
Payments to brokers
or dealers................... $73,015 $733,402
General Information
Performance
As noted in the Prospectuses, each Fund and each class of the Insured Fund may
from time to time quote various performance figures to illustrate a Fund's past
performance. The Intermediate-Term Fund and each class of the Insured Fund may
occasionally cite statistics to reflect their volatility or risk.
INTERMEDIATE-TERM AND INSURED FUNDS
Performance quotations by investment companies are subject to rules adopted by
the SEC. These rules require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation furnished by a
Fund or class be accompanied by certain standardized performance information
computed as required by the SEC. Current yield and average annual compounded
total return quotations used by a Fund or class are based on the standardized
methods of computing performance mandated by the SEC. An explanation of those
and other methods used by the Intermediate-Term Fund and the classes of the
Insured Fund to compute or express performance follows.
Total Return
The average annual total return is determined by finding the average annual
compounded rates of return over one-, five- and ten-year periods, or fractional
portion thereof, that would equate an initial hypothetical $1,000 investment to
its ending redeemable value. The calculation assumes the maximum front-end sales
charge is deducted from the initial $1,000 purchase order, and that income
dividends and capital gains are reinvested at net asset value on the
reinvestment dates during the period. The quotation assumes the account was
completely redeemed at the end of each one-, five-, and ten-year period and the
deduction of all applicable charges and fees. If a change is made in the sales
charge structure, historical performance information will be restated to reflect
the maximum front-end sales charge in effect currently.
In considering the quotations of total return by each Fund and class, investors
should remember that the maximum front-end 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 an investor's investment in a
Fund. The actual performance of an investment will be affected less by this
charge the longer an investor retains the investment in a Fund. The average
annual compounded rates of return for the Intermediate-Term Fund and Class I of
the Insured Fund for the indicated periods ended on June 30, 1995 were as
follows:
One- Five- From
Fund Name Year Year Inception
Intermediate-Term
Fund....................... 4.81% N/A 5.29%
Insured Fund - Class I...... 3.22% 6.70% 7.94%
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = 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 the one-, five-, or ten-year periods at the end of the one-, five-,
or ten-year periods (or fractional portion thereof)
As discussed in the Prospectuses, the Intermediate-Term Fund and each class of
the Insured Fund may quote total rates of return in addition to their average
annual total return. Such quotations are computed in the same manner as a Funds'
or a class' average annual compounded rate, except that such quotations will be
based on each Funds' or class' actual return for a specified period rather than
on their average return over one-, five- and ten-year periods, or fractional
portion thereof. The total rates of return for the Intermediate-Term Fund and
Class I of the Insured Fund for the indicated periods ended on June 30, 1995
were as follows:
One- Five- From
Fund Name Year Year Inception
Intermediate-Term
Fund..................... 4.81% N/A 15.34%
Insured Fund -
Class I.................. 3.22% 38.31% 111.91%
Yield
Current yield reflects the income per share earned by a Fund's portfolio
investments.
Current yield for the Inermediate-Term Fund and each class of the Insured Fund
is determined by dividing the net investment income per share earned by such
Fund or class during a 30-day base period by the 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 a Fund or class
during the base period. The yields for the Intermediate-Term Fund and Class I
and Class II of the Insured Fund for the 30-day period ended on June 30, 1995
were 5.05%, 4.71% and 4.31%, respectively.
These figures were obtained using the following SEC formula:
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
Tax Equivalent Yield
The Intermediate-Term Fund and each class of the Insured Fund may also quote a
tax equivalent yield which demonstrates the taxable yield necessary to produce
an after-tax yield equivalent to that of a fund which invests in tax-exempt
obligations. Such yield is computed by dividing that portion of the yield of a
Fund or class (computed as indicated above) which is tax-exempt by one minus the
highest applicable combined federal and California income tax rate (and adding
the product to that portion of the yield of the Fund that is not tax-exempt, if
any). The tax equivalent yields for the Intermediate-Term Fund and Class I and
Class II of the Insured Fund for the 30-day period ended on June 30, 1995 were
9.39%, 8.76% and 8.02%, respectively.
