Franklin California
Tax-Free Trust
Franklin California Insured
Tax-Free Income Fund
Franklin California Tax-Exempt
Money Fund
PROSPECTUS November 1, 1994
as amended August 15, 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 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 distribution 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, 1994, as amended May 1, 1995, and as may be further 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.......................... 15
Distributions to Shareholders.................... 17
Taxation of the Funds
and Their Shareholders.......................... 19
How to Buy Shares of the Funds................... 21
Other Programs and Privileges
Available to Shareholders of the Funds.......... 30
Exchange Privilege............................... 32
How to Sell Shares of the Funds.................. 36
Telephone Transactions........................... 41
Valuation of Shares
of Each of the Funds............................ 42
How to Get Information
Regarding an Investment in the Funds............ 42
Performance...................................... 43
General Information.............................. 45
Account Registrations............................ 46
Important Notice Regarding
Taxpayer IRS Certifications..................... 47
Portfolio Operations............................. 48
Risk Factors in California....................... 48
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 each Fund for the fiscal year ended June 30, 1994.
<TABLE>
<CAPTION>
Insured Insured
Fund Fund Money
Class I Class II Fund
<S> <C> <C> <C>
Shareholder Transaction Expenses
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)........................................ $5.00* $5.00* $5.00*
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees....................................................... .47% .47% .48%
12b-1 Fees............................................................ .09%** .65%** NONE
Other Expenses:
Shareholder Servicing Costs......................................... .02% .02% .07%
Reports to Shareholders............................................. .02% .02% .04%
Other............................................................... .01% .01% .02%
Total Other Expenses.................................................. .05% .05%*** .13%
Total Fund Operating Expenses......................................... .61%*** 1.17%*** .61%
</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
investment in the Franklin Templeton Funds will reach the crossover point more
quickly. (See "How to Buy Shares of the Funds - Insured Funds 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 following 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 following 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.
**Annualized. Rule 12b-1 fees for the Insured Fund - Class I for the two months
ended June 30, 1994 were 0.015%. 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, 1994.
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.
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
<S> <C> <C> <C> <C>
Insured Fund- Class I............................... $48* $61 $75 $115
Insured Fund- Class II.............................. $32 $47 $74 $151
Money Fund.......................................... $ 6 $20 $34 $ 76
*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, assuming
no redemption.
One Three Five Ten
Year Years Years Years
Insured Fund - Class II.............................. $22 $47 $74 $151
</TABLE>
This example is based on the aggregate operating expenses shown above and should
not be considered a representation of past 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 Class I of the Insured Fund from the effective
date of each Fund's registration statement, as indicated below, through December
31, 1994. The information for each of the five fiscal years in the period ended
June 30, 1994 has been audited by Coopers & Lybrand L.L.P., independent
auditors, whose audit report thereon appears in the financial statements in the
Trust's SAI. The figures for the six months ended December 31, 1994 are
unaudited. The remaining figures, which are also audited, are not covered by the
auditors' current report. Information regarding Class II shares of the Insured
Fund will be included in this table after they have been offered to the public
for a reasonable period of time. 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 Gain (Loss) 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:
<S> <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
1994** 11.74 0.34 (0.454) (0.114) (0.336) 11.29 (0.99) 1,369,075 0.59++ 5.85++ 5.63
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 --
1994** 1.00 0.013 -- 0.013 0.013 1.00 1.30 692,157 0.62++ 2.59++ --
</TABLE>
*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 initial sales charge
and assumes reinvestment of dividends at the offering price for the Insured Fund
and of capital gains at net asset value. Effective May 1, 1994, with the
implementation of the Rule 12b-1 distribution plan, as discussed in the
prospectus, the Insured Fund's existing sales charge on reinvested dividends has
been eliminated.
**For the six months ended December 31, 1994 (unaudited).
++Annualized.
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. 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 the 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 no assurances can
be given that this will be maintained). 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.")
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.
The Funds' investment objectives are fundamental policies of each 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,
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,
except for temporary short-term investments carrying the highest rating by
Moody's, S&P or Fitch. (See "Insurance.")
In accordance with procedures adopted pursuant to Rule 2a-7 under the Investment
Company Act of 1940 (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 therefor. As approved by the Board of Trustees and
subject to the following conditions, the Funds may lend their portfolio
securities to qualified securities dealers or other institutional investors,
provided that such loans do not exceed 10% of the value of the Fund's total
assets at the time of the most recent loan. The borrower must deposit with the
Fund's custodian cash collateral with an initial market value of at least 102%
of the initial market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 102%. The
lending of securities is a common practice in the securities industry. Each Fund
engages in security loan arrangements with the primary objective of increasing
that Fund's income either through investing the cash collateral in short-term
interest bearing obligations or by receiving a loan premium from the borrower.
