FRANKLIN CALIFORNIA INTERMEDIATE-TERM
TAX-FREE INCOME FUND
Franklin California Tax-Free Trust
PROSPECTUS NOVEMBER 1, 1995
AS AMENDED FEBRUARY 15, 1996
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin California Tax-Free Trust (the "Trust") is an open-end management
investment company, consisting of two diversified and one non-diversified
series. This Prospectus relates only to the Franklin California
Intermediate-Term Tax-Free Income Fund (the "Fund"), the non-diversified series
of the Trust. The Fund offers individual investors, corporations and other
institutions a convenient way to invest in a professionally managed portfolio of
municipal securities, primarily issued by the state of California and its
political subdivisions. The Fund's investment objective is to provide investors
with as high a level of income exempt from federal income taxes and California
personal income taxes as is consistent with prudent investment management and
the preservation of shareholders' capital. The Fund invests primarily in a
portfolio of investment grade obligations with a dollar weighted average
portfolio maturity of more than three years but not more than ten years. There
can be no assurance that the investment objective of the Fund will be realized.
This Prospectus is intended to set forth in a clear and concise manner
information about the Trust and the Fund that a prospective investor should know
before investing. After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of shares and
other items which a prospective investor will find useful to have.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
A Statement of Additional Information ("SAI") concerning the Fund, dated
November 1, 1995, as may be amended from time to time, provides a further
discussion of certain areas in this Prospectus and other matters which may be of
interest to some investors. It has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated herein by reference. A copy is available
without charge from the Fund or the Fund's principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors") at the address or
telephone number shown above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES REPRESENTATIVE, DEALER,
OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM THE UNDERWRITER.
Contents Page
Expense Table.................... 2
Financial Highlights............. 4
About the Trust.................. 4
Investment Objective and
Policies of the Fund............ 4
Management of the Fund........... 9
Distributions to Shareholders.... 11
Taxation of the Fund
and Its Shareholders............ 12
How to Buy Shares of the Fund.... 13
Programs and Privileges
Available to Fund Shareholders.. 18
Exchange Privilege............... 20
How to Sell Shares of the Fund... 22
Telephone Transactions........... 25
Valuation of Fund Shares......... 26
How to Get Information Regarding
an Investment in the Fund....... 26
Performance...................... 27
General Information.............. 28
Account Registrations............ 29
Important Notice Regarding
Taxpayer IRS Certifications..... 30
Portfolio Operations............. 30
Risk Factors in California....... 31
Expense Table
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in the Fund. These figures are based on the
aggregate operating expenses of the Fund before fee waivers and expense
reductions for the fiscal year ended June 30, 1995.
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)............................... 2.25%
Deferred Sales Charge.............................................. NONE*
*Investments of $1 million or more are not subject to a front-end sales charge;
however, a contingent deferred sales charge of 1% is generally imposed on
certain redemptions within a contingency period of 12 months of the calendar
month of such investment. See "How to Sell Shares of the Fund - Contingent
Deferred Sales Charge."
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees.................................................... 0.63%***
12b-1 Fees......................................................... 0.08%++
Other Expenses:
Reports to shareholders.................................... 0.02%
Shareholder servicing costs................................ 0.02%
Other...................................................... 0.08%
Total Other Expenses............................................... 0.12%
Total Fund Operating Expenses...................................... 0.83%***
***Represents the amount that would have been payable to the investment manager,
absent a fee waiver by the investment manager. The investment manager, however,
has agreed in advance to waive a portion of its management fees and assume
responsibility for making payments to offset certain operating expenses
otherwise payable by the Fund. With this waiver, management fees and total
operating expenses represented 0.13% and 0.33%, respectively, of the average net
assets of the Fund. This arrangement may be terminated by the investment manager
at any time.
++The maximum amount of Rule 12b-1 fees allowed pursuant to the Fund's
distribution plan is 0.10%. Consistent with National Association of Securities
Dealers, Inc.'s rules, it is possible that the combination of front-end sales
charges and Rule 12b-1 fees could cause long-term shareholders to pay more than
the economic equivalent of the maximum front-end sales charges permitted under
those same rules.
Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an investment in the Fund.
Rather the table has been provided only to assist investors in gaining a more
complete understanding of fees, charges and expenses. For a more detailed
discussion of these matters, investors should refer to the appropriate sections
of this Prospectus.
Example
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge, that apply to a $1,000 investment
in the Fund over various time periods assuming (1) a 5% annual rate of return
and (2) redemption at the end of each time period:
1 year* 3 years 5 years 10 years
$31 $48 $68 $123
*Assumes that a contingent deferred sales charge will not apply.
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES, BEFORE FEE
WAIVERS AND EXPENSE REDUCTIONS, SHOWN ABOVE AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE
SHOWN. The operating expenses are borne by the Fund and only indirectly by
shareholders as a result of their investment in the Fund. In addition, federal
securities regulations require the example to assume an annual return of 5%, but
the Fund's actual return may be more or less than 5%.
Financial Highlights
Set forth below is a table containing the financial highlights for a share of
the Fund from the effective date of the registration statement, September 21,
1992, through June 30, 1995. This information has been audited by Coopers &
Lybrand L.L.P., independent auditors, whose audit report appears in the
financial statements in the Trust's Annual Report to Shareholders dated June 30,
1995. See the discussion "Reports to Shareholders" under "General Information"
in this Prospectus.
<TABLE>
<CAPTION>
Per Share Operating Performance Ratios/Supplemental Data
----------------------------------------- -----------------------
Ratio of Net
Net Asset Net Realized DistributionsNet Asset Net Assets Ratio of Investment
Year Value at Net & Unrealized Total From From Net Value at End Expenses Income Portfolio
Ended Beginning Investment Gain (Loss) Investment Investment at End Total of Year to Average to Average Turnover
June 30 of Year Income on SecuritiesOperations Income of Year Return+ (in 000's) Net Assets++ Net Assets Rate
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993** $10.00 $0.29 $0.550 $0.840 $(0.290) $10.55 10.95% $42,831 0.09%* 4.73%* 0.08%
1994 10.55 0.54 (0.360) 0.180 (0.530) 10.20 1.65 94,015 0.25 5.11 14.95
1995 10.20 0.54 0.170 0.710 (0.530) 10.38 7.19 88,785 0.33 5.34 10.90
</TABLE>
*Annualized
**For the period September 21, 1992 (effective date of registration) to June 30,
1993.
+Total return measures the change in value of an investment over the period
indicated. It does not include the maximum front-end sales charge, and assumes
reinvestment of dividends and capital gains at net asset value.
++During the periods indicated, Franklin Advisers, Inc., the investment manager,
agreed in advance to reduce management fees and reimbursed other expenses. Had
such action not been taken, the ratio of operating expenses to average net
assets would have been .95% (annualized), .80%, and .83% for the periods ended
June 30, 1993, 1994 and 1995, respectively.
About the Trust
Franklin California Tax-Free Trust is an open-end management investment company
commonly called a "mutual fund." The Trust was organized as a Massachusetts
business trust in July 1985 and registered with the SEC under the Investment
Company Act of 1940, as amended (the "1940 Act"). The Trust currently consists
of three series, each of which issues a separate series of the Trust's shares
and maintains a totally separate investment portfolio.
The Board of Trustees (the "Board") may determine, at a future date, to offer
shares of the Fund in one or more "classes" to permit the Fund to take advantage
of alternative methods of selling Fund shares. "Classes" of shares represent
proportionate interests in the same portfolio of investment securities but with
different rights, privileges and attributes, as determined by the trustees.
Certain funds in the Franklin Templeton Funds, as that term is defined under
"How to Buy Shares of the Fund," currently offer their shares in two classes,
designated "Class I" and "Class II." Because the Fund's sales charge structure
and plan of distribution are similar to those of Class I shares, shares of the
Fund may be considered Class I shares for redemption, exchange and other
purposes.
Shares of the Fund may be purchased (minimum investment of $100 initially and
$25 thereafter) at the current public offering price which is equal to the
Fund's net asset value (see "Valuation of Fund Shares") plus a sales charge
based upon a variable percentage not exceeding 2.25% of the offering price. (See
"How to Buy Shares of the Fund.")
Investment Objective and
Policies of the Fund
The Fund seeks to provide investors with as high a level of income exempt from
federal income taxes and California personal income taxes as is consistent with
prudent investment management and the preservation of shareholders' capital. The
objective is a fundamental policy of the Fund and may not be changed without the
approval of a majority of the Fund's outstanding shares. The Fund invests
primarily in a portfolio of investment grade obligations with a dollar weighted
average portfolio maturity of more than three years but not more than ten years.
There is, of course, no assurance that the Fund's objective will be achieved.
Under normal market conditions, the Fund attempts to invest 100% and, as a
matter of fundamental policy, will invest at least 80% of its total assets in
debt obligations issued by or on behalf of the state of California or any state,
territory or possession of the United States, the District of Columbia and their
respective authorities, agencies, instrumentalities and political subdivisions,
the interest on which is exempt from federal income tax. It is possible,
although not anticipated, that up to 20% of the Fund's total assets could be in
municipal securities subject to the alternative minimum tax and/or in taxable
obligations.
