As filed with the Securities and Exchange Commission on August 21, 1998
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. 16 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 16 (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)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] on November 1, 1998 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
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
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial "Financial Highlights"
Information
4. General Description "How Is the Trust Organized?";
of Registrant "How Do the Funds Invest Their
Assets?"; "What Are the Risks
of Investing in the Funds?"
5. Management of the Fund "Who Manages the Funds?"
5A. Management's Discussion Contained in Registrant's
of Fund Performance Annual Report to Shareholders
6. Capital Stock and "How Is the Trust Organized?";
Other Securities "Services to Help You Manage
Your Account"; "What
Distributions Might I Receive
From the Funds?"; "How Taxation
Affects the Funds and Their
Shareholders"; "What If I Have
Questions About My Account?"
7. Purchase of Securities "Who Manages the Funds?"; "How
Being Offered Do I Buy Shares?"; "May I
Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to
Help You Manage Your Account";
"Useful Terms and Definitions"
8. Redemption or "May I Exchange Shares for
Repurchase 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 Not Applicable
Proceedings
FRANKLIN CALIFORNIA TAX-FREE TRUST
CROSS REFERENCE SHEET
FORM N-1A
PART B: INFORMATION REQUIRED IN THE
STATEMENT OF ADDITIONAL INFORMATION
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
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information Not Applicable
and History
13. Investment Objectives "How Do the Funds Invest Their
and Policies Assets?"; "What Are the Risks
of Investing in the Funds?";
"Investment Restrictions"
14. Management of the Trust "Officers and Trustees"
15. Control Persons and "Officers and Trustees";
Principal Holders of "Investment Management and
Securities Other Services"; "Miscellaneous
Information"
16. Investment Advisory "Investment Management and
and Other Services Other Services"; "The Funds'
Underwriter"
17. Brokerage Allocation "How Do the Funds Buy
and Other Practices Securities for Their
Portfolios?"
18. Capital Stock and Not Applicable
Other Services
19. Purchase, Redemption "How Do I Buy, Sell and
and Pricing of Exchange Shares?"; "How Are
Securities Being Fund Shares Valued?";
Offered "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Funds' Underwriter"
22. Calculation of "How Do the Funds Measure
Performance Data Performance?"
23. Financial Statements "Financial Statements"
PROSPECTUS & APPLICATION
FRANKLIN CALIFORNIA TAX-FREE TRUST
Franklin California Insured Tax-Free Income Fund
Franklin California Intermediate-Term Tax-Free Income Fund
Franklin California Tax-Exempt Money Fund
NOVEMBER 1, 1998
INVESTMENT STRATEGY TAX-FREE INCOME
Please read this prospectus before investing, and keep it for future reference.
It contains important information, including how each fund invests and the
services available to shareholders.
To learn more about each fund and its policies, you may request a copy of the
funds' Statement of Additional Information ("SAI"), dated November 1, 1998,
which we may amend from time to time. We have filed the SAI with the SEC and
have incorporated it by reference into this prospectus.
For a free copy of the SAI or a larger print version of this prospectus, contact
your investment representative or 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 $1 SHARE PRICE.
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.
MUTUAL FUND SHARES 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. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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.
FRANKLIN CALIFORNIA TAX-FREE TRUST
November 1, 1998
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our glossary section.
TABLE OF CONTENTS
ABOUT THE FUNDS
Expense Summary..........................................
Financial Highlights.....................................
How Do the Funds Invest Their Assets?....................
What Are the Risks of Investing in the Funds?............
Who Manages the Funds?...................................
How Taxation Affects the Funds and Their Shareholders....
How Is the Trust Organized?..............................
ABOUT YOUR ACCOUNT
How Do I Buy Shares?.....................................
May I Exchange Shares for Shares of Another Fund?........
How Do I Sell Shares?....................................
What Distributions Might I Receive From the Funds?.......
Transaction Procedures and Special Requirements..........
Services to Help You Manage Your Account.................
What If I Have Questions About My Account?...............
GLOSSARY
Useful Terms and Definitions.............................
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN(R)
ABOUT THE FUNDS
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in a fund.
It is based on the historical expenses of each fund for the fiscal year ended
June 30, 1998. Each fund's actual expenses may vary.
<TABLE>
<CAPTION>
INSURED FUND - INSURED FUND - INTERMEDIATE MONEY
CLASS I CLASS II FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge
<S> <C> <C> <C> <C>
(as a 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% 0.60%** 0.49%
Rule 12b-1 Fees 0.09%*** 0.65%*** 0.10%*** None
Other Expenses 0.04% 0.04% 0.08% 0.11%
-------------------------------------------------------------------------
Total Fund Operating Expenses 0.60% 1.16% 0.78%** 0.60%
</TABLE>
C. EXAMPLE
Assume the annual return for each fund 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 a fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------------------
Insured Fund - Class I $48**** $61 $75 $114
Insured Fund - Class II $32 $46 $73 $149
Intermediate Fund $30**** $47 $65 $117
Money Fund $ 6 $19 $33 $ 75
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.
Each fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each fund 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? - Choosing a Share Class."
++++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 you would pay is
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, the manager had agreed in advance to limit its
management fees. With this reduction, management fees were 0.34% and total
operating expenses were 0.52%.
***These fees may not exceed 0.10% for the Intermediate Fund and Class I of the
Insured Fund. For Class II 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 each fund's financial history. The information has been
audited by PricewaterhouseCoopers LLP, the funds' independent auditor. The audit
report covering each of the most recent five years appears in the Trust's Annual
Report to Shareholders for the fiscal year ended June 30, 1998. The Annual
Report to Shareholders also includes more information about each fund's
performance. For a free copy, please call Fund Information.
<TABLE>
<CAPTION>
INSURED FUND - CLASS I
YEAR ENDED JUNE 30, 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $12.22 $12.01 $11.95 $11.74 $12.30 $11.67 $11.26 $11.17 $11.27 $10.53
------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .64 .66 .67 .68 .68 .69 .70 .74 .74 .74
Net realized and unrealized gains (losses) .37 .21 .06 .20 (.56) .64 .46 .09 (.10) .71
------------------------------------------------------------------------------------------
Total from investment operations 1.01 .87 .73 .88 .12 1.33 1.16 .83 .64 1.45
------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.64) (.66) (.67) (.67) (.68) (.70) (.75) (.74) (.74) (.71)
Net realized gains (.12) -- -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------------
Total distributions (.76) (.66) (.67) (.67) (.68) (.70) (.75) (.74) (.74) (.71)
------------------------------------------------------------------------------------------
Net asset value, end of year $12.47 $12.22 $12.01 $11.95 $11.74 $12.30 $11.67 $11.26 $11.17 $11.27
==========================================================================================
Total return+ 8.38% 7.41% 6.18% 7.80% .67% 11.47% 10.32% 7.45% 5.59% 13.97%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions) $1,717 $1,636 $1,589 $1,468 $1,451 $1,364 $968 $472 $307 $248
Ratios to average net assets:
Expenses .60% .60% .60% .59% .54% .53% .55% .57% .59% .61%
Net investment income 5.11% 5.41% 5.50% 5.77% 5.53% 5.82% 6.16% 6.48% 6.63% 6.79%
Portfolio turnover rate 21.66% 20.40% 14.22% 11.85% 6.98% 8.28% 3.50% 4.20% 10.41% 28.56%
</TABLE>
<TABLE>
<CAPTION>
INSURED FUND - CLASS II
YEAR ENDED JUNE 30, 1998 1997 1996 1995***
- ------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C>
Net asset value, beginning of year $12.29 $12.07 $11.99 $11.88
-----------------------------------------------
Income from investment operations:
Net investment income .58 .59 .60 .11
Net realized and unrealized gains .37 .22 .08 .10
-----------------------------------------------
Total from investment operations .95 .81 .68 .21
-----------------------------------------------
Less distributions from:
Net investment income (.57) (.59) (.60) (.10)
Net realized gains (.12) -- -- --
-----------------------------------------------
Total distributions (.69) (.59) (.60) (.10)
-----------------------------------------------
Net asset value, end of year $12.55 $12.29 $12.07 $11.99
===============================================
Total return+ 7.80% 6.86% 5.70% 1.79%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $55,371 $34,899 $18,458 $507
Ratios to average net assets:
Expenses 1.16% 1.16% 1.17% 1.17%*
Net investment income 4.55% 4.81% 4.96% 5.03%*
Portfolio turnover rate 21.66% 20.40% 14.22% 11.85%
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE FUND
YEAR ENDED JUNE 30, 1998 1997 1996 1995 1994 1993**
- -----------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.93 $10.67 $10.38 $10.20 $10.55 $10.00
-----------------------------------------------------------------
Income from investment operations:
Net investment income .53 .53 .53 .54 .54 .29
Net realized and unrealized gains (losses) .31 .26 .29 .17 (.36) .55
-----------------------------------------------------------------
Total from investment operations .84 .79 .82 .71 .18 .84
-----------------------------------------------------------------
Less distributions from net investment income (.53) (.53) (.53) (.53) (.53) (.29)
-----------------------------------------------------------------
Net asset value, end of year $11.24 $10.93 $10.67 $10.38 $10.20 $10.55
=================================================================
Total return+ 7.76% 7.58% 7.96% 7.19% 1.65% 10.95%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions) $156 $118 $101 $89 $94 $43
Ratios to average net assets:
Expenses .52% .47% .45% .33% .25% .09%*
Expenses excluding waiver and payments by affiliate .78% .80% .81% .83% .80% .95%*
Net investment income 4.76% 4.96% 4.99% 5.34% 5.11% 4.73%*
Portfolio turnover rate 9.58% 6.29% 10.13% 10.90% 14.95% .08%
</TABLE>
<TABLE>
<CAPTION>
MONEY FUND
YEAR ENDED JUNE 30, 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share oustanding throughout the year)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $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 .03 .02 .02 .03 .05 .06 .06
Less distributions from
net investment income (.03) (.03) (.03) (.03) (.02) (.02) (.03) (.05) (.06) (.06)
------------------------------------------------------------------------------------------
Net asset value, end of year $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% 2.85% 2.94% 1.83% 2.08% 3.17% 4.58% 5.61% 5.67%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions) $657 $640 $598 $642 $754 $653 $759 $954 $1,039 $807
Ratios to average net assets:
Expenses .60% .60% .63% .64% .61% .62% .60% .57% .55% .55%
Net investment income 2.82% 2.83% 2.83% 2.88% 1.82% 2.07% 3.14% 4.47% 5.36% 5.57%
</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 does not reflect sales commissions or the Contingent Deferred
Sales Charge, and is not annualized. Before May 1, 1994, the Insured Fund's
dividends from net investment income were reinvested at the Offering Price.
HOW DO THE FUNDS INVEST THEIR ASSETS?
A QUICK LOOK AT THE FUNDS
<TABLE>
<CAPTION>
CALIFORNIA INSURED CALIFORNIA INTERMEDIATE-TERM CALIFORNIA TAX-EXEMPT
TAX-FREE INCOME FUND TAX-FREE INCOME FUND MONEY FUND
- -------------------- ---------------------------- ---------------------
<S> <C> <C>
GOAL: High current GOAL: High current GOAL: High current
tax-free income for tax-free income for tax-free income for
California residents. California residents. California residents
while trying to keep a
stable $1 share price.
STRATEGY: Invests STRATEGY: Invests in STRATEGY: Invests in
primarily in municipal investment grade high-quality, short-term
securities covered by municipal securities municipal securities
insurance guaranteeing whose interest is free whose interest is free
the timely payment of from federal and from federal and
principal and interest California personal California personal
and whose interest is income taxes and income taxes.
free from federal and maintains a dollar-
California personal weighted average
income taxes. portfolio maturity of
three to 10 years.
</TABLE>
WHAT IS THE MANAGER'S APPROACH?
The funds' investment manager tries to select securities that it believes will
provide the best balance between risk and return within each fund's range of
allowable investments. The manager considers a number of factors, including
general market and economic conditions and the credit quality of the issuer. The
manager may also consider the cost of insurance when selecting securities for
the Insured Fund.
To provide tax-free income to shareholders, the manager typically uses a buy and
hold strategy. This means it holds securities in a fund's portfolio for income
purposes, rather than trading securities for capital gains. The manager may sell
a security at any time, however, when it believes doing so could help the fund
meet its goal.
While income is the most important part of return over time, the total return
from a municipal security includes both income and price gains or losses. Each
fund's focus on income does not mean it invests only in the highest-yielding
securities available, or that it can avoid losses of principal.
WHO MAY WANT TO INVEST?
The funds may be appropriate for investors in higher tax brackets who seek high
current income that is free from federal and California personal income taxes.
Each fund's level of risk and potential reward depends on the quality and
maturity of its investments.
The Money Fund, like all money funds, follows SEC guidelines on the quality,
maturity and diversification of its investments. These guidelines are designed
to help reduce a money fund's risks so that it is more likely to keep its share
price at $1. Unlike the Money Fund, the share price of the Insured and
Intermediate funds fluctuates. With their broader range of investments, the
Insured and Intermediate funds have the potential for higher yields, but also
carry a higher degree of risk. Please consider your investment goals and
tolerance for price fluctuations and risk when making your investment decision.
The value of each fund's investments and the income they generate will vary from
day to day, and generally reflect interest rates, market conditions, and other
federal and state political and economic news. When you sell your shares, they
may be worth more or less than what you paid for them.
THE FUNDS IN MORE DETAIL
WHAT ARE THE FUNDS' GOALS?
The investment goal of each fund 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. This goal is fundamental, which means that it may not be
changed without shareholder approval. The Money Fund also seeks liquidity in its
investments and tries to maintain a stable Net Asset Value of $1 per share.
WHAT KINDS OF SECURITIES DO THE FUNDS BUY?
Each fund tries to invest all of its assets in tax-free municipal securities,
including bonds, notes and commercial paper.
MUNICIPAL SECURITIES are issued by state and local governments, their agencies
and authorities, as well as by the District of Columbia and U.S. territories and
possessions, to borrow money for various public or private projects. The issuer
pays a fixed or variable rate of interest, and must repay the amount borrowed
(the "principal") at maturity.
Municipal securities generally pay interest free from federal income tax.
Municipal securities issued by California or its counties, municipalities,
authorities, agencies, or other subdivisions ("California municipal
securities"), as well as municipal securities issued by U.S. territories such as
Guam, Puerto Rico, or the U.S. Virgin Islands, also generally pay interest free
from California personal income taxes for California residents.
Each fund normally invests:
o at least 80% of its assets in securities that pay interest free from
federal income taxes, including the federal alternative minimum tax (this
policy is fundamental). Each fund applies this test to its net assets,
except for the Intermediate Fund, which applies the test to its total
assets;
o at least 80% of its net assets in securities that pay interest free from
California personal income taxes, although each fund tries to invest all of
its assets in these securities (this policy is also fundamental and does
not apply to the Intermediate Fund). The Intermediate Fund normally invests
at least 65% of its total assets in securities that pay interest free from
California personal income taxes, although it tries to invest all of its
assets in these securities; and
o at least 65% of its total assets in California municipal securities.
While each fund tries to invest 100% of its assets in tax-free municipal
securities, it is possible, although not anticipated, that a fund may have a
significant amount of its assets in securities that pay taxable interest. If you
are subject to the federal alternative minimum tax, please keep in mind that
each fund may also have a portion of its assets in municipal securities that pay
interest subject to the federal alternative minimum tax.
QUALITY. All things being equal, the lower a security's credit quality, the
higher the risk and the higher the yield the security generally must pay as
compensation to investors for the higher risk.
A security's credit quality depends on the issuer's ability to pay interest on
the security and, ultimately, to repay the principal. Independent rating
agencies, such as Fitch, Moody's and S&P, often rate municipal securities based
on their opinion of the issuer's credit quality. Most rating agencies use a
descending alphabet scale to rate long-term securities, and a descending
numerical scale to rate short-term securities. For example, Fitch and S&P use
AAA, AA, A and BBB for their top four long-term ratings, while Moody's uses Aaa,
Aa, A and Baa. Securities rated in the highest rating category are "top rated."
Securities in the top four ratings are "investment grade," although securities
in the fourth highest rating may have some speculative features. These ratings
are described in more detail in the SAI.
An insurance company, bank or other foreign or domestic entity may provide
credit support for a municipal security and enhance its credit quality. For
example, some municipal securities are insured, which means they are covered by
an insurance policy that insures the timely payment of principal and interest.
Other municipal securities may be backed by letters of credit, guarantees, or
escrow or trust accounts that contain securities backed by the full faith and
credit of the U.S. government to secure the payment of principal and interest.
o The INSURED FUND invests at least 65% of its total assets in insured
municipal securities. The fund pays insurance premiums either directly or
indirectly, which increases the credit safety of its insured investments,
but decreases its yield. It is important to note that the insurance does
not guarantee the market value of a security, or the fund's shares or
distributions, and shares of the fund are not insured.
o The Insured Fund may invest the balance of its assets in the following
types of uninsured securities: (i) municipal securities secured by an
escrow or trust account containing direct U.S. government obligations; (ii)
securities rated in one of the top three ratings or unrated securities that
the manager believes are comparable in quality; or (iii) top rated
short-term, tax-exempt securities, pending investment in longer-term
municipal securities. The fund may only invest up to 20% of its total
assets in the type of securities described in (ii) above.
o The INTERMEDIATE FUND only buys investment grade securities or unrated
securities that the manager believes are comparable.
o The MONEY FUND only buys securities that the manager determines present
minimal credit risks and that are rated in one of the top two ratings or
that are comparable unrated securities in the manager's opinion.