Under the securities loan agreement, each Fund continues to be entitled to all
dividends or interest on any loaned securities. As with any extension of credit,
there are risks of delay in recovery and loss of rights in the collateral should
the borrower of the security fail financially.
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. Municipal securities may
also be sold in "stripped" form. Stripped municipal securities represent
separate ownership of interest and principal payments on municipal obligations.
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, 1994, the Insured Fund and the Money Fund had invested 1.16% and 3.41%,
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 purchase floating rate and variable rate obligations. These
obligations bear interest at prevailing market rates. The Fund may also invest
in variable or Floating Rate Demand Notes ("VRDNs"). 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 according to its terms 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. 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 in floating rate and variable rate obligations
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 municipal
securities that are floating rate and variable rate obligations 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. In
addition, the investment manager monitors the earning power, cash flow and other
liquidity ratios of the issuers of such obligations, as well as the
creditworthiness of the institution responsible for paying the principal amount
of the obligations under the demand feature.
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. Although the cost of insurance on the Insured
Fund's portfolio will reduce the Fund's yield, one of the objectives of such
insurance is to obtain a higher yield than would be available if all securities
in such Fund's portfolio were rated "AAA" by S&P without the benefit of any
insurance.
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. For example, a COP may be created when
long-term lease revenue bonds 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 bonds 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" or
"abatement" clause. A nonappropriation clause provides that, while the
municipality will use its best efforts to make lease payments, the municipality
may terminate the lease without penalty if the municipality's appropriating body
does not allocate the necessary funds. Local administrations, being faced with
increasingly tight budgets, therefore 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. In most cases, however, the private sector value of the property
will be 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, 1994, the Insured Fund held
17.91% and the Money Fund held 4.48% of their respective net assets in COPs and
other municipal leases.
Investment Risk Considerations
While an investment in any of the Funds 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.
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 Fund's shares will fluctuate with movements in the broader bond markets.
In particular, changes in interest rates will affect the value of the Fund's
portfolio and thus its share price. Increased rates of interest which frequently
accompany inflation and/or a growing economy are likely to have a negative
effect on the value of the 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 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 therefor 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 triple-AAA by Moody's, S&P or Fitch.
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. 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.
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.
Because coverage under the Portfolio Insurance Policy terminates upon sale of a
security from the Insured Fund's portfolio, such insurance does not have an
effect on the resale value of the securities. Therefore, the Fund may retain any
municipal securities insured under a Portfolio Insurance Policy which are in
default or in significant risk of default, and place a value on the insurance
which will be equal to the difference between the market value of the defaulted
security and the market value of similar securities which are not in default.
(See "Valuation of Shares of Each of the Funds.") Because of this policy, the
Trust's investment manager may be unable to manage the Insured Fund's portfolio
to the extent that it holds defaulted securities, which may limit its ability in
certain circumstances to purchase other municipal securities. While a defaulted
municipal security is held in the Fund's portfolio, the Fund continues to pay
the insurance premium thereon but also collects interest payments from the
insurer and retains the right to collect the full amount of principal from the
insurer when the security comes due. This would not be applicable if the Insured
Fund elected to purchase the Secondary Market Policy discussed above in lieu of
the Portfolio Insurance Policy.
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 various aspects of the financial services industry
through its various subsidiaries (the "Franklin Templeton Group"). Advisers acts
as investment manager to 34 U.S. registered investment companies (113 separate
series) with aggregate assets of over $76 billion, approximately $42 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, 1994, fees totaling 0.47% of the average monthly net
assets of the Insured Fund and 0.48% 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 on a "net"
basis, that is, in principal transactions without the addition or deduction of
brokerage commissions or transfer taxes. In the event that a Fund does
participate in transactions involving brokerage commissions, it is the Manager's
responsibility to select brokers through whom such transactions will be
effected. The Manager would try 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, 1994, the expenses borne by the Trust,
including fees paid to Advisers and to Investor Services, totaled 0.61% of the
average monthly net assets of the Insured Fund on an annualized basis, and 0.61%
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
("Class I Plan" and "Class II Plan," respectively, or "Plans" pursuant to Rule
12b-1 under the 1940 Act. The Rule 12b-1 fees charged to 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 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 Trust on behalf of the
Fund, 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 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.
