As filed with the Securities and Exchange Commission on October 30, 1997.
File Nos.
2-99112
811-4356
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 15 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 15 (X)
FRANKLIN CALIFORNIA TAX-FREE TRUST
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404 (Address of
Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (650) 312-2000
HARMON E. BURNS, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[x] on November 1, 1997 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph(a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered:
Shares of Beneficial Interest of:
Franklin California Insured Tax-Free Income Fund - Class I
Franklin California Insured Tax-Free Income Fund - Class II
Franklin California Intermediate-Term Tax-Free Income Fund
Franklin California Tax-Exempt Money Fund
FRANKLIN CALIFORNIA TAX-FREE TRUST
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN THE PROSPECTUS
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial "Financial Highlights"; "How does the Fund
Information Measure Performance?"
4. General Description "How is the Trust Organized?"; "How does the
of Registrant Fund Invest its Assets?"; "What are the
Fund's Potential Risks?"
5. Management of the "Who Manages the Fund?"
Fund
5A. Management's Discussion Contained in Registrant's Annual Report to
of Fund Performance Shareholders
6. Capital Stock and Other "How is the Trust Organized?"; "Services to
Securities Help You Manage Your Account"; "What
Distributions Might I Receive from the
Fund?"; "How Taxation Affects the Fund and
its Shareholders"; "What If I Have Questions
About My Account?"
7. Purchase of "How Do I Buy Shares?"; "May I Exchange
Securities Being Shares for Shares of Another Fund?";
Offered "Transaction Procedures and Special
Requirements"; "Services to Help You Manage
Your Account"; "Who Manages the Fund?";
"Useful Terms and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares of Another
Fund?"; "How Do I Sell Shares?";
"Transaction Procedures and Special
Requirements"; "Services to Help You Manage
Your Account"; "Useful Terms and
Definitions"
9. Pending Legal Proceedings Not Applicable
FRANKLIN CALIFORNIA TAX-FREE TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in the
STATEMENT OF ADDITIONAL INFORMATION
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and Not Applicable
History
13. Investment Objectives and "How does the Fund Invest its Assets?";
Policies "Investment Restrictions"
14. Management of the Trust "Officers and Trustees"; "Investment
Management and Other Services";
15. Control Persons and "Officers and Trustees"; "Investment
Principal Holders Management and Other Services";
of Securities "Miscellaneous Information"
16. Investment Advisory and "Investment Management and Other Services";
Other Services "The Fund's Underwriter"
17. Brokerage Allocation and "How does the Fund Buy Securities for its
Other Practices Portfolio?"
18. Capital Stock and Other Not Applicable
Services
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange Shares?";
Pricing of Securities "How are Fund Shares Valued?"; "Financial
Being Offered Statements"
20. Tax Status "Additional Information on Distributions and
Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of "How does the Fund Measure Performance?"
Performance Data
23. Financial Statements "Financial Statements"
PROSPECTUS & APPLICATION
FRANKLIN CALIFORNIA
TAX-FREE TRUST
NOVEMBER 1, 1997
Franklin California Insured Tax-Free Income Fund
Franklin California Intermediate-Term Tax-Free Income Fund
Franklin California Tax-Exempt Money Fund
INVESTMENT STRATEGY
TAX-FREE INCOME
This prospectus describes the three series of Franklin California Tax-Free Trust
(the "Trust"). Each series may individually or together be referred to as the
"Fund(s)." This prospectus contains information you should know before investing
in the Fund. Please keep it for future reference.
The Fund has a Statement of Additional Information ("SAI"), dated November 1,
1997, which may be amended from time to time. It includes more information about
the Fund's procedures and policies. It has been filed with the SEC and is
incorporated by reference into this prospectus. For a free copy or a larger
print version of this prospectus, call 1-800/DIAL BEN.
An investment in the Money Fund is neither insured nor guaranteed by the U.S.
government. There can be no assurance that the Fund will be able to maintain a
stable Net Asset Value of $1 per share.
The Money Fund may invest a significant percentage of its assets in the
securities of a single issuer. Thus, an investment in the Money Fund may involve
more risk than an investment in other types of money market funds.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
FRANKLIN CALIFORNIA TAX-FREE TRUST
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY 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 DISTRIBUTORS.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary ............................................ 2
Financial Highlights ....................................... 4
How does the Fund Invest its Assets? ....................... 7
What are the Fund's Potential Risks? ....................... 15
Who Manages the Fund? ...................................... 18
How does the Fund Measure Performance? ..................... 21
How Taxation Affects the Fund and its Shareholders ......... 22
How is the Trust Organized? ................................ 25
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ....................................... 26
May I Exchange Shares for Shares of Another Fund?........... 33
How Do I Sell Shares? ...................................... 36
What Distributions Might I Receive from the Fund? .......... 40
Transaction Procedures and Special Requirements ............ 42
Services to Help You Manage Your Account ................... 46
What If I Have Questions About My Account?.................. 49
GLOSSARY
Useful Terms and Definitions 50
FRANKLIN
CALIFORNIA
TAX-FREE
TRUST
November 1, 1997
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our glossary section
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of each class for the fiscal year
ended June 30, 1997. The Fund's actual expenses may vary.
<TABLE>
<CAPTION>
INSURED FUND - INSURED FUND - INTERMEDIATE- MONEY
CLASS I CLASS II TERM FUND FUND
A. Shareholder Transaction Expenses+
Maximum Sales Charge (as a
<S> <C> <C> <C> <C>
percentage of Offering Price) 4.25% 1.99% 2.25% None
Paid at time of purchase 4.25%++ 1.00%+++ 2.25%++ None
Paid at redemption++++ None 0.99% None None
Exchange Fee (per transaction) None None None $5.00*
B. Annual Fund Operating Expenses
(as a percentage of average net assets) Management Fees 0.47% 0.47% 0.62%** 0.49%
Rule 12b-1 Fees 0.09%*** 0.65%*** 0.09%*** None
Other Expenses 0.04% 0.04% 0.09% 0.11%
------ ----- ----- -----
Total Fund Operating Expenses 0.60% 1.16% 0.80%** 0.60%
====== ====== ======= =====
</TABLE>
C. Example
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the Fund.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
INSURED FUND - CLASS I $48**** $61 $75 $114
INSURED FUND - CLASS II $32 $46 $73 $149
INTERMEDIATE-TERM FUND $30**** $47 $66 $119
MONEY FUND $ 6 $19 $33 $ 75
</TABLE>
For the same Class II investment in the Insured Fund, you would pay projected
expenses of $22 if you did not sell your shares at the end of the first year.
Your projected expenses for the remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The Fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each class and are not
directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service. ++There is no
front-end sales charge if you invest $1 million or more in Class I shares.
+++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? - Deciding Which Class to Buy." ++++A Contingent
Deferred Sales Charge may apply to any Class II purchase if you sell the shares
within 18 months and to Class I purchases of $1 million or more if you sell the
shares within one year. The charge is 1% of the value of the shares sold or the
Net Asset Value at the time of purchase, whichever is less. The number in the
table shows the charge as a percentage of Offering Price. While the percentage
is different depending on whether the charge is shown based on the Net Asset
Value or the Offering Price, the dollar amount paid by you would be the same.
See "How Do I Sell Shares? Contingent Deferred Sales Charge" for details. *$5.00
fee is only for Market Timers. We process all other exchanges without a fee.
**For the period shown, Advisers had agreed in advance to limit its management
fees. With this reduction, management fees were 0.29% and total operating
expenses were 0.47%. ***These fees may not exceed 0.10% for the
Intermediate-Term Fund and Class I shares of the Insured Fund. For Class II
shares of the Insured Fund, these fees may not exceed 0.65%. 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 charge
permitted under the NASD's rules. ****Assumes a Contingent Deferred Sales Charge
will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent five years appears in the
financial statements in the Trust's Annual Report to Shareholders for the fiscal
year ended June 30, 1997. The Annual Report to Shareholders also includes more
information about the Fund's performance. For a free copy, please call Fund
Information.
INSURED FUND - CLASS I
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- -------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at
Beginning of Period $12.01 $11.95 $11.74 $12.30 $11.67 $11.26 $11.17 $11.27 $10.53 $10.64
---------------------------------------------------------------------------------------
Net Investment Income .66. .67 .68 .68 .69 .70 .74 .74 .74 .72
Net Realized & Unrealized
Gain (Loss) on Securities .21 .06 .20 (.56) .64 .46 .09 (.10) .71 (.08)
Total From Investment
Operations .87 .73 .88 .12 1.33 1.16 .83 .64 1.45 .64
Distributions From
Net Investment Income (.66) (.67) (.67) (.68) (.70) (.75) (.74) (.74) (.71) (.75)
Net Asset Value at
End of Period $12.22 $12.01 $11.95 $11.74 $12.30 $11.67 $11.26 $11.17 $11.27 $10.53
=======================================================================================
Total Return+ 7.41% 6.18% 7.80% .67% 11.47% 10.32% 7.45% 5.59% 13.97% 6.06%
Ratios/Supplemental Data
Net Assets at End of Period
(in millions) $1,636 $1,589 $1,468 $1,451 $1,364 $968 $472 $307 $248 $208
Ratio of Expenses to
Average Net Assets .60% .60% .59% .54% .53% .55% .57% .59% .61% .62%
Ratio of Net Investment
Income to Average Net Assets 5.41% 5.50% 5.77% 5.53% 5.82% 6.16% 6.48% 6.63% 6.79% 6.91%
Portfolio Turnover Rate 20.40% 14.22% 11.85% 6.98% 8.28% 3.50% 4.20% 10.41% 28.56% 19.33%
</TABLE>
INSURED FUND - CLASS II
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended June 30, 1997 1996 1995***
Per Share Operating Performance
Net Asset Value at
Beginning of Period $12.07 $11.99 $11.88
-----------------------------
Net Investment Income .59 .60 .11
Net Realized & Unrealized Gain on Securities .22 .08 .10
----------------------
Total From Investment Operations .81 .68 .21
----------------------
Distributions From Net Investment Income (.59) (.60) (.10)
------------------------
Net Asset Value at End of Period $12.29 $12.07 $11.99
=========================
Total Return+ 6.86% 5.70% 1.79%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of
Period (in millions) $35 $18 $1
Ratio of Expenses to
Average Net Assets 1.16% 1.17% 1.17%*
Ratio of Net Investment
Income to Average Net Assets 4.81% 4.96% 5.03%*
Portfolio Turnover Rate 20.40% 14.22% 11.85%
</TABLE>
INTERMEDIATE-TERM FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1997 1996 1995 1994 1993**
- ---------------------------------------------------------------------------------------------
Per Share Operating Performance
Net Asset Value at
Beginning of Period $10.67 $10.38 $10.20 $10.55 $10.00
----------------------------------------------
Net Investment Income .53 .53 .54 .54 .29
Net Realized & Unrealized
Gain (Loss) on Securities .26 .29 .17 (.36) .55
-------------------------------------------
Total From Investment Operations .79 .82 .71 .18 .84
-------------------------------------------
Distributions From Net Investment Income (.53) (.53) (.53) (.53) (.29)
---------------------------------------------
Net Asset Value at
End of Period $10.93 $10.67 $10.38 $10.20 $10.55
===============================================
Total Return+ 7.58% 7.96% 7.19% 1.65% 10.95%
Ratios/Supplemental Data
Net Assets at End of Period
(in millions) $118 $101 $89 $94 $43
Ratio of Expenses to Average Net Assets++ .47% .45% .33% .25% .09%*
Ratio of Net Investment Income
to Average Net Assets 4.96% 4.99% 5.34% 5.11% 4.73%*
Portfolio Turnover Rate 6.29% 10.13% 10.90% 14.95% .08%
</TABLE>
<TABLE>
<CAPTION>
MONEY FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance
Net Asset Value at
Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
------------------------------------------------------------------------------------
Net Investment Income .03 .03 .03 .02 .02 .03 .05 .06 .06 .05
Net Realized & Unrealized
Gain (Loss) on Securities - - - - - - - - - -
------------------------------------------------------------------------------------
Total From Investment
Operations .03 .03 .03 .02 .02 .03 .05 .06 .06 .05
------------------------------------------------------------------------------------
Distributions From Net
Investment Income (.03) (.03) (.03) (.02) (.02) (.03) (.05) (.06) (.06) (.05)
------------------------------------------------------------------------------------
Net Asset Value
at End of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===================================================================================
Total Return+ 2.85% 2.85% 2.94% 1.83% 2.08% 3.17% 4.58% 5.61% 5.67% 4.67%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End
of Period (in millions) $640 $598 $642 $754 $653 $759 $954 $1,039 $807 $681
Ratio of Expenses to
Average Net Assets .60% .63% .64% .61% .62% .60% .57% .55% .55% .58%
Ratio of Net Investment
Income to Average
Net Assets 2.83% 2.83% 2.88% 1.82% 2.07% 3.14% 4.47% 5.36% 5.57% 4.56%
</TABLE>
*Annualized.
**For the period September 21, 1992 (effective date) to June 30, 1993. ***For
the period May 1, 1995 (effective date) to June 30, 1995.
+Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum front-end sales
charge or the Contingent Deferred Sales Charge and assumes reinvestment of
dividends and capital gains at Net Asset Value. Before May 1, 1994, for the
Insured Fund, dividends were reinvested at the maximum Offering Price and
capital gains at Net Asset Value. Effective May 1, 1994, with the implementation
of the Rule 12b-1 distribution plan for Class I shares, the sales charge on
reinvested dividends was eliminated. ++During the periods indicated, Advisers
agreed in advance to waive a portion of its management fees and made payments of
other expenses of the Intermediate-Term Fund. Had such action not been taken,
the ratio of expenses to average net assets would have been as follows:
RATIO OF EXPENSES
TO AVERAGE NET ASSETS
1993 .95%*
1994 .80%
1995 .83%
1996 .81%
1997 .80%
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
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 Money Fund also seeks liquidity in its investments
and attempts to maintain a stable Net Asset Value of $1 per share, although
there is no assurance that this will be achieved. The objective is a fundamental
policy of each Fund and may not be changed without shareholder approval. Of
course, there is no assurance that the Fund will achieve its objective.
HOW THE FUND SEEKS TO ACHIEVE ITS OBJECTIVE
INSURED FUND. The Insured Fund attempts to invest 100% and, as a matter of
fundamental policy, invests at least 80% of its net assets in securities that
pay interest exempt from federal income taxes, including the alternative minimum
tax, and from California personal income taxes. It is possible, although not
anticipated, that up to 20% of the Fund's net assets could be in taxable
obligations.
The Fund invests at least 65% of its total assets in California Municipal
Securities. It is possible, although not anticipated, that up to 35% of the
Fund's total assets may be in municipal securities of a state, territory or
local government other than California.
The Insured Fund also invests at least 65% of its total assets in insured
municipal securities. The insurance may be obtained either by the issuer of the
security or by the Fund. Normally the underlying rating of these securities is
one of the three highest ratings of a nationally recognized rating service, such
as Moody's, S&P or Fitch. An insurer may insure municipal securities that are
rated below the three highest rating categories or that are unrated if the
securities otherwise meet the insurer's quality standards.
The Insured Fund may invest up to 35% of its total assets in uninsured
securities. The types of uninsured securities in which the Fund may invest are
currently limited to (i) municipal securities secured by an escrow or trust
account consisting of direct U.S. government obligations; (ii) securities that
are rated in one of the three highest rating categories of a nationally
recognized rating service or that are unrated but are considered by Advisers to
be comparable in quality; or (iii) short-term, tax-exempt instruments, pending
investment in longer-term municipal securities, rated in the highest rating
category of Moody's, S&P or Fitch. The Fund's investment in the type of
securities described in (ii) above is limited, however, to no more than 20% of
the Fund's total assets.
Under normal market conditions, the Fund invests its assets as described above.
For temporary defensive purposes, however, the Fund may invest up to 100% of its
assets in taxable obligations, including (i) municipal securities of a state,
territory or local government other than California; (ii) commercial paper rated
at least P-1 by Moody's, A-1 by S&P or F-1 by Fitch; or (iii) obligations issued
or guaranteed by the full faith and credit of the U.S. government.
INTERMEDIATE-TERM FUND. The Intermediate-Term Fund attempts to invest 100% and,
as a matter of fundamental policy, invests at least 80% of its total assets in
securities that pay interest exempt from federal income taxes. As a
nonfundamental policy, the Intermediate-Term Fund also invests at least 65% of
its total assets in securities that pay interest exempt from California personal
income taxes. It is possible, although not anticipated, that up to 20% of the
Fund's total assets could be in obligations subject to federal income taxes,
including the alternative minimum tax, and up to 35% of the Fund's total assets
could be in securities subject to California personal income taxes.
The Fund invests at least 65% of its total assets in California Municipal
Securities. It is possible, although not anticipated, that up to 35% of the
Fund's total assets may be in municipal securities of a state, territory or
local government other than California.
The Intermediate-Term Fund maintains a dollar-weighted average portfolio
maturity of three to ten years and invests in investment grade securities.
Investment grade securities are securities rated in one of the four highest
rating categories of a nationally recognized rating service and also include
unrated securities that Advisers considers comparable in quality to securities
that have been rated investment grade. The four highest rating categories are
Aaa, Aa, A and Baa for Moody's and AAA, AA, A and BBB for both S&P and Fitch.
Although securities rated in the fourth highest rating category are considered
investment grade, they are generally more vulnerable to adverse economic
conditions than securities rated in the three highest categories and are
considered to have some speculative characteristics. If the rating services
lower the rating on a security in the Fund's portfolio, the Fund will consider
this change in its evaluation of the security's overall investment merits. A
change in a security's rating, however, does not automatically require the Fund
to sell the security. For a description of the various rating categories, please
see "Appendix Description of Ratings" in the SAI.
When determining whether securities are consistent with the Fund's investment
objective and policies, and thereafter when determining an issuer's comparative
credit rating, Advisers considers the terms of an offering and various other
factors. Advisers may, among other things, (i) interview representatives of the
issuer at its offices; (ii) tour and inspect the physical facilities of the
issuer to evaluate the issuer and its operations; (iii) analyze the issuer's
financial and credit position, including all appropriate ratios; and (iv)
compare other similar securities offerings to the issuer's proposed offering.
Under normal market conditions, the Fund invests its assets as described above.
For temporary defensive purposes, however, the Fund may invest up to 100% of its
assets in taxable obligations, including (i) municipal securities of a state,
territory or local government other than California; (ii) commercial paper rated
at least P-1 by Moody's, A-1 by S&P or F-1 by Fitch; or (iii) obligations issued
or guaranteed by the full faith and credit of the U.S. government.
MONEY FUND. The Money Fund attempts to invest 100% and, as a matter of
fundamental policy, invests at least 80% of its net assets in securities that
pay interest exempt from federal income taxes, including the alternative minimum
tax, and from California personal income taxes. It is possible, although not
anticipated, that up to 20% of the Fund's net assets could be in taxable
obligations.
The Fund invests at least 65% of its total assets in California Municipal
Securities. It is possible, although not anticipated, that up to 35% of the
Fund's total assets may be in municipal securities of a state, territory or
local government other than California.
The Money Fund follows certain procedures required by federal securities laws
with respect to the quality, maturity and diversification of its investments.
These procedures are designed to help maintain a stable $1 share price.
Generally, they require the Fund to maintain a dollar-weighted average portfolio
maturity of 90 days or less and to limit its investments to U.S. dollar
denominated instruments that (i) the Board determines present minimal credit
risks; (ii) are rated by nationally recognized rating services in one of the two
highest rating categories, or are unrated but are considered to be comparable in
quality to securities that have been rated in one of the two highest rating
categories; and (iii) have remaining maturities of 397 calendar days or less.
Under normal market conditions, the Fund invests its assets as described above.
For temporary defensive purposes, however, the Fund may invest up to 100% of its
assets in taxable obligations, including (i) municipal securities of a state,
territory or local government other than California; (ii) commercial paper rated
at least P-1 by Moody's, A-1 by S&P or F-1 by Fitch; (iii) obligations issued or
guaranteed by the full faith and credit of the U.S. government; or (iv)
obligations of U.S. banks with assets of $1 billion or more.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
MUNICIPAL SECURITIES. Municipal securities are obligations that pay interest
exempt from regular federal income tax and that are issued by or on behalf of
states, territories or possessions of the U.S., the District of Columbia, or
their political subdivisions, agencies or instrumentalities. An opinion as to
the tax-exempt status of a municipal security is generally given to the issuer
by the issuer's bond counsel when the security is issued.
Municipal securities are issued to raise money for various public purposes, such
as constructing public facilities and making loans to public institutions.
Certain types of municipal securities are issued to provide funding for
privately operated facilities.
The Insured Fund has no restrictions on the maturity of municipal securities in
which it may invest. The Insured Fund attempts to invest in municipal securities
with maturities that, in Advisers' judgment, will provide a high level of
current income consistent with prudent investing. Advisers will also consider
current market conditions and the cost of obtaining insurance when determining
the securities it wants to buy and whether to hold securities currently in the
Fund's portfolio. The Intermediate-Term Fund and the Money Fund are subject to
the maturity restrictions discussed above.
The Fund may invest more than 25% of its assets in municipal securities in
particular market segments, including, but not limited to, hospital revenue
bonds, housing agency bonds, tax-exempt industrial development revenue bonds,
transportation bonds, or pollution control revenue bonds. An economic, business,
political or other change that affects one security may also affect other
securities in the same market segment, thereby potentially increasing market
risk. Examples of changes that may affect certain market segments include
proposed legislation affecting the financing of a project, shortages or price
increases of needed materials, or declining markets or needs for the projects.
FLOATING AND VARIABLE RATE OBLIGATIONS. The Fund may buy floating and variable
rate obligations. The interest rates on these obligations are not fixed, but
vary with changes in prevailing market rates on predesignated dates. The Fund
may also invest in floating or variable rate demand notes ("VRDNs"). VRDNs carry
a demand feature that allows the Fund to tender the obligation back to the
issuer or a third party before maturity, at par value plus accrued interest,
according to the terms of the obligation. Although it is not a put option in the
usual sense, the demand feature is sometimes known as a "put." Frequently, VRDNs
are secured by letters of credit or other credit support arrangements. The
Insured Fund limits its purchase of floating and variable rate obligations to
those rated in the highest rating category of Moody's, S&P or Fitch. The
Intermediate-Term Fund limits its purchase of floating and variable rate
obligations to those that are investment grade.