MATURITY. Municipal securities are issued with a specific maturity date - the
date when the issuer must repay the amount borrowed. Maturities typically range
from less than one year (short term) to 30 years (long term). In general,
securities with longer maturities are more sensitive to price changes, although
they may provide higher yields.
o The INSURED FUND has no restrictions on the maturity of the securities it
may buy or on its average portfolio maturity.
o The INTERMEDIATE FUND may buy securities with any maturity but must
maintain a dollar-weighted average portfolio maturity of three to 10 years.
o The MONEY FUND only buys securities with remaining maturities of 397
calendar days or less and maintains a dollar-weighted average portfolio
maturity of 90 days or less.
VARIABLE AND FLOATING RATE SECURITIES have interest rates that change either at
specific intervals or whenever a benchmark rate changes. While this feature
helps to protect against a decline in the security's market price, it also
lowers a fund's income when interest rates fall. Of course, a fund's income from
its variable rate investments may also increase if interest rates rise.
o The INSURED FUND may invest in top rated variable and floating rate
securities.
o The INTERMEDIATE FUND may invest in investment grade variable and floating
rate securities.
o The MONEY FUND may buy certain types of variable and floating rate
securities if they are consistent with the fund's goal of maintaining a
stable share price.
MUNICIPAL LEASE OBLIGATIONS finance the purchase of public property. The
property is leased to the state or a local government, and the lease payments
are used to pay the interest on the obligations. Municipal lease obligations
differ from other municipal securities because the lessee's governing body must
set aside the money to make the lease payments each year. If the money is not
set aside, the issuer or the lessee can end the lease without penalty. If the
lease is cancelled, investors who own the municipal lease obligations may not be
paid.
o Each fund may invest in municipal lease obligations without limit, if the
obligations meet the fund's quality and maturity standards.
What Are Some of the Funds' Other Investment Strategies and Practices?
TEMPORARY INVESTMENTS. When the manager believes unusual or adverse economic,
market or other conditions exist, it may invest a fund's portfolio in a
temporary defensive manner. Under these circumstances, each fund may invest all
of its assets in securities that pay taxable interest, including (i) municipal
securities issued by a state or local government other than California, or by a
U.S. territory such as Guam, Puerto Rico or the U.S. Virgin Islands; (ii) high
quality commercial paper; or (iii) securities issued or guaranteed by the full
faith and credit of the U.S. government. During these times, the Money Fund may
also invest in obligations of U.S. banks with assets of $1 billion or more.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS are those where payment and
delivery for the security take place at a future date. Since the market price of
the security may fluctuate during the time before payment and delivery, the fund
assumes the risk that the value of the security at delivery may be more or less
than the purchase price.
DIVERSIFICATION. Diversification involves limiting the amount of money invested
in any one issuer or, on a broader scale, in any one state or type of project to
help spread and reduce the risks of investment. A fund can be either diversified
or non-diversified. A non-diversified fund may invest a greater portion of its
assets in the securities of one issuer than a diversified fund. Economic,
business, political or other changes can affect all securities of a similar
type. A non-diversified fund may be more sensitive to these changes.
o The Intermediate Fund is a non-diversified fund, although it intends to
meet certain diversification requirements for tax purposes. The Insured and
Money Funds are diversified. Each fund may, however, invest more than 25%
of its assets in municipal securities that finance similar types of
projects, such as hospitals, housing, industrial development,
transportation or pollution control.
OTHER POLICIES AND RESTRICTIONS. Each fund has a number of additional investment
policies and restrictions that govern its activities. Those that are identified
as "fundamental" may only be changed with shareholder approval. The others may
be changed by the Board alone. For a list of these restrictions and more
information about each fund's investment policies, including those described
above, please see "How Do the Funds Invest Their Assets?" and "Investment
Restrictions" in the SAI.
Generally, the policies and restrictions discussed in this prospectus and in the
SAI apply when a fund makes an investment. In most cases, a fund is not required
to sell a security because circumstances change and the security no longer meets
one or more of the fund's policies or restrictions.
WHAT ARE THE RISKS OF INVESTING IN THE FUNDS?
Like all investments, an investment in a fund involves risks. The risks of each
fund are basically the same as those of other investments in municipal
securities of similar quality, although an investment in the fund may involve
more risk than an investment in a fund that does not focus on securities of a
single state. Because each fund holds many securities, it is likely to be less
risky than any one, or few, directly held municipal investments.
GENERAL RISK. There is no assurance that a fund will meet its investment goal. A
fund's share price, and the value of your investment, may change. Generally,
when the value of a fund's investments go down, so does the fund's share price.
Similarly, when the value of a fund's investments go up, so does the fund's
share price. Since the value of a fund's shares can go up or down, it is
possible to lose money by investing in the fund. The Money Fund, however, tries
to maintain a stable share price of $1, although there is no assurance that the
Money Fund will be able to do so.
INTEREST RATE RISK is the risk that changes in interest rates can reduce the
value of a security. When interest rates rise, municipal security prices fall.
The opposite is also true: municipal security prices go up when interest rates
fall. To explain why this is so, assume you hold a municipal security offering a
5% yield. A year later, interest rates are on the rise and comparable securities
are offered with a 6% yield. With higher-yielding securities available, you
would have trouble selling your 5% security for the price you paid - causing you
to lower your asking price. On the other hand, if interest rates were falling
and 4% municipal securities were being offered, you would be able to sell your
5% security for more than you paid.
INCOME RISK is the risk that a fund's income will decrease due to falling
interest rates. Since a fund can only distribute what it earns, a fund's
distributions to its shareholders may decline when interest rates fall.
CREDIT RISK is the possibility that an issuer will be unable to make interest
payments or repay principal. Changes in an issuer's financial strength or in a
security's credit rating may affect its value. Even securities supported by
credit enhancements have the credit risk of the entity providing the credit
support. Credit support provided by a foreign entity may be less certain because
of the possibility of adverse foreign economic, political or legal developments
that may affect the ability of that foreign entity to meet its obligations.
Changes in the credit quality of the credit provider could affect the value of
the security and the fund's share price. The Money Fund's ability to keep a
stable share price may depend on these credit supports, which are not backed by
federal deposit insurance.
MARKET RISK is the risk that a security's value will be reduced by market
activity or the results of supply and demand. This is a basic risk associated
with all securities. When there are more sellers than buyers, prices tend to
fall. Likewise, when there are more buyers than sellers, prices tend to
increase.
CALL RISK is the likelihood that a security will be prepaid (or "called") before
maturity. An issuer is more likely to call its bonds when interest rates are
falling, because the issuer can issue new bonds with lower interest payments. If
a bond is called, a fund may have to replace it with a lower-yielding security.
At any time, a fund may have a large amount of its assets invested in municipal
securities subject to call risk, including escrow-secured or defeased bonds. A
call of some or all of these securities may lower the fund's income and its
distributions to shareholders.
CALIFORNIA RISKS. Since the funds invest heavily in California municipal
securities, events in California are likely to affect a fund's investments and
its performance. These events may include:
o economic or political policy changes;
o tax base erosion;
o state constitutional limits on tax increases;
o budget deficits and other financial difficulties; and
o changes in the ratings assigned to California's municipal issuers.
A negative change in any one of these or other areas could affect the ability of
California's municipal issuers to meet their obligations. In recent years,
certain issuers in California have experienced financial difficulties, such as
the 1994 bankruptcy of Orange County. It is important to remember that economic,
budget and other conditions within California are unpredictable and can change
at any time.
U.S. TERRITORIES RISKS. Each fund may invest up to 35% of its assets in
municipal securities issued by U.S. territories such as Guam, Puerto Rico or the
U.S. Virgin Islands. As with California municipal securities, events in any of
these territories where a fund invests may affect the fund's investments and its
performance.
FOR MORE INFORMATION ABOUT THE FUNDS' RISKS. The funds' SAI also has information
about each fund's investment policies and their risks, including specific
information on California's economy and financial strength. Please see "How Do
the Funds Invest Their Assets?" and "What Are the Risks of Investing in the
Funds?" in the SAI.
WHO MANAGES THE FUNDS?
THE BOARD. The Board oversees the management of each fund and elects its
officers. The officers are responsible for each 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. Franklin Advisers, Inc. manages each fund's assets and makes
its investment decisions. The manager 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,
the manager and its affiliates manage over $236 billion in assets, including $49
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 funds' Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of each
fund's portfolio is:
Carrie Higgins
Portfolio Manager of Franklin Advisers, Inc.
Ms. Higgins has been an analyst or portfolio manager for the Money Fund since
1992. She holds a Bachelor of Science degree in Economics from the University of
California at Davis. She joined the Franklin Templeton Group in 1990. She is a
member of several securities industry-related committees and associations.
Thomas Kenny
Executive Vice President of Franklin Advisers, Inc.
Mr. Kenny has been an analyst or portfolio manager for the Intermediate Fund
since inception and the Insured and Money funds since 1987. He 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
securities industry-related committees and associations.
John Pomeroy
Portfolio Manager of Franklin Advisers, Inc.
Mr. Pomeroy has been an analyst or portfolio manager for the Money Fund since
1989. He 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 Franklin Advisers, Inc.
Mr. Schroer has been an analyst or the portfolio manager for the Insured Fund
since 1987 and the Intermediate Fund since inception. He 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 securities
industry-related committees and associations.
John Wiley
Portfolio Manager of Franklin Advisers, Inc.
Mr. Wiley has been an analyst or portfolio manager for the Insured Fund since
1991 and the Intermediate Fund since inception. He holds a Master of Business
Administration degree in Finance from Saint Mary's College and a Bachelor of
Science degree from the 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, 1998, management fees
paid to the manager 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 Fund 0.34%* 0.52%*
Money Fund 0.49% 0.60%
*Management fees, before any advance waiver, totaled 0.60% and total operating
expenses were 0.78%. Under an agreement by the manager to limit its fees, the
Intermediate Fund paid the management fees and total operating expenses shown.
The manager may end this arrangement at any time upon notice to the Board.
PORTFOLIO TRANSACTIONS. The manager tries to obtain the best execution on all
transactions. If the manager 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 Do the Funds Buy
Securities for Their Portfolios?" in the SAI for more information.
ADMINISTRATIVE SERVICES. Under an agreement with the manager, FT Services
provides certain administrative services and facilities for each fund. During
the fiscal year ended June 30, 1998, administration fees paid to FT Services,
as a percentage of average daily net assets, were as follows:
ADMINISTRATION
FEES
----------------
Insured Fund 0.11%
Intermediate Fund 0.15%
Money Fund 0.14%
These fees are paid by the manager. They are not a separate expense of the
funds. Please see "Investment Management and Other Services" in the SAI for more
information.
YEAR 2000 ISSUE. Like other mutual funds, the fund could be adversely affected
if the computer systems used by [IM] and other service providers do not properly
process date-related information on or after January 1, 2000 ("Year 2000
Issue"). The Year 2000 Issue[, and in particular foreign service providers'
responsiveness to the issue,] could affect portfolio and operational areas
including securities trade processing, interest and dividend payments,
securities pricing, shareholder account services, reporting, custody functions,
and others. While there can be no assurance that the fund will not be adversely
affected, [IM] and its affiliated service providers are taking steps that they
believe are reasonably designed to address the Year 2000 Issue, including
seeking reasonable assurances from the fund's other major service providers.
THE RULE 12B-1 PLANS
The Intermediate 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 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, Securities Dealers may not be eligible to receive the
Rule 12b-1 fees associated with the purchase.
Under its 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,
Securities Dealers may not be eligible to receive 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 its 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
Funds' Underwriter" in the SAI.
<TABLE>
<CAPTION>
HOW TAXATION AFFECTS THE FUNDS AND THEIR SHAREHOLDERS
-----------------------------------------------
<S> <C>
TAXATION OF THE FUNDS' INVESTMENTS. Each HOW DO THE FUNDS EARN INCOME AND GAINS?
fund invests your money in the municipal Each fund earns interest and other income
and other securities described in the (the fund's "income") on its investments.
section "How Do the Funds Invest Their When a fund sells a security for a price that
Assets?" Special tax rules may apply when is higher than it paid, it has a gain. When a
determining the income and gains that each fund sells a security for a price that is
fund earns on its investments. These rules lower than it paid, it has a loss. If a fund
may, in turn, affect the amount of has held the security for more than one year,
distributions that a fund pays to you. the gain or loss will be a long-term capital
These special tax rules are discussed in gain or loss. If a fund has held the security
the SAI. for one year or less, the gain or loss will
be a short-term capital gain or loss. A
TAXATION OF THE FUNDS. As a regulated fund's gains and losses are netted together,
investment company, each fund generally and, if the fund has a net gain (the fund's
pays no federal income tax on the income "gains"), that gain will generally be
and gains that it distributes to you. distributed to you.
-----------------------------------------------
TAXATION OF SHAREHOLDERS
-----------------------------------------------
DISTRIBUTIONS. Distributions made to you WHAT IS A DISTRIBUTION?
from interest income on municipal As a shareholder, you will receive your share
securities will be exempt from the regular of a fund's income and gains on its
federal income tax. Distributions made to investments. A fund's interest income on
you from other income on temporary municipal securities is paid to you as
investments, short-term capital gains, or exempt-interest dividends. A fund's ordinary
ordinary income from the sale of market income and short-term capital gains are paid
discount bonds will be taxable to you as to you as ordinary dividends. A fund's
ordinary dividends, whether you receive long-term capital gains are paid to you as
them in cash or in additional shares. capital gain distributions. If a fund pays
Distributions made to you from interest on you an amount in excess of its income and
certain private activity bonds, while gains, this excess will generally be treated
still exempt from the regular federal as a non-taxable distribution. These amounts,
income tax, are a preference item when taken together, are what we call a fund's
determining your alternative minimum tax. distributions to you.
The fund will send you a statement in
January of the current year that reflects
the amount of exempt-interest dividends,
ordinary dividends, capital gain
distributions, interest income that is a
tax preference item under the alternative
minimum tax and non-taxable distributions
you received from the fund in the prior
year. This statement will include
distributions declared in December and
paid to you in January of the current
year, but which are taxable as if paid on
December 31 of the prior year. The IRS
requires you to report these amounts on
your income tax return for the prior year.
-----------------------------------------------
DIVIDENDS-RECEIVED DEDUCTION. It is anticipated that no portion of the funds'
distributions will qualify for the corporate dividends-received deduction.
-----------------------------------------------
REDEMPTIONS AND EXCHANGES. If you redeem WHAT IS A REDEMPTION?
your shares or if you exchange your shares A redemption is a sale by you to the fund of
in the funds for shares in another some or all of your shares in the fund. The
Franklin Templeton Fund, you will price per share you receive when you redeem
generally have a gain or loss that the IRS fund shares may be more or less than the
requires you to report on your income tax price at which you purchased those shares. An
return. If you exchange fund shares held exchange of shares in the fund for shares of
for 90 days or less and pay no sales another Franklin Templeton Fund is treated as
charge, or a reduced sales charge, for the a redemption of fund shares and then a
new shares, all or a portion of the sales purchase of shares of the other fund. When
charge you paid on the purchase of the you redeem or exchange your shares, you will
shares you exchanged is not included in generally have a gain or loss, depending upon
their cost for purposes of computing gain whether the amount you receive for your
or loss on the exchange. If you hold your shares is more or less than your cost or
shares for six months or less, any loss other basis in the shares. Please call Fund
you have will be disallowed to the extent Information for a free Tax Information
of any exempt-interest dividends paid on Handbook if you need more information on
your shares. Any such loss not disallowed calculating the gain or loss on the
will be treated as a long-term capital redemption or exchange of your shares.
loss to the extent of any long-term
capital gain distributions paid on your
shares. All or a portion of any loss on
the redemption or exchange of your shares
will be disallowed by the IRS if you buy
other shares in the fund within 30 days
before or after your redemption or
exchange. Because the Money Fund expects
to maintain a $1.00 Net Asset Value per
share, you should not have any gain or
loss on the redemption or exchange of
Money Fund shares.
-----------------------------------------------
CALIFORNIA STATE TAXES. Ordinary dividends and capital gain distributions that you
receive from the funds, and gains arising from redemptions or exchanges of your fund
shares, will generally be subject to state and local income tax. Distributions paid from
the interest earned on California municipal securities will generally be exempt from
California state personal income taxes. Dividends paid from interest earned on qualifying
U.S. territorial obligations (including qualifying obligations of Puerto Rico, the U.S.