The Fund may invest, without percentage limitation, in securities having, at the
time of purchase, one of the four highest ratings of Moody's Investors Service
("Moody's") (Aaa, Aa, A, Baa), Standard & Poor's Corporation ("S&P") (AAA, AA,
A, BBB), or Fitch Investors Service, Inc. ("Fitch") (AAA, AA, A, BBB), or in
securities which are not rated, provided that, in the opinion of the Fund's
investment manager, such securities are comparable in quality to those within
the four highest ratings. These are considered to be "investment grade"
securities, although bonds rated in the fourth highest ratings level (Baa by
Moody's) are regarded as having an adequate capacity to pay principal and
interest but with greater vulnerability to adverse economic conditions and as
having some speculative characteristics. In the event the rating of an issue
held in the Fund's portfolio is lowered by the rating services, the change will
be considered by the Fund in its evaluation of the overall investment merits of
that security but the change will not necessarily result in an automatic sale of
the security. For a description of municipal securities ratings, see "Appendix
B" in the SAI.
In addition, under normal market conditions, the Fund will invest at least 65%
of its total assets in municipal securities and obligations issued by or on
behalf of the state of California and its local governments, municipalities,
authorities, agencies and political subdivisions which pay income exempt from
federal and California income taxes ("California Municipal Securities"). It is
possible, although not anticipated, that up to 35% of the Fund's total assets
could be in municipal securities from a state, possession or territory other
than California.
Dividends paid by the Fund which are derived from interest on tax-exempt
obligations that are not California Municipal Securities will be exempt from
federal income tax, but will be subject to California income taxes.
For temporary defensive purposes only, the Fund may invest (i) more than 20% of
its assets (which could be up to 100%) in fixed-income obligations the interest
on which is subject to federal income tax, and (ii) more than 35% of the value
of its net assets (which could be up to 100%) in instruments the interest on
which is exempt from federal income taxes but not California personal income
taxes. Any such temporary taxable investments will be limited to obligations
issued or guaranteed by the full faith and credit of the U.S. government or
commercial paper rated A-1 by S&P, P-1 by Moody's, or F-1+ by Fitch.
The Fund may borrow from banks for temporary or emergency purposes and pledge up
to 5% of its total assets for that purpose.
Municipal Securities
The term "municipal securities," as used in this Prospectus, means obligations
issued by or on behalf of the state of California or any state, territory or
possession of the U.S. and the District of Columbia, and their political
subdivisions, agencies, and instrumentalities, the interest on which is exempt
from federal income tax. An opinion as to the tax-exempt status of a municipal
security is generally rendered to the issuer by the issuer's bond counsel at the
time of issuance of the security.
Municipal securities are used to raise money for various public purposes, such
as constructing public facilities and making loans to public institutions.
Certain types of municipal bonds are issued to obtain funding for privately
operated facilities. Further information on the maturity and funding
classifications of municipal securities is included in the SAI.
It is possible, from time to time, that the Fund will invest more than 25% of
its assets in a particular segment of the municipal securities market, such as
hospital revenue bonds, housing agency bonds, industrial development revenue
bonds, transportation bonds, or pollution control revenue bonds, or in
securities the interest upon which is paid from revenues of a similar type of
project. In such circumstances, economic, business, political or other changes
affecting one bond (such as proposed legislation affecting the financing of a
project; shortages or price increases of needed materials; or declining markets
or need for the projects) might also affect other bonds in the same segment,
thereby potentially increasing market risk.
Yields on municipal securities vary, depending on a variety of factors,
including the general condition of the financial markets and of the municipal
securities market, the size of a particular offering, the maturity of the
obligation and the credit rating of the issuer. Generally, municipal securities
of longer maturities produce higher current yields than municipal securities
with shorter maturities, but are subject to greater price fluctuation due to
changes in interest rates, tax laws and other general market factors.
Lower-rated municipal securities generally produce a higher yield than
higher-rated municipal securities due to the perception of a greater degree of
risk as to the ability of the issuer to pay principal and interest obligations.
The interest on bonds issued to finance public purpose state and local
government operations is generally tax-exempt for regular federal income tax
purposes. Interest on certain "private activity bonds" (including those for
housing and student loans) issued after August 7, 1986, while still tax-exempt,
constitutes a preference item for taxpayers in determining the federal
alternative minimum tax under the Internal Revenue Code of 1986, as amended (the
"Code"), and under the income tax provisions of some states. This interest could
subject a shareholder to, or increase the shareholder's liability under, the
federal alternative minimum tax (but not under California's alternative minimum
tax), depending on the shareholder's tax situation. In addition, all
distributions derived from interest exempt from regular federal income tax may
subject a corporate shareholder to, or increase its liability under, the federal
alternative minimum tax, because such distributions are included in the
corporation's "adjusted current earnings." Consistent with the Fund's investment
objective, the Fund may acquire such private activity bonds if, in the
investment manager's opinion, such bonds represent the most attractive
investment opportunity then available to the Fund. As of June 30, 1995, the Fund
derived 1.29% of its income from bonds, the interest on which constitutes a
preference item subject to the federal alternative minimum tax for certain
investors.
The Fund may invest in variable or floating rate demand notes ("VRDNs"), which
carry a demand feature that permits the Fund to tender the obligation back to
the issuer or a third party at par value plus accrued interest prior to
maturity, according to the terms of the obligation. These obligations bear
interest at rates that are not fixed, but that vary with changes in prevailing
market rates on predesignated dates. Frequently, VRDNs are secured by letters of
credit or other credit support arrangements provided by banks. Because of the
demand feature, the prices of VRDNs may be higher and the yields lower than they
otherwise would be for obligations without a demand feature. The Fund will limit
its purchase of municipal securities that are floating rate and variable rate
obligations to those meeting the quality standards set forth in this Prospectus.
The Fund may purchase and sell municipal securities on a "when-issued" and
"delayed delivery" basis. These transactions are subject to market fluctuation,
and the value at delivery may be more or less than the purchase price. Although
the Fund will generally purchase municipal securities on a when-issued basis
with the intention of acquiring such securities, it may sell such securities
before the settlement date if it is deemed advisable. When the Fund is the buyer
in such a transaction, it will maintain, in a segregated account with its
custodian, cash or high-grade marketable securities having an aggregate value
equal to the amount of such purchase commitments, until payment is made. To the
extent the Fund engages in "when-issued" and "delayed delivery" transactions, it
will do so for the purpose of acquiring securities for the Fund's portfolio
consistent with its investment objective and policies and not for the purpose of
investment leverage.
The Fund may also invest in municipal lease obligations, primarily through
Certificates of Participation ("COPs"). COPs, which are widely used by state and
local governments to finance the purchase of property, function much like
installment purchase agreements. A COP is created when long-term lease revenue
obligations are issued by a governmental corporation to pay for the acquisition
of property or facilities which are then leased to a municipality. The payments
made by the municipality under the lease are used to repay interest and
principal on the obligations issued to purchase the property. Once these lease
payments are completed, the municipality gains ownership of the property for a
nominal sum. This lease format is generally not subject to constitutional
limitations on the issuance of state debt, and COPs may enable a governmental
issuer to increase government liabilities beyond constitutional debt limits.
A feature which distinguishes COPs from municipal debt is that the lease which
is the subject of the transaction must contain a "nonappropriation" clause. A
nonappropriation clause provides that, while the municipality will use its best
efforts to make lease payments, the municipality may terminate the lease
annually without penalty if the municipality's appropriating body does not
allocate the necessary funds. Local administrations, when faced with
increasingly tight budgets, have more discretion to curtail payments under COPs
than they do to curtail payments on traditionally funded debt obligations. If
the government lessee does not appropriate sufficient monies to make lease
payments, the lessor or its agent is typically entitled to repossess the
property. The private sector value of the property may be more or less than the
amount the government lessee was paying.
While the risk of nonappropriation is inherent to COPs financing, the Fund
believes that this risk is mitigated by its policy of investing only in COPs
rated within the four highest rating categories of Moody's, S&P or Fitch, or in
unrated COPs believed to be of comparable quality. Criteria considered by the
rating agencies and the investment manager in assessing such risk include the
issuing municipality's credit rating, evaluation of how essential the leased
property is to the municipality and the term of the lease compared to the useful
life of the leased property. The Board reviews the COPs held in the Fund's
portfolio to assure that they constitute liquid investments based on various
factors reviewed by the investment manager and monitored by the Board. Such
factors include (a) the credit quality of such securities and the extent to
which they are rated or, if unrated, comply with existing criteria and
procedures followed to ensure that they are of quality comparable to the ratings
required for Fund investment, including an assessment of the likelihood that the
leases will not be canceled; (b) the size of the municipal securities market,
both in general and with respect to COPs; and (c) the extent to which the type
of COPs held by the Fund trade on the same basis and with the same degree of
dealer participation as other municipal bonds of comparable credit rating or
quality. While there is no limit as to the amount of assets which the Fund may
invest in COPs, as of June 30, 1995, the Fund held 29.06% of its net assets in
COPs and other municipal leases.