As of the date of this SAI, the state and the combined state and federal income
tax rates upon which the Funds' tax equivalent yield quotations were based were
11.0% and 46.24%, respectively. These rates do not reflect the tax costs
resulting from the full or partial loss of the benefits of personal exemptions
and itemized deductions that may result from the receipt of additional taxable
income by taxpayers with adjusted gross income exceeding $100,000. Actual tax
equivalent yields and tax equivalent distribution rates may be higher for
taxpayers subject to the loss of these benefits than the rates reported by the
Funds. Furthermore, from time to time, as any changes to such rates become
effective, tax equivalent yield quotations advertised by the Funds will be
updated to reflect such changes. The Funds expect updates may be necessary as
tax rates are changed by federal, state and local governments. The advantage of
tax-free investments, such as the Intermediate-Term and Insured Funds, will be
enhanced by any tax rate increases. Therefore, the details of specific tax
increases may be used in sales material for the Funds.
Quotations of taxable equivalent yield by the Intermediate-Term and Insured
Funds in advertisements may reflect assumed rates of return which are not
intended to represent historical or current distribution rates or yields. Such
quotations will be used in sales literature, such as Franklin's Tax-Free Yield
Calculator, to illustrate the general principle of the impact taxes have on
rates of return or to show the taxable rate of return that would be needed to
match a tax-free rate of return.
Current Distribution Rate
Current yield and tax equivalent yield, which are calculated according to a
formula prescribed by the SEC, are not indicative of the amounts which were or
will be paid to a Fund's or a class' shareholders. Amounts paid to shareholders
are reflected in the quoted current distribution rate or taxable equivalent
distribution rate. The current distribution rate is computed by dividing the
total amount of dividends per share paid by a Fund or class during the past 12
months by a current maximum offering price. A taxable equivalent distribution
rate demonstrates the taxable distribution rate equivalent to a Fund's or a
class' current distribution rate (calculated as indicated above). The advertised
taxable equivalent distribution rate will reflect the most current federal and
California state tax rates available to a Fund. Under certain circumstances,
such as when there has been a change in the amount of dividend payout or a
fundamental change in investment policies, it might be appropriate to annualize
the dividends paid over the period such policies were in effect, rather than
using the dividends during the past 12 months. The current distribution rate
differs from the current yield computation because it may include distributions
to shareholders from sources other than dividends and interest, such as
short-term capital gains, and is calculated over a different period of time.
Volatility
Occasionally, statistics may be used to specify Fund volatility or risk.
Measures of volatility or risk are generally used to compare Fund net asset
value or performance relative to a market index. One 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 premise is that greater volatility connotes greater risk undertaken in
achieving performance.
Other Performance Quotations
With respect to those categories of investors who are permitted to purchase
shares of the Intermediate-Term Fund or Class I shares of the Insured Fund at
net asset value, sales literature pertaining to such Fund or class may quote a
"Current Distribution Rate for Net Asset Value Investments." This rate is
computed by adding the income dividends paid by a Fund or class during the last
12 months and dividing that sum by a current net asset value. Figures for yield,
total return and other measures of performance for Net Asset Value Investments
may also be quoted. These will be derived as described elsewhere in this SAI
with the substitution of net asset value for public offering price.
Regardless of the method used, past performance is not necessarily indicative of
future results, but is an indication of the return to shareholders only for the
limited historical period used.
Each Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Templeton Group of Funds. Resources is the parent company of the advisers and
underwriter of both the Franklin Group of Funds and the Templeton Group of
Funds.