Virgin Islands and Guam) will also generally be exempt from California state personal
income taxes. Investments in municipal securities of other states generally do not
qualify for tax-free treatment. Corporate taxpayers subject to the California state
franchise tax are subject to special rules. The holding of fund shares may also be
subject to state and local intangibles taxes. Each fund in which you are a shareholder
will provide you with information at the end of each calendar year on the amounts of such
dividends that may qualify for exemption from reporting on your individual income tax
returns. You may wish to contact your tax advisor to determine the state and local tax
consequences of your investment in the fund.
SOCIAL SECURITY AND RAILROAD RETIREMENT BENEFITS. Exempt-interest dividends paid to you,
although exempt from the regular federal income tax, are includible in the tax base for
determining the taxable portion of your social security or railroad retirement benefits.
The IRS requires you to disclose these exempt-interest dividends on your federal income
tax return.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income tax
withholding. Your home country may also tax ordinary dividends, exempt-interest
dividends, capital gain distributions and gains arising from redemptions or exchanges of
your fund shares. Fund shares held by the estate of a non-U.S. investor may be subject to
U.S. estate tax. You may wish to contact your tax advisor to determine the U.S. and
non-U.S. tax consequences of your investment in a fund.
-----------------------------------------------
BACKUP WITHHOLDING. When you open an WHAT IS A BACKUP WITHHOLDING?
account, IRS regulations require that you Backup withholding occurs when a fund is
provide your taxpayer identification required to withhold and pay over to the IRS
number ("TIN"), certify that it is 31% of your distributions and redemption
correct, and certify that you are not proceeds. You can avoid backup withholding
subject to backup withholding under IRS by providing the fund with your TIN, and by
rules. If you fail to provide a correct completing the tax certifications on your
TIN or the proper tax certifications, the shareholder application that you were asked
IRS requires the fund to withhold 31% of to sign when you opened your account.
all the distributions (including ordinary However, if the IRS instructs the fund to
dividends and capital gain distributions), begin backup withholding, it is required to
and redemption proceeds paid to you. The do so even if you provided the fund with your
fund is also required to begin backup TIN and these tax certifications, and backup
withholding on your account if the IRS withholding will remain in place until the
instructs the fund to do so. The fund fund is instructed by the IRS that it is no
reserves the right not to open your longer required.
account, or, alternatively, to redeem your
shares at the current Net Asset Value,
less any taxes withheld, if you fail to
provide a correct TIN, fail to provide the
proper tax certifications, or the IRS
instructs the fund to begin backup
withholding on your account.
-----------------------------------------------
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUNDS. FOR A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS, PLEASE SEE "ADDITIONAL
INFORMATION ON DISTRIBUTIONS AND TAXES" IN THE SAI. THE TAX TREATMENT TO YOU
OF DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS, INTEREST INCOME THAT IS A TAX
PREFERENCE ITEM AND INCOME TAXES WITHHELD IS ALSO DISCUSSED IN A FREE
FRANKLIN TEMPLETON TAX INFORMATION HANDBOOK, WHICH YOU MAY REQUEST BY
CONTACTING FUND INFORMATION.
</TABLE>
HOW IS THE TRUST ORGANIZED?
The funds are series of Franklin California Tax-Free Trust (the "Trust"), an
open-end management investment company, commonly called a mutual fund. The Trust
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 and Money funds, are considered Class I shares. 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?
OPENING YOUR ACCOUNT
To open your account, please follow the steps below. This will help avoid any
delays in processing your request. PLEASE KEEP IN MIND THAT THE INSURED AND
INTERMEDIATE FUNDS DO NOT CURRENTLY ALLOW INVESTMENTS BY MARKET TIMERS.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The funds' minimum
investments are:
o To open a regular account $1,000
o To open a custodial account for a minor
(an UGMA/UTMA account) $ 100
o To open an account with an automatic
investment plan $ 50
o To add to an account $ 50
For purchases by broker-dealers, registered investment advisors or
certified financial planners who have entered into an agreement with
Distributors for clients participating in comprehensive fee programs,
the minimum initial investment is $250. The minimum initial investment
is $100 for 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.
We reserve the right to change the amount of these minimums from time
to time or to waive or lower these minimums for certain purchases. We
also reserve the right to refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application,
including the optional shareholder privileges section. By applying for
privileges now, you can avoid the delay and inconvenience of having to
send an additional application to add privileges later. FOR THE INSURED
FUND, PLEASE ALSO INDICATE WHICH CLASS OF SHARES YOU WANT TO BUY. IF
YOU DO NOT SPECIFY A CLASS, WE WILL AUTOMATICALLY INVEST YOUR PURCHASE
IN CLASS I SHARES. It is important that we receive a signed application
since we will not be able to process any redemptions from your account
until we receive your signed application.
4. Make your investment using the table below.
- --------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL For an initial investment:
Return the application to the fund with your
check made payable to the fund. For an
investment in the Money Fund you may also send
a Federal Reserve draft or negotiable bank
draft, but instruments drawn on other
investment companies may not be accepted.
For additional investments:
Send a check made payable to the fund. Please
include your account number on the check. If you
are a Money Fund shareholder, you may also use
the deposit slips included with your monthly
statement or checkbook (if you have requested
one).
- --------------------------------------------------------------------------------
BY WIRE 1. Call Shareholder Services or, if that number is
busy, call 1-650/312-2000 collect, to receive a
wire control number. You need a new wire control
number 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 we will not credit
the purchase to your account.
2. For the Insured and Intermediate funds, we will
provide wire instructions when you call. If we
receive your call before 1:00 p.m. Pacific time
and the bank receives the wired funds and
reports the receipt of wired funds to the fund
by 3:00 p.m. Pacific time, we will credit the
purchase to your account that day. If we receive
your call after 1:00 p.m. or the bank receives
the wire after 3:00 p.m., we will credit the
purchase to your account the following business
day. For the Money Fund, 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 an initial investment you must also return
your signed shareholder application to the fund.
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
You may buy shares of the 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 Money Fund or any
bank.
If the Money Fund receives your order in proper form before 3:00 p.m. Pacific
time, we will credit the purchase to your account that day. Orders received
after 3:00 p.m. will be credited the following business day.
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 fund is able to make investments immediately (within
one business day), it may accept your order with payment in other than federal
funds.
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.
CHOOSING A SHARE CLASS - INSURED FUND ONLY
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. The class that may be best for
you depends on a number of factors, including the amount and length of time you
expect to invest. Generally, Class I shares may be more attractive for long-term
investors or investors who qualify to buy Class I shares at a reduced sales
charge. Your financial representative can help you decide.
CLASS I CLASS II
- --------------------------------------------------------------------------------
o Higher front-end sales o Lower front-end sales
charges than Class II shares. charges than Class I shares
There are several ways to
reduce these charges, as
described below. There is no
front-end sales charge for
purchases of $1 million or
more.*
o Contingent Deferred Sales o Contingent Deferred Sales
Charge on purchases of $1 Charge on purchases sold
million or more sold within within 18 months
one year
o Lower annual expenses than o Higher annual expenses than
Class II shares Class I shares
*If you are investing $1 million or more, it is generally more beneficial for
you to buy Class I shares because there is no front-end sales charge and the
annual expenses are lower. Therefore, ANY PURCHASE OF $1 MILLION OR MORE IS
AUTOMATICALLY INVESTED IN CLASS I SHARES. You may accumulate more than $1
million in Class II shares through purchases over time. If you plan to do this,
however, you should determine if it would be better for you to buy Class I
shares through a Letter of Intent.
INSURED AND INTERMEDIATE FUNDS
The rest of the "How Do I Buy Shares?" section of this prospectus only applies
to the Insured and Intermediate funds.
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 3.50% 3.63% 3.25%
$250,000
$250,000 but less than 2.75% 2.83% 2.50%
$500,000
$500,000 but less than 2.15% 2.20% 2.00%
$1,000,000
$1,000,000 or more* None None None
INSURED FUND - CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
INTERMEDIATE FUND
Under $100,000 2.25% 2.30% 2.00%
$100,000 but less than 1.75% 1.78% 1.50%
$250,000
$250,000 but less than 1.25% 1.26% 1.00%
$500,000
$500,000 but less than 1.00% 1.01% 0.85%
$1,000,000
$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 "Choosing a Share
Class - Insured Fund Only."
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 in
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. If one of the following sales charge waivers applies to
you or your purchase of fund shares, you may buy shares of the fund without a
front-end sales charge or a Contingent Deferred Sales Charge. All of the sales
charge waivers listed below apply to purchases of Class I shares only, except
for items 1 and 2 which also apply to Class II purchases.
Certain distributions, payments or redemption proceeds that you receive may be
used to buy shares of the fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the SAME CLASS of shares.
Certain exceptions apply, however, to Class II shareholders who chose to
reinvest their distributions in Class I shares of the fund before November
17, 1997, and to Advisor Class or Class Z shareholders of a Franklin
Templeton Fund who may reinvest their distributions in Class I shares of
the fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton Fund
if you originally paid a sales charge on the shares and you reinvest the
money in the SAME CLASS of shares. This waiver does not apply to exchanges.
If you paid a Contingent Deferred Sales Charge when you redeemed your
shares from a Franklin Templeton Fund, a Contingent Deferred Sales Charge
will apply to your purchase of fund shares and a new Contingency Period
will begin. We will, however, credit your fund account with additional
shares based on the Contingent Deferred Sales Charge you paid and the
amount of redemption proceeds that you reinvest.
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.
3. Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
4. 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 or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any tax
consequences that may apply.
5. Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or
a Franklin Templeton money fund, you may reinvest them as described above.
The proceeds must be reinvested within 365 days from the date the CD
matures, including any rollover, or the date you redeem your money fund
shares.
6. Redemption proceeds from the sale of Class A shares of any of the Templeton
Global Strategy Funds if you are a qualified investor.
If you paid a contingent deferred sales charge when you redeemed your Class
A shares from a Templeton Global Strategy Fund, a Contingent Deferred Sales
Charge will apply to your purchase of fund shares and a new Contingency
Period will begin. We will, however, credit your fund account with
additional shares based on the contingent deferred sales charge you paid
and the amount of the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
Various individuals and institutions also may buy Class I shares without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. 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.
2. An Eligible Governmental Authority.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs.
4. Qualified registered investment advisors who buy through a broker-dealer or
service agent who has entered into an agreement with Distributors
5. Registered Securities Dealers and their affiliates, for their investment
accounts only
6. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
7. 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.
8. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
9. Accounts managed by the Franklin Templeton Group
10. 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.
FOR INVESTORS OUTSIDE THE U.S.
The distribution of this prospectus and the offering of fund shares may be
limited in many jurisdictions. An investor who wishes to buy shares of the fund
should determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
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 goal 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 signed written instructions
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 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 the
difference is more than 0.25%. 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.
CONTINGENT DEFERRED 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.
For accounts with 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. If you exchange your Class II shares for shares of Money Fund II,
however, the time your shares are held in that fund will count towards the
completion of any Contingency Period.
For more information about the Contingent Deferred Sales Charge, please see "How
Do I Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You must meet the applicable minimum investment amount of the fund you
are exchanging into, or exchange 100% of your fund shares.
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 funds, such as "Advisor Class" or "Class Z" shares. Because the
funds do not currently offer an Advisor Class, you may exchange Advisor Class
shares of any Franklin Templeton Fund for Class I shares of a 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 a fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
- --------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY CHECK - MONEY FUND 1. You may request redemption drafts (checks) free
ONLY of charge on the shareholder application or by
(Only available if there calling TeleFACTS(R).
are no outstanding share
certificates for your 2. You may make checks payable to any person and in
account) 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 signed written instructions. 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.
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 and
Intermediate 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's are not bound to meet any
redemption request in less than the seven day period prescribed by law. Neither
the funds nor their 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 until your check or draft has cleared, which may take
seven business days or more. A certified or cashier's check may clear in less
time.
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 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 a 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 FUNDS?
Each 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 AND INTERMEDIATE FUNDS
These funds declare dividends from their net investment income daily and pay
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 each class.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUNDS DO NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN THEIR SHARES.
If you buy shares shortly before a fund deducts a capital gain distribution from
its Net Asset Value, please keep in mind that you will receive a portion of the
price you paid back in the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from a fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge) by
reinvesting capital gain distributions, or both dividend and capital gain
distributions. This is a convenient way to accumulate additional shares and
maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy shares of another Franklin Templeton Fund (without a sales
charge or imposition of a Contingent Deferred Sales Charge). Many shareholders
find this a convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - 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."
Distributions may be reinvested only in the SAME CLASS of shares, except as
follows: (i) Class II shareholders who chose to reinvest their distributions in
Class I shares of the fund or another Franklin Templeton Fund before November
17, 1997, may continue to do so; and (ii) Class II shareholders may reinvest
their distributions in shares of any Franklin Templeton money fund.
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 funds are open for business each day the NYSE is open. For the Insured and
Intermediate funds, we determine the Net Asset Value per share of each class as
of the close of the NYSE, normally 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 in many
newspapers.
To calculate Net Asset Value per share of each fund, the assets of each fund 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.
For the Insured Fund, 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.
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.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of transactions
or account changes. These include transactions or account changes that you could
also make by phone, such as certain redemptions of $50,000 or less, exchanges
between identically registered accounts, and changes to the address of record.
For most other types of transactions or changes, written instructions must be
signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed by
all registered owners on the account.
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 and changes to your account 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. 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.
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. We also will not be liable for any loss if we
follow instructions by phone that we reasonably believe are genuine or if you
are unable to execute a transaction by phone.
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, we cannot accept instructions to change owners on the account unless ALL
owners agree in writing, even if the law in your state says otherwise. 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 told us that
you do not want telephone privileges to apply to your account.
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 $250, or less than $50 for
employee accounts and custodial accounts for minors. 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 $1,000,
or $100 for employee accounts and custodial accounts for minors. These minimums
do not apply to accounts managed by the Franklin Templeton Group.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in a fund. Under
the plan, you can have money transferred automatically from your checking
account to a 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 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 calling Shareholder Services.
AUTOMATIC PAYROLL DEDUCTION - CLASS I ONLY
You may have money transferred from your paycheck to a 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 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 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 by mail or by
phone 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 Class I
shares of a 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 (within the same class) between identically registered
Franklin Templeton Class I and Class II accounts; and
o request duplicate statements, money fund checks, and deposit slips for
Franklin Templeton accounts.
You will need the code number for each class to use TeleFACTS(R). The code
numbers are as follows:
<TABLE>
<CAPTION>
CODE
NUMBER
- ------------------------------------------------------
<S> <C>
Insured Fund - Class I 124
Insured Fund - Class II 224
Intermediate Fund 125
Money Fund 152
</TABLE>
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 funds 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 funds'
financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the funds 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 funds 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 funds, Distributors and the manager 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
BOARD - The Board of Trustees of the Trust
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 and Money funds 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. The holding period for Class I begins on the first day of
the month in which you buy shares. Regardless of when during the month you buy
Class I shares, they will age one month on the last day of that month and each
following month. The holding period for Class II begins on the day you buy your
shares. For example, if you buy Class II shares on the 18th of the month, they
will age one month on the 18th day of the next 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 funds' 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, Templeton Capital Accumulator Fund, Inc., 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 funds' administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the funds'
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 is 2.25% for the Intermediate Fund, 4.25% for the Insured
Fund - Class I and 1% for the Insured Fund - Class I. There is no front-end
sales charge for the Money Fund. We calculate the offering price to two decimal
places using standard rounding criteria.
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
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
Franklin California Insured Tax-free Income Fund
Franklin California Intermediate-term Tax-free Income Fund
Franklin California Tax-exempt Money Fund
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 1, 1998
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN(R)
TABLE OF CONTENTS
How Do the Funds Invest Their Assets?........................
What Are the Risks of Investing in the Funds?................
Investment Restrictions......................................
Officers and Trustees........................................
Investment Management
and Other Services..........................................
How Do the Funds Buy
Securities for Their Portfolios?............................
How Do I Buy, Sell and Exchange Shares?......................
How Are Fund Shares Valued?..................................
Additional Information on
Distributions and Taxes.....................................
The Funds' Underwriter.......................................
How Do the Funds Measure Performance?........................
Miscellaneous Information....................................
Financial Statements.........................................
Useful Terms and Definitions.................................
Appendix.....................................................
Description of Ratings......................................
- --------------------------------------------------------------------------------
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
- --------------------------------------------------------------------------------
The funds are series of Franklin California Tax-Free Trust (the "Trust"), an
open-end management investment company. The Prospectus, dated November 1, 1998,
which we may amend from time to time, contains the basic information you should
know before investing in the funds. 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 EACH
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 DO THE FUNDS INVEST THEIR ASSETS?
WHAT ARE THE FUNDS' GOALS?
The investment goal of each fund 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. This goal is fundamental, which means that it may not be
changed without shareholder approval. The Money Fund also seeks liquidity in its
investments and tries to maintain a stable Net Asset Value of $1 per share.
The following gives more detailed information about each fund's investment
policies and the types of securities that it may buy. Please read this
information together with the section "How Do the Funds Invest Their Assets?" in
the Prospectus.