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 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.
Under the Class II Plan, the maximum amount which the Fund is permitted to pay
to Distributors or others for distribution expenses and related expenses is
0.50% per annum of Class II's daily net assets, payable quarterly. 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 0.50% per annum of Class II's average daily net assets to partially
recoup fees Distributors pays to securities dealers. Distributors, or 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, 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 generally in the form of interest
and other income derived from its investments. This income, less the expenses
incurred in the Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of dividends paid per
share may vary with each distribution.
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 of Trustees, 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 Trust's Board of
Trustees. 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. 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 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 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 Group of Funds or the
Templeton Group, 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. Dividend and
capital gain distributions are eligible for investment in another fund in the
Franklin Group of Funds or the Templeton Group at net asset value.
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, 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. 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.
Differences Between Class I and Class II. The difference between Class I and
Class II shares lies primarily in their front-end and contingent deferred sales
charges and Rule 12b-1 fees as described below.
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. Voting rights of each class will be the same on
matters affecting the Fund as a whole, but each will vote separately on matters
affecting its class. 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 0.15% of
average daily net assets of such shares. With this multiclass structure, Class I
shares have higher front-end sales charges than Class II shares and
comparatively lower Rule 12b-1 fees. Class I shares may be purchased at a
reduced front-end sales charges 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. The current public offering price of Class II shares is equal to the
net asset value, plus a front-end sales charge of 1% of the amount invested.
Class II shares are also subject to a contingent deferred sales charge of 1% if
shares are redeemed within 18 months of the calendar month following purchase.
In addition, Class II shares are subject to Rule 12b-1 fees of up to a maximum
of 0.65% per annum of average daily net assets of such shares, 0.50% of which
will be retained by Distributors during the first year of investment. Class II
shares have lower front-end sales charges than Class I shares and comparatively
higher Rule 12b-1 fees. 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 slightly higher operating expenses and lower
income dividends for Class II shares, which will accumulate over time to
outweigh the difference in initial sales charges. 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
definitely should 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.
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
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.
Purchase Price of Insured Fund Shares
Shares of both classes of the Insured Fund are offered at their respective
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 of total front-end sales charges or underwriting
commissions 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 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. 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 as set forth
in 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.
See 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 assessed to those shares to partially
recoup fees Distributors pays to securities dealers.
Class II shares redeemed within 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."
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 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. In addition, the aggregate investments of a trustee or
other fiduciary account (for an account under exclusive investment authority)
may be considered in determining whether a reduced sales charge is available,
even though there may be a number of beneficiaries of the account. 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 a 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 any investments made by such parties
after cessation of employment; (2) companies exchanging shares with 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.
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 their own resources, to such securities dealer in an amount not
to exceed 0.25% of the amount invested. Contact Franklin's Institutional Sales
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.
Purchasing Class I And Class II 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. Purchases of $1 million or
more in a single payment will be invested in Class I shares. There are no
conversion features attached to either class of shares.
Investors who qualify to purchase Class I shares at net asset value should
purchase Class I rather than Class II shares. See the section "Purchases at Net
Asset Value" and "Description of Special Net Asset Value Purchases" above for a
discussion of when shares may be purchased at net asset value.
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.
Shareholders should contact Franklin's Shareholder Services Department at
the above telephone number to obtain a wire control number each time funds
are to be wired for investment to the Fund. 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 Fund 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."
Other 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 investment, as well as subsequent investments, 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 in writing 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 shares
and Class II shares may be subject to a contingent deferred sales charge if the
shares are redeemed within 12 months (Class I shares) or 18 months (Class II
shares) of the calendar month following 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.
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% semi-annually, 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% (or applicable) 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
Franklin's 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 12 months
(Class I shares) or 18 months (Class II shares) of the calendar month of the
original purchase date, 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 originally 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 original investment on which no
sales charge was paid was transferred in from a fund on which the investor paid
a 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
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 Funds at any time
upon 60 days' written notice to shareholders.
Exchanges Of Class I Shares
The contingency period 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 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.
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.
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.
Timing Accounts
Accounts which are administered by allocation or market timing services to
purchase or redeem shares based on predetermined market indicators ("Timing
Accounts") will be charged a $5.00 administrative service fee per each such
exchange. All other exchanges are without charge.
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 Funds reserve 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 1/4 of 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 Funds reserve 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 a 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 Funds and therefore may be refused.
The Funds and Distributors also, as indicated in "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.