The Fund may purchase and hold callable municipal bonds which contain a
provision in the indenture permitting the issuer to redeem the bonds prior to
their maturity dates at a specified price which typically reflects a premium
over the bonds' original issue price. These bonds generally have call protection
(that is, a period of time during which the bonds may not be called) which
usually lasts for five to ten years, after which time such bonds may be called
away. An issuer may generally be expected to call its bonds, or a portion of
them, during periods of relatively declining interest rates, when borrowings may
be replaced at lower rates than those obtained in prior years. If the proceeds
of a bond called under such circumstances are reinvested, the result may be a
lower overall yield due to lower current interest rates. If the purchase price
of such bonds included a premium related to the appreciated value of the bonds,
some or all of that premium may not be recovered by bondholders, such as the
Fund, depending on the price at which such bonds were redeemed. Notwithstanding
the call feature, any such investment would still be subject to the policy
whereby the Fund is required to maintain a dollar weighted average portfolio
maturity of between three and ten years.
Investment Risk Considerations
While an investment in the Fund is not without risk, certain policies are
followed in managing the Fund which may help to reduce the investor's risk.
There are two categories of risks to which the Fund is subject: credit risk and
market risk. Credit risk is a function of the ability of an issuer of a
municipal security to maintain timely interest payments and to pay the principal
of a security upon maturity. It is generally reflected in a security's
underlying credit rating and its stated interest rate (normally the coupon
rate). A change in the credit risk associated with a municipal security may
cause a corresponding change in the security's price. Market risk is the risk of
price fluctuation of a municipal security caused by changes in general economic
and interest rate conditions generally affecting the market as a whole. A
municipal security's maturity length also affects its price. As with other debt
instruments, the price of the securities in which the Fund invests are likely to
decrease in times of rising interest rates. Conversely, when rates fall, the
value of the Fund's debt investments may rise. Price changes of securities held
by the Fund have a direct impact on the net asset value per share of the Fund.
Since the Fund will generally invest primarily in California Municipal
Securities, there are certain specific factors and considerations concerning
California which may affect the credit and market risk of the municipal
securities that the Fund may purchase. See "Risk Factors in California" for a
discussion of these factors.
As a non-diversified investment company, the Fund is not subject to any
statutory restriction under the 1940 Act with respect to the concentration of
its investments in the assets of one or more issuers. This concentration may
present greater risks than in the case of a diversified company. (See the SAI
for the diversification requirements the Fund intends to meet in order to
qualify as a regulated investment company under the Code.)
The Fund is subject to a number of additional investment restrictions, some of
which may be changed only with the approval of shareholders, which limit its
activities to some extent. A list of these restrictions and additional
information concerning the characteristics of municipal securities is included
in the SAI.
How Shareholders Participate in the
Results of the Fund's Activities
The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
the shareholder owns will increase. If the securities owned by the Fund decrease
in value, the value of the shareholder's shares will also decline. In this way,
shareholders participate in any change in the value of the securities owned by
the Fund. In addition to the factors which affect the value of individual
securities, as described in the preceding sections, a shareholder may anticipate
that the value of Fund shares will fluctuate with movements in the broader
equity and bond markets.
In particular, changes in interest rates will affect the value of the Fund's
portfolio and thus its share price. Increased rates of interest, which
frequently accompany higher inflation and/or a growing economy, are likely to
have a negative effect on the value of Fund shares. History reflects both
increases and decreases in the prevailing rate of interest and these may reoccur
unpredictably in the future.
Management of the Fund
The Board has the primary responsibility for the overall management of the Fund
and for electing the officers of the Trust who are responsible for administering
its day-to-day operations.
Franklin Advisers, Inc. ("Advisers" or "Manager"), serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin Resources,
Inc. ("Resources"), a publicly owned holding company, the principal shareholders
of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its various subsidiaries (the "Franklin Templeton Group"). Advisers acts
as investment manager or administrator to 36 U.S. registered investment
companies (118 separate series) with aggregate assets of over $80 billion,
approximately $49 billion of which are in the municipal securities market.
Pursuant to a management agreement, the Manager supervises and implements the
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct the Fund's business. The Manager
performs similar services for other funds and there may be times when the
actions taken with respect to the Fund's portfolio will differ from those taken
by the Manager on behalf of other funds. Neither the Manager (including its
affiliates) nor its officers, directors or employees nor the officers and
trustees of the Trust are prohibited from investing in securities held by the
Fund or other funds which are managed or administered by the Manager to the
extent such transactions comply with the Trust's Code of Ethics. Please see
"Investment Advisory and Other Services" and "General Information" in the SAI
for further information on securities transactions and a summary of the Trust's
Code of Ethics.
During the fiscal year ended June 30, 1995, management fees, before any advance
waiver, totaled 0.63% of the average monthly net assets of the Fund. Total
operating expenses, including management fees, before any advance waiver,
totaled 0.83% of the average monthly net assets of the Fund. Pursuant to an
advance agreement by Advisers to waive its fees, the Fund paid management fees
and operating expenses totaling 0.13% and 0.33%, respectively, of the average
monthly net assets of the Fund.
It is not anticipated that the Fund will incur a significant amount of brokerage
expenses because municipal securities are generally traded in principal
transactions which involve the receipt by the broker of a spread between the bid
and ask prices for the securities, and not the receipt of commissions. In the
event that the Fund does participate in transactions involving brokerage
commissions, it is the Manager's responsibility to select brokers through whom
these transactions will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more than one broker is
able to provide the best execution, the Manager will consider the furnishing of
quotations and of other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of shares of the Fund,
as factors in selecting a broker. Further information is included under "The
Trust's Policies Regarding Brokers Used on Portfolio Transactions" in the SAI.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services"),
in its capacity as transfer agent and dividend-paying agent. Investor Services
is a wholly-owned subsidiary of Resources.
Plan of Distribution
A plan of distribution has been adopted for the Fund (the "Plan") pursuant to
Rule 12b-1 under the 1940 Act. Under the Plan, the Fund may reimburse
Distributors or others for all expenses incurred by Distributors or others in
the promotion and distribution of the Fund's shares. Such expenses may include,
but are not limited to, the printing of prospectuses and reports used for sales
purposes, expenses of preparing and distributing sales literature and related
expenses, advertisements, and other distribution-related expenses, including a
prorated portion of Distributors' overhead expenses attributable to the
distribution of Fund shares, as well as any distribution or service fees paid to
securities dealers or their firms or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates. The maximum amount
which the Fund may reimburse to Distributors or others for such distribution
expenses is 0.10% per annum of its average daily net assets, payable on a
quarterly basis. All expenses of distribution in excess of 0.10% per annum will
be borne by Distributors, or others who have incurred them, without
reimbursement from the Fund. The Plan also covers any payments to or by the
Fund, Advisers, Distributors, or other parties on behalf of the Fund, Advisers
or Distributors, to the extent such payments are deemed to be for the financing
of any activity primarily intended to result in the sale of shares issued by the
Fund within the context of Rule 12b-1. The payments under the Plan are included
in the maximum operating expenses which may be borne by the Fund. For more
information, please see the SAI.
Distributions to Shareholders
There are two types of distributions which the Fund may make to its
shareholders:
1. Income dividends. The Fund receives income generally in the form of
dividends, interest and other income derived from its investments. This income,
less the expenses incurred in the Fund's operations, is its net investment
income from which income dividends may be distributed. Thus, the amount of
dividends paid per share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed capital gains from the prior fiscal year. The
distributions, when made, will generally be fully taxable to the Fund's
shreholders. The Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or adjust the timing of
these distributions for operational or other reasons.
Distribution Date
Although subject to change by the Board, without prior notice to or approval by
shareholders, the Fund's current policy is to declare income dividends daily and
pay them monthly on or about the last business day of that month. The amount of
income dividend payments by the Fund is dependent upon the amount of net income
received by the Fund from its portfolio holdings, is not guaranteed and is
subject to the discretion of the Board. THE FUND DOES NOT PAY "INTEREST" OR
GUARANTEE ANY FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
Distribution Options
Shareholders may choose to receive distributions from the Fund in any of these
ways:
1. Purchase additional shares of the Fund - Shareholders may purchase additional
shares of the Fund (without a sales charge or imposition of a contingent
deferred sales charge) by reinvesting capital gain distributions, or both
dividend and capital gain distributions. This is a convenient way to accumulate
additional shares and maintain or increase the shareholder's earnings base.
2. Purchase shares of other Franklin Templeton Funds - Shareholders may direct
their distributions to purchase the same class of shares of another Franklin
Templeton Fund (without a sales charge or imposition of a contingent deferred
sales charge). Many shareholders find this a convenient way to diversify their
investments.
3. Receive distributions in cash - Shareholders may choose to receive dividends,
or both dividend and capital gain distributions in cash. Shareholders may have
the money sent directly to them, to another person, or to a checking account.
Shareholders choosing to send the money to a checking account, should see
"Electronic Fund Transfers" below.