MORE INFORMATION ABOUT THE KINDS OF SECURITIES THE FUNDS BUY
Each fund tries to achieve its investment goal by attempting to invest all of
its assets in tax-free municipal securities. The issuer's bond counsel generally
gives the issuer an opinion on the tax-exempt status of a municipal security
when the security is issued. As described in the Prospectus, the quality and
maturity of the municipal securities each fund buys may differ significantly.
Below is a description of various types of municipal and other securities that
each fund may buy. Other types of municipal securities may become available that
are similar to those described below and in which each fund may also invest, if
consistent with its investment goal and policies.
TAX ANTICIPATION NOTES are issued to finance short-term working capital needs of
municipalities in anticipation of various seasonal tax revenues, which will be
used to pay the notes. They are usually general obligations of the issuer,
secured by the taxing power for the payment of principal and interest.
REVENUE ANTICIPATION NOTES are similar to tax anticipation notes except they 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 are normally issued to provide interim financing until
long-term financing can be arranged. Proceeds from long-term bond issues then
provide the money for the repayment of the notes.
CONSTRUCTION LOAN NOTES are issued to provide construction financing for
specific projects. After successful completion and acceptance, many projects
receive permanent financing through the Federal Housing Administration under the
Federal National Mortgage Association or the Government National Mortgage
Association.
TAX-EXEMPT COMMERCIAL PAPER typically represents a short-term obligation (270
days or less) issued by a municipality to meet working capital needs.
MUNICIPAL BONDS meet longer-term capital needs and generally have maturities
from one to 30 years when issued. They have two principal classifications:
general obligation bonds and revenue bonds.
GENERAL OBLIGATION BONDS. Issuers of general obligation bonds include states,
counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads. The basic security
behind general obligation bonds is the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. The taxes that can
be levied for the payment of debt service may be limited or unlimited as to the
rate or amount of special assessments.
REVENUE BONDS. The full faith, credit and taxing power of the issuer do not
secure revenue bonds. Instead, the principal security for a revenue bond 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. Some authorities have 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 are issued by or on behalf of
public authorities to finance various privately operated facilities for
business, manufacturing, housing, sports and pollution control, as well as
public facilities such as airports, mass transit systems, ports and parking. The
payment of principal and interest is solely dependent on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of the
facility or other property as security for payment.
VARIABLE OR FLOATING RATE SECURITIES. Each fund may invest in variable or
floating rate securities, including variable rate demand notes, which have
interest rates that change either at specific intervals (variable rate), from
daily up to monthly, or whenever a benchmark rate changes (floating rate). The
interest rate adjustments are designed to help stabilize the security's price.
Variable or floating rate securities may include a demand feature, which may be
unconditional. The demand feature allows the holder to demand prepayment of the
principal amount before maturity, generally on no more than 30 days' notice. The
holder receives the principal amount plus any accrued interest either from the
issuer or by drawing on a bank letter of credit, a guarantee or insurance issued
with respect to the security.
The Money Fund's investment in variable or floating rate securities is subject
to certain SEC rules on the quality and maturity of the securities.
MUNICIPAL LEASE OBLIGATIONS. Each fund may invest in municipal lease
obligations, including certificates of participation. The Board reviews a fund's
municipal lease obligations to assure that they are liquid investments based on
various factors reviewed by the fund's investment manager 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 comparable in quality to the ratings
required for the fund to invest, including an assessment of the likelihood of
the lease being canceled, taking into account how essential the leased property
is and the term of the lease compared to the useful life of the leased property;
(b) the size of the municipal securities market, both in general and with
respect to municipal lease obligations; and (c) the extent to which the type of
municipal lease obligations held by the fund trade on the same basis and with
the same degree of dealer participation as other municipal securities of
comparable credit rating or quality.
Since annual appropriations are required to make lease payments, municipal lease
obligations generally are not subject to constitutional limitations on the
issuance of debt and may allow an issuer to increase government liabilities
beyond constitutional debt limits. When faced with increasingly tight budgets,
local governments have more discretion to curtail lease payments under a
municipal lease obligation than they do to curtail payments on other municipal
securities. If not enough money is appropriated to make the lease payments, the
leased property may be repossessed as security for holders of the municipal
lease obligations. If this happens, there is no assurance that the property's
private sector or re-leasing value will be enough to make all outstanding
payments on the municipal lease obligations or that the payments will continue
to be tax-free.
While cancellation risk is inherent to municipal lease obligations, each fund
believes that this risk may be reduced, although not eliminated, by its policies
on the quality of securities in which it may invest. Keeping in mind that each
fund can invest in municipal lease obligations without percentage limits, the
funds' holdings in municipal lease obligations were:
AS OF JUNE 30, 1998
(as a percentage of net assets)
- ------------------------------------
Insured Fund 13.0%
Intermediate Fund 26.2%
Money Fund 10.5%
MELLO-ROOS BONDS are issued under the California Mello-Roos Community Facilities
Act to finance the building of roads, sewage treatment plants and other projects
designed to improve the infrastructure of a community. They are not rated and
are not considered obligations of the municipality.
Mello-Roos bonds are primarily secured by real estate taxes levied on property
located in the community. The timely payment of principal and interest on the
bonds depends on the developer's or other property owner's ability to pay the
real estate taxes. This ability could be negatively affected by a declining
economy or real estate market in California. While the fund may invest in
Mello-Roos bonds without limit, the funds' holdings in Mello-Roos bonds were:
AS OF JUNE 30, 1998
(as a percentage of net assets)
- -----------------------------------
Insured Fund 2.0
Intermediate Fund 0.3%
Money Fund 0.0%
CALLABLE BONDS. Each fund may invest in callable bonds, which allow the issuer
to repay some or all of the bonds ahead of schedule. If a bond is called, the
fund will receive the principal amount, the accrued interest, and a small
additional payment as a call premium. The manager may sell a callable bond
before its call date, if it believes the bond is at its maximum premium
potential.
An issuer is more likely to call its bonds when interest rates are falling,
because the issuer can issue new bonds with lower interest payments. If a bond
is called, the fund may have to replace it with a lower-yielding security. If
the fund originally paid a premium for the bond because it had appreciated in
value from its original issue price, the fund also may not be able to recover
the full amount it paid for the bond. One way for a fund to protect itself from
call risk is to buy bonds with call protection. Call protection is an assurance
that the bond will not be called for a specific time period, typically five to
10 years from when the bond is issued.
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 a fund's callable bonds may
impact the fund's Net Asset Value. Based on a number of factors, including
certain portfolio management strategies used by the manager, the fund believes
it has reduced the risk of an adverse impact on its Net Asset Value from calls
of callable bonds. In light of each fund's pricing policies and certain
amortization procedures required by the IRS, the funds do not expect to suffer
any material adverse impact related to the value at which they have carried the
bonds in connection with calls of bonds purchased at a premium. As with any
investment strategy, however, there is no guarantee that a call may not have a
more substantial impact than anticipated.
Notwithstanding the call feature, an investment in callable bonds by the
Intermediate Fund is subject to its policy of maintaining a dollar-weighted
average portfolio maturity of three to 10 years.
ESCROW-SECURED OR DEFEASED BONDS are created when an issuer refunds, before
maturity, an outstanding bond issue that is not immediately callable (or
pre-refunds), and sets aside funds for redemption of the bonds at a future date.
The issuer uses the proceeds from a new bond issue to buy high grade, interest
bearing debt securities, generally direct obligations of the U.S. government.
These securities are then deposited in an irrevocable escrow account held by a
trustee bank to secure all future payments of principal and interest on the
pre-refunded bond. Escrow-secured bonds often receive a triple A or equivalent
rating from Fitch, Moody's or S&P.
STRIPPED MUNICIPAL SECURITIES. Municipal securities may be sold in "stripped"
form. Stripped municipal securities represent separate ownership of principal
and interest payments on municipal securities.
ZERO-COUPON SECURITIES. The Insured and Intermediate 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 market interest rates, liquidity of the security, and the
issuer's perceived credit quality. The discount, in the absence of financial
difficulties of the issuer, typically decreases as the final maturity date
approaches. If the issuer defaults, the fund may not receive any return on its
investment.
Because zero-coupon securities bear no interest and compound semiannually at the
rate fixed at the time of issuance, their value 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.
An investment in zero-coupon and delayed interest securities may cause a fund to
recognize income and make distributions to shareholders before it receives any
cash payments on its investment. To generate cash to satisfy distribution
requirements, a fund may have to sell portfolio securities that it otherwise
would have continued to hold or to use cash flows from other sources such as the
sale of fund shares.
CONVERTIBLE AND STEP COUPON BONDS. The Insured and Intermediate 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.
U.S. GOVERNMENT OBLIGATIONS 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 is a promissory note issued by a corporation to finance its
short-term credit needs. Each fund may invest in taxable commercial paper only
for temporary defensive purposes.
MORE INFORMATION ABOUT SOME OF THE FUNDS' OTHER INVESTMENT STRATEGIES AND
PRACTICES
WHEN-ISSUED TRANSACTIONS. Municipal securities are frequently offered on a
"when-issued" basis. When so offered, the price, which is generally expressed in
yield terms, is fixed at the time the commitment to buy is made, but delivery
and payment take place at a later date. During the time between purchase and
settlement, no payment is made by a fund to the issuer and no interest accrues
to the fund. If the other party to the transaction fails to deliver or pay for
the security, the fund could miss a favorable price or yield opportunity, or
could experience a loss.
When a 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 funds believe that their Net Asset
Value or income will not be negatively affected by their purchase of municipal
securities on a when-issued basis. A fund will not engage in when-issued
transactions for investment leverage purposes.
Although a 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 considered advisable. When a 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. If assets of a fund are held in cash
pending the settlement of a purchase of securities, the fund will not earn
income on those assets.
ILLIQUID INVESTMENTS. Each fund may invest up to 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.
REPURCHASE AGREEMENTS. The Money Fund may invest in repurchase agreements. 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. A custodian bank approved
by the Board holds the securities subject to resale for the fund. 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 lose
money. The fund may also experience a delay in the liquidation of the securities
underlying the repurchase agreement and may incur liquidation costs. The fund,
however, intends to enter into repurchase agreements only with banks or
broker-dealers that are considered creditworthy by the manager.
The Money Fund may invest in repurchase agreements with a term of one year or
less, and usually invests in those with terms ranging from overnight to one
week. The securities underlying a repurchase agreement may, however, have
maturity dates longer than one year from the effective date of the repurchase
agreement. The fund may not enter into a repurchase agreement with a term of
more than seven days if, as a result, more than 10% of the fund's net assets
would be invested in such repurchase agreements and other illiquid securities.
DIVERSIFICATION. The Intermediate Fund is a non-diversified fund. The Insured
and Money funds are diversified funds. As a fundamental policy, the Insured and
Money 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 diversification, each political
subdivision, agency, or instrumentality, each multi-state agency of which a
state is a member, and each public authority that issues private activity bonds
on behalf of a private entity, is considered a separate issuer. Escrow-secured
or defeased bonds are not generally considered an obligation of the original
municipality when determining diversification. For securities backed only by the
assets or revenues of a particular instrumentality, facility or subdivision, the
entity is considered the issuer.
Each fund, including the Intermediate Fund, intends to meet certain
diversification requirements for tax purposes. These requirements are discussed
under "Additional Information on Distributions and Taxes." The Money Fund must
also meet certain diversification requirements under federal securities laws
that are more restrictive than those required for tax purposes.
Each fund may invest more than 25% of its assets in municipal securities that
finance similar types of projects, such as hospitals, housing, industrial
development, transportation or pollution control. A change that affects one
project, such as proposed legislation on the financing of the project, a
shortage of the materials needed for the project, or a declining need for the
project, would likely affect all similar projects.
SECURITIES TRANSACTIONS. The frequency of portfolio transactions, usually
referred to as the portfolio turnover rate, varies for each fund from year to
year, depending on market conditions. While short-term trading increases
portfolio turnover and may increase costs, the execution costs for municipal
securities are substantially less than for equivalent dollar values of equity
securities.
Generally, all of the securities held by the Money Fund are offered on the basis
of a quoted yield to maturity. The price of the security is adjusted so that,
relative to the stated rate of interest, 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.
As discussed in the Prospectus, each fund has different limitations on the
quality of securities it may buy. These limitations are generally applied when a
fund makes an investment so that a fund is not required to sell a security
because of a later change in circumstances. In the case of the MONEY FUND,
however, the fund and its Board must follow guidelines under federal securities
laws and act accordingly if the rating on a security in the fund's portfolio is
downgraded. These procedures only apply to changes between the "major" rating
categories, and not to changes in a security's relative standing within a rating
category.
INSURANCE. The Insured Fund invests primarily in insured municipal securities.
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." Normally, the underlying rating of an insured
security is one of the top three ratings of Fitch, Moody's or S&P. An insurer
may insure municipal securities that are rated below the top three ratings or
that are unrated if the securities otherwise meet the insurer's quality
standards.
The fund will only enter into a contract to buy an insured municipal security if
either permanent insurance or an irrevocable commitment to insure the municipal
security by a qualified municipal bond insurer is in place. 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 Insured Fund's shares, or (iii) the Insured Fund's dividend
distributions.
NEW ISSUE INSURANCE POLICY. An issuer may obtain a New Issue Insurance Policy,
also called a "Primary Insurance Policy," when securities are issued. The issuer
pays all premiums on the policy in advance. The policy continues in effect as
long as the securities are outstanding and the insurer remains in business, and
may not otherwise be canceled. Since the policy remains in effect as long as the
securities are outstanding, the insurance is likely to increase the credit
rating of the security, as well as its purchase price and resale value.
PORTFOLIO INSURANCE POLICY. The Insured Fund may obtain a Portfolio Insurance
Policy, which is effective only as long as the fund holds the securities
described in the policy and the insurer is in business and meeting its
obligations. If the fund sells a security or the principal amount of the
security is paid before maturity, the policy terminates as to that security and
will continue to cover only those securities the fund still holds. 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 for that security.
Because coverage under a Portfolio Insurance Policy ends when the fund sells a
security, the insurance does not affect the resale value of the security.
Therefore, the fund may hold any security insured under a Portfolio Insurance
Policy that is in default or in significant risk of default. The manager will
consider the value of the insurance for the principal and interest payments, the
market value of the 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, the manager 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. 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.
The insurer may not change premium rates for securities covered by a Portfolio
Insurance Policy, 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, the coverage and obligation of the fund to pay
monthly premiums for the security under the Portfolio Insurance Policy ends. The
insurer may not change the price of the Secondary Insurance Policy, 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. A
defaulted security covered by a Secondary Insurance Policy would be valued at
its market value.
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 may otherwise be without the insurance. The
triple A or equivalent rating is not automatic, however, and must specifically
be requested from Fitch, Moody's or S&P for each security.
The fund is likely to buy a Secondary Insurance Policy if, in the manager's
opinion, 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 the manager believes such insurance would best serve the
fund's interests in meeting its investment goal.
QUALIFIED MUNICIPAL BOND INSURERS. Insurance policies may be issued by any one
of several qualified municipal bond insurers, which allows the manager to
diversify among credit enhancements. The Insured 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 Fitch,
Moody's or S&P.
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 guarantees
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 the manager 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.
GENERAL. 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 Insured Fund's right to receive payment
of the principal or interest due for payment, and (ii) evidence, including any
appropriate instruments of assignment, that all of the rights to payment of 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 Insured 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.
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 RISKS OF INVESTING IN THE FUNDS?
The following gives more information about the risks of investing in the funds.
Please read this information together with the section "What Are the Risks of
Investing in the Funds?" in the Prospectus. More information about each fund's
investment policies and their risks is also included under "How Do the Funds
Invest Their Assets?" in both the Prospectus and this SAI.
CALIFORNIA RISKS. Since the funds mainly invest in California municipal
securities, their performance is closely tied to the ability of issuers of
California municipal securities to continue to make principal and interest
payments on their securities. The issuers' ability to do this is in turn
dependent on economic, political and other conditions within California. Below
is a discussion of certain conditions that may affect California issuers. It is
not a complete analysis of every material fact that may affect the ability of
issuers of California municipal securities to meet their debt obligations or the
economic or political conditions within California. The information below is
based on January and February 1998 publications from Fitch and S&P, two
historically reliable sources, but the funds have not independently verified it.
The ability of California issuers to continue to make principal and interest
payments is dependent in large part on the ability of the state to raise
revenues, primarily through taxes, and to control spending. Many factors can
affect a state's revenues including the rate of population growth, unemployment
rates, personal income growth, federal aid, and the ability to attract and keep
successful businesses. A number of factors can also affect a state's spending
including current debt levels, and the existence of accumulated budget deficits.
The following provides some information on these and other factors.
Like many other states, California was significantly affected by the national
recession of the early 1990s, especially in the southern portion of the state.
Most of its job losses during its recession resulted from military cutbacks and
the downturn in the construction industry. Downsizing in the state's aerospace
industry, excess office capacity, and slow growth in California's export market
also contributed to the state's recession.