The Money Fund may invest in floating and variable rate obligations with stated
maturities in excess of one year, if the obligations carry demand features that
comply with certain conditions and SEC rules. The Money Fund limits its purchase
of floating and variable rate obligations to those meeting the Fund's quality
standards, as discussed above. The quality of the underlying creditor, as
determined by Advisers under the supervision of the Board, must also be
equivalent to the Fund's quality standards discussed in this prospectus. In
addition, Advisers monitors the earning power, cash flow and other liquidity
ratios of the issuers of floating and variable rate obligations, as well as the
creditworthiness of the institution responsible for paying the principal amount
of the obligation under the demand feature.
MUNICIPAL LEASE OBLIGATIONS. The Fund may invest in municipal lease obligations,
including certificates of participation ("COPs"). Municipal lease obligations
are widely used by state and local governments to finance the purchase of
property. Under a common lease format, lease revenue obligations are issued by a
governmental corporation to pay for the acquisition of property or facilities.
The property or facilities acquired are then leased to a municipality and the
lease payments are used to repay the interest and principal on the obligations
issued to buy the property. After all of the lease payments have been made,
according to the terms of the lease, 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 thus may enable a
governmental issuer to increase government liabilities beyond constitutional
debt limits.
CALLABLE BONDS. The Fund may buy and hold callable municipal bonds. Callable
bonds have a provision in their indenture allowing the issuer to redeem the
bonds before their maturity dates at a specified price. This price typically
reflects a premium over the bonds' original issue price. Callable bonds
generally have call protection, that is, a period of time when the bonds may not
be called. This period usually lasts for five to ten years from the date of
issue. An issuer may generally be expected to call its bonds, or a portion of
them, during periods of 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 these circumstances are reinvested, the result may be a lower
overall yield due to lower current interest rates. If the purchase price of the
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 the bonds were redeemed. Notwithstanding the
call feature, an investment in callable bonds by the Intermediate-Term Fund is
subject to the Fund's policy of maintaining a dollar-weighted average portfolio
maturity of three to ten years.
MELLO-ROOS BONDS. The Fund may invest in bonds issued under the California
Mello-Roos Community Facilities Act, commonly known as Mello-Roos bonds.
Mello-Roos bonds are issued to finance the building of roads, sewage treatment
plants and other projects designed to improve the infrastructure of a community.
OTHER INVESTMENT POLICIES OF THE FUND
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may buy and sell
municipal securities on a "when-issued" and "delayed delivery" basis. These are
trading practices where payment and delivery of the securities take place at a
future date. These transactions are subject to market fluctuations and the risk
that the value of a security at delivery may be more or less than its purchase
price. Although the Fund will generally buy municipal securities on a
when-issued basis with the intention of acquiring the securities, it may sell
the securities before the settlement date if it is deemed advisable. When the
Fund is the buyer, it will maintain cash or liquid securities, with an aggregate
value equal to the amount of its purchase commitments, in a segregated account
with its custodian bank until payment is made. The Fund will not engage in
when-issued and delayed delivery transactions for investment leverage purposes.
REPURCHASE AGREEMENTS - Money Fund Only. In a repurchase agreement, the Fund
buys U.S. government securities from a bank or broker-dealer at one price and
agrees to sell them back to the bank or broker-dealer at a higher price on a
specified date. The securities subject to resale are held on behalf of the Fund
by a custodian bank approved by the Board. The bank or broker-dealer must
transfer to the custodian securities with an initial market value of at least
102% of the repurchase price to help secure the obligation to repurchase the
securities at a later date. The securities are then marked-to-market daily to
maintain coverage of at least 100%. If the bank or broker-dealer does not
repurchase the securities as agreed, the Fund may experience a loss or delay in
the liquidation of the securities underlying the repurchase agreement and may
also incur liquidation costs. The Fund, however, intends to enter into
repurchase agreements only with banks or broker-dealers that are considered
creditworthy by Advisers.
BORROWING. The Fund may borrow up to 5% of its total assets from banks for
temporary or emergency purposes. The Fund may also lend its portfolio securities
to qualified securities dealers or other institutional investors, if the loans
do not exceed 10% of the value of the Fund's total assets at the time of the
most recent loan. The Fund, however, currently intends to limit its lending of
securities to no more than 5% of its total assets.
ILLIQUID INVESTMENTS. The Fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How does the Fund Invest its Assets?" and "Investment Restrictions" in the
SAI.
Each of the Fund's policies and restrictions discussed in this prospectus and in
the SAI is considered at the time the Fund makes an investment. The Fund is
generally not required to sell a security because of a change in circumstances.
INSURANCE - INSURED FUND ONLY
Each insured municipal security in the Insured Fund's portfolio is covered by
either a "New Issue Insurance Policy," a "Portfolio Insurance Policy" or a
"Secondary Insurance Policy." These policies are intended to insure that the
scheduled amount of principal and interest on a municipal security is paid when
due. The amount of principal refers to the face or par value of a security. It
is not affected by the price the Fund pays for the security or the security's
market value. The Fund will only enter into a contract to buy an insured
municipal security if there is either permanent insurance in place or an
irrevocable commitment to insure the municipal security by a qualified municipal
bond insurer.
The insurance policies are issued by any one of several qualified municipal bond
insurers, which allows Advisers to diversify among credit enhancements. The Fund
buys insured municipal securities only if they are secured by an insurance
policy issued by an insurer whose claims paying ability is rated triple A or its
equivalent by Moody's, S&P or Fitch.
While the cost of insurance to the Fund reduces the Fund's yield, one of the
goals of obtaining insurance is to seek a higher yield than would be available
if all of the securities in the Fund's portfolio were rated triple A or its
equivalent without the benefit of any insurance. THE INSURANCE DOES NOT
GUARANTEE THE MARKET VALUE OF THE MUNICIPAL SECURITY AND, EXCEPT AS INDICATED IN
THIS PROSPECTUS, HAS NO EFFECT ON THE NET ASSET VALUE OR DIVIDENDS PAID BY THE
FUND. SHARES OF THE FUND ARE NOT INSURED.
NEW ISSUE INSURANCE POLICY. A New Issue Insurance Policy, also called a "Primary
Insurance Policy," is obtained by the issuer of municipal securities. The issuer
pays all premiums on the policy in advance. The policy continues in effect as
long as the municipal securities are outstanding and the insurer remains in
business. It may not otherwise be canceled. Since the policy remains in effect
as long as the securities are outstanding, the insurance may affect the resale
value of the securities. While a New Issue Insurance Policy may represent an
element of the market value of the insured municipal securities, the exact
effect, if any, of this insurance cannot be determined.
PORTFOLIO INSURANCE POLICY. A Portfolio Insurance Policy is obtained by the Fund
and is effective only as long as the municipal securities described in the
policy are held by the Fund and the insurer is in business and meeting its
obligations. If there is a total or partial sale by the Fund of any municipal
security or payment of any municipal security before maturity, the policy
terminates as to that municipal security and will cover only those securities
the Fund continues to hold. A Portfolio Insurance Policy may not otherwise be
canceled, unless the Fund fails to pay the premium. If a security covered by a
Portfolio Insurance Policy is pre-refunded and irrevocably secured by a U.S.
government security, the insurance will no longer be required as to that
security.
Because coverage under a Portfolio Insurance Policy ends when the Fund sells a
security from its portfolio, the insurance does not affect the resale value of a
security. Therefore, the Fund may hold any municipal security insured under a
Portfolio Insurance Policy that is in default or in significant risk of default,
and place a value on the insurance that will be equal to the difference between
the market value of the defaulted security and the market value of a similar
security that is not in default. While a defaulted security is held in the
Fund's portfolio, the Fund continues to pay the insurance premium on the
security but also collects interest payments from the insurer and retains the
right to collect the full amount of principal from the insurer when the security
comes due.
Premium rates for securities covered by a Portfolio Insurance Policy may not be
changed by the insurer, regardless of the issuer's ability or willingness to
meet its obligations. Premiums are payable monthly and are adjusted for
purchases and sales of covered securities during the month. The premium on a
Portfolio Insurance Policy is a Fund expense. If the Fund fails to pay its
premium, the insurer may take action against the Fund to recover any premium
payments that are due.
SECONDARY INSURANCE POLICY. Under its agreement with the provider of the
Portfolio Insurance Policy, the Fund may at any time buy a permanent Secondary
Insurance Policy on any municipal security insured under the Portfolio Insurance
Policy, even if the security is currently in default. When the Fund buys a
Secondary Insurance Policy on a security, the coverage and obligation of the
Fund to pay monthly premiums under the Portfolio Insurance Policy ends. The
price of the Secondary Insurance Policy may not be changed by the insurer,
regardless of the security issuer's ability to meet its debt obligations.
With a Secondary Insurance Policy, the Fund obtains insurance against nonpayment
of scheduled principal and interest for the remaining term of a security. This
insurance coverage continues in effect as long as the insured security is
outstanding and may not otherwise be canceled. Thus, the Fund has the
opportunity to sell a security in default rather than hold it in its portfolio
in order to continue, in force, the applicable Portfolio Insurance Policy. When
the Fund buys a Secondary Insurance Policy on a security, the single premium is
added to the cost basis of the security and is not considered a Fund expense.
One of the reasons the Fund may buy a Secondary Insurance Policy is to enable it
to sell a security to a third party as a triple A rated or equivalent insured
security. In doing so, the Fund may be able to sell the security at a market
price that is higher than what it otherwise would be without the insurance. The
triple A or equivalent rating is not automatic, however, and must specifically
be requested from Moody's, S&P or Fitch for each security.
The Fund is likely to buy a Secondary Insurance Policy if, in the opinion of
Advisers, the market value or net proceeds of the sale of a security by the Fund
may exceed the current value of the security, without insurance, plus the cost
of the insurance. Any difference between the excess of a security's market value
as a triple A rated or equivalent security over its market value without such
rating, including the cost of insurance, inures to the Fund in determining the
net capital gain or loss realized by the Fund upon the sale of the security.
The Fund may buy a Secondary Insurance Policy instead of a Portfolio Insurance
Policy at any time, regardless of the effect of market value on the underlying
municipal security, if Advisers believes such insurance would best serve the
Fund's interests in meeting its objective and policies.
QUALIFIED MUNICIPAL BOND INSURERS. A qualified municipal bond insurer is a
company whose charter limits its risk assumption to insurance of financial
obligations. This precludes the assumption of other types of risk, such as life,
medical, fire and casualty, and auto and home insurance. The bond insurance
industry is a regulated industry. All bond insurers must be licensed in each
state in order to write financial guaranties in that jurisdiction. Regulations
vary from state to state. Most regulators, however, require minimum standards of
solvency and limitations on leverage and investment of assets. Regulators also
place restrictions on the amount an insurer can guarantee in relation to the
insurer's capital base. Neither the Fund nor Advisers makes any representations
as to the ability of any insurance company to meet its obligation to the Fund if
called upon to do so.
Currently, to the best of our knowledge, there are no securities in the Fund's
portfolio on which an insurer is paying the principal or interest otherwise
payable by the issuer of the bond.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the bond market as a whole. The Money Fund, however,
attempts to maintain a stable Net Asset Value of $1 per share, although there is
no assurance that this will be achieved.
Yields on municipal securities vary, depending on a variety of factors. These
include the general condition of the financial and municipal securities markets,
the size of a particular offering, the credit rating of the issuer and the
maturity of the obligation. Generally, municipal securities with longer
maturities produce higher current yields than municipal securities with shorter
maturities. Prices of longer-term securities, however, typically fluctuate more
than those of shorter-term securities due to changes in interest rates, tax laws
and other general market conditions. Lower-quality municipal securities also
generally produce higher yields than higher-quality municipal securities.
Lower-quality securities, however, generally have a higher degree of risk
associated with the issuer's ability to make timely principal and interest
payments.
CREDIT ENHANCEMENTS. The Fund may invest in securities backed by guarantees from
foreign and domestic banks and other financial institutions. Changes in the
credit quality of these institutions could have an adverse impact on securities
they have guaranteed or backed and could cause losses to the Fund. The Money
Fund's ability to maintain a stable share price is largely dependent on these
guarantees, which are not supported by federal deposit insurance, and a change
in credit quality could affect the stability of the Money Fund's share price.
NONAPPROPRIATION RISK OF MUNICIPAL LEASE OBLIGATIONS. A feature that
distinguishes municipal lease obligations from more traditional forms of
municipal debt is the "nonappropriation" clause in the lease. A nonappropriation
clause allows the municipality to 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 municipal lease obligations than they do to
curtail payments on traditionally funded debt obligations. If the municipality
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 municipality was paying.
While the risk of nonappropriation is inherent to municipal lease obligations,
the Fund believes that this risk may be reduced, although not eliminated, by its
policies with respect to the quality of the securities in which it may invest.
For example, the Intermediate-Term Fund may only invest in investment grade
obligations and the Money Fund may only invest in high quality obligations, as
described above. When assessing the risk of nonappropriation for these two
Funds, the rating services and Advisers consider, among other factors, the
issuing municipality's credit rating, 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 Insured Fund invests primarily in insured obligations.
While there is no limit as to the amount of assets that the Fund may invest in
municipal lease obligations, as of June 30, 1997, the Fund held the following
percentage of its net assets in COPs and other municipal lease obligations:
Insured Fund 13.88%
Intermediate-Term Fund 32.06%
Money Fund 6.04%
MELLO-ROOS BONDS. Generally, Mello-Roos bonds are unrated and are not considered
obligations of a municipality. They are primarily secured by real estate taxes
levied on property located in the community. The timely payment of principal and
interest on the bonds depends on the developer or other property owners' ability
to pay their real estate taxes. This ability could be adversely affected by a
declining economy or real estate market within California. While there is no
limit as to the amount of assets that the Fund may invest in Mello-Roos bonds,
as of June 30, 1997, the Fund held the following percentage of its assets in
Mello-Roos bonds:
Insured Fund 2.97%
Intermediate-Term Fund 0.3%
Money Fund 0%
CREDIT, MARKET AND INTEREST RATE RISK. Credit risk is a function of the ability
of an issuer of a municipal security to make 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 that affect the market as a whole. In
addition, changes in interest rates may affect the value of a security.
Generally, when interest rates rise the value of a municipal security falls, and
vice versa. Interest rates have increased and decreased in the past. These
changes are unpredictable. The short duration and high credit quality of the
securities in which the Money Fund invests may generally reduce these risks for
the Money Fund.
NON-DIVERSIFICATION RISK - Intermediate-Term Fund Only. The Intermediate-Term
Fund is a non-diversified series of the Trust. Under the federal securities
laws, this means the Fund is not subject to any restrictions on the amount of
its assets that it may invest in one or more issuers. An investment in the Fund
may involve more risk than an investment in a diversified fund. These risks
include increased susceptibility to adverse economic or regulatory developments.
Please see the SAI for the diversification requirements the Fund intends to meet
in order to qualify as a regulated investment company under the Code.
STATE RISK FACTORS. Since the Fund primarily invests in California Municipal
Securities, an investment in the Fund may involve more risk than an investment
in a fund that does not concentrate its investments in securities relating to a
single state. The Fund's performance is closely tied to the continuing ability
of issuers of California Municipal Securities to meet their debt obligations and
to the economic and political conditions within California.
California's diverse economic base has continued to recover from the recession
of the early 1990s, when the state experienced significant job losses and
general fund deficits. While the state's financial performance has improved in
recent years, its fiscal operations have remained vulnerable. Increased funding
for schools, prisons, and social services, and reduced federal aid levels have
offset some of the growth in revenues that has resulted from the improving
economy. The state's budget approval process, which requires a two-thirds
legislative vote, has also hampered the state's financial stability. In the
past, California voters have passed amendments to the state's constitution and
other measures that have limited the taxing and spending authority of various
government entities in California. Future voter initiatives may adversely affect
issuers of California Municipal Securities.
In recent years, certain issuers of California Municipal Securities have
experienced financial difficulties, such as the 1994 bankruptcy of Orange
County. A recurrence of these financial difficulties could adversely affect the
market values and marketability of certain California Municipal Securities, as
well as the Net Asset Value of the Fund.
The information provided above is based on information from independent
municipal credit reports and other historically reliable sources. It is not a
complete analysis of every material fact that may affect the ability of issuers
of California Municipal Securities to meet their debt obligations or the
economic or political conditions within the state.
The information has not been independently verified by the Fund.
Although the Fund's policy with respect to the quality of the securities in
which it may invest may reduce the credit and other risks that may exist on
California Municipal Securities, it does not eliminate them. Before investing
you should consider the risks discussed in this prospectus. For more information
about California's economy and the Fund's potential risks, please see "What are
the Fund's Potential Risks?" in the SAI.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Insured Fund to ensure no material conflicts exist among
the Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Advisers manages the Fund's assets and makes its investment
decisions. Advisers also performs similar services for other funds. It is wholly
owned by Resources, a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr.
are the principal shareholders of Resources. Together, Advisers and its
affiliates manage over $212 billion in assets, including $46 billion in the
municipal securities market. Please see "Investment Management and Other
Services" and "Miscellaneous Information" in the SAI for information on
securities transactions and a summary of the Fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is:
Donald Duerson
Vice President of Advisers
Mr. Duerson has been responsible for portfolio recommendations and decisions of
the Insured Fund since 1986. Mr. Duerson has a Bachelor of Science degree in
Business and Public Administration from the University of Arizona. He has been
in the securities industry since 1956 and has been with the Franklin Templeton
Group since 1986. He is a member of several industry-related committees and
associations.
Thomas Kenny
Senior Vice President of Advisers
Mr. Kenny has been responsible for portfolio recommendations and decisions of
all series of the Trust since 1994. Mr. Kenny is the Director of Franklin's
Municipal Bond Department. He holds a Master of Science degree in Finance from
Golden Gate University and a Bachelor of Arts degree in Business and Economics
from the University of California at Santa Barbara. Mr. Kenny joined the
Franklin Templeton Group in 1986. He is a member of several municipal securities
industry-related committees and associations.
John Pomeroy
Portfolio Manager of Advisers
Mr. Pomeroy has been responsible for portfolio recommendations and decisions of
the Money Fund since 1990. Mr. Pomeroy holds a Bachelor of Science degree in
Finance from San Francisco State University. He joined the Franklin Templeton
Group in 1986. He is a member of several securities industry-related committees
and associations.
Bernard Schroer
Vice President of Advisers
Mr. Schroer has been responsible for portfolio recommendations and decisions of
the Insured Fund since 1987 and the Intermediate-Term Fund since 1992. Mr.
Schroer holds a Bachelor of Arts degree in Finance from Santa Clara University.
He has been with the Franklin Templeton Group since 1987. He is a member of
several municipal securities industry-related committees and associations.
Robert Schubert
Vice President of Advisers
Mr. Schubert has been responsible for portfolio recommendations and decisions of
the Money Fund since 1993. Mr. Schubert attended Farleigh Dickenson University
and has been in the securities industry since 1960. He joined the Franklin
Templeton Group in 1989. Before joining the Franklin Templeton Group, he managed
the bond department for First Equity Corporation of Florida. He is a member of
several securities industry-related associations.
John Wiley
Portfolio Manager of Advisers
Mr. Wiley has been responsible for portfolio recommendations and decisions of
the Intermediate-Term Fund since March 1997. Mr. Wiley holds a Masters of
Business Administration degree in Finance from Saint Mary's College. He earned
his Bachelor of Science degree from University of California at Berkeley. He
joined the Franklin Templeton Group in 1989. He is a member of several
securities industry-related committees and associations.
MANAGEMENT FEES. During the fiscal year ended June 30, 1997, management fees
paid to Advisers and total operating expenses, as a percentage of average net
assets, were as follows:
TOTAL
MANAGEMENT OPERATING
FEES EXPENSES
Insured Fund - Class I 0.47% 0.60%
Insured Fund - Class II 0.47% 1.16%
Intermediate-Term Fund 0.29%* 0.47%*
Money Fund 0.49% 0.60%
*Management fees, before any advance waiver, totaled 0.62% and total operating
expenses were 0.80%. Under an agreement by Advisers to limit its fees, the
Intermediate-Term Fund paid the management fees and total operating expenses
shown.
Advisers may end this arrangement at any time upon notice to the Board.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares, as well as shares of other funds in the Franklin Templeton Group
of Funds, when selecting a broker or dealer. Please see "How does the Fund Buy
Securities for its Portfolio?" in the SAI for more information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. Please see
"Investment Management and Other Services" in the SAI for more information.
THE RULE 12B-1 PLANS
The Intermediate-Term Fund and each class of the Insured Fund have separate
distribution plans or "Rule 12b-1 Plans" under which they may pay or reimburse
Distributors or others for the expenses of activities that are primarily
intended to sell shares of the Fund. These expenses may include, among others,
distribution or service fees paid to Securities Dealers or others who have
executed a servicing agreement with the Fund, Distributors or its affiliates; a
prorated portion of Distributors' overhead expenses; and the expenses of
printing prospectuses and reports used for sales purposes, and preparing and
distributing sales literature and advertisements.
Payments by the Intermediate-Term Fund under its plan may not exceed 0.10% per
year of the Fund's average daily net assets. Payments by the Insured Fund under
its Class I plan also may not exceed 0.10% per year of Class I's average daily
net assets. All distribution expenses over this amount will be borne by those
who have incurred them. During the first year after certain Class I purchases
made without a sales charge, Distributors may keep the Rule 12b-1 fees
associated with the purchase.
Under the Class II plan, the Insured Fund may pay Distributors up to 0.50% per
year of Class II's average daily net assets to pay Distributors or others for
providing distribution and related services and bearing certain Class II
expenses. All distribution expenses over this amount will be borne by those who
have incurred them. During the first year after a purchase of Class II shares,
Distributors may keep this portion of the Rule 12b-1 fees associated with the
purchase.
The Insured Fund may also pay a servicing fee of up to 0.15% per year of Class
II's average daily net assets under the Class II plan. This fee may be used to
pay Securities Dealers or others for, among other things, helping to establish
and maintain customer accounts and records, helping with requests to buy and
sell shares, receiving and answering correspondence, monitoring dividend
payments from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, the Fund advertises its performance. Commonly used measures
of performance for the Insured and Intermediate-Term Funds include total return,
current yield and current distribution rate. These Funds may also advertise
their taxable-equivalent yield and distribution rate. Performance figures are
usually calculated using the maximum sales charges, but certain figures may not
include sales charges.