TO SELECT ONE OF THESE OPTIONS, COMPLETE SECTIONS 6 AND 7 OF THE SHAREHOLDER
APPLICATION INCLUDED WITH THIS PROSPECTUS OR THE SHAREHOLDER'S INVESTMENT
REPRESENTATIVE MAY BE NOTIFIED OF THE OPTION PREFERRED. IF NO OPTION IS
SELECTED, DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS WILL BE AUTOMATICALLY
REINVESTED IN THE FUND. THE DISTRIBUTION OPTION SELECTED MAY BE CHANGED AT ANY
TIME BY NOTIFYING THE FUND BY MAIL OR BY TELEPHONE. PLEASE ALLOW AT LEAST SEVEN
DAYS PRIOR TO THE REINVESTMENT DATE FOR THE FUND TO PROCESS THE NEW OPTION.
Taxation of the Fund and Its Shareholders
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For further information, see the section
entitled "Additional Information Regarding Taxation" in the SAI.
Each series of the Trust is treated as a separate entity for federal income tax
purposes. The Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code, qualified as such, and intends to continue to so
qualify. By distributing all of its income and meeting certain other
requirements relating to the sources of its income and diversification of its
assets, the Fund will not be liable for federal income or excise taxes.
The Fund intends to qualify and elect to pay exempt-interest dividends to its
shareholders. To the extent that dividends are derived from interest income from
debt obligations of California or its political subdivisions or from interest on
U.S. territorial obligations (including Puerto Rico, the U.S. Virgin Islands and
Guam) which are exempt from regular federal and California personal income tax,
they will not be subject to either federal or California personal income tax
when received by the Fund's shareholders. The pass through of exempt-interest
dividends is allowed only if the Fund meets its federal and California
requirements that at least 50% of its total assets are invested in such exempt
obligations at the end of each quarter of its fiscal year. In addition, to the
extent that exempt-interest dividends are derived from direct obligations of the
federal government, they will also be exempt from California personal income
taxes. For corporate taxpayers subject to the California franchise tax, however,
all distributions will be fully taxable.
To the extent dividends are derived from taxable income from temporary
investments (including the discount from certain stripped obligations or their
coupons or income from securities loans or other taxable transactions) or from
the excess of net short-term capital gain over net long-term capital loss or
from ordinary income derived from the sale or disposition of bonds purchased
with market discount after April 30, 1993, they are treated as ordinary income
whether the shareholder has elected to receive them in cash or in additional
shares.
From time to time, the Fund may purchase a tax-exempt obligation with market
discount, that is, for a price that is less than the principal amount of the
bond or for a price that is less than the principal amount of the bond where the
bond was issued with original issue discount and such market discount exceeds a
de minimis amount under the Code. For such obligations purchased after April 30,
1993, a portion of the gain (not to exceed the accrued portion of market
discount as of the time of sale or disposition) is treated as ordinary income
rather than capital gain. Any distribution by the Fund of such ordinary income
to its shareholders will be subject to regular income tax in the hands of Fund
shareholders. In any fiscal year, the Fund may elect not to distribute to its
shareholders its taxable ordinary income and, instead, to pay federal income or
excise taxes on this income at the Fund level.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time a shareholder has owned Fund shares and regardless of whether
such distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January, will be treated for tax purposes as if
received by the shareholder on December 31 of the calendar year in which they
are declared.
Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on the sale or
exchange of Fund shares, held for six months or less, will be treated as a
long-term capital loss to the extent of capital gain dividends received with
respect to such shares.
Since the Fund's income is derived from interest income and gain on the sale of
portfolio securities rather than dividend income, no portion of the Fund's
distributions will generally be eligible for the corporate dividends-received
deduction.
The Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid and will, promptly after the close of
each calendar year, advise them of the tax status for federal income tax
purposes of such dividends and distributions, including the portion of the
dividends on an average basis which constitutes taxable income, such as market
discount income, if any, or interest income that is a tax preference item under
the federal alternative minimum tax. Shareholders who have not held shares of
the Fund for a full calendar year may have designated as tax-exempt or as tax
preference income a percentage of income which is not equal to the actual amount
of tax-exempt or tax preference income earned during the period of their
investment in the Fund.
Exempt-interest dividends of the Fund, although exempt from regular federal
income tax in the hands of a shareholder, are includable in the tax base for
determining the extent to which a shareholder's social security or railroad
retirement benefits will be subject to federal income tax. Shareholders are
required to disclose the receipt of exempt-interest dividends on their federal
income tax returns.
Interest on indebtedness incurred (directly or indirectly) by shareholders to
purchase or carry Fund shares will not be deductible for federal income tax
purposes.
Shareholders who are not U.S. persons for purposes of federal income taxation
should consult their financial or tax advisors regarding the applicability of
U.S. withholding or other taxes on distributions received by them from the Fund
and the application of foreign tax laws to these distributions.
The foregoing description relates solely to federal income tax law and to
California personal income tax treatment to the extent indicated. Shareholders
should consult their tax advisors with respect to the applicability of other
state and local income tax laws to distributions and redemption proceeds
received from the Fund. Corporate, individual and trust shareholders should
contact their tax advisors to determine the impact of Fund dividends and capital
gain distributions under the alternative minimum tax that may be applicable to a
shareholder's particular tax situation.
How to Buy Shares of the Fund
An investor may buy shares to open a Fund account with as little as $100 and
make additional investments at any time with as little as $25. To open an
account, an investor may contact an investment representative or complete and
sign the enclosed Shareholder Application and return it to the Fund with your
check.
Purchase Price of Fund Shares
An investor may buy shares at the public offering price, unless the investor
qualifies to purchase shares at a discount or without a sales charge as
discussed below. The offering price will be calculated to two decimal places
using standard rounding criteria.
Quantity Discounts in Sales Charges
The sales charge paid when an investor buys shares may be reduced based upon the
size of the purchase, as shown in the table below.
<TABLE>
<CAPTION>
Total Sales Charge
As a Percentage of
Amount Allowed to
Net Amount Dealer as a Percentage
Size of Transaction at Offering Price Offering Price Invested of Offering Price*
<S> <C> <C> <C>
Under $100,000........................ 2.25% 2.30% 2.00%
$100,000 but less than $250,000....... 1.75% 1.78% 1.50%
$250,000 but less than $500,000....... 1.25% 1.26% 1.00%
$500,000 but less than $1,000,000..... 1.00% 1.01% 0.85%
$1,000,000 or more.................... None** None None***
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. Distributors may at times allow
the entire sales charge to the securities dealer. A securities dealer who
receives 90% or more of the sales commission may be deemed an underwriter under
the Securities Act of 1933, as amended.
**A contingent deferred sales charge of 1% may be imposed on certain redemptions
of all or a part of an investment of $1 million or more. See "How to Sell Shares
of the Fund - Contingent Deferred Sales Charge."
***Please see "General - Other Payments to Securities Dealers" below for a
discussion of payments Distributors may make to securities dealers out of its
own resources.
Rights of Accumulation. To determine if the investor may pay a reduced sales
charge, add the cost or current value, whichever is higher, of the Class I and
Class II shares in other Franklin Templeton Funds, as well as those of the
investor's spouse, children under the age of 21 and grandchildren under the age
of 21, to the amount of the current purchase. To receive the reduction, the
investor or the investment representative must notify Distributors that the
investment qualifies for a discount.
Letter of Intent. Investors may purchase shares at a reduced sales charge by
completing the Letter of Intent section of the Shareholder Application. A Letter
of Intent is a commitment by the investor to invest a specified dollar amount
during a 13 month period. The amount the investor agrees to invest determines
the sales charge paid. The investor or investment representative must inform the
Fund that the Letter of Intent is in effect each time shares are purchased.
By completing the Letter of Intent section of the Shareholder Application, the
investor acknowledges and agrees to the following:
o The investor authorizes Distributors to reserve five percent (5%) of the
amount of the total intended purchase in Fund shares registered in the
investor's name.
o The investor grants Distributors a security interest in these shares and
appoints Distributors as attorney-in-fact with full power of substitution to
redeem any or all of these reserved shares to pay any unpaid sales charge if the
investor does not fulfill the terms of the Letter of Intent.
o The Fund will include the reserved shares in the total shares owned by the
shareholder as reflected on the periodic statements.
o The shareholder receives dividend and capital gain distributions on the
reserved shares; we will pay or reinvest these distributions as directed by the
shareholder.
Although the shares may be exchanged, the shareholder may not liquidate reserved
shares until the Letter of Intent is completed or the higher sales charge is
paid.
For more information about the Letter of Intent privilege, please see the SAI or
call our Shareholder Services Department.
Group Purchases. An individual who is a member of a qualified group may purchase
Fund shares at the reduced sales charge applicable to the group as a whole. The
sales charge is based on the combined dollar value of the group members'
existing investments, plus the amount of the current purchase. For example, if
group members previously invested and still hold $80,000 of Fund shares and
invest $25,000, the sales charge will be 1.75%.
Distributors defines a qualified group as one which (i) has been in existence
for more than six months, (ii) has a purpose other than acquiring Fund shares at
a discount and (iii) satisfies uniform criteria which enables Distributors to
realize economies of scale in its costs of distributing shares.