Since mid-1993, California's economic recovery has been fueled by growth in the
export, entertainment, tourism and computer services sectors. The state's
diverse employment base has reached prerecession levels with manufacturing
accounting for 14.4% of employment (based on 1997 state estimates), trade 23%,
services 31.1%, and government 16.4%. Despite 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. Recent economic problems in Asia may affect the state's
economy and reduce growth rates, although the impact of Asia's economic problems
on the state is uncertain.
During the period from 1990 to 1994, California experienced large budget
deficits due to its economic recession, as well as unrealistic budget
assumptions. School expenditures totaling $1.8 billion were recorded as "loan
assets" on the state's books to be repaid by 2002. When adjusted to account for
these loans, California's deficit balance was 10.7% of expenditures in 1992. By
the end of fiscal 1997, the deficit had declined to 7.6% of expenditures.
Although California's debt levels have grown in recent years, they have remained
relatively moderate. During fiscal 1997, debt service accounted for 5% of
general fund expenditures.
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 flexibility. The state's accumulated deficits, as
well as its lack of reserves and flexibility, make the state vulnerable to a
future economic downturn. Overall, however, S&P considers California's outlook
to be positive.
U.S. TERRITORIES RISKS. Since each fund may invest up to 35% of its assets in
municipal securities issued by U.S. territories, the ability of U.S. territory
issuers to continue to make principal and interest payments may also affect a
fund's performance. As with California, the ability to make these payments is
dependent on economic, political and other conditions. Below is a discussion of
certain conditions within some of the territories where the funds may be
invested. It is not a complete analysis of every material fact that may affect
the ability of issuers of U.S. territory municipal securities to meet their debt
obligations or the economic or political conditions within the territories. It
is based on recent data available to the funds from Fitch, Moody's and S&P, and
other historically reliable sources, but it has not been independently verified
by the funds.
GUAM. Guam's economy has been heavily dependent on its tourism industry, which
accounted for almost 40% of total employment in 1997. It has been especially
dependent on Japanese tourism, which has made Guam vulnerable to fluctuations in
the relationship between the U.S. dollar and the Japanese yen.
In the early to mid-1990s, Guam's financial position deteriorated due to a
series of natural disasters that led to increased spending on top of already
significant budget gaps. As a result, the government introduced a comprehensive
financial plan in June 1995 to help balance the budget and reduce the general
fund deficit by fiscal 1999. As of fiscal 1997, the deficit had improved and the
budget was balanced. It is not yet known, however, whether the goals of the
financial plan will be met.
While Guam's debt burden has been manageable, Guam's ability to maintain current
debt levels may be challenged in the near future. U.S. military downsizing has
reduced the federal presence on the island and may also reduce federal support
for infrastructure projects. At the same time, Guam has faced increasing
pressure to improve its infrastructure to help generate economic development.
Overall, as of October 1997, S&P's outlook for Guam was negative due to Guam's
continued weak financial position and the need for continued political support
towards the goals of the financial plan.
PUERTO RICO. Overall, both Moody's and S&P recently considered Puerto Rico's
outlook stable. The economy has continued to grow and diversify. Much of this
growth has come from the construction, trade and service sectors, which have
accounted for more than 50% of the employment base. Manufacturing has
contributed more than 40% of the island's gross domestic product and has
generally provided some of Puerto Rico's higher paying jobs. This sector,
however, has experienced declines in each of the past two years. Despite an
increasingly skilled workforce, unemployment has remained high at 12-14%.
Over the past three years, Puerto Rico's financial performance has improved.
Strong revenue growth and more aggressive tax collection procedures have helped.
Fiscal 1997 ended with an operating deficit of $34 million, although this was
better than had been originally anticipated.
Puerto Rico's debt levels have been high. Going forward, these levels may
increase as Puerto Rico attempts to finance significant capital and
infrastructure improvements. Puerto Rico will also need to address its large
unfunded pension liability of more than $5 billion.
Despite Puerto Rico's stable outlook, Puerto Rico may face challenges in the
coming years with the 1996 passage of a bill eliminating section 936 of the
Code. This Code section has given certain U.S. corporations operating in Puerto
Rico significant tax advantages. These incentives have helped considerably with
Puerto Rico's economic growth, especially with the development of its
manufacturing sector. U.S. firms that have benefited from these incentives have
provided a significant portion of Puerto Rico's revenues, employment and
deposits in local financial institutions. The section 936 incentives will be
phased out over a 10-year period ending in 2006. It is hoped that this long
phase-out period will give Puerto Rico sufficient time to lessen the potentially
negative effects of section 936's elimination. Outstanding issues relating to
the potential for a transition to statehood may also have broad implications for
Puerto Rico and its financial and credit position.
INVESTMENT RESTRICTIONS
Each 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 a fund or (ii) 67% or
more of the shares of a fund present at a shareholder meeting if more than 50%
of the outstanding shares of a fund are represented at the meeting in person or
by proxy, whichever is less. Each fund MAY NOT:
1. Borrow money or mortgage or pledge any of its assets, except that borrowings
(and a pledge of assets therefor) for temporary or emergency purposes may be
made from banks in any amount up to 5% of the total asset value. Secured
temporary borrowings may take the form of a reverse repurchase agreement,
pursuant to which 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 manager own beneficially more than
one-half 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 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 a 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 each fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of each 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
each fund under the 1940 Act are indicated by an asterisk (*).
POSITIONS AND OFFICES PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS WITH THE TRUST DURING THE PAST FIVE YEARS
- --------------------------------------------------------------------------------
Frank H. Abbott, III (77)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (66)
191 Clapboard Ridge Road
Greenwich, CT 06830
Trustee
Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods (a meat
packing company); director or trustee, as the case may be, of 49 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
*Harmon E. Burns (53)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President and Director, Franklin Resources, Inc., 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 53 of the
investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (66)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee, as
the case may be, of 51 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Director, General Host Corporation (nursery and
craft centers).
*Charles B. Johnson (65)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board 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. and Franklin Templeton Services, Inc.; officer and/or director or trustee,
as the case may be, of most of the other subsidiaries of Franklin Resources,
Inc. and of 50 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Director, General Host Corporation (nursery and craft
centers).
*Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Trustee
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 53 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (69)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); Chairman of the Board and Director,
Quarterdeck Corporation (software firm); Director, Digital Transmission Systems,
Inc. (wireless communications); director or trustee, as the case may be, of 27
of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Director, Fischer Imaging Corporation (medical imaging systems) and
General Partner, Peregrine Associates, which was the General Partner of
Peregrine Ventures (venture capital firm).
Gordon S. Macklin (70)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Director, Fund American Enterprises Holdings, Inc., MCI Communications
Corporation, MedImmune, Inc. (biotechnology), Spacehab, Inc. (aerospace
services) and Real 3D (software); director or trustee, as the case may be, of 49
of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Chairman, White River Corporation (financial services) and Hambrecht
and Quist Group (investment banking), and President, National Association of
Securities Dealers, Inc.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief 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.; Executive Vice President and Chief Financial Officer, Franklin Advisers,
Inc.; Chief Financial Officer, Franklin Advisory Services, Inc. and Franklin
Investment Advisory Services, Inc.; President and Director, Franklin Templeton
Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin/Templeton Investor Services, Inc.; officer and/or director of some of
the other subsidiaries of Franklin Resources, Inc.; and officer and/or director
or trustee, as the case may be, of 53 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (49)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.; Vice President, Chief Legal Officer
and Chief Operating Officer, Franklin Investment Advisory Services, Inc.; and
officer of 53 of the investment companies in the Franklin Templeton Group of
Funds.
Thomas J. Kenny (35)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President, Franklin Advisers, Inc.; and officer of eight of the
investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32 of
the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (61)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 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 the manager. As of June 1, 1998, nonaffiliated members of the
Board are paid $830 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 fees payable to nonaffiliated
Board members by the Trust are subject to reductions resulting from fee caps
limiting the amount of fees payable to Board members who serve on other boards
within the Franklin Templeton Group of Funds. 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 $15,207 $165,937 27
Harris J. Ashton 14,612 344,642 49
S. Joseph Fortunato 14,536 361,562 51
David W. Garbellano* 2,560 91,317 N/A
Frank W.T. LaHaye 15,207 141,433 27
Gordon S. Macklin 14,612 337,292 49
*Deceased, September 27, 1997.
**For the fiscal year ended June 30, 1998. During the period from July 1, 1997
through May 31, 1998, fees at the rate of $640 per month plus $640 per meeting
attended were in effect.
***For the calendar year ended December 31, 1997.
****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 54 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 funds 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 August 4, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of the funds: approximately 159
shares of Insured Fund - Class I and 176 shares of the Intermediate Fund, or
less than 1% of the total outstanding shares of each of these funds, and
17,693,722 shares of the Money Fund or 2.7% 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. Each fund's investment manager is
Franklin Advisers, Inc. The manager provides investment research and portfolio
management services, including the selection of securities for each fund to buy,
hold or sell and the selection of brokers through whom each fund's portfolio
transactions are executed. The manager's extensive research activities include,
as appropriate, traveling to meet with issuers and to review project sites. The
manager's activities are subject to the review and supervision of the Board to
whom the manager renders periodic reports of each fund's investment activities.
The manager and its officers, directors and employees are covered by fidelity
insurance for the protection of each fund.
The manager and its affiliates act as investment manager to numerous other
investment companies and accounts. The manager may give advice and take action
with respect to any of the other funds it manages, or for its own account, that
may differ from action taken by the manager on behalf of each fund. Similarly,
with respect to each fund, the manager is not obligated to recommend, buy or
sell, or to refrain from recommending, buying or selling any security that the
manager and access persons, as defined by the 1940 Act, may buy or sell for its
or their own account or for the accounts of any other fund. The manager is not
obligated to refrain from investing in securities held by the funds or other
funds that it manages. Of course, any transactions for the accounts of the
manager and other access persons will be made in compliance with the funds' Code
of Ethics. Please see "Miscellaneous Information - Summary of Code of Ethics."
MANAGEMENT FEES. Under their management agreements, the Insured and Intermediate
funds each pay the manager a management fee equal to a monthly rate of 5/96 of
1% of the value of net assets up to and including $100 million; and 1/24 of 1%
of the value of net assets over $100 million up to and including $250 million;
and 9/240 of 1% 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 the manager 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 the
manager, and is computed at the close of business each day.
The table below shows the management fees paid by each fund for the fiscal years
ended June 30, 1998, 1997 and 1996.
MANAGEMENT FEES PAID
1998 1997 1996
- ----------------------------------------------------------------------
Insured Fund $ 8,057,731 $7,686,324 $7,290,593
Intermediate Fund 454,104* 311,342* 263,181*
Money Fund 3,224,282 3,127,809 3,083,906
*For the fiscal years ended June 30, 1998, 1997 and 1996, management fees,
before any advance waiver, totaled $794,091, $673,288 and $607,672,
respectively. Under an agreement by the manager to limit its fees, the
Intermediate Fund paid the management fees shown.
MANAGEMENT AGREEMENTS. The management agreements are in effect until March 31,
1999. 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 the manager, or by
the manager on 30 days' written notice to the fund, and will automatically
terminate in the event of their assignment, as defined in the 1940 Act.
ADMINISTRATIVE SERVICES. Under an agreement with the manager, FT Services
provides certain administrative services and facilities for each 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, the manager 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 table below shows the administration fees paid to FT Services for the fiscal
years ended June 30, 1998 and 1997. The fees are paid by the manager. They are
not a separate expense of the funds.
ADMINISTRATION FEES PAID
1998 1997*
- ------------------------------------------------------------
Insured Fund $1,872,018 $1,364,513
Intermediate Fund 198,693 125,005
Money Fund 922,214 676,600
*For the period October 1, 1996 through June 30, 1997.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the funds' shareholder servicing agent and acts as the funds'
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. Each 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
each fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITOR. PricewaterhouseCoopers LLP, 333 Market Street, San Francisco,
California 94105, is the funds' independent auditor. During the fiscal year
ended June 30, 1998, the auditor's 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, 1998.
HOW DO THE FUNDS BUY SECURITIES FOR THEIR PORTFOLIOS?
Since most purchases by the funds are principal transactions at net prices, the
funds incur little or no brokerage costs. The funds deal directly with the
selling or buying principal or market maker without incurring charges for the
services of a broker on their 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
funds do not buy bonds in underwritings where they are given no choice, or only
limited choice, in the designation of dealers to receive the commission. The
funds seek to obtain prompt execution of orders at the most favorable net price.
Transactions may be directed to dealers in return for research and statistical
information, as well as for special services provided by the dealers in the
execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits the manager to supplement its own research
and analysis activities and to receive the views and information of individuals
and research staffs of other securities firms. As long as it is lawful and
appropriate to do so, the manager and its affiliates may use this research and
data in their investment advisory capacities with other clients. If the funds'
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 funds' portfolio transactions.
If purchases or sales of securities of the funds and one or more other
investment companies or clients supervised by the manager are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to all
by the manager, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. In some cases this procedure could
have a detrimental effect on the price or volume of the security so far as the
funds are concerned. In other cases it is possible that the ability to
participate in volume transactions may improve execution and reduce transaction
costs to the funds.
During the fiscal years ended June 30, 1998, 1997 and 1996, the funds paid no
brokerage commissions.
As of June 30, 1998, the funds did not own securities of their regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The funds continuously offer their 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 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.
Banks and financial institutions that sell shares of the funds 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? - INSURED AND INTERMEDIATE
FUNDS - 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 fund's transfer agent. No share certificates
will be issued for fractional shares of the Money Fund 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.
Under agreements with certain banks in Taiwan, Republic of China, shares of the
Insured and Intermediate 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 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 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.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy shares
of the Intermediate 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 the amount of your total purchases,
less redemptions, equals 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 the amount of your total purchases, less redemptions, exceeds 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 amount of your total purchases, less
redemptions, is 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 in either the
Insured or Intermediate Fund, 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 general policy of the Insured and Intermediate 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
each fund's investment goal exist immediately. This money will then be withdrawn
from the short-term, tax-exempt municipal securities and invested in portfolio
securities in as orderly a manner as is possible when attractive investment
opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh day. The sale of fund shares to complete an exchange will be effected at
Net Asset Value at the close of business on the day the request for exchange is
received in proper form. 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.
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. Each fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the 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 funds do 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 funds 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 funds nor their
affiliates will be liable for any loss caused by your failure to cash such
checks. The funds are not responsible for tracking down uncashed checks, unless
a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of a 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 funds on behalf of numerous beneficial owners
for recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, a 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 Fund and each
class of the Insured Fund as of the close of the NYSE, normally 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 funds are
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 FUNDS. For the purpose of determining the aggregate net
assets of each 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 the manager. Municipal securities generally trade in the
over-the-counter market rather than on a securities exchange. In the absence of
a sale or reported bid and ask prices, information with respect to bond and note
transactions, quotations from bond dealers, market transactions in comparable
securities, and various relationships between securities are used to determine
the value of municipal securities.
Generally, trading in U.S. government securities and money market instruments is
substantially completed each day at various times before the close of the NYSE.
The value of these securities used in computing the 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 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
funds may use 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
DISTRIBUTIONS OF NET INVESTMENT INCOME. By meeting certain requirements of the
Code, each fund has qualified and continues to qualify to pay "exempt-interest
dividends" to shareholders. These dividends are derived from interest income
exempt from regular federal income tax, and are not subject to regular federal
income tax when they are distributed to you. In addition, to the extent that
exempt-interest dividends are derived from interest on obligations of California
or its political subdivisions, or from interest on qualifying U.S. territorial
obligations (including qualifying obligations of Puerto Rico, the U.S. Virgin
Islands or Guam), they will also be exempt from California state personal income
taxes. California generally does not grant tax-free treatment to interest on
state and municipal securities of other states.
At the end of each calendar year, each fund in which you are a shareholder will
provide you with the percentage of any dividends paid that may qualify for
tax-free treatment on your personal income tax return. You should consult with
your personal tax advisor to determine the application of your state and local
laws to these distributions. Corporate shareholders should consult with their
corporate tax advisors about whether any of their distributions may be exempt
from corporate income or franchise taxes.
A fund may earn taxable income on any temporary investments, on the discount
from stripped obligations or their coupons, on income from securities loans or
other taxable transactions, on the excess of short-term capital gains over
long-term capital losses earned by the fund ("net short-term capital gain"), or
on ordinary income derived from the sale of market discount bonds. Any
distributions by a fund from such income will be taxable to you as ordinary
income, whether you take them in cash or additional shares.
From time to time, a fund may buy a tax-exempt bond in the secondary market for
a price that is less than the principal amount of the bond. This discount is
called market discount if it exceeds a de minimis amount of discount under the
Code. For market discount bonds purchased after April 30, 1993, a portion of the
gain on sale or disposition (not to exceed the accrued portion of market
discount at the time of the sale) is treated as ordinary income rather than
capital gain. Any distribution by a fund of market discount income will be
taxable as ordinary income to you. A fund may elect in any fiscal year not to
distribute to you its taxable ordinary income and to pay a federal income or
excise tax on this income at the fund level. In any case, the amount of market
discount, if any, is expected to be small.