Commonly used measures of performance for the Money Fund include current and
effective yield. The Money Fund may also advertise its taxable-equivalent yield
and effective yield.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. When the yield is
calculated assuming that income earned is reinvested, it is called an effective
yield. The current distribution rate shows the dividends or distributions paid
to shareholders of a class. This rate is usually computed by annualizing the
dividends paid per share during a certain period and dividing that amount by the
current Offering Price of the class. Unlike current yield, the current
distribution rate may include income distributions from sources other than
dividends and interest received by the Fund. The taxable-equivalent yield,
effective yield and distribution rate show the before-tax yield or distribution
rate that would have to be earned from a taxable investment to equal the yield
or distribution rate of the class, assuming one or more tax rates.
The investment results of each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund is treated as a separate entity for federal income tax purposes. The
Fund has elected and intends to continue to qualify as a regulated investment
company under Subchapter M of the Code. 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 generally not be liable for federal
income or excise taxes.
By meeting certain requirements of the Code and California personal income tax
law, the Fund has qualified and continues to qualify to pay exempt-interest
dividends to its shareholders. Exempt-interest dividends are derived from
interest income exempt from regular federal income tax, and are not subject to
regular federal income tax for you. In addition, to the extent that
exempt-interest dividends are derived from interest on obligations of California
or its political subdivisions, from interest on direct obligations of the
federal government, or from interest on U.S. territorial obligations, including
Puerto Rico, the U.S. Virgin Islands or Guam, they will also be exempt from
California personal income tax.
Dividends paid by the Fund from interest on obligations exempt from tax in
California will generally be fully taxable to corporate shareholders who are
subject to California's corporate franchise tax.
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, 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 you have elected to receive them in cash or in additional shares.
From time to time, the Fund may buy 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. For 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 market discount income will be taxable as
ordinary income. In any fiscal year, the Fund may elect not to distribute its
taxable ordinary income and, instead, to pay federal income or excise taxes on
this income at the Fund level. The amount of such distributions, if any, is
expected to be small.
Pursuant to the Code, certain distributions that are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January will be treated, for tax purposes, as if received by
you on December 31 of the calendar year in which they are declared.
The Fund may derive capital gains and losses in connection with sales of its
portfolio securities. Distributions derived from the excess of net short-term
capital gain over net long-term capital loss will be taxable to you as ordinary
income. Distributions paid from long-term capital gain will be taxable to you as
long-term capital gain, regardless of the length of time you have owned Fund
shares and regardless of whether such distributions are received in cash or in
additional shares.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss, although no gain or loss is anticipated with respect to
shares of the Money Fund since the Money Fund attempts to maintain a stable Net
Asset Value of $1 per share. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be disallowed to the extent of any
exempt-interest dividends received with respect to such shares and will be
treated as a long-term capital loss to the extent of capital gain dividends
received with respect to such shares.
All or a portion of any loss that you realize when you redeem Fund shares will
be disallowed to the extent that you buy other shares in the Fund (through
reinvestment of dividends or otherwise) within 30 days before or after your
share redemption. Any loss disallowed under these rules will be added to the tax
basis that you receive in the purchase of your new 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 you of the source of your dividends and distributions at
the time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of such dividends
and distributions, including the portion of the dividends on an average basis
that is a tax preference item under the federal alternative minimum tax. If you
have not held shares of the Fund for a full calendar year, you 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 your investment in the Fund.
The interest on bonds issued to finance public purpose state and local
government operations is generally tax-exempt. Interest on certain private
activity bonds, while still tax-exempt for regular income tax reporting, is a
preference item in determining if you are subject to the alternative minimum
tax, and could subject you to, or increase your liability for, federal and state
alternative minimum taxes. In addition, all distributions derived from interest
exempt from regular federal income tax may subject a corporate shareholder to,
or increase a corporate shareholder's liability for, the federal alternative
minimum tax, because these distributions are included in the corporation's
adjusted current earnings.
Consistent with its investment objective, the Fund may buy private activity
bonds if, in Advisers' opinion, the bonds represent the most attractive
investment opportunity then available to the Fund. For the fiscal year ended
June 30, 1997, the Fund derived the following percentage of its income from
bonds, the interest on which is a preference item subject to the federal
alternative minimum tax for certain investors:
Insured Fund 4.03%
Intermediate-Term Fund 5.52%
Money Fund 6.68%
Exempt-interest dividends of the Fund, although exempt from regular federal
income tax, 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
regular federal income tax. You are required to disclose the receipt of
tax-exempt interest dividends on your federal income tax returns.
Interest on indebtedness incurred (directly or indirectly) by you to buy or
carry Fund shares may not be fully deductible for federal income tax purposes.
You should consult with your personal tax advisor on the deductibility of this
interest.
The description above relates only to federal income tax law and to California
personal and corporate income tax treatment to the extent indicated. You should
consult your tax advisor to determine whether other state or local income or
franchise taxes will apply to your investment in the Fund or to distributions or
redemption proceeds received from the Fund.
If you are not considered a U.S. person for federal income tax purposes, you
should consult with your financial or tax advisor regarding the applicability of
U.S. withholding or other taxes on distributions received by you from the Fund
and the application of foreign tax laws to these distributions.
HOW IS THE TRUST ORGANIZED?
The Intermediate-Term Fund is a nondiversified series and the Insured and Money
Funds are diversified series of the Trust, an open-end management investment
company, commonly called a mutual fund. It was organized as a Massachusetts
business trust on July 18, 1985, and is registered with the SEC. The Insured
Fund offers two classes of shares: Franklin California Insured Tax-Free Income
Fund - Class I and Franklin California Insured Tax-Free Income Fund - Class II.
All shares of the Insured Fund outstanding before the offering of Class II
shares, and all shares of the Intermediate-Term and Money Funds, are considered
Class I shares for redemption, exchange and other purposes. Additional series
and classes of shares may be offered in the future.
Shares of each class of the Insured Fund represent proportionate interests in
the assets of the Fund and have the same voting and other rights and preferences
as any other class of the Fund for matters that affect the Fund as a whole. For
matters that only affect one class, however, only shareholders of that class may
vote. Each class will vote separately on matters affecting only that class, or
expressly required to be voted on separately by state or federal law. Shares of
each class of a series have the same voting and other rights and preferences as
the other classes and series of the Trust for matters that affect the Trust as a
whole.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares. In
certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
MONEY FUND
OPENING YOUR ACCOUNT
You may buy shares of the Money Fund without a sales charge and write redemption
drafts against your account. Redemption drafts are similar to checks and are
referred to as checks in this prospectus. When you buy shares, it does not
create a checking or other bank account relationship with the Fund or any bank.
MINIMUM
INVESTMENTS*
To Open Your Account $500
To Add to Your Account $ 25
* We may refuse any order to buy shares.
METHOD STEPS TO FOLLOW
BY MAIL For an initial investment:
1. Complete and sign the enclosed
shareholder application.
2. Return the application to the Fund with
your check, Federal Reserve draft or
negotiable bank draft made payable to the
Fund. Instruments drawn on other investment
companies may not be accepted.
For additional investments:
1. Send a check or use the deposit slips
included with your monthly statement or
checkbook (if you have requested one).
2. If you send a check, please include your
account number on the check
METHOD STEPS TO FOLLOW
BY WIRE 1. Call Shareholder Services or, if
that number is busy, call 1-650/312-2000
collect, to receive a wire control number. A
new number is needed every time you wire
money into your account. If you do not have
a currently effective wire control number,
we will return the money to the bank and it
will not be credited to your account.
2. Wire the funds to Bank of America, ABA
routing number 121000358, for credit to
Franklin California Tax-Exempt Money Fund,
A/C 1493-3-04779. Your name and wire control
number must be included.
3. For initial investments, you must also
complete and sign the enclosed shareholder
application and return it to the Fund.
THROUGH YOUR DEALER CALL YOUR INVESTMENT REPRESENTATIVE
If the Fund receives your order in proper form before 3:00 p.m. Pacific time, it
will be credited to your account that day. Orders received after 3:00 p.m. will
be credited the following business day.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
The investment authority of certain investors may be restricted by law. If you
are such an investor, you should consult your legal advisor to determine whether
and to what extent shares of the Fund are legal investments for you. If you are
a municipal investor considering investing proceeds of bond offerings, you
should consult with expert counsel to determine the effect, if any, of payments
by the Fund on arbitrage rebate calculations.
INSURED AND INTERMEDIATE-TERM FUNDS
OPENING YOUR ACCOUNT
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check. FOR THE INSURED FUND, PLEASE INDICATE WHICH CLASS OF SHARES YOU WANT TO
BUY. IF YOU DO NOT SPECIFY A CLASS, YOUR PURCHASE WILL BE AUTOMATICALLY INVESTED
IN CLASS I SHARES. CURRENTLY, THE FUNDS DO NOT ALLOW INVESTMENTS BY MARKET
TIMERS.
MINIMUM
INVESTMENTS*
To Open Your Account $500
To Add to Your Account $ 25
* We may refuse any order to buy shares.
DECIDING WHICH CLASS TO BUY - INSURED FUND ONLY
You should consider a number of factors when deciding which class of shares to
buy. IF YOU PLAN TO BUY $1 MILLION OR MORE IN A SINGLE PAYMENT OR YOU QUALIFY TO
BUY CLASS I SHARES WITHOUT A SALES CHARGE, YOU MAY NOT BUY CLASS II SHARES.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds; and
o you plan to sell a substantial number of your shares within approximately six
years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
PURCHASE PRICE OF FUND SHARES
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID TO
AS A PERCENTAGE OF DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
INSURED FUND - CLASS I
Under $100,000 4.25% 4.44% 4.00%
$100,000 but less than
$250,000 3.50% 3.63% 3.25%
$250,000 but less than
$500,000 2.75% 2.83% 2.50%
$500,000 but less than
$1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more* None None None
INSURED FUND - CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
Intermediate-Term Fund
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% 2.26% 1.00%
$500,000 but less than
$1,000,000 1.00% 1.01% 0.85%
$1,000,000 or more* None None None
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Deciding Which
Class to Buy."
Sales Charge Reductions and Waivers
IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT
WITH EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't
include this statement, we cannot guarantee that you will receive the
sales charge reduction or waiver.
CUMULATIVE QUANTITY DISCOUNTS - Class I Only. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds, as well as those of your spouse, children under the
age of 21 and grandchildren under the age of 21. If you are the sole owner of a
company, you may also add any company accounts, including retirement plan
accounts.
LETTER OF INTENT - Class I Only. You may buy Class I 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 you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase i
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES - Class I Only. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
SALES CHARGE WAIVERS. The Fund's front-end sales charge and Contingent Deferred
Sales Charge do not apply to certain purchases. For waiver categories 1 or 2
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges do not apply if you are buying Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 3:
1. Dividend and capital gain distributions from any Franklin Templeton
Fund or a real estate investment trust (REIT) sponsored or advised by
Franklin Properties, Inc.
2. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds, the Templeton Variable Annuity
Fund, the Templeton Variable Products Series Fund, or the Franklin
Government Securities Trust. You should contact your tax advisor for
information on any tax consequences that may apply.
3. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares were subject to a
Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
The Fund's sales charges also do not apply to Class I purchases by:
4. Trust companies and bank trust departments agreeing to invest in
Franklin Templeton Funds over a 13 month period at least $1 million of
assets held in a fiduciary, agency, advisory, custodial or similar
capacity and over which the trust companies and bank trust departments
or other plan fiduciaries or participants, in the case of certain
retirement plans, have full or shared investment discretion. We will
accept orders for these accounts by mail accompanied by a check or by
telephone or other means of electronic data transfer directly from the
bank or trust company, with payment by federal funds received by the
close of business on the next business day following the order.
5. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments
by the Fund on arbitrage rebate calculations.
6. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for
clients participating in comprehensive fee programs
7. Registered Securities Dealers and their affiliates, for their
investment accounts only
8. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
9. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family
members, consistent with our then-current policies
10. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
11. Accounts managed by the Franklin Templeton Group
12. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not by
the Fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 0.75% of the amount invested.
3. Class I purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of
clients participating in comprehensive fee programs - up to 0.25% of the
amount invested.
A Securities Dealer may receive only one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1 or 2 above will be eligible to receive the Rule 12b-1
fee associated with the purchase starting in the thirteenth calendar month after
the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums. Some Franklin Templeton Funds do not offer Class II shares.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us written instructions signed by all account
owners
2. Include any outstanding share certificates for the
shares you want to exchange
BY PHONE Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to exchange by phone to
apply to your account, please let us know.
THROUGH YOUR DEALER CALL YOUR INVESTMENT REPRESENTATIVE
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
If you are exchanging shares of the Money Fund, you will generally pay the
applicable front-end sales charge of the fund you are exchanging into, unless
you acquired your Money Fund shares under the exchange privilege. These charges
may not apply if you qualify to buy shares without a sales charge.
For the Insured and Intermediate-Term Funds, you generally will not pay a
front-end sales charge on exchanges. If you have held your shares less than six
months, however, you will pay the percentage difference between the sales charge
you previously paid and the applicable sales charge of the new fund. If you have
never paid a sales charge on your shares because, for example, they have always
been held in a money fund, you will pay the Fund's applicable sales charge no
matter how long you have held your shares. These charges may not apply if you
qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
CONTINGENT DEFERRED SALES CHARGE - Class I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, we will first exchange any shares
in your account that are not subject to the charge. If there are not enough of
these to meet your exchange request, we will exchange shares subject to the
charge in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
CONTINGENT DEFERRED SALES CHARGE - Class II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
Contingent Deferred Sales Charge, such as shares from the reinvestment of
dividends and capital gains ("free shares"), $2,000 in shares that are no longer
subject to a Contingent Deferred Sales Charge because you have held them for
longer than 18 months ("matured shares"), and $3,000 in shares that are still
subject to a Contingent Deferred Sales Charge ("CDSC liable shares"). If you
exchange $3,000 into a new fund, $500 will be exchanged from free shares, $1,000
from matured shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. The tax consequences of a sale or exchange are determined by the
Code and not by the method used by the Fund to transfer shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. Please notify us in writing if you do not want this option
to be available on your account. Additional procedures may apply. Please see
"Transaction Procedures and Special Requirements."
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o For the Money Fund, your exchange may be restricted or refused if you
have: (i) requested an exchange out of the Fund within two weeks of an
earlier exchange request, (ii) exchanged shares out of the Fund more than
twice in a calendar quarter, or (iii) exchanged shares equal to at least
$5 million, or more than 1% of the Fund's net assets. Shares under common
ownership or control are combined for these limits. If you have exchanged
shares as described in this paragraph, you will be considered a Market
Timer. Each exchange by a Market Timer, if accepted, will be charged
$5.00. Currently, none of the Funds, except the Money Fund, allow
investments by Market Timers. Some of the other funds in the Franklin
Templeton Funds may also not allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Advisor Class" or "Class Z" shares. Because the
Fund does not currently offer an Advisor Class, you may exchange Advisor Class
shares of any Franklin Templeton Fund for Class I shares of the Fund at Net
Asset Value. If you do so and you later decide you would like to exchange into a
fund that offers an Advisor Class, you may exchange your Class I shares for
Advisor Class shares of that fund. Certain shareholders of Class Z shares of
Franklin Mutual Series Fund Inc. may also exchange their Class Z shares for
Class I shares of the Fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
BY CHECK - MONEY FUND ONLY
(Only available if there are no outstanding share certificates for your account)
METHOD STEPS TO FOLLOW
1. You may request redemption drafts (checks) free of charge
on the shareholder application or by calling TeleFACTS(R).
2. You may make checks payable to any person and in any
amount of $100 or more. You will continue to earn daily
income dividends until the check has cleared. Please
see "More Information About Selling Your Shares By Check"
below.
BY MAIL 1. Send us written instructions
signed by all account owners. If you
would like your redemption proceeds
wired to a bank account, your
instructions should include:
o The name, address and telephone number of the bank
where you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit union, the
name of the corresponding bank and the account number
If you are a Money Fund shareholder, you may
also request to have your Money Fund
redemption proceeds wired to a bank account
by completing the "Wire Redemption
Privilege" section of the Money Fund
shareholder application and sending it to
us.
METHOD STEPS TO FOLLOW
BY MAIL (cont.) 2. Include any outstanding share certificates for the
shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to
send additional documents. Accounts under court
jurisdiction may have other requirements.
BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other than an
escrow account, you must first sign up for the wire
feature. To sign up, send us written instructions, with a
signature guarantee. To avoid any delay in processing, the
instructions should include the items listed in "By Mail"
above. If you are a Money Fund shareholder, you may also
sign up by completing the "Wire Redemption Privilege"
section of the Money Fund shareholder application and
sending it to us.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts
may exceed $50,000 by completing a separate agreement.
Call Institutional Services to receive a copy.
o If there are no share certificates issued for the shares
you want to sell or you have already returned them to the
Fund
o Unless the address on your account was changed by phone
within the last 15 days
If you do not want the ability to redeem by phone to apply
to your account, please let us know.
THROUGH YOUR DEALER CALL YOUR INVESTMENT REPRESENTATIVE
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time for the Insured or
Intermediate-Term Funds or before 3.00 p.m. Pacific Time for the Money Fund,
your wire payment will be sent the next business day. For requests received in
proper form after these deadlines, the payment will be sent the second business
day. You may also have Money Fund redemption proceeds wired to an escrow account
the same day, if we receive your request in proper form before 9:00 a.m. Pacific
time. By offering these services to you, the Fund is not bound to meet any
redemption request in less than the seven day period prescribed by law. Neither
the Fund nor its agents shall be liable to you or any other person if, for any
reason, a redemption request by wire is not processed as described in this
section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
MORE INFORMATION ABOUT SELLING YOUR SHARES BY CHECK - MONEY FUND ONLY
If you want the convenience of check access to your Money Fund account, order
your checks from the Money Fund, free of charge, as described above. For
security reasons and reasons related to check processing systems that require
checks to be a certain size and printed with specific encoding formats, the
Money Fund can only accept checks ordered from the Money Fund. The Money Fund
cannot be responsible for any check not ordered from the Money Fund that is
returned unpaid to a payee.
The checks are drawn through Bank of America NT & SA (the "Bank"). The Bank may
terminate this service at any time upon notice to you.
When a check is presented for payment, we will redeem an equivalent number of
shares in your account to cover the amount of the check. Your shares will be
redeemed at the Net Asset Value next determined after we receive a check that
does not exceed the collected balance in your account. If a check is presented
for payment that exceeds the collected balance in your account, the Bank may
return the check unpaid. Since you will not know the exact amount in your
account on the day a check clears, you should not use a check to close your
account.
You will generally not be able to convert a check drawn on your Money Fund
account into a certified or cashier's check by presenting it at the Bank.
Because the Money Fund is not a bank, we cannot assure that a stop payment order
written by you will be effective. We will use our best efforts, however, to see
that these orders are carried out.
CONTINGENT DEFERRED SALES CHARGE
Most Franklin Templeton Funds impose a Contingent Deferred Sales Charge on
certain investments if you sell all or a part of the investment within the
Contingency Period. While the Money Fund generally does not impose a Contingent
Deferred Sales Charge, it will do so if you sell shares that were exchanged into
the Money Fund from another Franklin Templeton Fund and those shares would have
been assessed a Contingent Deferred Sales Charge in the other fund. The charge
is 1% of the value of the shares sold or the Net Asset Value at the time of
purchase, whichever is less. The time the shares are held in the Money Fund does
not count towards the completion of any Contingency Period.
For purchases of the Intermediate-Term Fund and Class I shares of the Insured
Fund, if you did not pay a front-end sales charge because you invested $1
million or more or agreed to invest $1 million or more under a Letter of Intent,
a Contingent Deferred Sales Charge may apply if you sell all or a part of your
investment within the Contingency Period. Once you have invested $1 million or
more, any additional Class I investments you make without a sales charge may
also be subject to a Contingent Deferred Sales Charge if they are sold within
the Contingency Period. For any Class II purchase, a Contingent Deferred Sales
Charge may apply if you sell the shares within the Contingency Period. The
charge is 1% of the value of the shares sold or the Net Asset Value at the time
of purchase, whichever is less.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated dollar amount, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated number of shares, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Account fees
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, at a rate of up to 1% a month of an account's Net Asset Value. For
example, if you maintain an annual balance of $1 million in Class I shares,
you can redeem up to $120,000 annually through a systematic withdrawal plan
free of charge. Likewise, if you maintain an annual balance of $10,000 in
Class II shares, $1,200 may be redeemed annually free of charge.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund receives income generally in the form of interest and other income
derived from its investments. This income, less the expenses incurred in the
Fund's operations, is its net investment income from which income dividends may
be distributed. Thus, the amount of dividends paid per share may vary with each
distribution.
MONEY FUND
The Fund declares dividends each day that its Net Asset Value is calculated and
pays them to shareholders of record as of the close of business the day before.
The daily allocation of net investment income begins on the day after we receive
your money or settlement of a wire order trade and continues to accrue through
the day we receive your request to sell your shares or the settlement of a wire
order trade.
Dividend payments may vary from day to day and may be omitted on some days,
depending on changes in the Fund's net investment income. THE FUND DOES NOT PAY
"INTEREST" OR GUARANTEE ANY AMOUNT OF DIVIDENDS OR RETURN ON AN INVESTMENT IN
ITS SHARES.
DIVIDEND OPTIONS. Dividends will automatically be reinvested each day in the
form of additional shares of the Fund at the Net Asset Value per share at the
close of business.
If you complete the "Special Payment Instructions for Dividends" section of the
shareholder application included with this prospectus, you may direct your
dividends to buy 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.
You may also choose to receive dividends in cash. If you have the money sent to
another person or to a checking account, you may need a signature guarantee. If
you send the money to a checking account, please see "Electronic Fund Transfers
Class I Only" under "Services to Help You Manage Your Account."
If you choose one of these options, the dividends reinvested and credited to
your account during the month will be redeemed as of the close of business on
the last business day of the month and paid as directed on the shareholder
application. You may change your dividend option at any time by notifying us by
mail or phone. Please allow at least seven days for us to process the new
option.
INSURED FUND AND INTERMEDIATE-TERM FUND
The Fund declares dividends from its net investment income daily and pays them
monthly on or about the 20th day of the month. The daily allocation of net
investment income begins on the day after we receive your money or settlement of
a wire order trade and continues to accrue through the day we receive your
request to sell your shares or the settlement of a wire order trade.
Capital gains, if any, may be distributed annually, usually in December.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of Class I and Class II.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
DISTRIBUTION OPTIONS. You may receive your distributions from the Fund in any of
these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the same
class 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. If you own Class II shares, you may also reinvest
your distributions in Class I shares of the Fund. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge). If
you own Class II shares, you may also direct your distributions to buy Class I
shares of another Franklin Templeton Fund. Many shareholders find this a
convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers - Class I
Only" under "Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days before the reinvestment date
for us to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value per
share of the class you wish to purchase, plus any applicable sales charges. When
you sell shares, you receive the Net Asset Value per share minus any applicable
Contingent Deferred Sales Charges.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund.