Comparisons
To help investors better evaluate how an investment in the Funds might satisfy
their investment objective, advertisements and other materials regarding the
Insured and Intermediate-Term Funds may discuss various measures of Fund
performance as reported by various financial publications. Materials may also
compare performance (as calculated above) to performance as reported by other
investments, indices, and averages. Such comparisons may include, but are not
limited to, the following examples:
a) Salomon Brothers Broad Bond Index or its component indices -The Broad Index
measures yield, price, and total return for Treasury, Agency, Corporate, and
Mortgage bonds.
b) Lehman Brothers Aggregate Bond Index or its component indices - The Aggregate
Bond Index measures yield, price and total return for Treasury, Agency,
Corporate, Mortgage, and Yankee bonds.
c) Donoghue's Money Fund Report(R) - Industry averages for seven-day annualized
and compounded yields of taxable, tax-free, and government money funds.
d) Lehman Brothers Municipal Bond Index (LBMBI) or its component indices - LBMBI
measures yield, price and total return for the municipal bond market.
e) Bond Buyer's 20-Bond Index - An index of municipal bond yields based upon
yields of 20 general obligation bonds maturing in 20 years.
f) Bond Buyer's 30-Bond Index - An index of municipal bond yields based upon
yields of 20 revenue bonds maturing in 30 years.
g) Financial publications: The Wall Street Journal, Business Week, Financial
World, Forbes, Fortune, and Money magazines - Provide performance statistics
over specified time periods.
h) Salomon Brothers Composite High Yield Index or its component indices - The
High Yield Index measures yield, price and total return for Long-Term High Yield
Index, Intermediate-Term High Yield Index, and Long-Term Utility High Yield
Index.
i) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Pierce, Fenner & Smith, Lehman Brothers and Bloomberg, L.P.
j) 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.
k) Lipper - Mutual Fund Performance Analysis, Lipper - Fixed Income Fund
Performance Analysis and Lipper - Mutual Fund Yield Survey - 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.
l) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
Analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
m) Mutual Fund Source Book, published by Morningstar, Inc. - Analyzes price,
yield, risk, and total return for mutual funds.
n) Inflation as measured by the Consumer Price Index, published by the U.S.
Bureau of Labor Statistics.
o) Standard & Poor's Bond Indices - Measure yield and price of corporate,
municipal, and government bonds.
From time to time, advertisements or information for each Fund may include a
discussion of certain attributes or benefits to be derived by an investment in
the Fund. Such advertisements or information may include symbols, headlines, or
other material which highlight or summarize the information discussed in more
detail in the communication.
Advertisements or information may also compare each Fund's performance to the
return on certificates of deposit or other investments. Investors should be
aware, however, that an investment in a Fund involves the risk of fluctuation of
principal value, a risk generally not present in an investment in a certificate
of deposit issued by a bank. For example, as the general level of interest rates
rise, the value of a Fund's fixed-income investments, as well as the value of
its shares which are based upon the value of such portfolio investments, can be
expected to decrease. Conversely, when interest rates decrease, the value of a
Fund's shares can be expected to increase. Certificates of deposit are
frequently insured by an agency of the U.S. government. An investment in a Fund
is not insured by any federal, state or private entity.
In assessing such comparisons of performance, an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to a Fund's portfolio, that the indices and averages are generally
unmanaged, and that the items included in the calculations of such averages may
not be identical to the formula used by the Funds to calculate their figures. In
addition, there can be no assurance that the Funds will continue this
performance as compared to such other averages.
MONEY FUND
Current Yield
Current yield reflects the interest income per share earned by the Money Fund's
portfolio investments.
Current yield is calculated by determining the net change, excluding capital
changes, in the value of a hypothetical preexisting account having a balance of
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then annualizing the result by multiplying the base period
return by (365/7).
The yield for the Money Fund for the seven-day period ended on June 30, 1995 was
3.36%.
Effective Yield
Effective yield is computed in the same manner, except that the annualization of
the return for the seven-day period reflects the results of compounding by
adding one to the base period return, raising the sum to a power equal to 365
divided by seven, and subtracting one from the result.
Effective yield for the Money Fund for the seven-day period ended on June 30,
1995 was 3.42%.