DISTRIBUTIONS OF CAPITAL GAINS. A fund may derive capital gains and losses in
connection with sales or other dispositions 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 gains realized by a fund will be taxable to you as
long-term capital gain, regardless of how long you have held your shares in the
fund. Any net short-term or long-term capital gains realized by a fund (net of
any capital loss carryovers) generally will be distributed once each year, and
may be distributed more frequently, if necessary, in order to reduce or
eliminate federal excise or income taxes on the fund.
Gains from securities sold by the fund that are held for more than one year will
be taxable at a maximum rate of 20% for individual investors in the 28% or
higher federal income tax brackets, and at a maximum rate of 10% for individual
investors in the 15% federal income tax bracket. Gains from securities sold by
the fund before January 1, 1998, are taxable at different rates depending on the
length of time the fund held such assets.
For "qualified 5-year gains," the maximum capital gains rate is 18% for
individuals in the 28% or higher federal income tax brackets and 8% for
individuals in the 15% federal income tax bracket. For individuals in the 15%
bracket, qualified 5-year gains are net gains on securities held for more than
five years that are sold after December 31, 2000. For individuals who are
subject to tax at higher rates, qualified 5-year gains are net gains on
securities that are purchased after December 31, 2000 and are held for more than
five years. Taxpayers subject to tax at the higher rates may also make an
election for shares held on January 1, 2001 to recognize gain on their shares in
order to qualify such shares as qualified 5-year property.
Additional information on reporting capital gains distributions on your personal
income tax returns is available in Franklin Templeton's Tax Information
Handbook. Please call Fund Information to request a copy. Questions about your
personal tax reporting should be addressed to your personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions of taxable income, if any,
which are declared in October, November or December to shareholders of record in
such month, and paid to you in January of the following year, will be treated
for tax purposes as if they had been received by you on December 31 of the year
in which they were declared. A fund will report this income to you on your Form
1099-DIV for the year in which these distributions were declared. You will
receive a Form 1099-DIV only for calendar years in which a fund has made a
distribution to you of taxable ordinary income or capital gain.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. Each fund in which you are a
shareholder will inform you of the amount and character of your distributions at
the time they are paid, and will shortly after the close of each calendar year
advise you of the tax status for federal income tax purposes of such
distributions, including the portion of the distributions that on average
comprise taxable income or interest income that is a tax preference item under
the alternative minimum tax. If you have not held fund shares for a full year,
you may have designated as taxable, tax-exempt or as a tax preference a
percentage of income that is not equal to the actual amount of such income
earned during the period of your investment in the fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. Each fund has elected to
be treated as a regulated investment company under Subchapter M of the Code, has
qualified as such for its most recent fiscal year, and intends to so qualify
during the current fiscal year. The Board reserves the right not to maintain the
qualification of a fund as a regulated investment company if it determines such
course of action to be beneficial to shareholders. In such case, the fund will
be subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of the fund's available earnings and profits.
In order to qualify as a regulated investment company for tax purposes, each
fund must meet certain specific requirements, including:
o The fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. government securities and securities of other
regulated investment companies) can exceed 25% of the fund's total assets,
and, with respect to 50% of the fund's total assets, no investment (other
than cash and cash items, U.S. government securities and securities of
other regulated investment companies) can exceed 5% of the fund's total
assets or 10% of the outstanding voting securities of the issuer;
o The fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the
sale or disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies; and
o The fund must distribute to its shareholders at least 90% of its investment
company taxable income (i.e., net investment income plus net short-term
capital gains) and net tax-exempt income for each of its fiscal years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires a fund to distribute at
least 98% of its taxable ordinary income earned during the calendar year and 98%
of its capital gain net income earned during the twelve month period ending
October 31 (in addition to undistributed amounts from the prior year) to you by
December 31 of each year in order to avoid federal excise taxes. Each fund
intends to declare and pay sufficient dividends in December (or in January that
are treated by you as received in December) but does not guarantee and can give
no assurances that its distributions will be sufficient to eliminate all such
taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. The tax law requires
that you recognize a gain or loss in an amount equal to the difference between
your tax basis and the amount you received in exchange for your shares, subject
to the rules described below. If you hold your shares as a capital asset, the
gain or loss that you realize will be capital gain or loss, and will be
long-term for federal income tax purposes if you have held your shares for more
than one year at the time of redemption or exchange. Any loss incurred on the
redemption or exchange of shares held for six months or less will be disallowed
to the extent of any exempt-interest dividends distributed to you with respect
to your shares in a fund and any remaining loss will be treated as a long-term
capital loss to the extent of any long-term capital gains distributed to you by
a fund on those shares.
All or a portion of any loss that you realize upon the redemption of your fund
shares will be disallowed to the extent that you buy other shares in the fund
(through reinvestment of dividends or otherwise) within 30 days before or after
your share redemption. Any loss disallowed under these rules will be added to
your tax basis in the new shares you buy. Because the Money Fund seeks to
maintain a stable $1.00 per share Net Asset Value, you should not expect to
realize a gain or loss upon redemption of your Money Fund shares.
DEFERRAL OF BASIS. All or a portion of the sales charge that you paid for your
shares in a fund will be excluded from your tax basis in any of the shares sold
within 90 days of their purchase (for the purpose of determining gain or loss
upon the sale of such shares) if you reinvest the sales proceeds in the fund or
in another of the Franklin Templeton Funds, and the sales charge that would
otherwise apply to your reinvestment is reduced or eliminated. The portion of
the sales charge excluded from your tax basis in the shares sold will equal the
amount that the sales charge is reduced on your reinvestment. Any portion of the
sales charge excluded from your tax basis in the shares sold will be added to
the tax basis of the shares you acquire from your reinvestment.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. Because each fund's income is
derived primarily from interest rather than dividends, no portion of its
distributions will generally be eligible for the corporate dividends-received
deduction. None of the dividends paid by the funds for the most recent fiscal
year qualified for such deduction, and it is anticipated that none of the
current year's dividends will so qualify.
TREATMENT OF PRIVATE ACTIVITY BOND INTEREST. The interest on bonds issued to
finance essential state and local government operations is generally tax-exempt,
and distributions paid from this interest income will generally qualify as an
exempt-interest dividend. Interest on certain non-essential or "private activity
bonds" (including those for housing and student loans) issued after August 7,
1986, while still exempt from regular federal income tax, is a preference item
for taxpayers when determining their alternative minimum tax under the Code and
under the income tax provisions of several states. Private activity bond
interest could subject you to or increase your liability under federal and state
alternative minimum taxes, depending on your individual or corporate tax
position.
Consistent with each fund's investment goals, each fund may acquire such private
activity bonds if, in the manager's opinion, such bonds represent the most
attractive investment opportunity then available to the fund. Persons who are
defined in the Code as "substantial users" (or persons related to such users) of
facilities financed by private activity bonds should consult with their tax
advisors before buying shares in the fund.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT BONDS. To the
extent a fund invests in zero coupon bonds, bonds issued or acquired at a
discount, delayed interest bonds, or bonds that provide for payment of
interest-in-kind (PIK), the fund may have to recognize income and make
distributions to you before its receipt of cash payments. Zero coupon and
delayed interest bonds are normally issued at a discount and are therefore
generally subject to tax reporting as OID obligations. A fund is required to
accrue as income a portion of the discount at which these securities were
issued, and to distribute such income each year (as ordinary dividends) in order
to maintain its qualification as a regulated investment company and to avoid
income reporting and excise taxes at the fund level. PIK bonds are subject to
similar tax rules concerning the amount, character and timing of income required
to be accrued by a fund. Bonds acquired in the secondary market for a price less
than their stated redemption price, or revised issue price in the case of a bond
having OID, are said to have been acquired with market discount. For these
bonds, a fund may elect to accrue market discount on a current basis, in which
case the fund will be required to distribute any such accrued discount. If a
fund does not elect to accrue market discount into income currently, gain
recognized on sale will be recharacterized as ordinary income instead of capital
gain to the extent of any accumulated market discount on the obligation.
DEFAULTED OBLIGATIONS. A fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy these distribution requirements, a fund may be required
to dispose of portfolio securities that it otherwise would have continued to
hold or to use cash flows from other sources such as the sale of fund shares.
THE FUNDS' UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of each 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. Each fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions received by
Distributors in connection with the offering of each 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, 1998,
1997 and 1996.
AMOUNT
RECEIVED IN
CONNECTION
TOTAL AMOUNT WITH REDEMP-
COMMISSIONS RETAINED BY TIONS OR
RECEIVED DISTRIBUTORS REPURCHASES
- --------------------------------------------------------------------------------
1998
Insured Fund $4,250,370 $275,269 $41,527
Intermediate Fund 421,185 60,619 0
Money Fund 0 0 0
1997
Insured Fund $4,562,364 $316,761 $19,125
Intermediate Fund 298,929 19,851 0
Money Fund 0 0 0
1996
Insured Fund 6,000,521 396,891 40,474
Intermediate Fund 206,859 27,358 9,939
Money Fund 0 0 5,658
Distributors may be entitled to reimbursement under the Rule 12b-1 plans for the
Intermediate Fund and each class of the Insured Fund, as discussed below. Except
as noted, Distributors received no other compensation from the funds for acting
as underwriter.
THE RULE 12B-1 PLANS - INSURED AND INTERMEDIATE FUNDS
The Intermediate 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 Fund and Class I of the Insured Fund, each
fund may pay up to a maximum of 0.10% per year of its average daily net assets,
payable quarterly, for expenses incurred in the promotion and distribution of
its shares.
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
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 its Class II plan, the Insured 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 Insured 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, the manager or
Distributors or other parties on behalf of the fund, the manager or Distributors
make payments that are deemed to be for the financing of any activity primarily
intended to result in the sale of shares of a fund within the context of Rule
12b-1 under the 1940 Act, then such payments shall be deemed to have been made
pursuant to the plan. 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 the manager or by vote of a majority of the
outstanding shares of the class. The Intermediate 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, 1998, 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 $1,706,363 $1,476,715
Insured Fund - Class II 438,916 269,335
Intermediate Fund 203,715 127,828
HOW DO THE FUNDS 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 a 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 funds, 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 funds 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 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, 1998, was as follows:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-------------------------------
INCEPTION FROM
DATE ONE-YEAR FIVE-YEAR TEN-YEAR INCEPTION
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Insured Fund - Class I 09/03/85 3.79% 5.18% 7.55% 7.81%
Insured Fund - Class II 05/01/95 5.77 - - 6.66
Intermediate Fund 09/23/92 5.35 5.93 - 6.58
</TABLE>
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 hypothetical $1,000
payment made at the beginning of each period at the end of
each period
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum 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, 1998, was as follows:
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
---------------------------
INCEPTION FROM
DATE ONE-YEAR FIVE-YEAR TEN-YEAR INCEPTION
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Insured Fund - Class I 09/03/85 3.79% 28.71% 107.01% 162.14%
Insured Fund - Class II 05/01/95 5.77- - - 22.62
Intermediate Fund 09/23/92 5.35 33.36 - 44.41
</TABLE>
YIELD
CURRENT YIELD. Current yield shows the income per share earned by a fund. It is
calculated by dividing the net investment income per share earned during a
30-day base period by the applicable maximum Offering Price per share on the
last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders of the class during the base
period. The yield for the Intermediate Fund and Class I and Class II of the
Insured Fund for the 30-day period ended June 30, 1998, was 4.09%, 4.13% and
3.71%, 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 funds may also quote a taxable-equivalent yield
that shows the before-tax yield that would have to be earned from a taxable
investment to equal the yield for the fund or class. Taxable-equivalent yield is
computed by dividing the portion of the yield that is tax-exempt by one minus
the highest applicable combined federal and state income tax rate and adding the
product to the portion of the yield that is not tax-exempt, if any. The
taxable-equivalent yield for the Intermediate Fund and Class I and Class II of
the Insured Fund for the 30-day period ended June 30, 1998, was 7.47%, 7.54% and
6.77%, 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 during a certain period and dividing that amount by the current
maximum Offering Price. The current distribution rate differs from the current
yield computation because it may include distributions to shareholders from
sources other than interest, if any, and is calculated over a different period
of time. The current distribution rate for the Intermediate Fund and Class I and
Class II of the Insured Fund for the 30-day period ended June 30, 1998, was
4.59%, 4.88% and 4.46%, 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 Fund and Class I and Class II of the Insured Fund for the
30-day period ended June 30, 1998, was 8.38%, 8.91% and 8.14%, respectively.
VOLATILITY
Occasionally statistics may be used to show a fund's volatility or risk.
Measures of volatility or risk are generally used to compare a 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 funds 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, 1998,
was 2.72%.
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, 1998, was 2.76%.
This figure was obtained using the following SEC formula:
365/7
Effective Yield = [(Base Period Return + 1) ]-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, 1998, was
4.97%. The fund's taxable-equivalent effective yield based on the fund's
effective yield for the seven day period ended June 30, 1998, was 4.97%.
ALL FUNDS
As of June 30, 1998, the combined federal and state income tax rate upon which
the taxable-equivalent yield quotations are based was 45.2%. From time to time,
as any changes to the rate become effective, taxable-equivalent yield quotations
advertised by a fund will be updated to reflect these changes. The funds expect
updates may be necessary as tax rates are changed by federal, state and local
governments. The advantage of tax-free investments, like the funds, will be
enhanced by any tax rate increases. Therefore, the details of specific tax
increases may be used in sales material for the funds.
COMPARISONS
To help you better evaluate how an investment in the funds may satisfy your
investment goal, advertisements and other materials about the funds may discuss
certain measures of fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. 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 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 Index - an index of municipal bond yields based upon yields of
20 general obligation bonds maturing in 20 years.
f) Bond Buyer 40 Index - an index composed of the yield to maturity of 40 bonds.
The index attempts to track the new-issue market as closely as possible, so it
changes bonds twice a month, adding all new bonds that meet certain requirements
and deleting an equivalent number according to their secondary market trading
activity. As a result, the average par call date, average maturity date, and
average coupon rate can and have changed over time. The average maturity
generally has been about 29-30 years.
g) Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK, FINANCIAL
WORLD, FORBES, FORTUNE, and MONEY magazines - provide performance statistics
over specified time periods.
h) Salomon Brothers Composite High Yield Index or its component indices -
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 funds may include a
discussion of certain attributes or benefits to be derived from an investment in
the funds. 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 funds may include in their advertising or sales material information
relating to investment goals 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 funds 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 a fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in a fund involves the risk of fluctuation of principal value, a risk
generally not present in an investment in a CD issued by a bank. For example, as
the general level of interest rates rise, the value of a fund's fixed-income
investments, as well as the value of its shares that are based upon the value of
such portfolio investments, can be expected to decrease. Conversely, when
interest rates decrease, the value of a fund's shares can be expected to
increase. CDs are frequently insured by an agency of the U.S. government. An
investment in a fund is not insured by any federal, state or private entity.
In assessing 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 funds' portfolios, 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 funds to calculate their figures. In
addition, there can be no assurance that the funds will continue their
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
The funds 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 a fund
cannot guarantee that these goals will be met.
Each 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 50 years and
now services more than 3 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton, a pioneer in international
investing. The Mutual Series team, known for its value-driven approach to
domestic equity investing, became part of the organization four years later.
Together, the Franklin Templeton Group has over $236 billion in assets under
management for more than 6 million U.S. based mutual fund shareholder and other
accounts. The Franklin Templeton Group of Funds offers 119 U.S. based open-end
investment companies to the public. Each 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
$49 billion in municipal bond assets for over three quarters of a million
investors. According to Research and Ratings Review, Franklin had one of the
largest staffs of municipal securities analysts in the industry, as of June 30,
1998.
Under current tax laws, municipal securities remain one of the few investments
offering the potential for tax-free income. In 1998, taxes could cost almost $47
on every $100 earned from a fully taxable investment (based on the maximum
combined 39.6% federal tax rate and the highest state tax rate of 12% for 1998).
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
a fund.
Currently, there are more mutual funds than there are stocks listed on the NYSE.
While many of them have similar investment goals, no two are exactly alike. As
noted in the Prospectus, shares of the funds 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.
From time to time, the number of fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of the funds, no other person holds beneficially or of record
more than 5% of the fund's outstanding shares of any class.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations. The
funds' 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 a fund's assets if you are held personally liable for
obligations of the fund. The Declaration of Trust provides that a 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 a 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 a 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 that you
would incur financial loss on account of shareholder liability is limited to the
unlikely circumstance 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, each fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the fund to have a potential property interest in the account, 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 and statements must be sent
to a compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) 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, 1998, including the auditor's
report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
Board - The Board of Trustees of the Trust
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 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 funds' 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, Templeton Capital Accumulator Fund, Inc., 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 funds' administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the funds'
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 Fund, 4.25% for the Insured
Fund - Class I and 1% for the Insured Fund - Class II. There is no front-end
sales charge for the Money Fund. We calculate the offering price to two decimal
places using standard rounding criteria.
PROSPECTUS - The prospectus for the funds dated November 1, 1998, which we may
amend 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.
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 that make the
long-term risks appear somewhat larger.
A: Municipal bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa: Municipal bonds rated Baa are considered medium-grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
These bonds lack outstanding investment characteristics and, in fact, have
speculative characteristics as well.