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. For the Insured and
Intermediate-Term Funds, we determine the Net Asset Value per share as of the
scheduled close of the NYSE, generally 1:00 p.m. Pacific time. For the Money
Fund, we determine the Net Asset Value per share at 3:00 p.m. Pacific time. You
can find the prior day's closing Net Asset Value and Offering Price for each
class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
PROPER FORM
An order to buy shares of the Insured or Intermediate-Term Funds is in proper
form when we receive your signed shareholder application and check. An order to
buy shares of the Money Fund is in proper form when we receive your signed
shareholder application, check or wired funds. Written requests to sell or
exchange shares are in proper form when we receive written instructions signed
by all registered owners, with a signature guarantee if necessary. We must also
receive any outstanding share certificates for those shares.
Many of the Money Fund's investments must be paid for in federal funds, which
are monies held by the Fund's custodian bank on deposit at the Federal Reserve
Bank of San Francisco and elsewhere. The Money Fund generally cannot invest
money received from you until it is converted into and is available to the Fund
in federal funds. Therefore, your purchase order may not be considered in proper
form until the money received from you is available in federal funds, which may
take up to two days. If the Money Fund is able to make investments immediately
(within one business day), it may accept your order with payment in other than
federal funds.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by phone, we will not be liable for any loss.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
CORPORATION Corporate Resolution
PARTNERSHIP 1. The pages from the partnership agreement
that identify the general partners, or
2. A certification for a partnership
agreement
TRUST 1. The pages from the trust document that
identify the trustees, or
2. A CERTIFICATION FOR TRUST
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have let us know
that you do not want telephone privileges to apply to your account.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50 in the Insured or
Intermediate-Term Fund or $250 in the Money Fund. We will only do this if the
value of your account fell below this amount because you voluntarily sold your
shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to the
required minimum investment amount for the Fund.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Insured and Intermediate-Term Funds' shares may fluctuate
and a systematic investment plan such as this will not assure a profit or
protect against a loss. You may discontinue the program at any time by notifying
Investor Services by mail or phone.
AUTOMATIC PAYROLL DEDUCTION - CLASS I ONLY
You may have money transferred from your paycheck to the Fund to buy additional
Class I shares. Your investments will continue automatically until you instruct
the Fund and your employer to discontinue the plan. To process your investment,
we must receive both the check and payroll deduction information in required
form. Due to different procedures used by employers to handle payroll
deductions, there may be a delay between the time of the payroll deduction and
the time we receive the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50.
If you would like to establish a systematic withdrawal plan in the Insured or
Intermediate-Term Fund, please complete the systematic withdrawal plan section
of the shareholder application included with this prospectus and indicate how
you would like to receive your payments. If you would like to establish a
systematic withdrawal plan in the Money Fund, call Shareholder Services.
You may choose to direct your payments to buy the same class of shares of
another Franklin Templeton Fund or have the money sent directly to you, to
another person, or to a checking account. If you choose to have the money sent
to a checking account, please see "Electronic Fund Transfers - Class I Only"
below. Once your plan is established, any distributions paid by the Fund will be
automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan in the
Insured or Intermediate-Term Fund if you plan to buy shares on a regular basis.
Shares sold under the plan may also be subject to a Contingent Deferred Sales
Charge. Please see "Contingent Deferred Sales Charge" under "How Do I Sell
Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS - CLASS I ONLY
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements, money fund checks, and deposit slips for
Franklin accounts.
You will need the code number for each class to use TeleFACTS(R). The code
numbers are as follows:
CODE
FUND NUMBER
- -----------------------------------------------------------------------------
Insured Fund - Class I 124
Insured Fund - Class II 224
Intermediate-Term Fund 125
Money Fund 152
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
Special procedures have been designed for banks and other institutions that
would like to open multiple accounts in the Money Fund. Please see the SAI for
more information.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
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.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CALIFORNIA MUNICIPAL SECURITIES - Municipal securities issued by or on behalf of
the state of California, its local governments, municipalities, authorities,
agencies and political subdivisions.
CD - Certificate of deposit
CLASS I AND CLASS II - The Insured Fund offers two classes of shares, designated
"Class I" and "Class II." The two classes have proportionate interests in the
Fund's portfolio. They differ, however, primarily in their sales charge
structures and Rule 12b-1 plans. Shares of the Intermediate-Term Fund and the
Money Fund are considered Class I shares for redemption, exchange and other
purposes.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
FITCH - Fitch Investors Service, Inc.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge for the Insured Fund is 4.25% for Class I and 1% for
Class II. The maximum front-end sales charge for the Intermediate-Term Fund is
2.25%. There is no front-end sales charge for the Money Fund.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
FRANKLIN CALIFORNIA
TAX-FREE TRUST
STATEMENT OF
ADDITIONAL INFORMATION
NOVEMBER 1, 1997
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
How does the Fund Invest its Assets? ................. 2
What are the Fund's Potential Risks? .................. 6
Investment Restrictions ............................... 7
Officers and Trustees ................................. 8
Investment Management and Other Services ............. 11
How does the Fund Buy
Securities for its Portfolio? ........................ 12
How Do I Buy, Sell and Exchange Shares? .............. 13
How are Fund Shares Valued? ........................... 16
Additional Information on
Distributions and Taxes .............................. 17
The Fund's Underwriter ................................ 19
How does the Fund Measure Performance? ............... 21
Miscellaneous Information ............................. 25
Financial Statements .................................. 26
Useful Terms and Definitions .......................... 26
Appendix
Description of Ratings ............................... 27
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When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
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This SAI describes the three series of the Franklin California Tax-Free Trust
(the "Trust"), an open-end management investment company. Each series may
individually or together be referred to as the "Fund(s)." 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
Money Fund also seeks liquidity in its investments.
The Insured Fund seeks to achieve its objective by investing primarily in
California Municipal Securities covered by insurance guaranteeing the scheduled
payment of principal and interest.
The Intermediate-Term Fund seeks to achieve its objective by investing primarily
in investment grade California Municipal Securities and maintaining a
dollar-weighted average portfolio maturity of three to ten years.
The Money Fund seeks to achieve its objective by investing primarily in high
quality, short-term California Municipal Securities. The Money Fund attempts to
maintain a stable Net Asset Value of $1 per share.
The Prospectus, dated November 1, 1997, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL
HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How does the Fund Invest its Assets?"
The Intermediate-Term Fund is a non-diversified series of the Trust and thus not
subject to any restrictions under federal securities laws with respect to the
concentration of its assets in one or relatively few issuers. The
Intermediate-Term Fund, however, intends to qualify as a regulated investment
company under Subchapter M of the Code. To qualify, at the close of each quarter
of the Fund's taxable year, (i) at least 50% of the value of its total assets
must be represented by cash, government securities, and other securities limited
in respect of any one issuer to not more than 5% of the value of the Fund's
total assets, and (ii) not more than 25% of the Fund's total assets may be
invested in securities of one issuer, other than U.S. government securities.
The Insured Fund and the Money Fund are diversified series of the Trust. As a
fundamental policy, these Funds will not buy a security if, with respect to 75%
of their net assets, more than 5% would be in the securities of any single
issuer. This limitation does not apply to investments issued or guaranteed by
the U.S. government or its instrumentalities.
For the purpose of determining diversification, each political subdivision,
agency, or instrumentality of a state, each multistate agency of which a state
is a member, and each public authority that issues private activity bonds on
behalf of a private entity is considered a separate issuer. Escrow-secured or
defeased bonds, described below, are not generally considered an obligation of
the original municipality when determining diversification. For securities
backed only by the assets or revenues of a particular instrumentality, facility
or subdivision, the entity is considered the issuer.
Generally, all of the securities held by the Money Fund are offered on the basis
of a quoted yield to maturity, and the price of the security is adjusted so
that, relative to the stated interest rate, it will return the quoted rate to
the buyer. The maturities of these securities at the time of issuance generally
range between three months to one year.
If a security in the Money Fund's portfolio ceases to be rated in the highest
rating category, or Advisers becomes aware that a security has been rated below
the second highest rating category, not including changes in a security's
relative standing within a category, the Board will promptly reassess whether
the security presents minimal credit risks. The Board will take such action as
it deems to be in the best interest of the Fund and its shareholders, unless the
security is sold or matures within five business days of Advisers becoming aware
of the new rating category and the Board is notified of Advisers' actions.
In addition to considering ratings assigned by the rating services in its
selection of portfolio securities for the Money Fund, Advisers considers, among
other things, information about the financial history and condition of the
issuer, revenue and expense prospects and, in the case of revenue bonds, the
financial history and condition of the source of revenue to service the bonds.
Depending on Advisers' view of market conditions, the Money Fund may or may not
buy securities with the expectation of holding them to maturity, although its
general policy is to hold securities to maturity. The Money Fund may, however,
sell securities before maturity to meet redemptions or as a result of a revised
management evaluation of the issuer.
DESCRIPTION OF MUNICIPAL AND OTHER SECURITIES
The Prospectus contains a general description of municipal securities. The
following provides more detailed information about the various municipal and
other securities in which the Fund may invest. There may be other types of
municipal securities that become available that are similar to those described
below and in which the Fund may also invest, if consistent with its investment
objective and policies.
TAX ANTICIPATION NOTES. These are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues,
which will be used to pay the notes. They are usually general obligations of the
issuer, secured by the taxing power for the payment of principal and interest.
REVENUE ANTICIPATION NOTES. These are issued in expectation of the receipt of
other kinds of revenue, such as federal revenues available under the Federal
Revenue Sharing Program.
BOND ANTICIPATION NOTES. These are normally issued to provide interim financing
until long-term financing can be arranged. Long-term bonds then provide the
money for the repayment of the notes.
CONSTRUCTION LOAN NOTES. These are sold to provide construction financing for
specific projects. After successful completion and acceptance, many projects
receive permanent financing through the Federal Housing Administration under the
Federal National Mortgage Association or the Government National Mortgage
Association.
TAX-EXEMPT COMMERCIAL PAPER. This typically represents a short-term obligation
(270 days or less) issued by a municipality to meet working capital needs.
MUNICIPAL BONDS. These meet longer-term capital needs and generally have
maturities of more than one year when issued. They have two principal
classifications: general obligation bonds and revenue bonds.
1. GENERAL OBLIGATION BONDS. Issuers of general obligation bonds include states,
counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads. The basic security
behind general obligation bonds is the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. The taxes that can
be levied for the payment of debt service may be limited or unlimited as to the
rate or amount of special assessments.
2. REVENUE BONDS. Revenue bonds are not secured by the full faith, credit and
taxing power of the issuer. Rather, the principal security for a revenue bond is
generally the net revenue derived from a particular facility, group of
facilities, or, in some cases, the proceeds of a special excise tax or other
specific revenue source. Revenue bonds are issued to finance a wide variety of
capital projects, including: electric, gas, water and sewer systems; highways,
bridges and tunnels; port and airport facilities; colleges and universities; and
hospitals. The principal security behind these bonds may vary. For example,
housing finance authorities have a wide range of security, including partially
or fully insured mortgages, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. Many bonds
provide additional security in the form of a debt service reserve fund that may
be used to make principal and interest payments on the issuer's obligations.
Some authorities are provided further security in the form of state assurances
(although without obligation) to make up deficiencies in the debt service
reserve fund.
TAX-EXEMPT INDUSTRIAL DEVELOPMENT REVENUE BONDS. These are bonds that pay
tax-exempt interest and are, in most cases, revenue bonds. They are issued by or
on behalf of public authorities to raise money for the financing of various
privately operated facilities for business, manufacturing, housing, sports and
pollution control. These bonds are also used to finance public facilities such
as airports, mass transit systems, ports and parking. The payment of the
principal and interest on these bonds is solely dependent on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of the
facility or other property as security for payment.
FLOATING OR VARIABLE RATE DEMAND NOTES ("VRDNS"). These are tax-exempt
obligations with a floating or variable interest rate. They have a right of
demand, which may be unconditional, to receive payment of the unpaid principal
balance plus accrued interest upon a short notice period, generally up to 30
days, before specified dates. The payment may be received either from the issuer
or by drawing on a bank letter of credit, a guarantee or insurance issued with
respect to the note. The interest rate is adjustable at intervals ranging from
daily up to monthly, and is calculated to maintain the market value of the VRDN
at approximately its par value upon the adjustment date.
The Money Fund may buy VRDNs according to procedures adopted by the Board and
designed to minimize credit risks. VRDNs purchased by the Money Fund must be of
high quality, as determined by the Board, with respect to both their long-term
and short-term aspects. If, however, credit support is provided in the event of
default on the underlying security, the Money Fund may rely only on the high
quality character of the short-term aspect of the demand note, that is, the
demand feature. If the quality of any VRDN falls below the high quality level
required by the Board and SEC rules, the Money Fund must either exercise the
demand feature or sell the VRDN in the secondary market within a reasonable
period of time, whichever Advisers believes is in the best interest of the Fund
and its shareholders. The maturities of VRDNs held by the Money Fund are deemed
to be the longer of the demand period or the period remaining until the next
interest rate adjustment, although the stated maturities may be in excess of one
year.
WHEN-ISSUED TRANSACTIONS. Municipal securities are frequently issued on a
"when-issued" basis. When so issued, the price, which is generally expressed in
yield terms, is fixed at the time the commitment to buy is made, but delivery
and payment for the when-issued securities take place at a later date. During
the period between purchase and settlement, no payment is made by the Fund to
the issuer and no interest accrues to the Fund. To the extent assets of the Fund
are held in cash pending the settlement of a purchase of securities, the Fund
would earn no income on those assets. It is the Fund's intention, however, to be
fully invested to the extent practicable and consistent with its investment
policies. When the Fund makes the commitment to buy a municipal security on a
when-issued basis, it records the transaction and reflects the value of the
security in the determination of its Net Asset Value. The Fund believes that its
Net Asset Value or income will not be adversely affected by its purchase of
municipal securities on a when-issued basis.
CALLABLE BONDS. Callable bonds allow the issuer to redeem the bonds before their
maturity date. To protect bondholders, however, callable bonds may be issued
with provisions that prevent them from being called for a period of time,
typically five to ten years from the date of issue. During times of generally
declining interest rates, if the call protection on a callable bond expires,
there is an increased likelihood that the bond may be called by the issuer.
Advisers may sell a callable bond before its call date, if it believes the bond
is at its maximum premium potential.
When pricing callable bonds, each bond is marked-to-market daily based on the
bond's call date. Thus, the call of some or all of the Fund's callable bonds may
have an impact on the Fund's Net Asset Value. Based on a number of factors,
including certain portfolio management strategies used by Advisers, the Fund
believes it has reduced the risk of an adverse impact on its Net Asset Value
based on calls of callable bonds. In light of the Fund's pricing policies and
because the Fund follows certain amortization procedures required by the IRS,
the Fund is not expected to suffer any material adverse impact related to the
value at which the Fund has carried the bonds in connection with calls of bonds
purchased at a premium. Notwithstanding these policies, however, the
reinvestment of the proceeds of any called bond may be in bonds that pay a lower
rate of return than the called bonds and, as with any investment strategy, there
is no guarantee that a call may not have a more substantial impact than
anticipated.
ESCROW-SECURED OR DEFEASED BONDS. These are created when an issuer refunds in
advance of maturity (or pre-refunds) an outstanding bond issue that is not
immediately callable, and it becomes necessary or desirable to set aside funds
for redemption of the bonds at a future date. In an advance refunding, the
issuer uses the proceeds of a new bond issue to buy high grade, interest bearing
debt securities that are then deposited in an irrevocable escrow account held by
a trustee bank to secure all future payments of principal and interest of the
advance refunded bond. Escrow-secured bonds often receive a triple A or
equivalent rating from Moody's, S&P or Fitch.
STRIPPED MUNICIPAL SECURITIES. Municipal securities may be sold in "stripped"
form. Stripped municipal securities represent separate ownership of principal
and interest payments on the municipal securities.
ZERO-COUPON SECURITIES. The Insured and Intermediate-Term Funds may each invest
in zero-coupon and delayed interest securities. Zero-coupon securities make no
periodic interest payments, but are sold at a deep discount from their face
value. The buyer recognizes a rate of return determined by the gradual
appreciation of the security, which is redeemed at face value on a specified
maturity date. The discount varies depending on the time remaining until
maturity, as well as prevailing interest rates, liquidity of the security, and
the perceived credit quality of the issuer. The discount, in the absence of
financial difficulties of the issuer, typically decreases as the final maturity
date approaches. If the issuer defaults, the Fund may not obtain any return on
its investment.
Because zero-coupon securities bear no interest and compound semiannually at the
rate fixed at the time of issuance, their value is generally more volatile than
the value of other fixed-income securities. Since zero-coupon bondholders do not
receive interest payments, zero-coupon securities fall more dramatically than
bonds paying interest on a current basis when interest rates rise. When interest
rates fall, zero-coupon securities rise more rapidly in value, because the bonds
reflect a fixed rate of return.
The Fund's investment in zero-coupon and delayed interest securities may cause
the Fund to recognize income and make distributions to shareholders before it
receives any cash payments on its investment. In order to generate cash to
satisfy distribution requirements, the Fund may be required to sell portfolio
securities that it otherwise may have continued to hold or to use cash flows
from other sources such as the sale of Fund shares.
CONVERTIBLE AND STEP COUPON BONDS. The Insured and Intermediate-Term Funds may
each invest a portion of their assets in convertible and step coupon bonds.
Convertible bonds are zero-coupon securities until a predetermined date, at
which time they convert to a specified coupon security. The coupon on step
coupon bonds changes periodically during the life of the security based on
predetermined dates chosen when the security is issued.
MUNICIPAL LEASE OBLIGATIONS. The Fund may invest in municipal lease obligations,
including certificates of participation. The Board reviews municipal lease
obligations held in the Fund's portfolio to assure that they are liquid
investments based on various factors reviewed by Advisers and monitored by the
Board. These factors include (a) the credit quality of the obligations and the
extent to which they are rated or, if unrated, comply with existing criteria and
procedures followed to ensure that they are of comparable quality to the ratings
required for the Fund to invest, 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 municipal lease obligations; and (c)
the extent to which the type of municipal lease obligations held by the Fund
trade on the same basis and with the same degree of dealer participation as
other municipal securities of comparable credit rating or quality.
U.S. GOVERNMENT OBLIGATIONS. These are issued by the U.S. Treasury or by
agencies and instrumentalities of the U.S. government and are backed by the full
faith and credit of the U.S. government. They include Treasury bills, notes and
bonds.
COMMERCIAL PAPER. This refers to promissory notes issued by corporations in
order to finance their short-term credit needs.
REPURCHASE AGREEMENTS - MONEY FUND ONLY. The Money Fund may invest in short-term
repurchase agreements, usually from overnight to one week. The Money Fund does
not invest in repurchase agreements with a term of more than one year. The
securities subject to a repurchase agreement, however, may have maturity dates
of more than one year from the effective date of the repurchase agreement. The
Money Fund may not enter into a repurchase agreement with more than seven days
to maturity if, as a result, more than 10% of the Fund's net assets would be
invested in such repurchase agreements or other illiquid securities.
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors, if
such loans do not exceed 10% of the value of the Fund's total assets at the time
of the most recent loan. The borrower must deposit with the Fund's custodian
bank collateral with an initial market value of at least 102% of the market
value of the securities loaned, including any accrued interest, with the value
of the collateral and loaned securities marked-to-market daily to maintain
collateral coverage of at least 102%. This collateral shall consist of cash. The
lending of securities is a common practice in the securities industry. The Fund
may engage in security loan arrangements with the primary objective of
increasing the Fund's income either through investing cash collateral in
short-term interest-bearing obligations or by receiving a loan premium from the
borrower. Under the securities loan agreement, the Fund continues to be entitled
to all dividends or interest on any loaned securities. As with any extension of
credit, there are risks of delay in recovery and loss of rights in the
collateral should the borrower of the security fail financially.
INSURANCE - INSURED FUND ONLY
Each insured municipal security in the Insured Fund's portfolio is covered by
either a "New Issue Insurance Policy," a "Portfolio Insurance Policy" or a
"Secondary Insurance Policy" issued by a qualified municipal bond insurer. The
insurance feature insures the scheduled payment of principal and interest, but
does not guarantee (i) the market value of the insured municipal security, (ii)
the value of the Fund's shares, nor (iii) the Fund's dividend distributions.
Under the provisions of an insurance policy, the insurer unconditionally and
irrevocably agrees to pay the appointed trustee or its successor and its agent
(the "Trustee") the portion of the principal or interest on an insured security
that is due for payment but that has not been paid by the issuer. The insurer
makes such payments to the Trustee on the date the principal or interest becomes
due for payment or on the next business day following the day on which the
insurer receives notice of nonpayment, whichever is later. The Trustee then
disburses the amount of principal or interest due to the Fund after the Trustee
receives (i) evidence of the Fund's right to receive payment of the principal or
interest due for payment, and (ii) evidence, including any appropriate
instruments of assignment, that all of the rights to payment of the principal or
interest due for payment will vest in the insurer. After the disbursement, the
insurer becomes the owner of the security, appurtenant coupon, or right to
payment of principal or interest on the security and is fully subrogated to all
of the Fund's rights with respect to the security, including the right to
payment. The insurer's rights to the security or to payment of principal or
interest are limited, however, to the amount the insurer has paid.
Under certain circumstances, a Portfolio Insurance Policy may affect the value
of the Fund's shares. As discussed in the Prospectus, unless the Fund buys a
Secondary Insurance Policy, the Fund intends to hold any defaulted security, or
security for which there is a significant risk of default, in its portfolio
until the default has been cured or the principal and interest are paid by the
issuer or the insurer. In this event, Advisers will consider the value of the
insurance for the principal and interest payments, the market value of the
portfolio security, the market value of securities of similar issuers whose
securities carry similar interest rates, and the discounted present value of the
principal and interest payments to be received from the insurance company in its
evaluation of the security. Absent any unusual or unforeseen circumstances as a
result of the Portfolio Insurance Policy, Advisers would likely recommend that
the Fund value the defaulted security, or security for which there is a
significant risk of default, at the same price as securities of a similar nature
that are not in default. A defaulted security covered by a Secondary Insurance
Policy, however, would be valued at its market value.