This figure was obtained using the SEC formula:
365/7
Effective Yield = [(Base Period Return + 1) ]-1
Tax Equivalent Yield
The Money Fund may also quote tax equivalent yield and tax equivalent effective
yield, which demonstrate the taxable yield necessary to produce an after-tax
yield equivalent to that of a fund which invests in tax-exempt obligations. Such
yields are computed by dividing that portion of the yield of the Fund (computed
as indicated above) which is tax-exempt by one minus the highest combined
federal and California income tax rate (and adding the product to that portion
of the yield of the Fund that is not tax-exempt, if any). The tax equivalent
yield based on the current yield of the Money Fund for the seven-day period
ended on June 30, 1995 was 6.25%. The tax equivalent effective yield based on
the effective yield of the Money Fund for the seven-day period ended on June 30,
1995 was 6.36%.
The tax rate and advertisement discussions under the subcaption "Tax Equivalent
Yield," with respect to the Insured and Intermediate-Term Funds apply as well to
advertisements of tax equivalent yield by the Money Fund.
Comparisons
To help investors better evaluate how an investment in the Money Fund might
satisfy their investment objective, advertisements and other materials regarding
the Money Fund may discuss various measures of fund performance as reported by
various financial publications. Materials may also compare performance (as
calculated above) to performance as reported by other investments, indices, and
averages. Such comparisons may include, but are not limited to, the following
examples:
a) IBC/Donoghue's Money Fund Report(R) - Industry averages for seven-day
annualized and compounded yields of taxable, tax-free, and government money
funds.
b) Bank Rate Monitor - A weekly publication which reports various bank
investments such as CD rates, average savings account rates and average loan
rates.
c) Lipper - Mutual Fund Performance Analysis, Lipper - Fixed Income Fund
Performance Analysis, and Lipper - Mutual Fund Yield Survey - 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.
d) Salomon Brothers Bond Market Roundup - A weekly publication which reviews
yield spread changes in the major sectors of the money, government agency,
futures, options, mortgage, corporate, Yankee, Eurodollar, municipal, and
preferred stock markets and summarizes changes in banking statistics and reserve
aggregates.
e) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services, in major expenditure groups.
f) Stocks, Bonds, Bills, and Inflation published by Ibbotson Associates - a
historical measure of yield, price, and total return for common and small
company stock, long term government bonds, Treasury bills, and inflation.
g) Financial publications: The Wall Street Journal and Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money Magazines - provide
performance statistics over specified time periods.
In assessing such comparisons of performance, an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the Money Fund's portfolio, that the averages are generally
unmanaged, and that the items included in the calculations of such averages may
not be identical to the formula used by the Money Fund to calculate its figures.
In addition, there can be no assurance that the Fund will continue this
performance as compared to such other averages.
Other Features and Benefits (All Funds)
Franklin is a leader in the tax-free mutual fund industry, currently offering 42
tax-free funds, including 31 funds free from both federal and state personal
income taxes, and managing more than $41 billion in municipal bond assets for
over half a million investors.
Under current tax laws, municipal securities remain one of the few investments
offering the potential for tax-free income. In 1995, taxes could cost an
investor as much as $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 11% for 1995). 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 an investor 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 may also provide tax-free
compounding, when dividends are reinvested. An investment in Franklin's tax-free
funds can grow more rapidly than a similar taxable investment.
While municipal securities are generally considered to be creditworthy, second
in quality only to securities issued or guaranteed by the United States
government and its agencies, the market price of such securities may fluctuate.
This fluctuation will have a direct impact on the net asset value of an
investment in the Fund.
Currently, there are more mutual funds than there are stocks listed on the New
York Stock Exchange. While many of them have similar investment objectives, no
two are exactly alike. As noted in the Prospectuses, shares of the Funds are
generally sold through securities dealers or other financial institutions.
Investment representatives of such securities dealers or financial institutions
are experienced professionals who can offer advice on the type of investment
suitable to an investor's unique goals and needs, as well as the types of risks
associated with such investment.