Ba: Municipal bonds rated Ba are judged to have predominantly speculative
elements and their future cannot be considered well assured. Often the
protection of interest and principal payments may be very moderate and, thereby,
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B: Municipal bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Municipal bonds rated Caa are of poor standing. These issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Con.(-): Municipal bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals that begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon the
completion of construction or the elimination of the basis of the condition.
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 these bonds will likely have some quality and
protective characteristics, they are outweighed by large uncertainties or major
risk exposures to adverse conditions.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
FITCH
AAA: Municipal bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal that is unlikely to be affected by reasonably
foreseeable events.
AA: Municipal bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong although not quite as strong as bonds rated AAA and not
significantly vulnerable to foreseeable future developments.
A: Municipal bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Municipal bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB: Municipal bonds rated BB are considered speculative. The obligor's ability
to pay interest and repay principal may be affected over time by adverse
economic changes. Business and financial alternatives can be identified,
however, that could assist the obligor in satisfying its debt service
requirements.
B: Municipal bonds rated B are considered highly speculative. While bonds in
this class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Municipal bonds rated CCC have certain identifiable characteristics which,
if not remedied, may lead to default. The ability to meet obligations requires
an advantageous business and economic environment.
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 each 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. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FITCH
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, 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.
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, 1998 as
filed with the SEC electronically on Form Type N-30D on August
20, 1998
(i) Financial Highlights
(ii) Statement of Investments - June 30, 1998
(iii) Statements of Assets and Liabilities - June 30, 1998
(iv) Statements of Operations - for the year ended June 30, 1998
(v) Statements of Changes in Net Assets - for the years ended
June 30, 1998 and 1997
(vi) Notes to Financial Statements
(vii) Independent Auditor's Report
b) Exhibits:
The following exhibits are incorporated by reference herein,
except exhibits 8(iv), 9(iii), 10(i), 11(i) 27(i), 27(ii),
27(iii) and 27(iv) which are attached herewith
(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
Filing 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
Filing 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
Filing 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
Filing 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
Filing 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) copies of all instruments defining the rights of the holders of
the securities being registered, including where applicable, the
relevant portion of the Articles of Incorporation or By-Laws of
the Registrant;
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
Filing 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
Filing 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
Filing 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
Filing 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
Filing 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, l997 to the Master Custody Agreement
dated February 16, 1996 between Registrant and Bank of New
York
Filing: Post-Effective Amendment No. 15 to Registration
Statement on Form N-1A
File No. 2-99112
Filing Date: October 30, 1997
(iv) Amendment dated February 27, 1998, to Exhibit A of the
Master Custody Agreement between Registrant and Bank of New
York dated February 16, 1996
(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
Filing Date: April 21, 1995
(ii) Amendment to Agreement between Registrant and Financial
Guaranty Insurance Company dated November 24, 1992
Filing: Post-Effective Amendment No. 12 to Registration
Statement on Form N-1A
File No. 2-99112
Filing Date: April 21, 1995
(iii) Subcontract for Fund Administrative Services dated October
1, 1996 and Amendment thereto dated April 30, 1998 between
Franklin Advisers, Inc. and Franklin Templeton Services,
Inc.
(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;
(i) Opinion and Consent of Counsel dated August 18, 1998
(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
(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
Filing 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 Registrant, on
behalf of the Franklin California Intermediate-Term
Tax-Free Income Fund, and Franklin/Templeton
Distributors, Inc.
Filing: Post-Effective Amendment No. 12 to Registration
Statement on Form N-1A
File No. 2-99112
Filing Date: April 21, 1995
(ii) Distribution Plan pursuant to Rule 12b-1 dated May 1,
1994 between Registrant, on behalf of the Franklin
California Insured Tax-Free Income Fund, and
Franklin/Templeton Distributors, Inc.
Filing: Post-Effective Amendment No. 12 to Registration
Statement on Form N-1A
File No. 2-99112
Filing Date: April 21, 1995
(iii) Class II Distribution Plan pursuant to Rule 12b-1
dated March 30, 1995 between Registrant, on behalf of
the Franklin California Insured Tax-Free Income Fund
- Class II, and Franklin/Templeton Distributors, Inc.
Filing: Post-Effective Amendment No. 14 to
Registration Statement on Form N-1A
File No. 2-99112
Filing Date: October 29, 1996
(16) schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22.
Not Applicable
(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 dated October 19, 1995
Filing: Post-Effective Amendment No. 15 to Registration
Statement on Form N-1A
File No. 2-99112
Filing Date: October 30, 1997
(27) Financial Data Schedules
(i) Franklin California Insured Tax-Free Income Fund - Class I
(ii) Franklin California Insured Tax-Free Income Fund - Class II
(iii) Franklin California Tax-Exempt Money Fund
(iv) 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
Not Applicable
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
was formerly a director of General Host Corporation. For additional
information please see Part B and Schedules A and D of Form ADV of the 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
principal 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
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 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 the 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 has duly caused this Amendment to its
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
21st day of August, 1998
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 Amendment to
its Registration Amendment 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: August 21, 1998
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: August 21, 1998
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: August 21, 1998
FRANK H. ABBOTT, III* Trustee
Frank H. Abbott, III Dated: August 21, 1998
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: August 21, 1998
HARMON E. BURNS* Trustee
Harmon E. Burns Dated: August 21, 1998
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: August 21, 1998
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: August 21, 1998
FRANK W.T. LAHAYE* Trustee
Frank W.T. LaHaye Dated: August 21, 1998
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: August 21, 1998
*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, 1996
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
EX-99.B8(iv) Amendment dated February 27, 1998, Attached
to Exhibit A of the Master Custody
Agreement between Registrant and
Bank of New York dated February 16,
1996
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.B9(iii) Subcontract for Fund Administrative Attached
Services dated October 1, 1996 and
Amendment thereto dated April 30,
1998 between Franklin Advisers, Inc.
and Franklin Templeton Services, Inc.
EX-99.B10(i) Opinion and Consent of Attached
Counsel dated August 18, 1998
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 Registrant, on
behalf of the Franklin
California Intermediate-Term
Tax-Free Income Fund, and
Franklin/Templeton
Distributors, Inc.
EX-99.B15(ii) Distribution Plan pursuant to *
Rule 12b-1 dated May 1, 1994
between Registrant, on behalf
of the Franklin California
Insured Tax-Free Income Fund,
and Franklin/Templeton
Distributors, Inc.
EX-99.B15(iii) Class II Distribution Plan *
pursuant to Rule 12b-1 dated
March 30, 1995 between
Registrant, on behalf of the
Franklin California Insured
Tax-Free Income Fund, and
Franklin/Templeton
Distributors, Inc.
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 dated *
October 19, 1995
EX-27.B-1 Franklin California Insured Attached
Tax-Free Income Fund - Class I
EX-27.B-2 Franklin California Insured Tax-Free Attached
Income Fund - Class II
EX-27.B-3 Franklin California Tax-Exempt Attached
Money Fund
EX-27.B-4 Franklin California Attached
Intermediate-Term Tax-Free
Income Fund
*Incorporated by reference
AMENDMENT TO MASTER CUSTODY AGREEMENT
Effective February 27, 1998, The Bank of New York and each of the Investment
Companies listed in the Attachment appended to this Amendment, for themselves
and each series listed in the Attachment, hereby amend the Master Custody
Agreement dated as of February 16, 1996 by:
1. Replacing Exhibit A with the attached; and
2. Only with respect to the Investment Companies and series thereof listed in
the Attachment, deleting paragraphs (a) and (b) of Subsection 3.5 and
replacing them with the following:
(a) Promptly after each purchase of Securities by the Fund, the Fund shall
deliver to the Custodian Proper Instructions specifying with respect to
each such purchase: (a) the Series to which such Securities are to be
specifically allocated; (b) the name of the issuer and the title of the
Securities; (c) the number of shares or the principal amount purchased and
accrued interest, if any; (d) the date of purchase and settlement; (e) the
purchase price per unit; (f) the total amount payable upon such purchase;
(g) the name of the person from whom or the broker through whom the
purchase was made, and the name of the clearing broker, if any; and (h) the
name of the broker to whom payment is to be made. The Custodian shall, upon
receipt of Securities purchased by or for the Fund, pay to the broker
specified in the Proper Instructions out of the money held for the account
of such Series the total amount payable upon such purchase, provided that
the same conforms to the total amount payable as set forth in such Proper
Instructions.
(b) Promptly after each sale of Securities by the Fund, the Fund shall
deliver to the Custodian Proper Instructions specifying with respect to
each such sale: (a) the Series to which such Securities were specifically
allocated; (b) the name of the issuer and the title of the Security; (c)
the number of shares or the principal amount sold, and accrued interest, if
any; (d) the date of sale; (e) the sale price per unit; (f) the total
amount payable to the Fund upon such sale; (g) the name of the broker
through whom or the person to whom the sale was made, and the name of the
clearing broker, if any; and (h) the name of the broker to whom the
Securities are to be delivered. The Custodian shall deliver the Securities
specifically allocated to such Series to the broker specified in the Proper
Instructions against payment of the total amount payable to the Fund upon
such sale, provided that the same conforms to the total amount payable as
set forth in such Proper Instructions.
Investment Companies The Bank of New York
By: /s/ Elizabeth N. Cohernour By: /s/ Stephen E. Grunston
-------------------------- -----------------------
Name: Elizabeth N. Cohernour Name: Stephen E. Grunston
Title: Authorized Officer Title: Vice President
Attachment
INVESTMENT COMPANY SERIES
Franklin Mutual Series Fund Inc. Mutual Shares Fund
Mutual Qualified Fund
Mutual Beacon Fund
Mutual Financial Services Fund
Mutual European Fund
Mutual Discovery Fund
Franklin Valuemark Funds Mutual Discovery Securities Fund
Mutual Shares Securities Fund
Templeton Variable Products Series Fund Mutual Shares Investments Fund
Mutual Discovery Investments Fund
<TABLE>
<CAPTION>
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series for which the Custodian shall serve under the Master
Custody Agreement dated as of February 16, 1996.
- ------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ------------------------------------------- -------------------------------- -------------------------------------------------------
<S> <C> <C>
Adjustable Rate Securities Portfolios Delaware Business Trust U.S. Government Adjustable Rate Mortgage Portfolio
Adjustable Rate Securities Portfolio
Franklin Asset Allocation Fund Delaware Business Trust
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Trust Franklin California Insured Tax-Free Income Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free Income Fund California Corporation
- ------------------------------------------- -------------------------------- -------------------------------------------------------
- ------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ------------------------------------------- -------------------------------- -------------------------------------------------------
<S> <C> <C>
Franklin Gold Fund California Corporation
Franklin Government Securities Trust Massachusetts Business Trust
Franklin High Income Trust Delaware Business Trust AGE High Income Fund
Franklin Investors Securities Trust Massachusetts Business Trust Franklin Global Government Income Fund
Franklin Short-Intermediate U.S. Govt Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
Franklin Managed Trust Massachusetts Business Trust Franklin Corporate Qualified Dividend Fund
Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
- ------------------------------------------- -------------------------------- -------------------------------------------------------
- ------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ------------------------------------------- -------------------------------- -------------------------------------------------------
<S> <C> <C>
Franklin Mutual Series Fund Inc. Maryland Corporation Mutual Shares Fund
Mutual Qualified Fund
Mutual Beacon Fund
Mutual Financial Services Fund
Mutual European Fund
Mutual Discovery Fund
Franklin New York Tax-Free Income Fund Delaware Business Trust
Franklin New York Tax-Free Trust Massachusetts Business Trust Franklin New York Tax-Exempt Money Fund
Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
Franklin Real Estate Securities Trust Delaware Business Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio Delaware Business Trust
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Blue Chip Fund
Franklin Biotechnology Discovery Fund
Franklin Tax-Exempt Money Fund California Corporation
- ------------------------------------------- -------------------------------- -------------------------------------------------------
- ------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- ------------------------------------------- -------------------------------- -------------------------------------------------------
<S> <C> <C>
Franklin Tax-Free Trust Massachusetts Business Trust Franklin Massachusetts Insured Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free Income
Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income fund
Franklin Michigan Tax-Free Income Fund
- ------------------------------------------- -------------------------------- -------------------------------------------------------
- ------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ------------------------------------------- -------------------------------- -------------------------------------------------------
<S> <C> <C>
Franklin Templeton Fund Allocator Series Delaware Business Trust Franklin Templeton Conservative Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Global Trust Delaware Business Trust Franklin Templeton German Government Bond Fund
Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Franklin Templeton International Trust Delaware Business Trust Templeton Pacific Growth Fund
Templeton Foreign Smaller Companies Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II
Franklin Value Investors Trust Massachusetts Business Trust Franklin Balance Sheet Investment Fund
Franklin MicroCap Value Fund
Franklin Value Fund
Franklin Valuemark Funds Massachusetts Business Trust Money Market Fund
Growth and Income Fund
Natural Resources Securities Fund
Real Estate Securities Fund
Global Utilities Securities Fund
High Income Fund
Templeton Global Income Securities Fund
Income Securities Fund
U.S. Government Securities Fund
Zero Coupon Fund - 2000
Zero Coupon Fund - 2005
Zero Coupon Fund - 2010
Rising Dividends Fund
- ------------------------------------------- -------------------------------- -------------------------------------------------------
- ------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ------------------------------------------- -------------------------------- -------------------------------------------------------
<S> <C> <C>
Franklin Valuemark Funds (cont.) Massachusetts Business Trust Templeton Pacific Growth Fund
Templeton International Equity Fund
Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton Global Asset Allocation Fund
Small Cap Fund
Capital Growth Fund
Templeton International Smaller Companies Fund
Mutual Discovery Securities Fund
Mutual Shares Securities Fund
Global Health Care Securities Fund
Value Securities Fund
- ------------------------------------------- -------------------------------- -------------------------------------------------------
Institutional Fiduciary Trust Massachusetts Business Trust Money Market Portfolio
Franklin U.S. Government Securities Money Market
Portfolio
Franklin U.S. Treasury Money Market Portfolio
Franklin Institutional Adjustable U.S. Government
Securities Fund
Franklin Institutional Adjustable Rate Securities Fund
Franklin U.S. Government Agency Money Market Fund
Franklin Cash Reserves Fund
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market Portfolio
Templeton Variable Products Series Fund Mutual Shares Investments Fund
Mutual Discovery Investments Fund
Franklin Growth Investments Fund
- ------------------------------------------- -------------------------------- -------------------------------------------------------
- ------------------------------------------- -------------------------------- -------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- ------------------------------------------- -------------------------------- -------------------------------------------------------
<S> <C> <C>
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business Trust
Franklin Principal Maturity Trust Massachusetts Business Trust
Franklin Universal Trust Massachusetts Business Trust
INTERVAL FUND
Franklin Floating Rate Trust Delaware Business Trust
- ------------------------------------------- -------------------------------- -------------------------------------------------------
</TABLE>
SUBCONTRACT FOR FUND ADMINISTRATIVE SERVICES
This Subcontract for Fund Administrative Services ("Subcontract") is
made as of October 1, 1996 between FRANKLIN ADVISERS, INC., a California
corporation, hereinafter called the "Investment Manager," and FRANKLIN TEMPLETON
SERVICES, INC. (the "Administrator").
In consideration of the mutual agreements herein made, the
Administrator and the Investment Manager understand and agree as follows:
I. Prime Contract.
This Subcontract is made in order to assist the Investment Manager in fulfilling
certain of the Investment Manager's obligations under each investment management
and investment advisory agreement ("Agreement") between the Investment Manager
and each Investment Company listed on Exhibit A, ("Investment Company") for
itself or on behalf of each of its series listed on Exhibit A (each, a "Fund").
This Subcontract is subject to the terms of each Agreement, which is
incorporated herein by reference.
II. Subcontractual Provisions.
(1) The Administrator agrees, during the life of this Agreement, to provide
the following services to each Fund:
(a) providing office space, telephone, office equipment and supplies
for the Fund;
(b) providing trading desk facilities for the Fund, unless these
facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment on behalf
of the Fund;
(d) supervising preparation of periodic reports to shareholders,
notices of dividends, capital gains distributions and tax credits; and attending
to routine correspondence and other communications with individual shareholders
when asked to do so by the Fund's shareholder servicing agent or other agents of
the Fund;
(e) coordinating the daily pricing of the Fund's investment portfolio,
including collecting quotations from pricing services engaged by the Fund;
providing fund accounting services, including preparing and supervising
publication of daily net asset value quotations, periodic earnings reports and
other financial data; and coordinating trade settlements;
(f) monitoring relationships with organizations serving the Fund,
including custodians, transfer agents, public accounting firms, law firms,
printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping requirements
under the federal securities laws, including the 1940 Act and the rules and
regulations thereunder, and under other applicable state and federal laws; and
maintaining books and records for the Fund (other than those maintained by the
custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's income
tax returns, and monitoring the Fund's compliance with subchapter M of the
Internal Revenue Code, as amended, and other applicable tax laws and
regulations;
(i) monitoring the Fund's compliance with: 1940 Act and other federal
securities laws, and rules and regulations thereunder; state and foreign laws
and regulations applicable to the operation of investment companies; the Fund's
investment objectives, policies and restrictions; and the Code of Ethics and
other policies adopted by the Investment Company's Board of Trustees or
Directors ("Board") or by the Fund's investment adviser and applicable to the
Fund;
(j) providing executive, clerical and secretarial personnel needed to
carry out the above responsibilities;
(k) preparing and filing regulatory reports, including without
limitation Forms N-1A and NSAR, proxy statements, information statements and
U.S. and foreign ownership reports; and
(l) providing support services incidental to carrying out these
duties.