If the issuer of an insured municipal security fails to pay an installment of
principal or interest that is due for payment, the Fund will receive an
insurance payment in the amount of the payment due. When referring to the
principal amount, the term "due for payment" means the security's stated
maturity date or its call date for mandatory sinking fund redemption. It does
not mean any earlier date when payment is due because of a call for redemption
(other than by mandatory sinking fund redemption), acceleration or other
advancement of maturity. When referring to the interest on a security, the term
"due for payment" means the stated date for payment of interest.
The term "due for payment" may have another meaning if the interest on a
security is determined to be subject to federal income taxation, as provided in
the security's underlying documentation. When referring to the principal amount
in this case, the term also means the call date for mandatory redemption as a
result of the determination of taxability, and when referring to the interest on
the security, the term also means the accrued interest, to the call date for
mandatory redemption, at the rate provided in the security's documentation
together with any applicable redemption premium.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The following information is provided in light of the Fund's policy of investing
primarily in California Municipal Securities. It is not a complete analysis of
every material fact that may affect the ability of issuers of California
Municipal Securities to meet their debt obligations or of the economic or
political conditions within California. It is based on information available to
the Fund and on historically reliable sources, including periodic publications
by national rating services, but it has not been independently verified by the
Fund.
Like many other states, California was significantly affected by the national
recession of the early 1990s, especially in the southern portion of the state.
Between 1990 and 1993, the state's employment dropped 2.8% on an annualized
basis and real per capita income declined by 4%. Almost half of the state's job
losses resulted from military cutbacks and close to 40% were caused by a
downturn in the construction industry. Downsizing in the state's aerospace
industry, excess office space capacity, and slow growth in California's
significant export market also contributed to the state's recession.
Since mid-1993, California's economic recovery has been fueled by growth in the
export, entertainment, tourism and computer services sectors. The state's
diverse employment base recently reached pre-recession levels with manufacturing
accounting for 14.4% of employment, trade 23.6%, services 30% and government
16.9%, based on 1995 figures. Despite its strong employment growth, California's
unemployment rate has remained above the national average and wages, although
still above national levels, have declined with the loss of high paying
aerospace jobs.
During the period from 1990 to 1994, California experienced large budget
deficits due to its economic recession, as well as unrealistic budget
assumptions. School expenditures totaling $1.8 billion were recorded as "loan
assets" on the state's books to be repaid over eight years. When adjusted to
account for these loans, California's deficit balance was 10.7% of expenditures
in 1992.
During fiscal 1996, California's revenues were higher than expected due to the
strength of the state's growing economy. As a result, California ended fiscal
1996 with an accumulated surplus of $219 million. This amount falls to a
negative $1.4 billion, however, when adjusted to account for the remaining
school "loans." After this adjustment, California's deficit balance was 3.1% of
expenditures.
Although California's debt levels have grown in recent years, they have remained
relatively moderate. During fiscal 1996, debt service accounted for 5.6% of
general fund expenditures.
The fiscal 1997 budget included increases for education and extended welfare
cuts, and assumed approximately $216 million in additional federal aid for
illegal immigrants. As of March 1997, the state's assumptions for additional
federal budget support do not appear to have been realistic. An operating
deficit of $38 million has been estimated for fiscal 1997, as of March 1997,
before making adjustments for the school loans.
Overall, however, the outlook for California is considered stable.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. The Fund MAY NOT:
1. Borrow money or mortgage or pledge any of its assets, except that borrowings
(and a pledge of assets therefor) for temporary or emergency purposes may be
made from banks in any amount up to 5% of the total asset value. Secured
temporary borrowings may take the form of a reverse repurchase agreement,
pursuant to which the Fund would sell portfolio securities for cash and
simultaneously agree to repurchase them at a specified date for the same amount
of cash plus an interest component.
2. Buy any securities on "margin" or sell any securities "short," except that
it may use such short-term credits as are necessary for the clearance of
transactions.
3. Make loans, except through the purchase of debt securities which are either
publicly distributed or customarily purchased by institutional investors, or to
the extent the entry into a repurchase agreement may be deemed a loan. Although
such loans are not presently intended, this prohibition will not preclude the
Fund from loaning portfolio securities to broker-dealers or other institutional
investors if at least 102% cash collateral is pledged and maintained by the
borrower; provided such portfolio security loans may not be made if, as a
result, the aggregate of such loans exceeds 10% of the value of the Fund's total
assets at the time of the most recent loan.
4. Act as underwriter of securities issued by other persons, except insofar as
the Fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
5. Purchase the securities of any issuer which would result in owning more than
10% of the voting securities of such issuer.
6. Purchase securities from or sell to the Trust's officers and trustees, or
any firm of which any officer or trustee is a member, as principal, or retain
securities of any issuer if, to the knowledge of the Trust, one or more of the
Trust's officers, trustees, or investment advisor own beneficially more than 1/2
of 1% of the securities of such issuer and all such officers and trustees
together own beneficially more than 5% of such securities.
7. Acquire, lease or hold real estate, except such as may be necessary or
advisable for the maintenance of its offices and provided that this limitation
shall not prohibit the purchase of municipal and other debt securities secured
by real estate or interests therein.
8. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads, or any combination thereof, or interests in oil, gas, or other mineral
exploration or development programs, except that it may purchase, hold, and
dispose of "obligations with puts attached" in accordance with its investment
policies.
9. Invest in companies for the purpose of exercising control or management.
10. Purchase securities of other investment companies, except in connection with
a merger, consolidation, acquisition or reorganization; except to the extent the
Insured and Intermediate-Term Funds invest their uninvested daily cash balances
in shares of the Money Fund and other tax-exempt money market funds in the
Franklin Templeton Group of Funds provided i) their purchases and redemptions of
such money market fund shares may not be subject to any purchase or redemption
fees, ii) their investments may not be subject to duplication of management
fees, nor to any charge related to the expense of distributing their shares (as
determined under Rule 12b-1, as amended under federal securities laws), and iii)
aggregate investments in any such money market fund do not exceed (A) the
greater of (i) 5% of their total net assets or (ii) $2.5 million, or (B) more
than 3% of the outstanding shares of any such money market fund.
11. Purchase securities, in private placements or in other transactions, for
which there are legal or contractual restrictions on resale.
12. Invest more than 25% of its assets in securities of any industry. For
purposes of this limitation, tax-exempt securities issued by governments or
political subdivisions of governments are not considered to be part of any
industry.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the Fund, the Fund may receive stock, real estate, or other
investments that the Fund would not, or could not, buy. In this case, the Fund
intends to dispose of the investment as soon as practicable while maximizing the
return to shareholders.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
POSITIONS AND OFFICES PRINCIPAL OCCUPATIONS
NAME, AGE AND ADDRESS WITH THE TRUST DURING PAST FIVE YEARS
Frank H. Abbott, III (76) Trustee
1045 Sansome Street
San Francisco, CA 94111
President and Director, Abbott
Corporation (an investment
company); and director or
trustee, as the case may be,
of 29 of the investment
companies in the Franklin
Templeton Group of Funds.
Harris J. Ashton (65) Trustee
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive
Officer and Chairman of the
Board, General Host
Corporation (nursery and craft
centers); Director, RBC
Holdings, Inc. (a bank holding
company) and Bar-S Foods (a
meat packing company); and
director or trustee, as the
case may be, of 53 of the
investment companies in the
Franklin Templeton Group of
Funds.
*Harmon E. Burns (52) Vice President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President,
Secretary and Director,
Franklin Resources, Inc.;
Executive Vice President and
Director, Franklin Templeton
Distributors, Inc. and
Franklin Templeton Services,
Inc.; Executive Vice
President, Franklin Advisers,
Inc.; Director,
Franklin/Templeton Investor
Services, Inc.; and officer
and/or director or trustee, as
the case may be, of most of
the other subsidiaries of
Franklin Resources, Inc. and
of 58 of the investment
companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (65) Trustee
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of
Pitney, Hardin, Kipp & Szuch;
Director, General Host
Corporation (nursery and craft
centers); and director or
trustee, as the case may be,
of 55 of the investment
companies in the Franklin
Templeton Group of Funds.
*Charles B. Johnson (64) Chairman
777 Mariners Island Blvd. of the Board
San Mateo, CA 94404 and Trustee
President, Chief Executive
Officer and Director, Franklin
Resources, Inc.; Chairman of
the Board and Director,
Franklin Advisers, Inc.,
Franklin Advisory Services,
Inc., Franklin Investment
Advisory Services, Inc. and
Franklin Templeton
Distributors, Inc.; Director,
Franklin/Templeton Investor
Services, Inc., Franklin
Templeton Services, Inc. and
General Host Corporation
(nursery and craft centers);
and officer and/or director or
trustee, as the case may be,
of most of the other
subsidiaries of Franklin
Resources, Inc. and of 54 of
the investment companies in
the Franklin Templeton Group
of Funds.
*Rupert H. Johnson, Jr. (57) President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President and
Director, Franklin Resources,
Inc. and Franklin Templeton
Distributors, Inc.; President
and Director, Franklin
Advisers, Inc.; Senior Vice
President and Director,
Franklin Advisory Services,
Inc. and Franklin Investment
Advisory Services, Inc.;
Director, Franklin/Templeton
Investor Services, Inc.; and
officer and/or director or
trustee, as the case may be,
of most of the other
subsidiaries of Franklin
Resources, Inc. and of 58 of
the investment companies in
the Franklin Templeton Group
of Funds.
Frank W.T. LaHaye (68) Trustee
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Peregrine
Associates and Miller &
LaHaye, which are General
Partners of Peregrine Ventures
and Peregrine Ventures II
(venture capital firms);
Chairman of the Board and
Director, Quarterdeck
Corporation (software firm);
Director, Fischer Imaging
Corporation (medical imaging
systems) and Digital
Transmission Systems, Inc.
(wireless communications); and
director or trustee, as the
case may be, of 27 of the
investment companies in the
Franklin Templeton Group of
Funds.
Gordon S. Macklin (69) Trustee
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River
Corporation (financial
services); Director, Fund
American Enterprises Holdings,
Inc., MCI Communications
Corporation, CCC Information
Services Group, Inc.
(information services),
MedImmune, Inc.
(biotechnology), Shoppers
Express (home shopping), and
Spacehab, Inc. (aerospace
services); and director or
trustee, as the case may be,
of 50 of the investment
companies in the Franklin
Templeton Group of Funds;
formerly Chairman, Hambrecht
and Quist Group, Director, H &
Q Healthcare Investors, and
President, National
Association of Securities
Dealers, Inc.
Martin L. Flanagan (37) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President and
Chief Financial Officer,
Franklin Resources, Inc.;
Executive Vice President and
Director, Templeton Worldwide,
Inc.; Executive Vice
President, Chief Operating
Officer and Director,
Templeton Investment Counsel,
Inc.; Senior Vice President
and Treasurer, Franklin
Advisers, Inc.; Treasurer,
Franklin Advisory Services,
Inc.; Treasurer and Chief
Financial Officer, Franklin
Investment Advisory Services,
Inc.; President, Franklin
Templeton Services, Inc.;
Senior Vice President,
Franklin/Templeton Investor
Services, Inc.; and officer
and/or director or trustee, as
the case may be, of 58 of the
investment companies in the
Franklin Templeton Group of
Funds.
Deborah R. Gatzek (48) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President and
General Counsel, Franklin
Resources, Inc.; Senior Vice
President, Franklin Templeton
Services, Inc. and Franklin
Templeton Distributors, Inc.;
Vice President, Franklin
Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice
President, Chief Legal Officer
and Chief Operating Officer,
Franklin Investment Advisory
Services, Inc.; and officer of
58 of the investment companies
in the Franklin Templeton
Group of Funds.
Thomas J. Kenny (34) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President,
Franklin Advisers, Inc.; and
officer of eight of the
investment companies in the
Franklin Templeton Group of
Funds.
Diomedes Loo-Tam (58) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting
Officer
Senior Vice President,
Franklin Templeton Services,
Inc.; and officer of 35 of the
investment companies in the
Franklin Templeton Group of
Funds.
Edward V. McVey (60) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President and
National Sales Manager,
Franklin Templeton
Distributors, Inc.; and
officer of 30 of the
investment companies in the
Franklin Templeton Group of
Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are currently paid
$640 per month plus $640 per meeting attended. As shown above, the nonaffiliated
Board members also serve as directors or trustees of other investment companies
in the Franklin Templeton Group of Funds. They may receive fees from these funds
for their services. The following table provides the total fees paid to
nonaffiliated Board members by the Trust and by other funds in the Franklin
Templeton Group of Funds.
NUMBER OF BOARDS
TOTAL FEES IN THE FRANKLIN
TOTAL FEES RECEIVED FROM THE TEMPLETON GROUP
RECEIVED FRANKLIN TEMPLETON OF FUNDS ON WHICH
NAME FROM THE TRUST** GROUP OF FUNDS*** EACH SERVES****
- -------------------------------------------------------------------------------
Frank H. Abbott, III $14,720 $165,236 29
Harris J. Ashton $14,720 $343,591 53
S. Joseph Fortunato $14,720 $360,411 55
David W. Garbellano* $13,440 $148,916 28
Frank W.T. LaHaye $14,080 $139,233 27
Gordon S. Macklin $14,720 $335,541 50
*Deceased, September 27, 1997.
**For the fiscal year ended June 30, 1997.*
***For the calendar year ended December 31, 1996.
****We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not include
the total number of series or funds within each investment company for which the
Board members are responsible. The Franklin Templeton Group of Funds currently
includes 58 registered investment companies, with approximately 170 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or trustee.
No officer or Board member received any other compensation, including pension or
retirement benefits, directly or indirectly from the Fund or other funds in the
Franklin Templeton Group of Funds. Certain officers or Board members who are
shareholders of Resources may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
As of October 2, 1997, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately 87
shares of Insured Fund - Class I and 98 shares of the Intermediate-Term Fund, or
less than 1% of the total outstanding shares of each of these Funds, and
13,182,226 shares of the Money Fund or 2% of the Money Fund's shares. Many of
the Board members also own shares in other funds in the Franklin Templeton Group
of Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio transactions
are executed. Advisers' extensive research activities include, as appropriate,
traveling to meet with issuers and to review project sites. Advisers' activities
are subject to the review and supervision of the Board to whom Advisers renders
periodic reports of the Fund's investment activities. Advisers and its officers,
directors and employees are covered by fidelity insurance for the protection of
the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action with
respect to any of the other funds it manages, or for its own account, that may
differ from action taken by Advisers on behalf of the Fund. Similarly, with
respect to the Fund, Advisers is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that Advisers and
access persons, as defined by the 1940 Act, may buy or sell for its or their own
account or for the accounts of any other fund. Advisers is not obligated to
refrain from investing in securities held by the Fund or other funds that it
manages. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Fund's Code of Ethics. Please
see "Miscellaneous Information - Summary of Code of Ethics."
MANAGEMENT FEES. Under their management agreements, the Insured and
Intermediate-Term Funds each pay Advisers a management fee equal to a monthly
rate of 5/96 of 1% (approximately 5/8 of 1% per year) of the value of net assets
up to and including $100 million; and 1/24 of 1% (approximately 1/2 of 1% per
year) of the value of net assets over $100 million up to and including $250
million; and 9/240 of 1% (approximately 45/100 of 1% per year) of the value of
net assets in excess of $250 million. The fee is computed at the close of
business on the last business day of each month. Each class of the Insured fund
pays its proportionate share of the management fee.
Under its management agreement, the Money Fund pays Advisers a management fee
equal to a daily rate of 1/584 of 1% of the value of net assets up to and
including $100 million; and 1/730 of 1% of the value of net assets over $100
million up to and including $250 million; and 1/811 of 1% of the value of net
assets in excess of $250 million. The fee is payable at the request of Advisers,
and is computed at the close of business each day.
The table below shows the management fees paid by the Fund for the fiscal years
ended June 30, 1997, 1996 and 1995.
MANAGEMENT FEES PAID
1997 1996 1995
- --------------------------------------------------------------------------
Insured Fund $7,686,324 $7,290,593 $6,703,306
Intermediate-Term Fund 311,342* 263,181* 119,684*
Money Fund 3,127,809 3,083,906 3,419,037
*For the fiscal years ended June 30, 1995, 1996 and 1997, management fees,
before any advance waiver, totaled $587,796, $607,672 and $673,288,
respectively. Under an agreement by Advisers to limit its fees, the
Intermediate-Term Fund paid the management fees shown.
MANAGEMENT AGREEMENTS. The management agreements are in effect until March 31,
1998. They may continue in effect for successive annual periods if their
continuance is specifically approved at least annually by a vote of the Board or
by a vote of the holders of a majority of the Fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to the management agreements or interested persons of any such party
(other than as members of the Board), cast in person at a meeting called for
that purpose. The management agreements may be terminated without penalty at any
time by the Board or by a vote of the holders of a majority of the Fund's
outstanding voting securities on 30 days' written notice to Advisers, or by
Advisers on 30 days' written notice to the Fund, and will automatically
terminate in the event of its assignment, as defined in the 1940 Act.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. These include
preparing and maintaining books, records, and tax and financial reports, and
monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under its administration agreement, Advisers pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
The fee is paid by Advisers. It is not a separate expense of the Fund.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these services
per benefit plan participant Fund account per year may not exceed the per
account fee payable by the Fund to Investor Services in connection with
maintaining shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York 10286, acts as custodian of the securities and other assets of
the Fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Fund's independent auditors. During the fiscal year ended June
30, 1997, their auditing services consisted of rendering an opinion on the
financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended June 30, 1997.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
Since most purchases by the Fund are principal transactions at net prices, the
Fund incurs little or no brokerage costs. The Fund deals directly with the
selling or buying principal or market maker without incurring charges for the
services of a broker on its behalf, unless it is determined that a better price
or execution may be obtained by using the services of a broker. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask prices. As a general rule, the Fund does not buy
bonds in underwritings where it is given no choice, or only limited choice, in
the designation of dealers to receive the commission. The Fund seeks to obtain
prompt execution of orders at the most favorable net price. Transactions may be
directed to dealers in return for research and statistical information, as well
as for special services provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services Advisers receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staffs of other securities firms. As long as it is lawful and
appropriate to do so, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. If the Fund's
officers are satisfied that the best execution is obtained, the sale of Fund
shares, as well as shares of other funds in the Franklin Templeton Group of
Funds, may also be considered a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisers are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by
Advisers, taking into account the respective sizes of the funds and the amount
of securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
During the fiscal years ended June 30, 1995, 1996 and 1997, the Fund paid no
brokerage commissions.
As of June 30, 1997, the Fund did not own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities Dealers may at times receive the entire
sales charge on shares of the Insured and Intermediate-Term Funds. A Securities
Dealer who receives 90% or more of the sales charge may be deemed an underwriter
under the Securities Act of 1933, as amended.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - Purchase
Price of Fund Shares" in the Prospectus.
All purchases of Money Fund shares will be credited to you, in full and
fractional shares of the Fund (rounded to the nearest 1/1000 of a share), in an
account maintained for you by the Money Fund's transfer agent. No share
certificates will be issued for fractional shares at any time. No certificates
will be issued to you if you have elected to redeem shares by check or by
preauthorized bank or brokerage firm account methods. The offering of shares of
the Money Fund may be suspended at any time and resumed at any time thereafter.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, shares of the
Insured and Intermediate-Term Funds are available to these banks' trust accounts
without a sales charge. The banks may charge service fees to their customers who
participate in the trusts. A portion of these service fees may be paid to
Distributors or one of its affiliates to help defray expenses of maintaining a
service office in Taiwan, including expenses related to local literature
fulfillment and communication facilities.
Shares of the Intermediate-Term Fund and Class I shares of the Insured Fund may
be offered to investors in Taiwan through securities advisory firms known
locally as Securities Investment Consulting Enterprises. In conformity with
local business practices in Taiwan, Class I shares may be offered with the
following schedule of sales charges:
SALES
SIZE OF PURCHASE - U.S. DOLLARS CHARGE
- ---------------------------------------------
Under $30,000...................... 3%
$30,000 but less than $100,000..... 2%
$100,000 but less than $400,000.... 1%
$400,000 or more................... 0%
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of shares of the Intermediate-Term Fund or Class I
shares of the Insured Fund of $1 million or more: 0.75% on sales of $1 million
to $2 million, plus 0.60% on sales over $2 million to $3 million, plus 0.50% on
sales over $3 million to $50 million, plus 0.25% on sales over $50 million to
$100 million, plus 0.15% on sales over $100 million. These breakpoints are reset
every 12 months for purposes of additional purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy shares
of the Intermediate-Term Fund or Class I shares of the Insured Fund, as
described in the Prospectus. At any time within 90 days after the first
investment that you want to qualify for a reduced sales charge, you may file
with the Fund a signed shareholder application with the Letter of Intent section
completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds acquired more than 90 days before the Letter is filed will be counted
towards completion of the Letter, but they will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions you make during the 13
month period will be subtracted from the amount of the purchases for purposes of
determining whether the terms of the Letter have been completed. If the Letter
is not completed within the 13 month period, there will be an upward adjustment
of the sales charge, depending on the amount actually purchased (less
redemptions) during the period. If you execute a Letter before a change in the
sales charge structure of the Fund, you may complete the Letter at the lower of
the new sales charge structure or the sales charge structure in effect at the
time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the Fund registered in
your name until you fulfill the Letter. If total purchases, less redemptions,
equal the amount specified under the Letter, the reserved shares will be
deposited to an account in your name or delivered to you or as you direct. If
total purchases, less redemptions, exceed the amount specified under the Letter
and is an amount that would qualify for a further quantity discount, a
retroactive price adjustment will be made by Distributors and the Securities
Dealer through whom purchases were made pursuant to the Letter (to reflect such
further quantity discount) on purchases made within 90 days before and on those
made after filing the Letter. The resulting difference in Offering Price will be
applied to the purchase of additional shares at the Offering Price applicable to
a single purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified under the
Letter, you will remit to Distributors an amount equal to the difference in the
dollar amount of sales charge actually paid and the amount of sales charge that
would have applied to the aggregate purchases if the total of the purchases had
been made at a single time. Upon remittance, the reserved shares held for your
account will be deposited to an account in your name or delivered to you or as
you direct. If within 20 days after written request the difference in sales
charge is not paid, the redemption of an appropriate number of reserved shares
to realize the difference will be made. In the event of a total redemption of
the account before fulfillment of the Letter, the additional sales charge due
will be deducted from the proceeds of the redemption, and the balance will be
forwarded to you.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, accrued but
unpaid income dividends and capital gain distributions will be reinvested in the
Fund at the Net Asset Value on the date of the exchange, and then the entire
share balance will be exchanged into the new fund. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Insured and Intermediate-Term Funds' general policy to initially invest this
money in short-term, tax-exempt municipal securities, unless it is believed that
attractive investment opportunities consistent with the Fund's investment
objective exist immediately. This money will then be withdrawn from the
short-term, tax-exempt municipal securities and invested in portfolio securities
in as orderly a manner as is possible when attractive investment opportunities
arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be made
from the redemption of an equivalent amount of shares in your account, generally
on the 25th day of the month in which a payment is scheduled. If the 25th falls
on a weekend or holiday, we will process the redemption on the next business day
for the Money Fund, Intermediate-Term Fund and Class I shares of the Insured
Fund and on the prior business day for Class II shares of the Insured Fund. If
the processing dates are different, the date of the Net Asset Value used to
redeem the shares will also be different for Class I and Class II shares of the
Insured Fund.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of any efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank. All checks, drafts, wires and other payment
mediums used to buy or sell shares of the Money Fund must be drawn on a U.S.
bank and are accepted subject to collection at full face value. Checks drawn in
U.S. funds on foreign banks will not be credited to your account and dividends
will not begin accruing until the proceeds are collected, which may take a long
period of time.