In addition, a qualified group must have more than 10 members, and be available
to arrange for meetings between our representatives and group members. It must
also agree to include sales and other materials related to the Franklin
Templeton Funds in publications and mailings to its members at reduced or no
cost to Distributors, and arrange for payroll deduction or other bulk
transmission of investments to the Fund.
If a payroll deduction plan is selected, the investments will continue
automatically until the Fund and the shareholder's employer is notified to
discontinue further investments. Due to the varying procedures used by employers
to handle payroll deductions, there may be a delay between the time of the
payroll deduction and the time the money reaches the Fund. The purchase is
invested at the applicable offering price per share determined on the day that
the Fund receives both the check and the payroll deduction data in required
form.
Purchases at Net Asset Value
Investments of money from the following sources may be made in shares of the
Fund without paying front-end or contingent deferred sales charges:
(i) a distribution that the investor has received from a Franklin Templeton Fund
or a real estate investment trust ("REIT") sponsored or advised by Franklin
Properties, Inc., if the distribution is returned within 365 days of its payment
date. When returning the distribution, please include a written request to
reinvest the money at net asset value. The investor may reinvest Class II
distributions in either Class I or Class II shares, but Class I distributions
may only be invested in Class I shares under this privilege. For more
information, see "Distribution Options" under "Distributions to Shareholders" or
call Shareholder Services at 1-800/632-2301; or
(ii) a redemption from a mutual fund with investment objectives similar to those
of the Fund, if (a) the investment in that fund was subject to either a
front-end or contingent deferred sales charge at the time of purchase, (b) the
fund is not part of the Franklin Templeton Funds, and (c) the redemption
occurred within the past 60 days.
Investors may also reinvest the proceeds from a redemption of any of the
Franklin Templeton Funds at net asset value. To do so, the investor must (a)
have paid a sales charge on the purchase or sale of the original shares, (b)
reinvest the redemption money in the same class of shares, and (c) request the
reinvestment of the money in writing to the Fund within 365 days of the
redemption date. The investor may reinvest up to the total amount of the
redemption proceeds under this privilege. 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. While the investor will receive credit for any contingent
deferred sales charge paid on the shares redeemed, a new contingency period will
begin. Shares that were no longer subject to a contingent deferred sales charge
will be reinvested at net asset value and will not be subject to a new
contingent deferred sales charge. Shares exchanged into other Franklin Templeton
Funds are not considered "redeemed" for this privilege see "Exchange Privilege".
If redemption proceeds are immediately reinvested in a Franklin Bank Certificate
of Deposit ("CD") but the investor would like to reinvest them back into the
Franklin Templeton Funds as described above, the investor will have 365 days
from the date the CD (including any rollover) matures to do so.
If the investor's securities dealer or another financial institution reinvests
the money in the Fund at net asset value for the investor, that person or
institution may charge a fee for this service.
A 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 the investor has a loss on the redemption, the loss may be
disallowed if reinvestment is made in the same fund within a 30-day period. For
more information regarding the possible tax consequences of such a reinvestment,
please see the tax section of this Prospectus and the SAI.
Certain categories of investors also qualify to purchase shares of the Fund at
net asset value regardless of the source of the investment proceeds. If the
investor is included in one of the categories below, none of the shares
purchased will be subject to front-end or contingent deferred sales charges:
(i) companies exchanging shares or selling assets pursuant to a merger,
acquisition or exchange offer;
(ii) accounts managed by the Franklin Templeton Group;
(iii) certain unit investment trusts and unit holders of these trusts
reinvesting distributions from the trusts in the Fund;
(iv) registered securities dealers and their affiliates, for their investment
accounts only;
(v) current employees of securities dealers and their affiliates and their
family members, in accordance with the internal policies and procedures of the
employing securities dealer and affiliate;
(vi) broker-dealers who have entered into a supplemental agreement with
Distributors, or 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);
(vii) 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 ADVISOR TO DETERMINE WHETHER AND
TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS. Municipal
investors considering investment of proceeds of bond offerings into the Fund
should consult with expert counsel to determine the effect, if any, of various
payments made by the Fund or its investment manager on arbitrage rebate
calculations. If an investment by an eligible governmental authority at net
asset value is made through a securities dealer who has executed a dealer
agreement with Distributors, Distributors or one of its affiliates may make a
payment, out of its own resources, to the securities dealer in an amount not to
exceed 0.25% of the amount invested. Please contact the Franklin Templeton
Institutional Services Department for additional information;
(viii) officers, trustees, directors and full-time employees of the Franklin
Templeton Funds, or of the Franklin Templeton Group, and their family members.
Although such individuals may pay sales charges on investments in accounts
opened after the association with either Franklin Templeton Funds or Franklin
Templeton Group has ended, investments may continue in accounts opened while the
association was in place without paying sales charges; or
(ix) trust companies and bank trust departments that exercise exclusive
discretionary investment authority over funds held in a fiduciary, agency,
advisory, custodial or similar capacity and agree to invest at least $1 million
in Franklin Templeton Funds over a 13 month period. We will accept orders for
such accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with payment
by federal funds received by the close of business on the next business day
following such order.
Please see the SAI for more information.
General
The Fund continuously offers it shares through securities dealers who have an
agreement with Distributors. The Fund and Distributors may refuse any order for
the purchase of shares.
Securities laws of states in which the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required to register as securities dealers pursuant to state law.
Other Payments to Securities Dealers. Distributors will pay the following
commissions, 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. These breakpoints are reset every 12 months for
purposes of additional purchases.
Distributors or one of its affiliates may also pay up to 1% of the purchase
price to securities dealers who initiate and are responsible for purchases made
at net asset value by any of the entities described in paragraph (ix) under
"Purchases at Net Asset Value" above. Please see the SAI for the breakpoints
applicable to these purchases.
Either Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with the
sale of shares of the Franklin Templeton Funds. In some cases, this compensation
may be available only to securities dealers whose representatives have sold or
are expected to sell significant amounts of shares of the Franklin Templeton
Funds. Compensation may include financial assistance and payments made in
connection with conferences, sales or training programs for employees of the
securities dealer, seminars for the public, advertising, sales campaigns and/or
shareholder services, programs regarding one or more of the Franklin Templeton
Funds and other programs or events sponsored by securities dealers, and payment
for travel expenses of invited registered representatives and their families,
including lodging, in connection with business meetings or seminars located
within or outside the United States. Securities dealers may not use sales of the
Fund's shares to qualify for this compensation if prohibited by the laws of any
state or self-regulatory agency, such as the National Association of Securities
Dealers, Inc. None of this compensation is paid for by the Fund or its
shareholders.
For additional information about shares of the Fund, please see the SAI.
Programs and Privileges
Available to Fund Shareholders
Certain of the programs and privileges described in this section may not be
available directly from the Fund to shareholders whose shares are held, of
record, by a financial institution or in a "street name" account or networked
account through the National Securities Clearing Corporation ("NSCC") (see the
section captioned "Account Registrations" in this Prospectus).
Share Certificates
Shares from 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 the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by the shareholder, can be 2% or more of the value of
the lost, stolen or destroyed certificate. A certificate will be issued if
requested by the shareholder or by the securities dealer.
Confirmations
A confirmation statement will be sent to each shareholder quarterly to reflect
the dividends reinvested during that period and after each other transaction
which affects the shareholder's account. This statement will also show the total
number of shares owned by the shareholder, including the number of shares in
"plan balance" for the account of the shareholder.
Automatic Investment Plan
The Automatic Investment Plan offers a convenient way to invest in the Fund.
Under the plan, an investor can arrange to have money transferred automatically
from their checking account to the Fund each month to purchase additional
shares. Investors interested in this program should refer to the Automatic
Investment Plan Application at the back of this Prospectus for the requirements
of the program or contact their investment representative. Of course, the market
value of the Fund's shares may fluctuate and a systematic investment plan such
as this will not assure a profit or protect against a loss. An investor may
terminate the program at any time by notifying Investor Services by mail or by
phone.
Systematic Withdrawal Plan
The Systematic Withdrawal Plan allows shareholders to receive regular payments
from their account on a monthly, quarterly, semiannual or annual basis. To
establish a Systematic Withdrawal Plan, the value of the investor's account must
be at least $5,000 and the minimum payment amount for each withdrawal must be at
least $50. Please keep in mind that $50 is merely the minimum amount and is not
a recommended amount.
Shareholders who would like to establish a Systematic Withdrawal Plan should
complete the Systematic Withdrawal Plan section of the Shareholder Application
included with this Prospectus and indicate how they would like to receive their
payments. Shareholders may choose to receive their payments in any of the
following ways:
1. Purchase shares of other Franklin Templeton Funds - The shareholder may
direct payments to purchase the same class of shares of another Franklin
Templeton Fund.
2. Receive payments in cash - The shareholder may choose to receive payments in
cash. Payments may be sent directly to the shareholder, to another person, or to
a checking account. To have the money sent to a checking account, please see
"Electronic Fund Transfers" below.