Nothing in this Agreement shall obligate the Investment Company or any Fund to
pay any compensation to the officers of the Investment Company. Nothing in this
Agreement shall obligate the Administrator to pay for the services of third
parties, including attorneys, auditors, printers, pricing services or others,
engaged directly by the Fund to perform services on behalf of the Fund.
(2) The Investment Manager agrees to pay to the Administrator as
compensation for such services a monthly fee equal on an annual basis to 0.15%
of the first $200 million of the average daily net assets of each Fund during
the month preceding each payment, reduced as follows: on such net assets in
excess of $200 million up to $700 million, a monthly fee equal on an annual
basis to 0.135%; on such net assets in excess of $700 million up to $1.2
billion, a monthly fee equal on an annual basis to 0.1%; and on such net assets
in excess of $1.2 billion, a monthly fee equal on an annual basis to 0.075%.
From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually bound
hereunder by the terms of any publicly announced waiver of its fee, or any
limitation of each affected Fund's expenses, as if such waiver or limitation
were fully set forth herein.
(3) This Subcontract shall become effective on the date written above and
shall continue in effect as to each Investment Company and each Fund so long as
(1) the Agreement applicable to the Investment Company or Fund is in effect and
(2) this Subcontract is not terminated. This Subcontract will terminate as to
any Investment Company or Fund immediately upon the termination of the Agreement
applicable to the Investment Company or Fund, and may in addition be terminated
by either party at any time, without the payment of any penalty, on sixty (60)
days' written notice to the other party.
(4) In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Administrator, or of reckless disregard of its duties and
obligations hereunder, the Administrator shall not be subject to liability for
any act or omission in the course of, or connected with, rendering services
hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Subcontract to be
executed by their duly authorized officers.
FRANKLIN ADVISERS, INC.
By: /s/ Deborah R. Gatzek
---------------------
Deborah R. Gatzek
Title: Vice President
& Assistant Secretary
FRANKLIN TEMPLETON SERVICES, INC.
By: /s/ Harmon E. Burns
---------------------
Harmon E. Burns
Title: Executive Vice President
TERMINATION OF AGREEMENT
- ------------------------
Franklin Advisers, Inc. and Templeton Global Investors, Inc., hereby agree that
the Subcontracts for Administrative Services between them dated: (1) August 28,
1996 for the Franklin Templeton Global Trust on behalf of all series of the
Trust; (2) July 24, 1995 for the Franklin Templeton International Trust on
behalf of its series Templeton Foreign Smaller Companies Fund (formerly known as
Franklin International Equity Fund); (3) July 18, 1995 for the Franklin
Templeton International Trust on behalf of its series Templeton Pacific Growth
Fund; and (4) July 14, 1995 for the Franklin Investors Securities Trust on
behalf of its series Franklin Global Government Income Fund are terminated
effective as of the date of the Subcontract for Fund Administrative Services
above.
FRANKLIN ADVISERS, INC.
By /s/ Harmon E. Burns
----------------------
Harmon E. Burns
Executive Vice President
Templeton Global Investors, Inc.
By /s/ Martin L. Flanagan
----------------------
Martin L. Flanagan
President, CEO
AMENDMENT TO SUBCONTRACT FOR
FUND ADMINISTRATIVE SERVICES
The Subcontract for Fund Administrative Services dated October 1, 1996
between FRANKLIN ADVISERS, INC. and FRANKLIN TEMPLETON SERVICES, INC. is hereby
amended, to replace Exhibit A with the attached Exhibit A.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their duly authorized officers.
FRANKLIN ADVISERS, INC.
By: /s/ Deborah R. Gatzek
---------------------
Deborah R. Gatzek
Vice President & Assistant Secretary
FRANKLIN TEMPLETON SERVICES, INC.
By: /s/ Harmon E. Burns
---------------------
Harmon E. Burns
Executive Vice President
Date: April 30, 1998
<TABLE>
<CAPTION>
SUBCONTRACT FOR FUND ADMINISTRATIVE SERVICES
BETWEEN
FRANKLIN ADVISERS, INC.
AND
FRANKLIN TEMPLETON SERVICES, INC.
EXHIBIT A
- ----------------------------------------------------- ---------------------------------------------------------------------
INVESTMENT COMPANY SERIES ---(IF APPLICABLE)
- ----------------------------------------------------- ---------------------------------------------------------------------
<S> <C>
Franklin High Income Trust AGE High Income Fund
Franklin Asset Allocation Fund
Franklin California Tax-Free Income
Fund, Inc.
Franklin California Tax-Free Trust Franklin California Insured Tax-Free Income Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
Franklin Equity Fund
Franklin Federal Tax- Free Income Fund
Franklin Gold Fund
Franklin Investors Securities Trust Franklin Short-Intermediate U.S. Government Securities Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Municipal Securities Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
Franklin New York Tax-Free Trust Franklin New York Tax-Exempt Money Fund
Franklin New York Insured Tax-Free Income Fund
Franklin New York Intermediate-Term Tax-Free
Income Fund*
- ----------------------------------------------------- ---------------------------------------------------------------------
- ----------------------------------------------------- ---------------------------------------------------------------------
INVESTMENT COMPANY SERIES ---(IF APPLICABLE)
- ----------------------------------------------------- ---------------------------------------------------------------------
<S> <C>
Franklin Real Estate Securities Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio**
Franklin Strategic Series Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Blue Chip Fund
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust Franklin Massachusetts Insured Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income Fund
Franklin Michigan Tax-Free Income Fund
- ----------------------------------------------------- ---------------------------------------------------------------------
- ----------------------------------------------------- ---------------------------------------------------------------------
INVESTMENT COMPANY SERIES ---(IF APPLICABLE)
- ----------------------------------------------------- ---------------------------------------------------------------------
<S> <C>
Franklin Templeton International Trust Templeton Pacific Growth Fund
Templeton Foreign Smaller Companies Fund
Franklin Templeton Global Trust Franklin Templeton German Government Bond Fund
Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
CLOSED END FUNDS:
Franklin Multi-Income Trust
Franklin Principal Maturity Trust
Franklin Universal Trust
- ----------------------------------------------------- ---------------------------------------------------------------------
- -----------------------------------
* Effective as of March 19, 1998
**Effective as of February 26, 1998
</TABLE>
Law Offices
STRADLEY, RONON, STEVENS & YOUNG, LLP
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
(215) 564-8000
Direct Dial: (215) 564-8115
August 18, 1998
Franklin California Tax-Free Trust
777 Mariners Island Blvd.
San Mateo, CA 94403-7777
RE: LEGAL OPINION-SECURITIES ACT OF 1933
Ladies and Gentlemen:
We have examined the Agreement and Declaration of Trust, all as
amended (the "Declaration of Trust") of the Franklin California Tax-Free Trust
(the "Trust"), a business trust organized under the laws of the Commonwealth of
Massachusetts on July 18, 1985, the By-Laws of the Trust, and the various
pertinent proceedings we deem material. We have also examined the Notification
of Registration and the Registration Statements filed under the Investment
Company Act of 1940 (the "Investment Company Act") and the Securities Act of
1933 (the "Securities Act"), all as amended to date, as well as other items we
deem material to this opinion.
The Trust is authorized by its Declaration of Trust to issue an
unlimited number of shares of beneficial interest without a par value. The Trust
issues shares of the Franklin California Insured Tax-Free Income Fund, the
Franklin California Tax-Exempt Money Fund, and the Franklin California
Intermediate-Term Tax-Free Income Fund. The Declaration of Trust designates, or
authorizes the Trustees to designate, one or more series or classes of shares of
the Trust, and allocates, or authorizes the Trustees to allocate, shares of
beneficial interest to each such series or class. The Declaration of Trust also
empowers the Trustees to designate any additional series or classes and allocate
shares to such series or classes.
The Trust has filed with the U.S. Securities and Exchange Commission
(the "Commission"), a Registration Statement under the Securities Act, which
Registration Statement is deemed to register an indefinite number of shares of
the Trust pursuant to the provisions of Rule 24f-2 under the Investment Company
Act. You have further advised us that the Trust has filed, and each year
hereafter will timely file, a Notice pursuant to Rule 24f-2 perfecting the
registration of the shares sold by the Trust during each fiscal year during
which such registration of an indefinite number of shares remains in effect.
You have also informed us that the shares of the Trust have been, and
will continue to be, sold in accordance with the Trust's usual method of
distributing its registered shares, under which prospectuses are made available
for delivery to offerees and purchasers of such shares in accordance with
Section 5(b) of the Securities Act.
Based upon the foregoing information and examination, so long as the
Trust remains a valid and subsisting trust under the laws of the Commonwealth of
Massachusetts, and the registration of an indefinite number of shares of the
Trust remains effective, the authorized shares of the Trust when issued for the
consideration set by the Board of Trustees pursuant to the Declaration of Trust,
and subject to compliance with Rule 24f-2, will be legally outstanding,
fully-paid, and non-assessable shares, and the holders of such shares will have
all the rights provided for with respect to such holding by the Declaration of
Trust and the laws of the Commonwealth of Massachusetts.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement of the Trust, and any amendments thereto, covering the
registration of the shares of the Trust under the Securities Act and the
applications, registration statements or notice filings, and amendments thereto,
filed in accordance with the securities laws of the several states in which
shares of the Trust are offered, and we further consent to reference in the
registration statement of the Trust to the fact that this opinion concerning the
legality of the issue has been rendered by us.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
BY: /s/ Bruce G. Leto
-----------------
BRUCE G. LETO
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No. 16
to the Registration Statement of Franklin California Tax-Free Trust on Form N-1A
File No. 2-99112 of our report dated August 5, 1998 on our audit of the
financial statements and financial highlights of the funds comprising the
Franklin California Tax-Free Trust, which report is included in the Annual
Report to Shareholders for the year ended June 30, 1998, which is incorporated
by reference in the Registration Statement.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
August 20, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
CALIFORNIA TAX-FREE TRUST JUNE 30, 1998 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> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 1,622,293,975
<INVESTMENTS-AT-VALUE> 1,729,304,337
<RECEIVABLES> 70,538,501
<ASSETS-OTHER> 1,906,111
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,801,748,949
<PAYABLE-FOR-SECURITIES> 14,800,339
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 14,088,140
<TOTAL-LIABILITIES> 28,888,479
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,656,397,401
<SHARES-COMMON-STOCK> 137,714,533
<SHARES-COMMON-PRIOR> 133,814,581
<ACCUMULATED-NII-CURRENT> 364,333
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 9,088,374
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 107,010,362
<NET-ASSETS> 1,772,860,470
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 98,803,266
<OTHER-INCOME> 0
<EXPENSES-NET> (10,636,920)
<NET-INVESTMENT-INCOME> 88,166,346
<REALIZED-GAINS-CURRENT> 14,517,284
<APPREC-INCREASE-CURRENT> 35,549,088
<NET-CHANGE-FROM-OPS> 138,232,718
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (86,044,321)
<DISTRIBUTIONS-OF-GAINS> (15,480,792)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 22,389,869
<NUMBER-OF-SHARES-REDEEMED> (22,146,051)
<SHARES-REINVESTED> 3,656,134
<NET-CHANGE-IN-ASSETS> 102,418,679
<ACCUMULATED-NII-PRIOR> 254,790
<ACCUMULATED-GAINS-PRIOR> 10,448,981
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (8,057,731)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (10,636,920)
<AVERAGE-NET-ASSETS> 1,729,014,150
<PER-SHARE-NAV-BEGIN> 12.220
<PER-SHARE-NII> 0.640
<PER-SHARE-GAIN-APPREC> 0.370
<PER-SHARE-DIVIDEND> (0.640)
<PER-SHARE-DISTRIBUTIONS> (0.120)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.470
<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, 1998 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 012
<NAME> FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 1,622,293,975
<INVESTMENTS-AT-VALUE> 1,729,304,337
<RECEIVABLES> 70,538,501
<ASSETS-OTHER> 1,906,111
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,801,748,949
<PAYABLE-FOR-SECURITIES> 14,800,339
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 14,088,140
<TOTAL-LIABILITIES> 28,888,479
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,656,397,401
<SHARES-COMMON-STOCK> 4,413,589
<SHARES-COMMON-PRIOR> 2,839,130
<ACCUMULATED-NII-CURRENT> 364,333
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 9,088,374
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 107,010,362
<NET-ASSETS> 1,772,860,470
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 98,803,266
<OTHER-INCOME> 0
<EXPENSES-NET> (10,636,920)
<NET-INVESTMENT-INCOME> 88,166,346
<REALIZED-GAINS-CURRENT> 14,517,284
<APPREC-INCREASE-CURRENT> 35,549,088
<NET-CHANGE-FROM-OPS> 138,232,718
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,012,482)
<DISTRIBUTIONS-OF-GAINS> (397,099)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,210,276
<NUMBER-OF-SHARES-REDEEMED> (769,144)
<SHARES-REINVESTED> 133,327
<NET-CHANGE-IN-ASSETS> 102,418,679
<ACCUMULATED-NII-PRIOR> 254,790
<ACCUMULATED-GAINS-PRIOR> 10,448,981
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (8,057,731)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (10,636,920)
<AVERAGE-NET-ASSETS> 1,729,014,150
<PER-SHARE-NAV-BEGIN> 12.290
<PER-SHARE-NII> 0.580
<PER-SHARE-GAIN-APPREC> 0.370
<PER-SHARE-DIVIDEND> (0.570)
<PER-SHARE-DISTRIBUTIONS> (0.120)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.550
<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, 1998 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> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 712,910,715
<INVESTMENTS-AT-VALUE> 712,910,715
<RECEIVABLES> 4,630,686
<ASSETS-OTHER> 1,710,703
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 719,252,104
<PAYABLE-FOR-SECURITIES> 61,468,300
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,059,238
<TOTAL-LIABILITIES> 62,527,538
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 656,724,566
<SHARES-COMMON-STOCK> 656,724,566
<SHARES-COMMON-PRIOR> 639,790,573
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 656,724,566
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 22,567,839
<OTHER-INCOME> 0
<EXPENSES-NET> (3,934,181)
<NET-INVESTMENT-INCOME> 18,633,658
<REALIZED-GAINS-CURRENT> (2,802)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 18,630,856
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (18,630,856)<F1>
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 990,707,295
<NUMBER-OF-SHARES-REDEEMED> (992,374,601)
<SHARES-REINVESTED> 18,601,299
<NET-CHANGE-IN-ASSETS> 16,933,993
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (3,224,282)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (3,934,181)
<AVERAGE-NET-ASSETS> 660,891,266
<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> 0.030
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> (0.030)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 1.000
<EXPENSE-RATIO> 0.600
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
<FN>
<F1> Distributions were decreased by net realized loss
from security transaction of $2,802 in 1998.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
CALIFORNIA TAX-FREE TRUST JUNE 30, 1998 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 03
<NAME> FRANKLIN CALIFORNIA INTERMEDIATE-TERM TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 151,892,502
<INVESTMENTS-AT-VALUE> 158,031,605
<RECEIVABLES> 3,215,027
<ASSETS-OTHER> 1,680,099
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 162,926,731
<PAYABLE-FOR-SECURITIES> 6,674,223
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 588,949
<TOTAL-LIABILITIES> 7,263,172
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 149,326,703
<SHARES-COMMON-STOCK> 13,846,749
<SHARES-COMMON-PRIOR> 10,760,896
<ACCUMULATED-NII-CURRENT> 393,399
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (195,646)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,139,103
<NET-ASSETS> 155,663,559
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,985,988
<OTHER-INCOME> 0
<EXPENSES-NET> (688,051)
<NET-INVESTMENT-INCOME> 6,297,937
<REALIZED-GAINS-CURRENT> 373,164
<APPREC-INCREASE-CURRENT> 2,945,640
<NET-CHANGE-FROM-OPS> 9,616,741
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,184,726)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,049,630
<NUMBER-OF-SHARES-REDEEMED> (3,299,944)
<SHARES-REINVESTED> 336,167
<NET-CHANGE-IN-ASSETS> 37,997,621
<ACCUMULATED-NII-PRIOR> 280,188
<ACCUMULATED-GAINS-PRIOR> (568,810)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (794,091)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,028,038)
<AVERAGE-NET-ASSETS> 132,403,191
<PER-SHARE-NAV-BEGIN> 10.930
<PER-SHARE-NII> 0.530
<PER-SHARE-GAIN-APPREC> 0.310
<PER-SHARE-DIVIDEND> (0.530)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.240
<EXPENSE-RATIO> 0.520
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