SPECIAL SERVICES. Investor Services may pay certain financial institutions that
maintain omnibus accounts with the Fund on behalf of numerous beneficial owners
for recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, the Fund may reimburse Investor
Services an amount not to exceed the per account fee that the Fund normally pays
Investor Services. These financial institutions may also charge a fee for their
services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
SPECIAL SERVICES - MONEY FUND. Investor Services may charge you separate fees,
negotiated directly with you, for providing special services in connection with
your account, such as processing a large number of checks each month. Fees for
special services will not increase the expenses borne by the Fund.
Special procedures have been designed for banks and other institutions wishing
to open multiple accounts. An institution may open a single master account by
filing one application form with the Fund, signed by personnel authorized to act
for the institution. Individual sub-accounts may be opened at the time the
master account is filed by listing them, or instructions may be provided to the
Fund at a later date. These sub-accounts may be established by the institution
with registration either by name or number. The investment minimums applicable
to the Fund are applicable to each sub-account. The Fund will provide each
institution with a written confirmation for each transaction in a sub-account
and arrangements may be made at no additional charge for the transmittal of
duplicate confirmations to the beneficial owner of the sub-account.
The Fund will provide to each institution, on a quarterly basis or more
frequently if requested, a statement setting forth each sub-account's share
balance, income earned for the period, income earned for the year to date, and
total current market value.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share of the Intermediate-Term Fund and
each class of the Insured Fund as of the scheduled close of the NYSE, generally
1:00 p.m. Pacific time, each day that the NYSE is open for trading. We calculate
the Net Asset Value per share of the Money Fund as of 3:00 p.m. Pacific time,
each day that the NYSE is open for trading. As of the date of this SAI, the Fund
is informed that the NYSE observes the following holidays: New Year's Day,
Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
INSURED AND INTERMEDIATE-TERM FUNDS. For the purpose of determining the
aggregate net assets of the Fund, cash and receivables are valued at their
realizable amounts. Interest is recorded as accrued. Over-the-counter portfolio
securities are valued within the range of the most recent quoted bid and ask
prices. Portfolio securities that are traded both in the over-the-counter market
and on a stock exchange are valued according to the broadest and most
representative market as determined by Advisers. Municipal securities generally
trade in the over-the-counter market rather than on a securities exchange. In
the absence of a sale or reported bid and ask prices, information with respect
to bond and note transactions, quotations from bond dealers, market transactions
in comparable securities, and various relationships between securities are used
to determine the value of municipal securities.
Generally, trading in U.S. government securities and money market instruments is
substantially completed each day at various times before the scheduled close of
the NYSE. The value of these securities used in computing the Net Asset Value of
each class is determined as of such times. Occasionally, events affecting the
values of these securities may occur between the times at which they are
determined and the scheduled close of the NYSE that will not be reflected in the
computation of the Net Asset Value. If events materially affecting the values of
these securities occur during this period, the securities will be valued at
their fair value as determined in good faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
MONEY FUND. The valuation of the Fund's portfolio securities, including any
securities held in a separate account maintained for when-issued securities, is
based on the amortized cost of the securities, which does not take into account
unrealized capital gains or losses. This method involves valuing an instrument
at its cost and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. While this method provides certainty in
calculation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price the Fund would receive if it
sold the instrument. During periods of declining interest rates, the daily yield
on shares of the Fund computed as described above may tend to be higher than a
like computation made by a fund with identical investments but utilizing a
method of valuation based upon market prices and estimates of market prices for
all of its portfolio instruments. Thus, if the use of amortized cost by the Fund
resulted in a lower aggregate portfolio value on a particular day, a prospective
investor in the Fund would be able to obtain a somewhat higher yield than would
result from an investment in a fund utilizing only market values, and existing
investors in the Fund would receive less investment income. The opposite would
be true in a period of rising interest rates.
The Fund's use of amortized cost, which helps the Fund maintain its Net Asset
Value per share of $1, is permitted by a rule adopted by the SEC. Under this
rule, the Fund must adhere to certain conditions. The Fund must maintain a
dollar-weighted average portfolio maturity of 90 days or less and only buy
instruments having remaining maturities of 397 calendar days or less. The Fund
must also invest only in those U.S. dollar-denominated securities that the Board
determines present minimal credit risks and that are rated in one of the two
highest rating categories by nationally recognized rating services, or if
unrated are deemed comparable in quality, or are instruments issued by an issuer
that, with respect to an outstanding issue of short-term debt that is comparable
in priority and protection, has received a rating within the two highest rating
categories. Securities subject to floating or variable interest rates with
demand features that comply with applicable SEC rules may have stated maturities
in excess of one year.
The Board has established procedures designed to stabilize, to the extent
reasonably possible, the Fund's price per share at $1, as computed for the
purpose of sales and redemptions. These procedures include a review of the
Fund's holdings by the Board, at such intervals as it may deem appropriate, to
determine if the Fund's Net Asset Value calculated by using available market
quotations deviates from $1 per share based on amortized cost. The extent of any
deviation will be examined by the Board. If a deviation exceeds 1/2 of 1%, the
Board will promptly consider what action, if any, will be initiated. If the
Board determines that a deviation exists that may result in material dilution or
other unfair results to investors or existing shareholders, it will take
corrective action that it regards as necessary and appropriate, which may
include selling portfolio instruments before maturity to realize capital gains
or losses or to shorten average portfolio maturity, withholding dividends,
redeeming shares in kind, or establishing a Net Asset Value per share by using
available market quotations.
ADDITIONAL INFORMATION
ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
INSURED AND INTERMEDIATE-TERM FUNDS
You may receive two types of distributions from the Fund:
1. INCOME DIVIDENDS. The Fund receives income generally in the form of interest
and other income derived from its investments. This income, less the expenses
incurred in the Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of dividends paid per
share may vary with each distribution.
2. CAPITAL GAIN DISTRIBUTIONS. The 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 capital loss carryforward or post-October
loss deferral) may generally be made once each 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. These distributions, when made, will generally be fully
taxable to the Fund's shareholders. The Fund may adjust the timing of these
distributions for operational or other reasons.
MONEY FUND
The Fund's daily dividend includes accrued interest and any original issue and
market discount, plus or minus any gain or loss on the sale of portfolio
securities and changes in unrealized appreciation or depreciation in portfolio
securities (to the extent required to maintain a stable Net Asset Value per
share), less amortization of any premium paid on the purchase of portfolio
securities and the estimated expenses of the Fund.
Distributions and distribution adjustments resulting from realized gains and
losses on the sale of portfolio securities or from unrealized appreciation or
depreciation in the value of portfolio securities are required to maintain a $1
Net Asset Value per share and may result in under or over distributions of
investment company taxable income or net tax-exempt income.
The Fund may derive capital gains or losses in connection with sales or other
dispositions of its portfolio securities. However, because under normal
circumstances the Fund's portfolio is composed of short-term securities, the
Fund does not expect to realize any long-term capital gains or losses. Any net
short-term or long-term capital gains that are realized by the Fund (adjusted
for any daily amounts of unrealized appreciation or depreciation and taking into
account any capital loss carryforward or post-October loss deferral) will
generally be distributed once each year and may be distributed more frequently
if necessary to avoid federal excise taxes. Any distributions of capital gain
will be reinvested in additional shares of the Fund at Net Asset Value, unless
you have previously elected to have them paid in cash.
If you withdraw the entire amount in your account at any time during a month,
all dividends accrued with respect to your account during that month up to the
time of withdrawal will be paid in the same manner and at the same time as your
withdrawal proceeds. You will receive a monthly summary of your account,
including information about dividends reinvested or paid.
The Board may revise the Fund's dividend policy or postpone the payment of
dividends, if warranted in its judgment, due to unusual circumstances such as a
large expense, loss or unexpected fluctuation in net assets.
TAXES
As stated in the Prospectus, the Fund has elected and qualified to be treated as
a regulated investment company under Subchapter M of the Code. The Board
reserves the right not to maintain the qualification of the Fund as a regulated
investment company if it determines this course of action to be beneficial to
shareholders. In that case, the Fund will be subject to federal and possibly
state corporate taxes on its taxable income and gains, to the alternative
minimum tax on a portion of its tax-exempt income, and distributions (including
tax-exempt interest dividends) to shareholders will be taxable to the extent of
the Fund's available earnings and profits.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve-month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. The Fund intends, as a matter of policy,
to declare and pay these dividends, if any, in December to avoid the imposition
of this tax, but can give no assurances that its distributions will be
sufficient to eliminate all such taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders subject to taxation, gain
or loss will be recognized in an amount equal to the difference between your
basis in the shares and the amount realized from the transaction, subject to the
rules described below. If you hold your shares as a capital asset, gain or loss
realized will be capital gain or loss and will be long-term for federal income
tax purposes if the shares have been held for more than one year.
All or a portion of the sales charge incurred in buying shares of the Insured or
Intermediate-Term Fund will not be included in the federal tax basis of such
shares sold or exchanged within 90 days of their purchase (for purposes of
determining gain or loss upon the sale of such shares) if the sales proceeds are
reinvested in the Fund or in another fund in the Franklin Templeton Group of
Funds and a sales charge that would otherwise apply to the reinvestment is
reduced or eliminated. Any portion of such sales charge excluded from the tax
basis of the shares sold will be added to the tax basis of the shares acquired
in the reinvestment. You should consult with your tax advisor concerning the tax
rules applicable to the redemption or exchange of Fund shares.
Many states grant tax-free status to dividends paid to shareholders of mutual
funds from interest income earned by a fund from direct obligations of the U.S.
government, subject in some states to minimum investment requirements that must
be met by the fund. Investments in GNMA/FNMA securities, repurchase agreements
collateralized by U.S. government securities, and commercial paper do not
generally qualify for tax-free treatment. Investments in state and municipal
obligations of other states also generally do not qualify for tax-free
treatment. To the extent that such investments are made, the Fund will provide
you with the percentage of any dividends paid that may qualify for such tax-free
treatment at the end of each calendar year. You should consult with your own tax
advisor with respect to the application of your state and local laws to these
distributions and on the application of other state and local laws on
distributions and redemption proceeds received from the Fund.
If you are defined in the Code as a "substantial user" (or related person) of
facilities financed by private activity bonds, you should consult with your tax
advisor before buying shares of the Fund.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the Fund's shares. The
underwriting agreement will continue in effect for successive annual periods if
its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of the Fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting called
for that purpose. The underwriting agreement terminates automatically in the
event of its assignment and may be terminated by either party on 90 days'
written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions received by
Distributors in connection with the offering of the Fund's shares, the net
underwriting discounts and commissions retained by Distributors after allowances
to dealers, and the amounts received by Distributors in connection with
redemptions or repurchases of shares for the fiscal years ended June 30, 1997,
1996 and 1995.
AMOUNT
RECEIVED IN
CONNECTION
TOTAL AMOUNT WITH REDEMP-
COMMISSIONS RETAINED BY TIONS OR
RECEIVED DISTRIBUTORS REPURCHASES
1997
Insured Fund $4,562,364 $316,761 $19,125
Intermediate-Term Fund 298,929 19,851 0
Money Fund 0 0 0
1996
Insured Fund 6,000,521 396,891 40,474
Intermediate-Term Fund 206,859 27,358 9,939
Money Fund 0 0 5,658
1995
Insured Fund 3,795,114 254,497 0
Intermediate-Term Fund 177,913 22,737 0
Money Fund 0 0 0
Distributors may be entitled to reimbursement under the Rule 12b-1 plan for the
Intermediate-Term Fund or each class of the Insured Fund, as discussed below.
Except as noted, Distributors received no other compensation from the Fund for
acting as underwriter.
THE RULE 12B-1 PLANS - INSURED AND INTERMEDIATE-TERM FUNDS
The Intermediate-Term Fund and each class of the Insured Fund have separate
distribution plans or "Rule 12b-1 plans" that were adopted pursuant to Rule
12b-1 of the 1940 Act.
Under the plans for the Intermediate-Term Fund and Class I shares of the Insured
Fund, the Fund may pay up to a maximum of 0.10% per year of the Fund's or class'
average daily net assets, payable quarterly, for expenses incurred in the
promotion and distribution of shares of the Intermediate-Term Fund or Class I
shares of the Insured Fund.
In implementing the Class I plan for the Insured Fund, the Board has determined
that the annual fees payable under the plan will be equal to the sum of: (i) the
amount obtained by multiplying 0.10% by the average daily net assets represented
by Class I shares of the Fund that were acquired by investors on or after May 1,
1994, the effective date of the plan ("New Assets"), and (ii) the amount
obtained by multiplying 0.05% by the average daily net assets represented by
Class I shares of the Fund that were acquired before May 1, 1994 ("Old Assets").
These fees will be paid to the current Securities Dealer of record on the
account. In addition, until such time as the maximum payment of 0.10% is reached
on a yearly basis, up to an additional 0.02% will be paid to Distributors under
the plan. When the Fund reaches $4 billion in assets, the amount to be paid to
Distributors will be reduced from 0.02% to 0.01%. The payments made to
Distributors will be used by Distributors to defray other marketing expenses
that have been incurred in accordance with the plan, such as advertising.
For the Insured Fund's Class I plan, the fee is a Class I expense. This means
that all Class I shareholders, regardless of when they purchased their shares,
will bear Rule 12b-1 expenses at the same rate. The initial rate will be at
least 0.07% (0.05% plus 0.02%) of the average daily net assets of Class I and,
as Class I shares are sold on or after May 1, 1994, will increase over time.
Thus, as the proportion of Class I shares purchased on or after May 1, 1994,
increases in relation to outstanding Class I shares, the expenses attributable
to payments under the plan will also increase (but will not exceed 0.10% of
average daily net assets). While this is the currently anticipated calculation
for fees payable under the Class I plan, the plan permits the Board to allow the
Insured Fund to pay a full 0.10% on all assets at any time. The approval of the
Board would be required to change the calculation of the payments to be made
under the Class I plan.
Under the Insured Fund's Class II plan, the Fund pays Distributors up to 0.50%
per year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the Fund.
Under the Class II plan, the Fund also pays an additional 0.15% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
In addition to the payments that Distributors or others are entitled to under
each plan, each plan also provides that to the extent the Fund, Advisers or
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be for the financing of any activity primarily
intended to result in the sale of shares of each class within the context of
Rule 12b-1 under the 1940 Act, then such payments shall be deemed to have been
made pursuant to the plan. The terms and provisions of each plan relating to
required reports, term, and approval are consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the Board, including a majority vote
of the Board members who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such Board members be done by the non-interested
members of the Board. The plans and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of the
management agreement with Advisers or by vote of a majority of the outstanding
shares of the class. The Intermediate-Term Fund's plan may also be terminated by
any act that constitutes an assignment of the underwriting agreement with
Distributors. Distributors or any dealer or other firm may also terminate their
respective distribution or service agreement at any time upon written notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the non-interested
members of the Board, cast in person at a meeting called for the purpose of
voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plans should be continued.
For the fiscal year ended June 30, 1997, Distributors' eligible expenditures for
advertising, printing, and payments to underwriters and broker-dealers pursuant
to the plans and the amounts the Fund paid Distributors under the plans were as
follows:
DISTRIBUTORS' AMOUNT
ELIGIBLE PAID BY
EXPENSES FUND
Insured Fund
- Class I $1,592,055 $1,364,105
Insured Fund
- Class II 263,065 149,370
Intermediate-
Term Fund 561,220 232,797
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the Fund, and
effective yield quotations used by the Money Fund, are based on the standardized
methods of computing performance mandated by the SEC. If a Rule 12b-1 plan is
adopted, performance figures reflect fees from the date of the plan's
implementation. An explanation of these and other methods used by the Fund to
compute or express performance follows. Regardless of the method used, past
performance does not guarantee future results, and is an indication of the
return to shareholders only for the limited historical period used.
INSURED AND INTERMEDIATE-TERM FUNDS
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over the periods indicated below that
would equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes the maximum front-end sales charge is deducted
from the initial $1,000 purchase, and income dividends and capital gain
distributions are reinvested at Net Asset Value. The quotation assumes the
account was completely redeemed at the end of each period and the deduction of
all applicable charges and fees. If a change is made to the sales charge
structure, historical performance information will be restated to reflect the
maximum front-end sales charge currently in effect. The average annual total
return for the indicated periods ended June 30, 1997, was as follows:
AVERAGE ANNUAL TOTAL RETURN
INCEPTION FROM
DATE ONE-YEAR FIVE-YEAR TEN-YEAR INCEPTION
Insured Fund - Class I 09/03/85 2.87% 5.81% 7.35% 7.75%
Insured Fund - Class II 05/01/95 4.82 - - 6.10
Intermediate-Term Fund 09/23/92 5.12 - - 6.33
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypo
thetical $1,000 payment made at the
beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at Net Asset Value. Cumulative total return, however, is based on the
actual return for a specified period rather than on the average return over the
periods indicated above. The cumulative total return for the indicated periods
ended June 30, 1997, was as follows:
CUMULATIVE TOTAL RETURN
INCEPTION FROM
DATE ONE-YEAR FIVE-YEAR TEN-YEAR INCEPTION
Insured Fund - Class I 09/03/85 2.87% 32.62% 103.15% 141.76%
Insured Fund - Class II 05/01/95 4.82 - - 13.69
Intermediate-Term Fund 09/23/92 5.12 - - 33.96
YIELD
CURRENT YIELD. Current yield shows the income per share earned by the Fund. It
is calculated by dividing the net investment income per share of each class
earned during a 30-day base period by the applicable maximum Offering Price per
share on the last day of the period and annualizing the result. Expenses accrued
for the period include any fees charged to all shareholders of the class during
the base period. The yield for the Intermediate-Term Fund and Class I and Class
II of the Insured Fund for the 30-day period ended June 30, 1997, was 4.65%,
4.59% and 4.25%, respectively.
These figures were obtained using the following SEC formula:
6
Yield = 2 [(A-B + 1) - 1]
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the maximum Offering Price per share on the last day of the period
TAXABLE-EQUIVALENT YIELD. The Fund may also quote a taxable-equivalent yield for
each class that shows the before-tax yield that would have to be earned from a
taxable investment to equal the yield for the class. Taxable-equivalent yield is
computed by dividing the portion of the class' yield that is tax-exempt by one
minus the highest applicable combined federal and state income tax rate and
adding the product to the portion of the class' yield that is not tax-exempt, if
any. The taxable-equivalent yield for the Intermediate-Term Fund and Class I and
Class II of the Insured Fund for the 30-day period ended June 30, 1997, was
8.49%, 8.38% and 7.76%, respectively.
CURRENT DISTRIBUTION RATE
Current yield and taxable-equivalent yield, which are calculated according to a
formula prescribed by the SEC, are not indicative of the amounts which were or
will be paid to shareholders. Amounts paid to shareholders are reflected in the
quoted current distribution rate or taxable-equivalent distribution rate. The
current distribution rate is usually computed by annualizing the dividends paid
per share by a class during a certain period and dividing that amount by the
current maximum Offering Price. The current distribution rate differs from the
current yield computation because it may include distributions to shareholders
from sources other than interest, such as short-term capital gains, and is
calculated over a different period of time. The current distribution rate for
the Intermediate-Term Fund and Class I and Class II of the Insured Fund for the
30-day period ended June 30, 1997, was 4.72%, 5.17% and 4.72%, respectively.
A taxable-equivalent distribution rate shows the taxable distribution rate
equivalent to the class' current distribution rate. The advertised
taxable-equivalent distribution rate will reflect the most current federal and
state tax rates available to the Fund. The taxable-equivalent distribution rate
for the Intermediate-Term Fund and Class I and Class II of the Insured Fund for
the 30-day period ended June 30, 1997, was 8.62%, 9.44% and 8.62%, respectively.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
MONEY FUND
YIELD
CURRENT YIELD. Current yield shows the income per share earned by the Fund. It
is calculated by determining the net change, excluding capital changes, in the
value of a hypothetical pre-existing account having a balance of one share at
the beginning of the period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return. The result is then annualized by multiplying the base period return by
(365/7). The Fund's current yield for the seven day period ended June 30, 1997,
was 3.41%.
EFFECTIVE YIELD. The Fund's effective yield is calculated in the same manner as
its current yield, except the annualization of the return for the seven day
period reflects the results of compounding. The Fund's effective yield for the
seven day period ended June 30, 1997, was 3.47%.
This figure was obtained using the following SEC formula:
Effective Yield = [(Base Period Return + 1)365/7]-1
TAXABLE-EQUIVALENT YIELDS. The Money Fund may also quote a taxable-equivalent
yield and a taxable-equivalent effective yield that show the before-tax yield
that would have to be earned from a taxable investment to equal the Fund's
yield. These yields are computed by dividing the portion of the Fund's yield
that is tax-exempt by one minus the highest applicable combined federal and
state income tax rate and adding the product to the portion of the Money Fund's
yield that is not tax-exempt, if any. The Fund's taxable-equivalent yield based
on the Fund's current yield for the seven day period ended June 30, 1997, was
6.22%. The Fund's taxable-equivalent effective yield based on the Fund's
effective yield for the seven day period ended June 30, 1997, was 6.33%.