Each Fund may help investors achieve various investment goals, such as
accumulating money for retirement, saving for a down payment on a home, college
costs and/or other long-term goals. The Franklin College Costs Planner may
assist an investor in determining how much money must be invested on a monthly
basis in order to have a projected amount available in the future to fund a
child's college education. (Projected college cost estimates are based upon
current costs published by the College Board.) The Franklin Retirement Planning
Guide leads an investor through the steps to start a retirement savings program.
Of course, an investment in the Funds cannot guarantee that such goals will be
met.
Miscellaneous Information
Each Fund is a member of the Franklin Templeton Group, one of the largest mutual
fund organizations in the United States and may be considered in a program for
diversification of assets. Founded in 1947, Franklin, one of the oldest mutual
fund organizations, has managed mutual funds for over 47 years and now services
more than 2.5 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 Worldwide, Inc., a pioneer in international
investing. Together, the Franklin Templeton Group has over $129 billion in
assets under management for more than 3.9 million U.S. based mutual fund
shareholder and other accounts. The Franklin Group of Funds and the Templeton
Group of Funds offer to the public 115 U.S. based mutual funds. The Funds may
identify themselves by their NASDAQ or CUSIP number.
The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin number one in
service quality for five of the past seven years.
According to Research and Ratings Review, Volume II, dated February 28, 1994,
Franklin's municipal research team ranked number 2 out of 1,000 investment
advisory firms surveyed by TMS Holdings, Inc. As of April 19, 1995, this ranking
was unchanged.
From time to time, advertisements or sales material issued by the Funds 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 amount of time, on an annual basis, the average taxpayer
works to satisfy his or her tax obligations to the federal, state and local
taxing authorities.
Access persons of the Franklin Templeton Group, as defined in SEC Rule 17(j)
under the 1940 Act, who are employees of Resources or its subsidiaries, are
permitted to engage in personal securities transactions subject to the following
general restrictions and procedures: (1) the trade must receive advance
clearance from a compliance officer and must be completed within 24 hours after
this clearance; (2) copies of all brokerage confirmations must be sent to the
compliance officer, and within 10 days after the end of each calendar quarter, a
report of all securities transactions must be provided to the compliance
officer; (3) in addition to items (1) and (2), access persons involved in
preparing and making investment decisions must file annual reports of their
securities holdings each January and also inform the compliance officer (or
other designated personnel) if they own a security that is being considered for
a fund or other client transaction or if they are recommending a security in
which they have an ownership interest for purchase or sale by a fund or other
client.
Distributions and distribution adjustments by the Money Fund resulting from
realized gains and losses on the sale of portfolio securities or from unrealized
appreciation or depreciation in the value of portfolio securities are required
to maintain a $1.00 net asset value and may result in under or over
distributions of investment company taxable income.
As noted in its Prospectus, the Money Fund declares dividends for each day that
the Fund's net asset value is calculated equal to all of its daily net interest
income, payable to shareholders of record as of the close of business the
preceding day. The Intermediate-Term and Insured Funds make monthly income
distributions substantially equal to all of their net investment income for the
fiscal year.
Shareholders who so request may have their dividends paid out monthly in cash.
For Money Fund shareholders, the shares reinvested and credited to their account
during the month will be redeemed as of the close of business on the last bank
business day of the month and the proceeds will be paid to them in cash. If a
shareholder withdrew the entire amount in an account at any time during the
month, all dividends accrued with respect to the account during the month to the
time of withdrawal would be paid in the same manner and at the same time as the
proceeds of withdrawal. Each Money Fund shareholder will receive a monthly
summary of the account, including information as to dividends reinvested or
paid.
The Board reserves the right to revise the above dividend policy or postpone the
payment of dividends, if warranted in its judgment, due to unusual circumstances
such as a large expense, loss or unexpected fluctuation in net assets.