There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once a plan is established, any distributions paid by the Fund
will be automatically reinvested in the shareholder's account. Payments under
the plan will be made from the redemption of an equivalent amount of shares in
the shareholder's account, generally on the first business day of the month in
which a payment is scheduled. The shareholder will generally receive payments
within three to five days after the shares are redeemed.
Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the
shares in the shareholder's account if payments exceed distributions received
from the Fund. This is especially likely to occur if there is a market decline.
If a withdrawal amount exceeds the value of the shareholder's account, the
account will be closed and the remaining balance in the account will be sent to
the shareholder. Redemptions under a Systematic Withdrawal Plan are considered 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.
While a Systematic Withdrawal Plan is in effect, shares must be held either in
plan balance or, where share certificates are outstanding, deposited with the
Fund. A shareholder should ordinarily not make additional investments in the
Fund of less than $5,000 or three times the amount of annual withdrawals under
the plan because of the sales charge on additional purchases. Shares redeemed
under the plan may also be subject to a contingent deferred sales charge. Please
see "Contingent Deferred Sales Charge" under "How to Sell Shares of the Fund."
Shareholders may terminate a Systematic Withdrawal Plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying Investor
Services in writing at least seven business days prior to the end of the month
preceding a scheduled payment. The Fund may also terminate a Systematic
Withdrawal Plan by notifying the shareholder in writing and will automatically
terminate a Systematic Withdrawal Plan if all shares in the shareholder's
account are withdrawn or if the Fund receives notification of the shareholder's
death or incapacity.
Electronic Fund Transfers
The shareholder may choose to have distributions from the Fund or payments under
a Systematic Withdrawal Plan sent directly to a checking account. If the
checking account is maintained at a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. Shareholders who choose this option should allow at least fifteen days
for initial processing. Any payments made during that time will be sent to the
address of record on the shareholder's account.
Institutional Accounts
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
the Franklin Templeton Institutional Services Department at 1-800/321-8563.
Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and 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, Fund 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. Before
making an exchange, investors should review the prospectuses of the fund they
wish to exchange from and the fund they wish to exchange into for all specific
requirements or limitations on exercising the exchange privilege, for example,
minimum holding periods or applicable sales charges. No exchanges between
different classes of shares are allowed and, therefore, shares of the Fund may
not be exchanged for Class II shares of other Franklin Templeton Funds.
Shareholders of a Class II Franklin Templeton Fund may, however, elect to direct
their dividend and capital gain distributions to the Fund or another Class I
Franklin Templeton Fund. Shareholders may choose to redeem shares of the Fund
and purchase Class II shares of other Franklin Templeton Funds, but such
purchase will be subject to that Fund's Class II front-end and contingent
deferred sales charges for the contingency period of 18 months.
Exchanges may be made in any of the following ways:
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.
By Telephone
Shareholders, or their investment representative of record, if any, may exchange
shares of the Fund by calling Investor Services at 1-800/632-2301 or the
automated TeleFACTS(R) system (day or night) at 1-800/247-1753. If the
shareholder does not wish this privilege extended to a particular account, the
Fund or Investor Services should be notified.
The telephone exchange privilege allows a shareholder to exchange shares from
the Fund into Class I shares of an identically registered account in one of the
other available Franklin Templeton Funds. The telephone exchange privilege is
available only for uncertificated shares or those which have previously been
deposited in the shareholder's account. The Fund and Investor Services will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. Please refer to "Telephone Transactions - Verification
Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, shareholders should follow the other
exchange procedures discussed in this section, including the procedures for
processing exchanges through securities dealers.
Exchanges Through Securities Dealers
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "By Telephone" above. A
dealer-ordered exchange will be effective only for uncertificated shares on
deposit in the shareholder's account or for which certificates have previously
been deposited. A securities dealer may charge a fee for handling an exchange.
Additional Information Regarding Exchanges
If the account has shares subject to a contingent deferred sales charge, the
shares will be exchanged into the new account on a "first-in, first-out" basis.
The contingency period of 12 months during which a contingent deferred sales
charge may be assessed will be tolled (or stopped) for the period such shares
are exchanged into and held in a Franklin or Templeton money market fund. See
also "How to Sell Shares of the Fund - Contingent Deferred Sales Charge."
Exchanges are made on the basis of the net asset values of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the investment on
which no sales charge was paid was transferred in from a fund on which the
investor paid a sales charge. Exchanges of shares of the Fund which were
purchased with a lower sales charge to a fund which has a higher sales charge
will be charged the difference, unless the shares were held in the Fund for at
least six months prior to executing the exchange. When an investor requests the
exchange of the total value of the Fund account, accrued but unpaid income
dividends and capital gain distributions will be reinvested in the Fund at the
net asset value on the date of the exchange, and then the entire share balance
will be exchanged into the new fund in accordance with the procedures set forth
above. Because the exchange is considered a redemption and purchase of shares,
the shareholder may realize a gain or loss for federal income tax purposes.
Backup withholding and information reporting may also apply. Information
regarding the possible tax consequences of such an exchange is included in the
tax section in this Prospectus and in the SAI.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing municipal
securities, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objective exist immediately. Subsequently,
this money will be withdrawn from such short-term municipal securities and
invested in portfolio securities in as orderly a manner as is possible when
attractive investment opportunities arise.
The exchange privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
Timing Accounts
"Timing Accounts" are not permitted to purchase shares of the Fund or to
exchange into the Fund. This policy does not affect any other types of investor.
Timing Accounts generally include market timing or allocation services; accounts
administered as to redeem or purchase shares based upon certain predetermined
market indicators; or any person whose transactions seem to follow a timing
pattern.
How to Sell Shares of the Fund
A shareholder may at any time liquidate shares owned and receive from the Fund
the value of the shares. Shares may be redeemed in any of the following ways:
By Mail
Send a written request signed by all registered owners, to Investor Services, at
the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from the
Fund the value of the shares 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
the scheduled closing of the New York Stock Exchange (the "Exchange") which is
generally 1:00 p.m. Pacific time) each day that the Exchange is open for
business will receive the price calculated on the following business day.
Shareholders are requested to provide a telephone number(s) where they may be
reached during business hours, or in the evening if preferred. Investor
Services' ability to contact a shareholder promptly when necessary will speed
the processing of the redemption.
TO BE CONSIDERED IN PROPER FORM, SIGNATURE(S) MUST BE GUARANTEED IF THE
REDEMPTION REQUEST INVOLVES ANY OF THE FOLLOWING:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage
firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated or
may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.
Signature(s) must be guaranteed by an "eligible guarantor institution" as
defined under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered shareholders exactly as the account is
registered, with the signature(s) guaranteed as referenced above. Shareholders
are advised, for their own protection, to send the share certificate and
assignment form in separate envelopes if they are being mailed in for
redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officer(s) of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustee(s) and
(2) a copy of the pertinent pages of the trust document listing the trustee(s)
or a Certification for Trust if the trustee(s) are not listed on the account
registration.
Custodial - Signature guaranteed letter of instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form.
By Telephone
Shareholders who complete the Franklin Templeton Telephone Redemption
Authorization Agreement (the "Agreement"), included with this Prospectus, may
redeem shares of the Fund by telephone. Information may also be obtained by
writing to the Fund or Investor Services at the address shown on the cover or by
calling 1-800/632-2301. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions given by telephone are genuine.
Shareholders, however, bear the risk of loss in certain cases as described under
"Telephone Transactions - Verification Procedures."
For shareholder accounts with the completed Agreement on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before the scheduled close of
the Exchange (generally 1:00 p.m. Pacific time) on any business day will be
processed that same day. The redemption check will be sent within seven days,
made payable to all the registered owners on the account, and will be sent only
to the address of record. Redemption requests by telephone will not be accepted
within 30 days following an address change by telephone. In that case, a
shareholder should follow the other redemption procedures set forth in this
Prospectus. Institutional accounts (certain corporations, bank trust
departments, and government entities which qualify to purchase shares at net
asset value pursuant to the terms of this Prospectus) which wish to execute
redemptions in excess of $50,000 must complete an Institutional Telephone
Privileges Agreement which is available from the Franklin Templeton
Institutional Services Department by telephoning 1-800/321-8563.
Redeeming Shares Through Securities Dealers
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if the
shareholder redeems shares through a dealer, the redemption price will be the
net asset value next calculated after the shareholder's dealer receives the
order which is promptly transmitted to the Fund, rather than on the day the Fund
receives the shareholder's written request in proper form. The documents
described under "Redemptions by Mail" above, as well as a signed letter of
instruction, are required regardless of whether the shareholder redeems shares
directly or submits such shares to a securities dealer for repurchase. A
shareholder's letter should reference the Fund, the account number, the fact
that the repurchase was ordered by a dealer and the dealer's name. Details of
the dealer-ordered trade, such as trade date, confirmation number, and the
amount of shares or dollars, will help speed processing of the redemption. The
seven-day period within which the proceeds of the shareholder's redemption will
be sent will begin when the Fund receives all documents required to complete
("settle") the repurchase in proper form. The redemption proceeds will not earn
dividends or interest during the time between receipt of the dealer's repurchase
order and the date the redemption is processed upon receipt of all documents
necessary to settle the repurchase. Thus, it is in a shareholder's best interest
to have the required documentation completed and forwarded to the Fund as soon
as possible. The shareholder's dealer may charge a fee for handling the order.