ALL FUNDS
As of June 30, 1997, the combined federal and state income tax rate upon which
the taxable-equivalent yield quotations are based was 45.22%. From time to time,
as any changes to the rates become effective, taxable-equivalent yield
quotations advertised by the Fund will be updated to reflect these changes. The
Fund expects updates may be necessary as tax rates are changed by federal, state
and local governments. The advantage of tax-free investments, like the Fund,
will be enhanced by any tax rate increases. Therefore, the details of specific
tax increases may be used in sales material for the Fund.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Salomon Brothers Broad Bond Index or its component indices - measures yield,
price and total return for Treasury, agency, corporate and mortgage bonds.
b) Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
c) IBC/Donoghue's Money Fund Report(R) - industry averages for seven-day
annualized and compounded yields of taxable, tax-free, and government money
funds.
d) Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.
e) Bond Buyer 20-Bond Index - an index of municipal bond yields based upon
yields of 20 general obligation bonds maturing in 20 years.
f) Bond Buyer 40-Bond Index - an index of municipal bond yields based upon
yields of 40 revenue bonds maturing in 30 years.
g) Financial publications: The Wall Street Journal, and Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.
h) Salomon Brothers Composite High Yield Index or its component indices -
measures yield, price and total return for the Long-Term High-Yield Index,
Intermediate-Term High-Yield Index, and Long-Term Utility High-Yield Index.
i) Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg, L.P.
j) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk-adjusted performance of a fund over specified
time periods relative to other funds within its category.
k) Lipper - Mutual Fund Performance Analysis, Lipper - Fixed Income Fund
Performance Analysis, and Lipper - Mutual Fund Yield Survey - measure total
return and average current yield for the mutual fund industry and rank
individual mutual fund performance over specified time periods, assuming
reinvestment of all distributions, exclusive of any applicable sales charges.
l) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
m) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
n) Inflation as measured by the Consumer Price Index, published by the U.S.
Bureau of Labor Statistics.
o) Standard & Poor's Bond Indices - measure yield and price of corporate,
municipal, and government bonds.
p) Merrill Lynch California Municipal Bond Index - based upon yields from
revenue and general obligation bonds weighted in accordance with their
respective importance to the California municipal market. The index is published
weekly in the Los Angeles Times and the San Francisco Chronicle.
q) Bank Rate Monitor - a weekly publication that reports various bank
investments such as CD rates, average savings account rates and average loan
rates.
r) Salomon Brothers Bond Market Roundup - a weekly publication that reviews
yield spread changes in the major sectors of the money, government agency,
futures, options, mortgage, corporate, Yankee, Eurodollar, municipal, and
preferred stock markets and summarizes changes in banking statistics and reserve
aggregates.
s) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
Advertisements or sales material issued by the Fund may also discuss or be based
upon information in a recent issue of the Special Report on Tax Freedom Day
published by the Tax Foundation, a Washington, D.C. based nonprofit research and
public education organization. The report illustrates, among other things, the
annual amount of time the average taxpayer works to satisfy his or her tax
obligations to the federal, state and local taxing authorities.
Advertisements or information may also compare the Fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, as well as the value of its shares that are based upon
the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition,
there can be no assurance that the Fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 49 years and
now services more than 2.7 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton, a pioneer in international
investing. The Mutual Series team, known for its value-driven approach to
domestic equity investing, became part of the organization four years later.
Together, the Franklin Templeton Group has over $212 billion in assets under
management for more than 5.6 million U.S. based mutual fund shareholder and
other accounts. The Franklin Templeton Group of Funds offers 120 U.S. based
open-end investment companies to the public. The Fund may identify itself by its
NASDAQ symbol or CUSIP number.
Franklin is a leader in the tax-free mutual fund industry and manages more than
$46 billion in municipal bond assets for over three quarters of a million
investors. Franklin's municipal research department is one of the largest in the
industry. According to Research and Ratings Review, Franklin, with 25 research
analysts, had one of the largest staffs of municipal securities analysts in the
industry, as of March 31, 1997.
Under current tax laws, municipal securities remain one of the few investments
offering the potential for tax-free income. In 1997, taxes could cost as much as
$47 on every $100 earned from a fully taxable investment (based on the maximum
combined 39.6% federal tax rate and the highest state tax rate of 12% for 1997).
Franklin tax-free funds, however, offer tax relief through a professionally
managed portfolio of tax-free securities selected based on their yield, quality
and maturity. An investment in a Franklin tax-free fund can provide you with the
potential to earn income free of federal taxes and, depending on the fund, state
and local taxes as well, while supporting state and local public projects.
Franklin tax-free funds may also provide tax-free compounding, when dividends
are reinvested. An investment in Franklin's tax-free funds can grow more rapidly
than similar taxable investments.
Municipal securities are generally considered to be creditworthy, second in
quality only to securities issued or guaranteed by the U.S. government and its
agencies. The market price of such securities, however, may fluctuate. This
fluctuation will have a direct impact on the Net Asset Value of an investment in
the Fund.
Currently, there are more mutual funds than there are stocks listed on the NYSE.
While many of them have similar investment objectives, no two are exactly alike.
As noted in the Prospectus, shares of the Fund are generally sold through
Securities Dealers. Investment representatives of such Securities Dealers are
experienced professionals who can offer advice on the type of investment
suitable to your unique goals and needs, as well as the types of risks
associated with such investment.
As of October 2, 1997, the principal shareholder of the Fund, beneficial or of
record, was as follows:
PER-
NAME AND ADDRESS SHARE AMOUNT CENTAGE
MONEY FUND
Kenneth Rainin 33,058,588 5.08%
5400 Hollis Street
Emeryville, CA 94606-2508
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations. The
Fund's Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the Fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the Fund's assets if you are held personally liable for
obligations of the Fund. The Declaration of Trust provides that the Fund shall,
upon request, assume the defense of any claim made against you for any act or
obligation of the Fund and satisfy any judgment thereon. All such rights are
limited to the assets of the Fund. The Declaration of Trust further provides
that the Fund may maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the Fund, its
shareholders, trustees, officers, employees and agents to cover possible tort
and other liabilities. Furthermore, the activities of the Fund as an investment
company, as distinguished from an operating company, would not likely give rise
to liabilities in excess of the Fund's total assets. Thus, the risk of you
incurring financial loss on account of shareholder liability is limited to the
unlikely circumstances in which both inadequate insurance exists and the Fund
itself is unable to meet its obligations.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations must be sent to a compliance
officer and, within 10 days after the end of each calendar quarter, a report of
all securities transactions must be provided to the compliance officer; and
(iii) access persons involved in preparing and making investment decisions must,
in addition to (i) and (ii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended June 30, 1997, including the auditors'
report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Trustees of the Trust
CALIFORNIA MUNICIPAL SECURITIES - Municipal securities issued by or on behalf of
the state of California, its local governments, municipalities, authorities,
agencies and political subdivisions.
CD - Certificate of deposit
CLASS I AND CLASS II - The Insured Fund offers two classes of shares, designated
"Class I" and "Class II." The two classes have proportionate interests in the
Fund's portfolio. They differ, however, primarily in their sales charge
structures and Rule 12b-1 plans. Shares of the Intermediate-Term and Money Funds
are considered Class I shares for redemption, exchange and other purposes.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FITCH - Fitch Investors Service, Inc.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 2.25% for the Intermediate-Term Fund, 4.25% for Class
I of the Insured Fund and 1% for Class II of the Insured Fund. There is no
front-end sales charge for the Money Fund.
PROSPECTUS - The prospectus for the Fund dated November 1, 1997, as may be
amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
MUNICIPAL BOND RATINGS
MOODY'S
AAA: Municipal bonds rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA: Municipal bonds rated Aa are judged to be high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat larger.
A: Municipal bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present which suggest
a susceptibility to impairment sometime in the future.
BAA: Municipal bonds rated Baa are considered medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
BA: Municipal bonds rated Ba are judged to have predominantly speculative
elements; their future cannot be considered well assured. Often the protection
of interest and principal payments may be very moderate and, thereby, not well
safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Municipal bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Municipal bonds rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CON.(-): Municipal bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon the
completion of construction or the elimination of the basis of the condition.
S&P
AAA: Municipal bonds rated AAA are the highest-grade obligations. They possess
the ultimate degree of protection as to principal and interest. In the market,
they move with interest rates and, hence, provide the maximum safety on all
counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations, and in the
majority of instances differ from AAA issues only in a small degree. Here, too,
prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium-grade. They have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions. Interest and principal are regarded
as safe. They predominantly reflect money rates in their market behavior but
also, to some extent, economic conditions.
BBB: Municipal bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC: Municipal bonds rated BB, B, CCC and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and CC the highest
degree of speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
Note: The S&P ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within the major rating categories.
FITCH
AAA: Municipal bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal which is unlikely to be affected by reasonably
foreseeable events.
AA: Municipal bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong although not quite as strong as bonds rated AAA and not
significantly vulnerable to foreseeable future developments.
A: Municipal bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Municipal bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB: Municipal bonds rated BB are considered speculative. The obligor's ability
to pay interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service requirements.
B: Municipal bonds rated B are considered highly speculative. While bonds in
this class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Municipal bonds rated CCC have certain identifiable characteristics which,
if not remedied, may lead to default. The ability to meet obligations requires
an advantageous business and economic environment.
Plus (+) or minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus or minus signs
are not used with the AAA category.
MUNICIPAL NOTE RATINGS
MOODY'S
Moody's ratings for state, municipal and other short-term obligations will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing; factors of the first importance in long-term borrowing
risk are of lesser importance in the short run. Symbols used will be as follows:
MIG 1: Notes are of the best quality enjoying strong protection from established
cash flows of funds for their servicing or from established and broad-based
access to the market for refinancing, or both.
MIG 2: Notes are of high quality, with margins of protection ample, although not
so large as in the preceding group.
MIG 3: Notes are of favorable quality, with all security elements accounted for,
but lacking the undeniable strength of the preceding grades. Market access for
refinancing, in particular, is likely to be less well established.
MIG 4: Notes are of adequate quality, carrying specific risk but having
protection and not distinctly or predominantly speculative.
S&P
Until June 29, 1984, S&P used the same rating symbols for notes and bonds. After
June 29, 1984, for new municipal note issues due in three years or less, the
ratings below will usually be assigned. Notes maturing beyond three years will
most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong capacity to
pay principal and interest. Issues determined to possess overwhelming safety
characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Fund, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FITCH
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, CDs, medium-term notes, and municipal and investment notes. The
short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. Reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as for issues assigned F-1+ and F-1
ratings.
F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-5: Weak credit quality. Have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
D: Default. Actual or imminent payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
CAT SAI 10/97
FRANKLIN CALIFORNIA TAX-FREE TRUST
File Nos. 2-99112
811-4356
FORM N-1A
PART C
OTHER INFORMATION
ITEM 24 FINANCIAL STATEMENTS AND EXHIBITS
a) Financial Statements incorporated herein by reference to the
Registrant's Annual Report to Shareholders dated June 30, 1997 as
filed with the SEC electronically on form type N-30D on September
10, 1997.
(i) Report of Independent Auditors
(ii) Statement of Investments in Securities and Net Assets - June
30, 1997
(iii Statements of Assets and Liabilities - June 30, 1997
(iv) Statements of Operations - for the year ended June 30, 1997
(v) Statements of Changes in Net Assets - for the years ended June
30, 1997 and 1996
(vi) Notes to Financial Statements
(b) Exhibits:
The following exhibits are incorporated by reference herein, except
exhibits 8(iii), 11(i), 18(i), 27(i), 27(ii), 27(iii) and 27(iv)
which are attached.
(1) copies of the charter as now in effect;
(i) Agreement and Declaration of Trust dated July 18, 1985
Filing: Post-Effective Amendment No. 12 to
Registration Statement on Form N-1A
File No. 2-99112
File Date: April 21, 1995
(ii) Certificate of Amendment of Agreement and Declaration of Trust
for the Franklin California Tax-Free Trust dated July 22, 1992
Filing: Post-Effective Amendment No. 12 to
Registration Statement on Form N-1A
File No. 2-99112
File Date: April 21, 1995
(iii) Certificate of Amendment of Agreement and Declaration of Trust
of Franklin California Tax-Free Trust dated March 21, 1995
Filing: Post-Effective Amendment No. 12 to
Registration Statement on Form N-1A
File No. 2-99112
File Date: April 21, 1995
(2) copies of the existing By-Laws or instruments corresponding thereto;
(i) By-Laws
Filing: Post-Effective Amendment No. 12 to
Registration Statement on Form N-1A
File No. 2-99112
File Date: April 21, 1995
(ii) Amendment to By-Laws dated January 18, 1994
Filing: Post-Effective Amendment No. 12 to
Registration Statement on Form N-1A
File No. 2-99112
File Date: April 21, 1995
(3) copies of any voting trust agreement with respect to more than five
percent of any class of equity securities of the Registrant;
Not Applicable
(4) specimens or copies of each security issued by the Registrant,
including copies of all constituent instruments, defining the rights
of the holders of such securities, and copies of each security being
registered;
Not Applicable
(5) copies of all investment advisory contracts relating to the
management of the assets of the Registrant;
(i) Management Agreement between Registrant and Franklin Advisers,
Inc. dated November 1, 1986
Filing: Post-Effective Amendment No. 12 to
Registration Statement on Form N-1A
File No. 2-99112
File Date: April 21, 1995
(ii) Management Agreement between Registrant on behalf of the
Franklin California Intermediate-Term Tax-Free Income Fund and
Franklin Advisers, Inc. dated September 21, 1992
Filing: Post-Effective Amendment No. 12 to
Registration Statement on Form N-1A
File No. 2-99112
File Date: April 21, 1995
(iii) Amendment dated August 1, 1995 to the Management Agreement
between Registrant on behalf of the Franklin California
Intermediate-Term Tax-Free Income Fund and Franklin Advisers,
Inc. dated September 21, 1992
Filing: Post-Effective Amendment No. 14 to
Registration Statement on Form N-1A
File No. 2-99112
File Date: October 29, 1996
(6) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies of
all agreements between principal underwriters and dealers;
(i) Amended and Restated Distribution Agreement between Registrant
and Franklin/Templeton Distributors, Inc. dated March 30, 1995
Filing: Post-Effective Amendment No. 13 to Registration
Statement on Form N-1A
File No. 2-99112
File Date: September 1, 1995
(ii) Forms of Dealer Agreements between Franklin/Templeton
Distributors, Inc. and Securities Dealers
Registrant: Franklin Tax-Free Trust
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 2-94222
Date: March 14, 1996
(7) copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
trustees or officers of the Registrant in their capacity as such;
any such plan that is not set forth in a formal document, furnish a
reasonably detailed description thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts under
Section 17(f) of the 1940 Act, with respect to securities and
similar investments of the Registrant, including the schedule of
remuneration;
(i) Master Custody Agreement between Registrant and Bank of New
York dated February 16, 1996
Registrant: Franklin New York Tax-Free Trust
Filing: Post-Effective Amendment No. 13 to Registration
Statement on Form N-1A
File No. 33-7785
Filing Date: March 1, 1996
(ii) Terminal Link Agreement between Registrant and Bank of New
York dated February 16, 1996
Registrant: Franklin New York Tax-Free Trust
Filing: Post-Effective Amendment No. 13 to Registration
Statement on Form N-1A
File No. 33-7785
Filing Date: March 1, 1996
(iii) Amendment dated May 7, 1997 to the Master Custody Agreement
dated February 16, 1996 between Registrant and Bank of New
York
(9) Copies of all other material contracts not made in the ordinary
course of business which are to be performed in whole or in part at
or after the date of filing the Registration Statement;
(i) Agreement between Registrant and Financial Guaranty Insurance
Company dated September 3, 1985
Filing: Post-Effective Amendment No. 12 to
Registration Statement on Form N-1A
File No. 2-99112
File Date: April 21, 1995
(ii) Amendment to Agreement between Registrant and Financia
Guaranty Insurance Company dated November 24, 1992
Filing: Post-Effective Amendment No. 12 to
Registration Statement on Form N-1A
File No. 2-99112
File Date: April 21, 1995
(10) an opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will when sold
be legally issued, fully paid and nonassessable;
Not Applicable
(11) copies of any other opinions, appraisals or rulings and consents to
the use thereof relied on in the preparation of this Registration
Statement as required by Section 7 of the 1933 Act;
(i) Consent of Independent Auditors dated October 27, 1997
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in consideration for
providing the initial capital between or among the Registrant, the
underwriter, advisor, promoter or initial stockholders and written
assurances from promoters or initial stockholders that their
purchases were made for investment purposes without any present
intention of redeeming or reselling;
(i) Letter of Understanding dated April 12, 1995
Filing: Post-Effective Amendment No. 12 to
Registration Statement on Form N-1A
File No. 2-99112
File Date: April 21, 1995
(14) copies of the model plan used in the establishment of any retirement
plan in conjunction with which Registrant offers its securities, any
instructions thereto and any other documents making up the model
plan. Such form(s) should disclose the costs and fees charged in
connection therewith;
Not Applicable
(15) copies of any plan entered into by Registrant pursuant to Rule 12b-1
under the 1940 Act, which describes all material aspects of the
financing of distribution of Registrant's shares, and any agreements
with any person relating to implementation of such plan.
(i) Amended and Restated Distribution Plan pursuant to Rule
12b-1 dated July 1, 1993 between Franklin/Templeton
Distributors, Inc. and the Registrant on behalf of the
Franklin California Intermediate-Term Tax-Free Income Fund
Filing: Post-Effective Amendment No. 12 to
Registration Statement on Form N-1A
File No. 2-99112
File Date: April 21, 1995
(ii) Distribution Plan pursuant to Rule 12b-1 dated May 1, 1994
between Franklin/Templeton Distributors, Inc. and the
Registrant on behalf of the Franklin California Insured
Tax-Free Income Fund
Filing: Post-Effective Amendment No. 12 to
Registration Statement on Form N-1A
File No. 2-99112
File Date: April 21, 1995
(iii) Distribution Plan pursuant to Rule 12b-1 dated March 30, 1995
between Franklin/Templeton Distributors, Inc. and the
Registrant on behalf of the Franklin California Insured
Tax-Free Income Fund - Class II
Filing: Post-Effective Amendment No. 14 to
Registration Statement on Form N-1A
File No. 2-99112
File Date: October 29, 1996
(16) schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22.
(i) Schedule for Computation of Performance Quotations
Filing: Post-Effective Amendment No. 12 to
Registration Statement on Form N-1A
File No. 2-99112
File Date: April 21, 1995
(17) Power of Attorney
(i) Power of Attorney dated February 16, 1995
Filing: Post-Effective Amendment No. 12 to
Registration Statement on Form N-1A
File No. 2-99112
File Date: April 21, 1995
(ii) Certificate of Secretary dated February 16, 1995
Filing: Post-Effective Amendment No. 12 to
Registration Statement on Form N-1A
File No. 2-99112
File Date: April 21, 1995
(18) Copies of any plan entered into by Registrant pursuant to Rule 18f-3
under the 1940 Act
(i) Multiple Class Plan
(27) Financial Data Schedule
(i) Financial Data Schedule for Franklin California
Insured Tax-Free Income Fund - Class I
(ii) Financial Data Schedule for Franklin California
Insured Tax-Free Income Fund - Class II
(iii) Financial Data Schedule for Franklin California
Tax-Exempt Money Fund
(iv) Financial Data Schedule for Franklin California
Intermediate-Term Tax-Free Income Fund
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 26 NUMBER OF HOLDERS OF SECURITIES
As of August 31, 1997, the number of record holders of each class of securities
of the Registrant was as follows:
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Beneficial Interest CLASS I CLASS II
Franklin California
Insured Tax-Free Income Fund: 21,274 915
Franklin California
Tax-Exempt Money Fund: 21,356 N/A
Franklin California
Intermediate-Term Tax-Free
Income Fund: 2,084 N/A
ITEM 27 INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Please see the Declaration of Trust, By-Laws, Management Agreement, and
Distribution Agreements, previously filed as exhibits and incorporated herein by
reference.
Notwithstanding the provisions contained in the Registrant's By-Laws, in the
absence of authorization by the appropriate court on the merits pursuant to said
By-Laws, any indemnification under said By-Laws shall be made by Registrant only
if authorized in the manner provided by such By-Laws.
ITEM 28 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
The officers and directors of the Registrant's investment advisor also serve as
officers and/or directors or trustees for (1) the advisor's corporate parent,
Franklin Resources, Inc., and/or (2) other investment companies in the Franklin
Templeton Group of Funds. In addition, Mr. Charles B. Johnson is a director of
General Host Corporation. For additional information please see Part B and
Schedules A and D of Form ADV of the Funds' investment advisor (SEC File
801-26292), incorporated herein by reference, which sets forth the officers and
directors of the investment advisor and information as to any business,
profession, vocation or employment of a substantial nature engaged in by those
officers and directors during the past two years.
ITEM 29 PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principa] underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
Franklin Templeton Japan Fund
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Annuity Fund
Templeton Variable Products Series Fund
b) The information required by this Item 29 with respect to each director and
officer of Distributors is incorporated by reference to Part B of this N-1A and
Schedule A of Form BD filed by Distributors with the Securities and Exchange
Commission pursuant to the Securities Act of 1934 (SEC File No. 8-5889)
c) Not Applicable. Registrant's principal underwriter is an affiliated person
of an affiliated person of the Registrant.
ITEM 30 LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 are kept by the Trust or its
shareholder services agent, Franklin/Templeton Investor Services, Inc., both of
whose address is 777 Mariners Island Blvd., San Mateo, CA 94404-1585.
ITEM 31 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 32 UNDERTAKINGS
The Registrant hereby undertakes to comply with the information requirement in
Item 5A of the Form N-1A by including the required information in the Trust's
annual report and to furnish each person to whom a prospectus is delivered a
copy of t3he annual report upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of San Mateo and the State of California, on the 29th day
of October, 1997.