The portfolio insurance of the Insured Fund may affect the value of the Insured
Fund's shares under certain circumstances. As discussed in its Prospectus,
unless a Secondary Market Insurance Policy is purchased with respect to the
portfolio security, the Insured Fund intends to hold any defaulted securities or
securities for which there is a significant risk of default in its portfolio
until the default has been cured or the principal and interest are paid by the
issuer or the insurer. In such circumstances, the Board of Trustees has
instructed the Manager to consider in its evaluation of these securities the
value of the insurance for the interest and principal payments, as well as the
market value of the portfolio securities, the market value of securities of
similar issuers whose securities carry similar interest rates, and the
discounted present value of the interest and principal payments to be received
from the insurance company. Absent any unusual or unforeseen circumstances, as a
result of the Portfolio Insurance Policy, the Manager would likely recommend
that the Insured Fund value the defaulted securities, or securities for which
there is a significant risk of default, at the same price as securities of a
similar nature which are not in default. A defaulted security covered by a
Secondary Market Policy would be valued at market.
The shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations. The
Trust's Declaration of Trust, however, contains an express disclaimer of
shareholder liability for acts or obligations of the Trust. The Declaration of
Trust also provides for indemnification and reimbursement of expenses out of
Trust assets for any shareholder held personally liable for obligations of the
Trust. The Declaration of Trust provides that the Trust shall, upon request,
assume the defense of any claim made against any shareholder for any act or
obligation of the Trust and satisfy any judgment thereon. All such rights are
limited to the assets of the Fund(s) of which a shareholder holds shares. The
Declaration of Trust further provides that the Trust may maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Trust, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance exists and the Trust
itself is unable to meet its obligations.
As of August 3, 1995, the principal shareholders of any of the Funds, beneficial
or of record, the shareholder's address and the amount of the shareholder's
share ownership were as follows:
Number of
Shares Held Percentage
Intermediate-Term Fund
Thomas W. Cotter
Neva J. Cotter
741 Center Dr.
Palo Alto, CA 94301......... 528,753.611 5.9%
Insured Fund Class II
Prudential Securities FBO
Rakesh C. Gupta &
Neelam Gupta Co-TTEES
FBO Gupta Fam. Liv. Tr.
UA DTD 12/22/94
Hemet, CA 92544-6523........ 9,146.973 5.04%
James A. Dimsey &
Carol J. Dimsey TTEES
Dimsey Fam Tr
3384 Amy Dr.
Corona, CA 91720............ 16,546.070 9.12%
Edna Dibartolomeo TTEE
Edma Dibartolomeo
1995 Fam. Tr. DTD 2/2/95
741 N. Valley St.
Burbank, CA 91505........... 12,386.530 6.83%
Harold L. Weiner &
Gertrude S. Weiner TTEES
HL & GS Weiner
REV LIV TR
U/D/T DTD 10/9/88
431 N. Highland Ave.
Los Angeles, CA 90036....... 17,703.000 9.76%
From time to time, the number of shares of the Funds 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.
Ownership and Authority Disputes
In the event of disputes involving multiple claims of ownership or authority to
control a shareholder's account, each 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, prior
to 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 Internal Revenue Service in response
to a Notice of Levy.
Financial Statements
The audited financial statements contained in the Trust's Annual Report to
Shareholders dated June 30, 1995, including the auditor's report, are
incorporated herein by reference
Appendices
Appendix A -
RISK FACTORS AFFECTING CALIFORNIA MUNICIPAL SECURITIES
As indicated in the Funds' Prospectuses, the following information is given in
view of the Funds' policies of investing primarily in California state and
municipal issuers. Such information constitutes only a brief discussion, does
not purport to be a complete description, and is based primarily upon
information derived from independent credit reports and historically reliable
sources, but has not been independently verified by the Funds.
On June 6, 1978, California voters approved Proposition 13, which added Article
XIIIA to the California Constitution. The principal thrust of Article XIIIA is
to limit the amount of ad valorem taxes on real property to one percent of the
full cash value as determined by the county assessor. The assessed valuation of
all real property may be increased, but not in excess of two percent per year,
or decreased to reflect the rate of inflation or deflation as shown by the
consumer price index. Article XIIIA requires a vote of two thirds of the
qualified electorate to impose special taxes, and completely prohibits the
imposition of any additional ad valorem, sales or transaction tax on real
property (other than ad valorem taxes to repay general obligation bonds issued
to acquire or improve real property), and requires the approval of two-thirds of
all members of the State Legislature to change any state tax laws resulting in
increased tax revenues.