The SAI contains more information on the redemption of shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers, all or a portion of
investments of $1 million or more redeemed within the contingency period of 12
months of the calendar month of such investment will be assessed a contingent
deferred sales charge, unless one of the exceptions described below applies. The
charge is 1% of the lesser of the value of the shares redeemed (exclusive of
reinvested dividends and capital gain distributions) or the net asset value at
the time of purchase of such shares, and is retained by Distributors. The
contingent deferred sales charge is waived in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation on shares held less than the contingency
period; (ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than the contingency period.
Shares subject to a contingent deferred sales charge will then be redeemed on a
"first in, first out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
The contingent deferred sales charge is waived as applicable for: specified net
asset value purchases discussed under "How To Buy Shares of The Fund - Purchases
at Net Asset Value"; exchanges; any account fees; redemptions through a
Systematic Withdrawal Plan set up for shares prior to February 1, 1995, and for
Systematic Withdrawal Plans set up thereafter, redemptions of up to 1% monthly
of an account's net asset value (3% quarterly, 6% semiannually or 12% annually);
redemptions initiated by the Fund due to a shareholder's account falling below
the minimum specified account size; and redemptions following the death of the
shareholder or the beneficial owner.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Requests for redemptions of a specified dollar amount, unless otherwise
specified, will result in additional shares being redeemed to cover any
applicable contingent deferred sales charge while requests for redemption of a
specific number of shares will result in the applicable contingent deferred
sales charge being deducted from the total dollar amount redeemed.
Additional Information Regarding Redemptions
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption. In addition, the right of redemption may be suspended or
the date of payment postponed if the Exchange is closed (other than customary
closing) or upon the determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it, by order, for the
protection of shareholders. Of course, the amount received may be more or less
than the amount invested by the shareholder, depending on fluctuations in the
market value of securities owned by the Fund.
Other Information
Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Fund nor its affiliates will be liable for any loss to the shareholder caused by
the shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the securities dealer may
call Franklin's Dealer Services Department.
Telephone Transactions
Shareholders of the Fund and their investment representative of record, if any,
may be able to execute various transactions, including the following, by calling
Investor Services at 1-800/632-2301.
Shareholders may: (i) effect a change in address, (ii) change a dividend option,
(iii) transfer Fund shares in one account to another identically registered
account in the Fund, (iv) request the issuance of certificates, to be sent to
the address of record only, and (v) exchange Fund shares as described in this
Prospectus by telephone. In addition, shareholders who complete and file an
Agreement as described under "How to Sell Shares of the Fund - Redemptions by
Telephone" will be able to redeem shares of the Fund.
Verification Procedures
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to the shareholder caused by an unauthorized transaction.
The Fund and Investor Services may be liable for any losses due to unauthorized
or fraudulent instructions in the event such reasonable procedures are not
followed. Shareholders are, of course, under no obligation to apply for or
accept telephone transaction privileges. In any instance where the Fund or
Investor Services is not reasonably satisfied that instructions received by
telephone are genuine, the requested transaction will not be executed, and
neither the Fund nor Investor Services will be liable for any losses which may
occur because of a delay in implementing a transaction.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privilege will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
investment representative for assistance, or to send written instructions to the
Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.
The telephone transaction privilege may be modified or discontinued by the Fund
at any time upon 60 days' written notice to shareholders.
Valuation of Fund Shares
The net asset value per share of the Fund is determined as of the scheduled
close of the Exchange (generally 1:00 p.m. Pacific time) each day that the
Exchange is open for trading. Many newspapers carry daily quotations of the
prior trading day's closing "bid" (net asset value) and "ask" (offering price,
which includes the maximum front-end sales charge of the Fund).
The net asset value per share of the Fund is determined by deducting the
aggregate gross value of all liabilities from the aggregate gross value of all
assets, and then dividing the difference by the number of shares outstanding.
Assets in the Fund's portfolio are valued as described in the SAI.
How to Get Information
Regarding an Investment in the Fund
Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.
From a touch-tone phone, Franklin and Templeton shareholders may access
TeleFACTS(R) (Franklin Templeton's automated customer servicing system).
By calling the TeleFACTS system (day or night) at 1-800/247-1753, shareholders
may obtain account information, current price and, if available, yield or other
performance information specific to the Fund or any Franklin Templeton Fund. In
addition, Franklin Class I shareholders may process an exchange, within the same
class, into an identically registered Franklin account; and request duplicate
confirmation or year-end statements and deposit slips.
Fund information may be accessed by entering Fund Code 152 followed by the #
sign. The system's automated operator will prompt the caller with easy to follow
step-by-step instructions from the main menu. Other features may be added in the
future.
To assist shareholders and securities dealers wishing to speak directly with a
representative, the following list of the various Franklin departments,
telephone numbers and hours of operation is provided. The same numbers may be
used when calling from a rotary phone:
Hours of Operation (Pacific Time)
Department Name Telephone No. (Monday through Friday)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
Performance
Advertisements, sales literature and communications to shareholders may contain
several measures of the Fund's performance, including current yield, tax
equivalent yield, various expressions of total return, current distribution rate
and taxable equivalent distribution rate. They may occasionally cite statistics
to reflect its volatility or risk.
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five- and
ten-year periods, or portion thereof, to the extent applicable, through the end
of the most recent calendar quarter, assuming reinvestment of all distributions.
The Fund may also furnish total return quotations for other periods or based on
investments at various sales charge levels or at net asset value. For such
purposes, total return equals the total of all income and capital gain paid to
shareholders, assuming reinvestment of all distributions, plus (or minus) the
change in the value of the original investment, expressed as a percentage of the
purchase price.
Current yield reflects the income per share earned by the Fund's portfolio
investments; it is calculated by dividing the Fund's net investment income per
share during a recent 30-day period by the maximum public offering price on the
last day of that period and annualizing the result. Tax equivalent yield
demonstrates the yield from a taxable investment necessary to produce an
after-tax yield equivalent to that of a fund which invests in tax-exempt
obligations. It is computed by dividing the tax-exempt portion of a fund's yield
(calculated as indicated) by one minus a stated income tax rate and adding the
product to the taxable portion (if any) of the fund's yield.
Current yield and tax equivalent yield, which are calculated according to a
formula prescribed by the SEC (see the SAI), are not indicative of the dividends
or distributions which were or will be paid to the Fund's shareholders.
Dividends or distributions paid to shareholders are reflected in the current
distribution rate or taxable equivalent distribution rate, which may be quoted
to shareholders. The current distribution rate is computed by dividing the total
amount of dividends per share paid by the Fund during the past 12 months by a
current maximum offering price. A taxable equivalent distribution rate
demonstrates the taxable distribution rate necessary to produce an after tax
distribution rate equivalent to the Fund's distribution rate (calculated as
indicated above). Under certain circumstances, such as when there has been a
change in the amount of dividend payout or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid during the
period such policies were in effect, rather than using the dividends during the
past 12 months. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as short-term capital gain, and is
calculated over a different period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against Fund income and will assume the payment of the maximum
sales charge on the purchase of shares. When there has been a change in the
sales charge structure, the historical performance figures will be restated to
reflect the new rate. The investment results of the Fund, like all other
investment companies, will fluctuate over time; thus, performance figures should
not be considered to represent what an investment may earn in the future or what
the Fund's yield, tax equivalent yield, distribution rate, taxable equivalent
distribution rate or total return may be in any future period.
General Information
Reports to Shareholders
The Fund's fiscal year ends June 30. Annual Reports containing audited financial
statements of the Trust, including the auditors' report, and Semi-Annual Reports
containing unaudited financial statements are automatically sent to
shareholders. To reduce the volume of mail sent to each household as well as to
reduce Fund expenses, Investor Services will attempt to identify related
shareholders within a household, and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to the Trust at
the telephone number or address set forth on the cover page of this Prospectus.
Additional information on Fund performance is included in the Fund's Annual
Report to Shareholders and the SAI.
Organization and Voting Rights
The Trust was organized as a Massachusetts business trust on July 18, 1985. The
Agreement and Declaration of Trust permits the trustees to issue an unlimited
number of full and fractional shares of beneficial interest without par value,
which may be issued in any number of series and classes. Shares issued will be
fully paid and non-assessable and will have no preemptive, conversion, or
sinking rights. Shares of each series have equal and exclusive rights as to
dividends and distributions as declared by such series and the net assets of
such series upon liquidation or dissolution. Additional series or classes may be
added in the future by the Board.