FRANKLIN CALIFORNIA TAX-FREE TRUST
(Registrant)
By: RUPERT H. JOHNSON, JR.*
Rupert H. Johnson, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
RUPERT H. JOHNSON, JR.* Principal Executive Officer and
Rupert H. Johnson, Jr. Trustee
Dated: October 29, 1997
FRANK H. ABBOTT, III* Trustee
Frank H. Abbott, III Dated: October 29, 1997
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: October 29, 1997
HARMON E. BURNS* Trustee
Harmon E. Burns Dated: October 29, 1997
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: October 29, 1997
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: October 29, 1997
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: October 29, 1997
FRANK W.T. LAHAYE* Trustee
Frank W.T. LaHaye Dated: October 29, 1997
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: October 29, 1997
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: October 29, 1997
*BY /s/ Larry L. Greene
Larry L. Greene, Attorney-in-Fact
(Pursuant to Power of Attorney previously filed)
FRANKLIN CALIFORNIA TAX-FREE TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.B1(i) Agreement and Declaration of Trust dated July *
18, 1985
EX-99.B1(ii) Certificate of Amendment of Agreement and *
Declaration of Trust for the Franklin
California Tax-Free Trust dated July 22, 1992
EX-99.B1(iii) Certificate of Amendment of Agreement and *
Declaration of Trust of Franklin California
Tax-Free Trust dated March 21, 1995
EX-99.B2(i) By-Laws *
EX-99.B2(ii) Amendment to By-Laws dated January 18, 1994 *
EX-99.B5(i) Management Agreement between Registrant and *
Franklin Advisers, Inc., dated November 1,
1986
EX-99.B5(ii) Management Agreement between Registrant on *
behalf of the Franklin California
Intermediate-Term Tax-Free Income Fund and
Franklin Advisers, Inc., dated September 21, 1992
EX-99.B5(iii) Amendment dated August 1, 1995 to the *
Management Agreement between Registrant on
behalf of the Franklin California Intermediate-
Term Tax-Free Income Fund and Franklin
Advisers, Inc., dated September 21, 1992
EX-99.B6(i) Amended and Restated Distribution Agreement *
between Registrant and Franklin/Templeton
Distributors, Inc., dated March 30, 1995
EX-99.B6(ii) Forms of Dealer Agreements between *
Franklin/Templeton Distributors, Inc. and
Securities dealers
EX-99.B8(i) Master Custody Agreement between *
Registrant and Bank of New York dated
February 16, 19956
EX-99.B8(ii) Terminal Link Agreement between Registrant *
and Bank of New York dated February 16, 1996
EX-99.B8(iii) Amendment dated May 7, 1997 to the Master
Custody Agreement dated February 16, 1996
between Registrant and Bank of New York Attached
EX-99.B9(i) Agreement between Registrant and Financial *
Guaranty Insurance Company dated September 3,
1985
EX-99.B9(ii) Amendment to Agreement between Registrant and *
Financial Guaranty Insurance Company dated
November 24, 1992
EX-99.B11(i) Consent of Independent Auditors Attached
EX-99.B13(i) Letter of Understanding dated April 12, 1995 *
EX-99.B15(i) Amended and Restated Distribution Plan *
pursuant to Rule 12b-1 dated July 1, 1993
between Franklin/Templeton Distributors, Inc.
and the Registrant on behalf of the Franklin
California Intermediate-Term Tax-Free Income
Fund
EX-99.B15(ii) Distribution Plan pursuant to Rule 12b-1 *
dated May 1, 1994 between Franklin/Templeton
Distributors, Inc. and the Registrant on behalf
of the Franklin California Insured Tax-Free
Income Fund
EX-99.B15(iii) Distribution Plan pursuant to Rule 12b-1 *
dated March 30, 1995 between Franklin/Templeton
Distributors, Inc. and the Registrant on
behalf of the Franklin California Insured
Tax-Free Income Fund - Class II
EX-99.B16(i) Schedule for Computation of Performance *
Quotations
EX-99.B17(i) Power of Attorney dated February 16, 1995 *
EX-99.B17(ii) Certificate of Secretary dated February 16, *
1995
EX-99.B18(i) Multiple Class Plan Attached
EX-27.B(i) Financial Data Schedule for Franklin Attached
California Insured Tax-Free Income Fund -
Class I
EX-27.B(ii) Financial Data Schedule for Franklin Attached
California Insured Tax-Free Income Fund -
Class II
EX-27.B(iii) Financial Data Schedule for Franklin Attached
California Tax-Exempt Money Fund
EX-27.B(iv) Financial Data Schedule for Franklin Attached
California Intermediate-Term Tax-Free Income
Fund
*Incorporated by reference
AMENDMENT, dated May 7, 1997, to the Master Custody Agreement ("Agreement")
between each Investment Company listed on Exhibit A to the Agreement and The
Bank of New York dated February 16, 1996.
It is hereby agreed as follows:
A. Unless otherwise provided herein, all terms and conditions of the
Agreement are expressly incorporated herein by reference and, except as modified
hereby, the Agreement is confirmed in all respects. Capitalized terms used
herein without definition shall have the meanings ascribed to them in the
Agreement.
B. The Agreement shall be amended to add a new Section 4. 1 0 as
follows:
4.10 ADDITIONAL DUTIES WITH RESPECT TO RUSSIAN SECURITIES.
(a) Upon 3 business days prior written notice from a Fund that
it will invest in any security issued by a Russian issuer ("Russian Security"),
the Custodian shall to the extent required and in accordance with the terms of
the Subcustodian Agreement between the Custodian and Credit Suisse ("Foreign
Custodian") dated as of August 8, 1996 (the "Subcustodian Agreement") direct the
Foreign Custodian to enter into a contract ("Registrar Contract") with the
entity providing share registration services to the Russian issuer ("Registrar")
containing substantially the following protective provisions:
(1) REGULAR SHARE CONFIRMATIONS. Each Registrar Contract
must establish the Foreign Custodian's right to conduct regular share
confirmations on behalf of the Foreign Custodian's customers.
(2) PROMPT RE-REGISTRATIONS. Registrars must be obligated
to effect re-registrations within 72 hours (or such other specified time as the
United States Securities and Exchange Commission (the "SEC") may deem
appropriate by rule, regulation, order or "no-action" letter) of receiving the
necessary documentation.
(3) USE OF NOMINEE NAME. The Registrar Contract must
establish the Foreign Custodian's right to hold shares not held directly in the
beneficial owner's name in the name of the Foreign Custodian's nominee.
(4) AUDITOR VERIFICATION. The Registrar Contract must allow
the independent auditors of the Custodian and the Custodian's clients to obtain
direct access to the share register for the independent auditors of each of the
Foreign Custodian's clients.
(5) SPECIFICATION OF REGISTRAR'S RESPONSIBILITIES AND
LIABILITIES. The contract must set forth: (1) the Registrar's responsibilities
with regard to corporate actions and other distributions; (ii) the Registrar's
liabilities as established under the regulations applicable to the Russian share
registration -system and (iii) the procedures for making a claim against and
receiving compensation from the registrar in the event a loss is incurred.
(b) The Custodian shall, in accordance with the Subcustodian
Agreement, direct the Foreign Custodian to conduct regular share confirmations,
which shall require the Foreign Custodian to (1) request either a duplicate
share extract or some other sufficient evidence of verification and (2)
determine if the Foreign Custodian's records correlate with those of the
Registrar. For at least the first two years following the Foreign Custodian's
first use of a Registrar in connection with a Fund investment, and subject to
the cooperation of the Registrar, the Foreign Custodian will conduct these share
confirmations on at least a quarterly basis, although thereafter they may be
conducted on a less frequent basis, but no less frequently than annually, if the
Fund's Board of Directors, in consultation with the Custodian, determine it
appropriate.
(c) The Custodian shall, pursuant to the Subcustodian
Agreement, direct the Subcustodian to maintain custody of the Fund's share
register extracts or other evidence of verification obtained pursuant to
paragraph (b) above.
(d) The Custodian shall, pursuant to the Subcustodian
Agreement, direct the Foreign Custodian to comply with the rules, regulations,
orders and "no-action" letters of the SEC with respect to
(1) the receipt, holding, maintenance, release and delivery
of Securities; and
(2) providing notice to the Fund and its Board of Directors
of events specified in such rules, regulations, orders and letters.
(e) The Custodian shall have no liability for the action or
inaction of any Registrar or securities depository utilized in connection with
Russian Securities except to the extent that any such action or inaction was the
result of the Custodian's negligence. With respect to any costs, expenses,
damages, liabilities or claims, including attorneys' and accountants' fees
(collectively, "Losses") incurred by a Fund as a result of the acts or the
failure to act by any Foreign Custodian or its subsidiary in Russia
("Subsidiary"), the Custodian shall take appropriate action to recover such
Losses from the Foreign Custodian or Subsidiary. The Custodian's sole
responsibility and liability to a Fund with respect to any Losses shall be
limited to amounts so received from the Foreign Custodian or Subsidiary
(exclusive of costs and expenses incurred by the Custodian) except to the extent
that such losses were the result of the Custodian's negligence.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
THE BANK OF NEW YORK
By:/s/ Stephen E. Grunston
Name: STEPHEN E. GRUNSTON
Title: Vice President
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A TO THE AGREEMENT
By:/s/ Deborah R. Gatzek
Name: Deborah R. Gatzek
Title: Vice President
By:/s/ Karen L. Skidmore
Name: Karen L. Skidmore
Title: Assistant Vice President
Amendment to Master Custody Agreement
The Bank of New York and Templeton Variable Products Series Fund, for itself and
on behalf of its series, hereby amend Schedule A of the Master Custody Agreement
dated as of February 16, 1996, to add the series listed below:
REGISTERED INVESTMENT COMPANY SERIES
Templeton Variable Products Series Fund Franklin Growth Investments Fund
Dated as of: May 1, 1997
TEMPLETON VARIABLE PRODUCTS
SERIES FUND
By: /s/ Karen L. Skidmore
Title: Asst. Vice President &
Asst. Secretary
THE BANK OF NEW YORK
By: /s/ Stephen E. Grunston
Title: Vice President
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No. 15
to the Registration Statement of Franklin California Tax-Free Trust on Form N-1A
File No.2-99112 of our report dated August 4, 1997 on our audit of the financial
statements and financial highlights of Franklin California Tax-Free Trust, which
report is included in the Annual Report to Shareholders for the year ended June
30, 1997, which is incorporated by reference in the Registration Statement.
/s/COOPERS & LYBRAND L.L.P.
San Francisco, California
October 27, 1997
Multiple Class Plan
This Multiple Class Plan (the "Plan") has been adopted by a majority of
each of the Boards of Directors or Trustees ("Boards") of the Franklin Funds and
Fund series listed on the attached Schedule A (the "Funds"). The Boards have
determined that the Plan is in the best interests of each class and each Fund as
a whole. The Plan sets forth the provisions relating to the establishment of
multiple classes of shares for each Fund.
1. Each Fund shall offer two classes of shares, to be known as Class I
and Class II.
2. Class I shares shall carry a front-end sales charge ranging from 0% -
4.50%, and Class II shares shall carry a front-end sales charge 1.00%, all as
set forth in each Fund's Prospectus.
3. Class I shares shall not be subject to a contingent deferred sales
charge ("CDSC") except in the following limited circumstances. On investments of
$1 million or more, a contingent deferred sales charge of 1.00% of the lesser of
the then-current net asset value or the original net asset value at the time of
purchase applies to redemptions of those investments within the contingency
period of 12 months from the calendar month following their purchase. The CDSC
is waived in certain circumstances, as described in each Fund's prospectus.
4. Class II shares redeemed within 18 months of their purchase shall be
assessed a CDSC of 1.00% of the lesser of the then-current net asset value or
the original net asset value at the time of purchase. The CDSC is waived in
certain circumstances as described in each Fund's prospectus.
5. The Rule 12b-1 Plan associated with Class I shares may be used to
reimburse Franklin/Templeton Distributors, Inc. (the "Distributor") or other for
expenses incurred in the promotion and distribution of the shares of Class I.
Such expenses 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 the Distributor's overhead expenses
attributable to the distribution of Class I 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 for Class I shares or with the
Distributor or its affiliates.
The Rule 12b-1 Plan associated with Class II shares has two components.
The first component is a shareholder servicing fee, to be paid to
broker-dealers, banks, trust companies and others who will provide personal
assistance to shareholders in servicing their accounts. The second component is
an asset-based sales charge to be retained by the Distributor during the first
year after sale of shares, and, in subsequent years, to be paid to dealers or
retained by the Distributor to be used in the promotion and distribution of
Class II shares, in a manner similar to that described above for Class I shares.
The Plans shall operate in accordance with the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., Article III, section
26(d).
6. The only difference in expenses as between Class I and Class II
shares shall relate to differences in the Rule 12b-1 plan expenses of each
class, as described in each class' Rule 12b-1 Plan.
7. There shall be no conversion features associated with the Class I
and Class II shares.
8. Shares of either Class may be exchanged for shares of another
investment company within the Franklin Templeton Group of Funds according to the
terms and conditions stated in each fund's prospectus, as it may be amended from
time to time, to the extent permitted by the Investment Company Act of 1940 and
the rules and regulations adopted thereunder.
9. Each Class will vote separately with respect to the Rule 12b-1 Plan
related to that Class.
10. On an ongoing basis, each Fund's Board pursuant to the fiduciary
responsibilities under the 1940 Act and otherwise, will monitor each Fund for
the existence of any material conflicts between the interests of the two classes
of shares. Each Board, including a majority of the independent Board members,
shall take such action as is reasonably necessary to eliminate any such conflict
that may develop. Franklin Advisers, Inc. and Franklin/Templeton Distributors,
Inc. shall be responsible for alerting the Board to any material conflicts that
arise.
11. All material amendments to this Plan must be approved by a
majority of the Board members of each Fund, including a majority of the Board
members who are not interested persons of each Fund.
I, Deborah R. Gatzek, Secretary of the Franklin Funds, do hereby
certify that this Multiple Class Plan has been adopted by a majority of each of
the Boards of Directors or Trustees of the Franklin Funds and Fund series listed
on the attached Schedule A on April 18, 1995.
Date: October 19, 1995 By: /s/ Deborah R. Gatzek
Deborah R. Gatzek
Secretary
SCHEDULE A
INVESTMENT COMPANY FUND & CLASS; TITAN NUMBER
Franklin California Tax-Free Franklin California Tax-Free Income
Income Fund, Inc. Fund - Class II; 212
Franklin New York Tax-Free Franklin New York Tax-Free Income
Income Fund, Inc. Fund - Class II; 215
Franklin Federal Tax-Free Franklin Federal Tax-Free Income Fund -
Income Fund Class II; 216
Franklin Managed Trust Franklin Rising Dividends Fund -
Class II; 258
Franklin California Tax-Free Franklin California Insured Tax-Free
Trust Income Fund - Class II; 224
Franklin New York Tax-Free Trust Franklin New York Insured Tax-Free
Income Fund - Class II; 281
Franklin Strategic Series Franklin Global Utilities Fund -
Class II; 297
Franklin Tax-Free Trust Franklin Alabama Tax-Free Income Fund -
Class II; 264
Franklin Arizona Tax-Free Income Fund -
Class II; 226
Franklin Colorado Tax-Free Income Fund -
Class II; 227
Franklin Connecticut Tax Free Income Fund -
Class II; 266
Franklin Florida Tax-Free Income Fund -
Class II; 265
Franklin Georgia Tax-Free Income Fund -
Class II; 228
Franklin High Yield Tax-Free Income Fund -
Class II; 230
Franklin Insured Tax-Free Income Fund -
Class II; 221
Franklin Louisiana Tax-Free Income Fund -
Class II; 268
Franklin Maryland Tax-Free Income Fund -
Class II; 269
Franklin Massachusetts Insured Tax-Free
Income Fund - Class II; 218
Franklin Michigan Insured Tax-Free Income
Fund - Class II; 219
Franklin Minnesota Insured Tax-Free Income
Fund - Class II; 220
Franklin Missouri Tax-Free Income Fund -
Class II; 260
Franklin New Jersey Tax-Free Income Fund -
Class II; 271
Franklin North Carolina Tax-Free Income Fund
- Class II; 270
Franklin Ohio Insured Tax-Free Income Fund -
Class II; 222
Franklin Oregon Tax-Free Income Fund -
Class II; 261
Franklin Pennsylvani Tax-Free Income Fund -
Class II; 229
Franklin Puerto Rico Tax-Free Income Fund
- Class II; 223
Franklin Texas Tax-Free Income Fund
- Class II; 262
Franklin Virginia Tax-Free Income Fund
- Class II; 263
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CALIFORNIA TAX-FREE TRUST JUNE 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 011
<NAME> FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 1,539,146,753
<INVESTMENTS-AT-VALUE> 1,610,608,027
<RECEIVABLES> 69,411,636
<ASSETS-OTHER> 17,739,760
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,697,759,423
<PAYABLE-FOR-SECURITIES> 20,504,395
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,813,237
<TOTAL-LIABILITIES> 27,317,632
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,588,276,746
<SHARES-COMMON-STOCK> 133,814,581
<SHARES-COMMON-PRIOR> 132,241,504
<ACCUMULATED-NII-CURRENT> 254,790
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10,448,981
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 71,461,274
<NET-ASSETS> 1,670,441,791
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 99,138,636
<OTHER-INCOME> 0
<EXPENSES-NET> (10,017,589)
<NET-INVESTMENT-INCOME> 89,121,047
<REALIZED-GAINS-CURRENT> 11,434,772
<APPREC-INCREASE-CURRENT> 17,743,963
<NET-CHANGE-FROM-OPS> 118,299,782
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (88,728,007)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 22,948,118
<NUMBER-OF-SHARES-REDEEMED> (24,432,714)
<SHARES-REINVESTED> 3,057,673
<NET-CHANGE-IN-ASSETS> 63,353,420
<ACCUMULATED-NII-PRIOR> 1,104,905
<ACCUMULATED-GAINS-PRIOR> (985,791)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7,686,324
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 10,017,589
<AVERAGE-NET-ASSETS> 1,651,014,344
<PER-SHARE-NAV-BEGIN> 12.010
<PER-SHARE-NII> 0.660
<PER-SHARE-GAIN-APPREC> 0.210
<PER-SHARE-DIVIDEND> (0.660)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.220
<EXPENSE-RATIO> 0.600
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CALIFORNIA TAX-FREE TRUST JUNE 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATMENTS.
</LEGEND>
<SERIES>
<NUMBER> 012
<NAME> FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 1,539,146,753
<INVESTMENTS-AT-VALUE> 1,610,608,027
<RECEIVABLES> 69,411,636
<ASSETS-OTHER> 17,739,760
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,697,759,423
<PAYABLE-FOR-SECURITIES> 20,504,395
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,813,237
<TOTAL-LIABILITIES> 27,317,632
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,588,276,746
<SHARES-COMMON-STOCK> 2,839,130
<SHARES-COMMON-PRIOR> 1,529,053
<ACCUMULATED-NII-CURRENT> 254,790
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10,448,981
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 71,461,274
<NET-ASSETS> 1,670,441,791
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 99,138,636
<OTHER-INCOME> 0
<EXPENSES-NET> (10,017,589)
<NET-INVESTMENT-INCOME> 89,121,047
<REALIZED-GAINS-CURRENT> 11,434,772
<APPREC-INCREASE-CURRENT> 17,743,963
<NET-CHANGE-FROM-OPS> 118,299,782
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,243,155)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,578,751
<NUMBER-OF-SHARES-REDEEMED> (336,345)
<SHARES-REINVESTED> 67,671
<NET-CHANGE-IN-ASSETS> 63,353,420
<ACCUMULATED-NII-PRIOR> 1,104,905
<ACCUMULATED-GAINS-PRIOR> (985,791)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7,686,324
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 10,017,589
<AVERAGE-NET-ASSETS> 1,651,014,344
<PER-SHARE-NAV-BEGIN> 12.070
<PER-SHARE-NII> 0.590
<PER-SHARE-GAIN-APPREC> 0.220
<PER-SHARE-DIVIDEND> (0.590)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.290
<EXPENSE-RATIO> 1.160
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CALIFORNIA TAX-FREE TRUST JUNE 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 02
<NAME> FRANKLIN CALIFORNIA TAX-EXEMPT MONEY FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 652,360,987
<INVESTMENTS-AT-VALUE> 652,360,987
<RECEIVABLES> 4,593,065
<ASSETS-OTHER> 30,547,056
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 687,501,108
<PAYABLE-FOR-SECURITIES> 46,848,510
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 862,025
<TOTAL-LIABILITIES> 47,710,535
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 639,790,573
<SHARES-COMMON-STOCK> 639,790,573
<SHARES-COMMON-PRIOR> 597,818,790
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 639,790,573
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 21,948,943
<OTHER-INCOME> 0
<EXPENSES-NET> (3,864,597)
<NET-INVESTMENT-INCOME> 18,084,346
<REALIZED-GAINS-CURRENT> (9,957)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 18,074,389
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (18,074,389)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 992,857,545
<NUMBER-OF-SHARES-REDEEMED> (898,885,246)
<SHARES-REINVESTED> 17,999,484
<NET-CHANGE-IN-ASSETS> 41,971,783
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,127,809
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,864,597
<AVERAGE-NET-ASSETS> 639,461,676
<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> .030
<PER-SHARE-GAIN-APPREC> .000
<PER-SHARE-DIVIDEND> (.030)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.000
<EXPENSE-RATIO> .600
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
CALIFORNIA TAX-FREE TRUST JUNE 30, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 03
<NAME> FRANKLIN CALIFORNIA INTERMEDIATE-TERM TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 112,625,000
<INVESTMENTS-AT-VALUE> 115,818,463
<RECEIVABLES> 3,847,862
<ASSETS-OTHER> 1,220,855
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 120,887,180
<PAYABLE-FOR-SECURITIES> 2,580,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 641,242
<TOTAL-LIABILITIES> 3,221,242
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 114,761,097
<SHARES-COMMON-STOCK> 10,760,896
<SHARES-COMMON-PRIOR> 9,481,540
<ACCUMULATED-NII-CURRENT> 280,188
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (568,810)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,193,463
<NET-ASSETS> 117,665,938
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,912,396
<OTHER-INCOME> 0
<EXPENSES-NET> (510,712)
<NET-INVESTMENT-INCOME> 5,401,684
<REALIZED-GAINS-CURRENT> 119,770
<APPREC-INCREASE-CURRENT> 2,477,165
<NET-CHANGE-FROM-OPS> 7,998,619
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,351,328)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,368,342
<NUMBER-OF-SHARES-REDEEMED> (2,389,859)
<SHARES-REINVESTED> 300,873
<NET-CHANGE-IN-ASSETS> 16,467,100
<ACCUMULATED-NII-PRIOR> 229,832
<ACCUMULATED-GAINS-PRIOR> (688,580)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 673,288
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 872,658
<AVERAGE-NET-ASSETS> 109,009,569
<PER-SHARE-NAV-BEGIN> 10.670
<PER-SHARE-NII> .530
<PER-SHARE-GAIN-APPREC> .260
<PER-SHARE-DIVIDEND> (.530)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 10.930
<EXPENSE-RATIO> .470
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