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 (other than a retirement account) - 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 Fund by telephone, subject to the Restricted Account
exception noted under "Telephone Transactions - Restricted Accounts."
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 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, government
entities, and qualified retirement plans 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.
The Agreement or other information may also be obtained by writing to the Funds
or Investor Services at the address shown on the cover or by calling
1-800/632-2301. The Funds 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."
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 the 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. These
documents, as described in the preceding section, are required even if the
shareholder's securities dealer has placed the repurchase order. After receipt
of a repurchase order from the dealer, the Insured Fund will still require a
signed letter of instruction and all other documents set forth above. 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 of 12 months (Class I) or 18 months (Class II) of the
calendar month following their purchase 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 (12 months in the case of Class I shares and 18 months in the
case of Class II shares); (ii) shares purchased with reinvested dividends and
capital gain distributions; and (iii) other shares held longer than the
contingency period; and followed by any shares held less than the contingency
period, 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 for 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.
Shares of the Funds may or may not constitute a legal investment for investors
whose investment authority is restricted by applicable law or regulation.
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 by calling Investor Services at
1-800/632-2301.
All shareholders will be able to: (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
Valuations for the Insured and Money Funds are currently made as of 1:00 and
3:00 p.m. Pacific time, respectively, 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 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 Money Fund or class of the Insured Fund
outstanding at the time. For the purpose of determining the aggregate net assets
of the Fund, cash and receivables are valued at their realizable amounts.
Interest is recorded as accrued. Portfolio securities for which market
quotations are readily available are valued within the range of the most recent
bid and ask prices as obtained from one or more dealers that make markets in the
securities. 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 of Trustees. With
the approval of trustees, the Insured Fund may utilize a pricing service, bank
or securities dealer to perform any of the above described functions.
Each of the Insured Fund's classes will bear, pro rata, all of the common
expenses of the Insured Fund, except that the Class I and Class II shares will
bear the Rule 12b-1 expenses payable under their respective plans. 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:
<TABLE>
<CAPTION>
Hours of Operation (Pacific Time)
Department Name Telephone No. (Monday Through Friday)
<S> <C> <C>
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
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.
</TABLE>
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' 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 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 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 Fund's 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 Fund's income and for the Insured Fund 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 of the Fund, 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,
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 Fund's yield, tax equivalent yield, distribution rate, taxable
equivalent distribution rate or total return may be in any future period.
Because Class II shares were not offered prior to May 1, 1995, no 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. 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 shareholders' meeting for such purposes as changing
fundamental investment restrictions, 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 a majority of the Board of Trustees in
their discretion or by shareholders holding at least ten percent of the
outstanding shares of any series. Shareholders will receive assistance in
communicating with other shareholders in connection with the election or removal
of trustees such as that 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 state
business trust law, or (3) required to be voted on separately 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 such 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 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 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. Their business history for at least the last five years
and positions with the Manager are also provided.
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 Funds' 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
Funds.
Changes in California constitutional and other laws during the last several
years have raised questions about 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 as revisions in the tax
rates or fee schedules. Because of the uncertain impact of the aforementioned
statutes, the possible inconsistencies in the respective terms of the statutes
and the impossibility of predicting the level of future appropriations and
applicability of related statutes to such questions, it is not currently
possible to assess the impact of such legislation and policies on the long-term
ability of California state and municipal issuers to pay interest or repay
principal on their obligations.
California's economy is larger than most sovereign nations. During the 1980s,
California experienced growth rates well in excess of the rest of the nation.
The state's major employment sectors are services, trade and manufacturing, with
industrial concentration in electronics, aerospace, and non-electrical
equipment. Other significant areas include agriculture and oil production.
Key sectors of California's economy have been severely affected by the most
recent recession, with job losses totaling over 850,000 since May of 1990. The
continuing growth of the state's population and labor force has produced high
unemployment rates compared to the nation as a whole. While total job loss has
declined with a slightly improving economy, key areas of California's economy,
including government, real estate and aerospace have been slow to recover.
Contraction in California's defense related industries, overbuilding in
commercial real estate, and consolidation and decline in the state's financial
services industry are expected to produce slower growth for several years.
Wealth levels in the state remain high relative to the nation, although this gap
continues to narrow.
In July of 1994, both S&P and Moody's lowered the general obligation bond
ratings of the state of California. These revisions reflect the state's heavy
reliance on short-term financing to cure cash imbalances and only moderate
economic growth projections for the state in fiscal 1994-95. For more
information on these ratings revisions and the state's current budget, please
refer to the SAI.