On November 6, 1979, California voters approved the initiative seeking to amend
the California Constitution entitled "Limitation of Government Appropriations"
which added Article XIIIB to the California Constitution. Under Article XIIIB
state and local governmental entities have an annual appropriations limit and
may not spend certain monies which are called appropriations subject to
limitations (consisting of tax revenues, state subventions and certain other
funds) in an amount higher than the appropriations limit. Generally, the
appropriations limit is to be based on certain 1978-79 expenditures, and is to
be adjusted annually to reflect changes in consumer prices, population and
services provided by these entities.
Decreases in state and local revenues in future fiscal years as a consequence of
these initiatives may continue to result in reductions in allocations of state
revenues to California municipal issuers or reduce the ability of such
California issuers to pay their obligations.
In its third year of economic recovery, California continues to show gradual
improvement. Although a large portion of the deficit accumulated during the
rececession still remains, it the state will likely be able to retire its
outstanding short-term borrowing as scheduled in April. Its balance sheet is
still weak, but California's reliance on external cash flow has been reduced
from previous years, and in the fiscal year ended June 30, 1995, the state
produced an operating surplus of approximately $800 million.
The 1995-1996 budget, which was passed on August 3, 1995, calls for an operating
surplus of approximately $600 million. The budget relies on the unlikely
prospect that federal government will provide $500 million in new funding for
incarceration of illegal aliens and other programs, as well as allow California
to cut an additional $500 million from federally mandated programs such as AFDC
and MediCal. At the same time, the temporary top marginal personal income tax
rates have expired, bringing down such rates from 10% and 11% to 9.3%. School
funding will increase by approximately $1 billion over last year, and there will
be an 8% increase in the share of the state budget devoted to prisons.
California's long-term economic difficulties will continue for an extended
period of time despite a gradually improving economy. K-12 education and prison
costs are expected to rise more rapidly than the overall budget, and county
governments are having difficulties resulting from the shift of property taxes
from counties to schools. Even in areas where the growth rates appear to be
decreasing, such as in health and welfare spending, it is likely that California
will encounter the same uncertainties faced by other states as the federal
government leaves more control to the states and as California's population
grows older.
Financial, economic and political factors will continue to have significant
effects on the health of the California economy. Voter initiatives have a strong
impact on the budget, and the budget process has difficulty reconciling spending
needs with a low tolerance for taxes. The constitutional reform commission will
present a final plan to address many of these issues in January, and
California's credit condition is expected to improve at a fairly limited rate
unless such a plan is adopted.
Appendix B -
Description of Municipal Securities Ratings
Municipal Bonds
Moody's
Aaa: Municipal bonds which are 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 by an
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 which are rated Aa are judged to be of 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 as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Municipal bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Municipal bonds which are rated Baa are considered as medium grade
obligations; i.e., 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. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Municipal bonds which are rated Ba are judged to have predominantly
speculative elements; their future cannot be considered as 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 which are 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 which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca: Municipal bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Municipal bonds which are 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 which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its municipal bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category. The modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA: Municipal bonds rated AA also qualify as high quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A: Municipal bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB: Municipal bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC: 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 such bonds will likely have some quality and
protective characteristics, these 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.
Note: The S&P ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within the major rating categories.
Fitch
AAA bonds: Considered to be of investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal which is unlikely to be affected by reasonably foreseeable
events.
AA bonds: 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 bonds: 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 bonds: Considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
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.
Municipal Notes
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, while various 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 usually will be assigned. Notes maturing beyond three years will
most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong capacity to
pay principal and interest. Issues determined to possess overwhelming safety
characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
Commercial Paper
Moody's
Moody's Commercial Paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Trust, 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,
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's Short-term and Commercial Paper Ratings
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. Reflects 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-S: 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.
CAT SAI 11/95