Shares of each series have equal rights as to voting and vote separately as to
issues affecting that series, or the Trust, unless otherwise permitted by the
1940 Act. Voting rights are noncumulative, so that in any election of trustees
the holders of more than 50% of the shares of the Trust voting can elect all of
the trustees, if they choose to do so, and in such event the holders of the
remaining shares voting will not be able to elect any person or persons to the
Board. The Trust does not intend to hold annual shareholders' meetings. The
Trust may, however, hold a special shareholders' meeting of a series for such
purposes as changing fundamental investment restrictions for the series,
approving a new management agreement or any other matters which are required to
be acted on by shareholders under the 1940 Act. A meeting may also be called by
the trustees in their discretion or by shareholders holding at least ten percent
of the outstanding shares of the Trust. Shareholders will receive assistance in
communicating with other shareholders in connection with the election or removal
of trustees as provided in Section 16(c) of the 1940 Act.
The Board may from time to time issue other funds of the Trust, the assets and
liabilities of which will likewise be separate and distinct from any other fund.
Redemptions by the Fund
The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $50, but only where the value
of such account has been reduced by the shareholder's prior voluntary redemption
of shares and has been inactive (except for the reinvestment of distributions)
for a period of at least six months, provided advance notice is given to the
shareholder.
More information is included in the SAI.
Account Registrations
An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, a shareholder may transfer an account in the Fund carried
in "street" or "nominee" name by the shareholder's securities dealer to a
comparably registered Fund account maintained by another securities dealer. Both
the delivering and receiving securities dealers must have executed dealer
agreements on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not process the
transfer and will so inform the shareholder's delivering securities dealer. To
effect the transfer, a shareholder should instruct the securities dealer to
transfer the account to a receiving securities dealer and sign any documents
required by the securities dealer(s) to evidence consent to the transfer. Under
current procedures, the account transfer may be processed by the delivering
securities dealer and the Fund after the Fund receives authorization in proper
form from the shareholder's delivering securities dealer. Account transfers may
be effected electronically through the services of the NSCC.
The Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of record on an
investor's account, the investor will be deemed to have authorized the use of
electronic instructions on the account, including, without limitation, those
initiated through the services of the NSCC, to have adopted as instruction and
signature any such electronic instructions received by the Fund and the
Shareholder Services Agent, and to have authorized them to execute the
instructions without further inquiry. At the present time, such services which
are available, include the NSCC's "Networking," "Fund/SERV," and "ACATS"
systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment, or by calling Franklin's Fund
Information Department.
Important Notice Regarding
Taxpayer IRS Certifications
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the Internal Revenue Service ("IRS") any taxable dividend, capital
gain distribution, or other reportable payment (including share redemption
proceeds) and withhold 31% of any such payments made to individuals and other
non-exempt shareholders who have not provided a correct taxpayer identification
number ("TIN") and made certain required certifications that appear in the
Shareholder Application. A shareholder may also be subject to backup withholding
if the IRS or a securities dealer notifies the Fund that the number furnished by
the shareholder is incorrect or that the shareholder is subject to backup
withholding for previous under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by the
shareholder is, in fact, incorrect or upon the failure of a shareholder who has
completed an "awaiting TIN" certification to provide the Fund with a certified
TIN within 60 days after opening the account.
Portfolio Operations
The team responsible for the day-to-day management of the Fund's portfolio is:
Bernard Schroer and Andrew Jennings, Sr. since the Fund's inception and Thomas
Kenny since August 1994.
Thomas J. Kenny
Senior Vice President
Franklin Advisers, Inc.
Mr. Kenny is Senior Vice President of the investment manager and is director of
Franklin's municipal bond department. He joined Franklin in 1986. He received a
Bachelor of Arts degree in Business and Economics from the University of
California at Santa Barbara and Master of Science degree in Finance from Golden
Gate University. He is a member of several municipal securities industry-related
committees and associations.
Bernard Schroer
Vice President
Franklin Advisers, Inc.
Mr. Schroer was the manager of trading at Kidder Peabody and Company, Inc. from
1974 to 1984. He has a degree in Finance from Santa Clara University and is
currently a member of various municipal securities industry related committees
and associations. He joined Advisers in 1987.
Andrew Jennings, Sr.
Vice President
Franklin Advisers, Inc.
Mr. Jennings attended Villanova University in Philadelphia and has been in the
securities industry for over 33 years. From 1985 to 1990, Mr. Jennings was First
Vice President and Manager of the Municipal Institutional Bond Department at
Dean Witter Reynolds, Inc. He is a member of several municipal securities
industry related committees and associations.
Risk Factors in California
The following information as to certain California risk factors is given to
investors in view of the Fund's policy of investing primarily in California
state and municipal issuers. The information is based primarily upon information
derived from public documents relating to securities offerings of California
state and municipal issuers, from independent municipal credit reports and
historically reliable sources, but has not been independently verified by the
Fund.
California constitutional and other laws affect the ability of California state
and municipal issuers to obtain sufficient revenue to pay their bond
obligations. In 1978, California voters approved an amendment to the California
Constitution known as Proposition 13. Proposition 13 limits ad valorem taxes on
real property and restricts the ability of taxing entities to increase real
property taxes. Legislation passed subsequent to Proposition 13, however,
provided for the redistribution of California's General Fund surplus to local
agencies, the reallocation of revenues to local agencies and the assumption of
certain local obligations by the state so as to help California municipal
issuers to raise revenue to pay their bond obligations. It is unknown, however,
whether additional revenue redistribution legislation will be enacted in the
future and whether, if enacted, such legislation would provide sufficient
revenue for such California issuers to pay their obligations. The state is also
subject to another constitutional amendment, Article XIIIB, which may have an
adverse impact on California state and municipal issuers. Article XIIIB
restricts the state from spending certain appropriations in excess of an
appropriations limit imposed for each state and local government entity. If
revenues exceed such appropriations limit, such revenues must be returned either
as revisions in the tax rates or fee schedules.
The past four years have challenged California's resiliency, as cyclical and
structural problems have been addressed. The national recession severely
affected California and its effects have lingered. The magnitude of California's
military-industrial complex and effects of the recession has resulted in a loss
of more than 700,000 jobs. Of the approximate 700,000 jobs lost, it is estimated
240,000 have been restored. Base closures have likewise impacted state and local
economies. California's social welfare and entitlement programs have strained
finances as caseload growth has exceeded resource availability. The high
priority of public safety has resulted in the enactment of strong crime
legislation that is both capital and labor intensive. California has been
affected by natural catastrophes including earthquakes, wildfires, floods and
droughts.
By the fall of 1993 it had become apparent the California economy had reached a
trough and recovery was underway. During 1994 the state's economy paralleled the
broad-based expansion occurring on the national level. California's economy
continued to gain momentum through 1994 as revenue collections exceeded budget
projections. The state's unemployment rate opened 1994 at 10.1 percent and
declined to 7.7 percent at calendar year-end. California's unemployment rate
rose slightly in January 1995 to 8.2 percent, perhaps reflecting the effect of
seven rate increases over the past year. The number of jobless in January 1995
was approximately 1.3 million, reflecting a decrease of 300,000 from the prior
year.
In July of 1994, both S&P and Moody's lowered the general obligation bond
ratings of the state of California from A+ to A and Aa to A1, respectively.
These revisions reflected the state's heavy reliance on the short-term note
market to finance its cash imbalance and the likelihood that this exposure will
persist for at least another two years. For more information on these ratings
revisions and the state's current budget, please refer to the Fund's SAI.
On December 6, 1994, Orange County, California (the "County"), together with its
pooled investment funds (the "Orange County Funds" or "Funds") filed for
protection under Chapter 9 of the federal Bankruptcy Code, after reports that
the Orange County Funds had suffered significant market losses in their
investments, causing a liquidity crisis for the Orange County Funds and the
County. More than 180 other public entities, most of which, but not all, are
located in the County, were also depositors in the Orange County Funds. As of
mid-January, 1995, following a restructuring of most of the Orange County Funds'
assets to increase their liquidity and reduce their exposure to interest rate
increases, the County estimated the Orange County Funds' loss at about $1.69
billion, or 22% of their initial deposits of approximately $7.5 billion.
Following the bankruptcy filing many of the entities which deposited moneys in
the Orange County Funds, including the County, faced cash flow difficulties
because of the bankruptcy filing and would have been required to reduce programs
or capital projects. On May 2, 1995, the bankruptcy court approved a settlement
between the County and the participants in the Orange County Funds which
provides for participants to receive 100% of their investment balances. The
settlement provides an initial cash distribution of 77% of their aggregate
investment balance followed by a combination of recovery notes and other claims.
The initial 77% distribution was released on May 19, 1995, which will greatly
reduce the cash flow difficulties faced by depositors.
The state has no existing obligation with respect to any outstanding obligations
or securities of the County or any of the other participating entities. However,
in the event the County is unable to maintain county administered state programs
because of insufficient resources, it may be necessary for the state to
intervene, but the state cannot presently predict what, if any, action may
occur. At this time, it appears that school districts may have collectively lost
up to $230 million from the amounts they had on deposit in the Orange County
Funds. Under existing legal precedent, the state is obligated to intervene when
a school district's fiscal problems would otherwise deny its students basic
educational quality. The state is not presently able to predict whether any
school districts will face insolvency because of their participation in the
Funds, and if so, the potential amount or form of aid which the state may have
to provide. The Governor has called a special session of the Legislature which
is expected to consider various responses to the Orange County situation.
