Prospectus
FRANKLIN CALIFORNIA TAX-FREE TRUST
INVESTMENT STRATEGY
TAX-FREE INCOME
FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND - CLASS A & C
FRANKLIN CALIFORNIA INTERMEDIATE-TERM TAX-FREE INCOME FUND - CLASS A
FRANKLIN CALIFORNIA TAX-EXEMPT MONEY FUND - CLASS A
November 1, 1999
[Insert Franklin Templeton Ben Head]
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.
CONTENTS
THE FUND
[Begin callout]
INFORMATION ABOUT
EACH FUND YOU SHOULD
KNOW BEFORE INVESTING
[End callout]
2 Franklin California Insured Tax-Free
Income Fund
15 Franklin California Intermediate-Term
Tax-Free Income Fund
27 Franklin California Tax-Exempt
Money Fund
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT
SALES CHARGES, ACCOUNT
TRANSACTIONS AND
SERVICES
[End callout]
39 Sales Charges
44 Buying Shares
46 Investor Services
49 Selling Shares
52 Account Policies
55 Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE
ABOUT EACH FUND
[End callout]
Back Cover
Franklin California Insured
Tax-Free Income Fund
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal 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.
PRINCIPAL INVESTMENTS The fund normally invests predominately in California
municipal securities whose interest is free from federal income taxes,
including the federal alternative minimum tax, and from California personal
income taxes. Although the fund tries to invest all of its assets in tax-free
securities, it is possible, although not anticipated, that up to 20% of its
assets may be in securities that pay taxable interest, including interest
that may be subject to the federal alternative minimum tax.
[Begin callout]
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 and private
projects. The issuer pays a fixed, floating or variable rate of interest, and
must repay the amount borrowed (the principal) at maturity.
[End callout]
The fund invests at least 65% of its total assets in insured municipal
securities, and under normal circumstances tries to invest more than 65% in
insured securities. Insured municipal securities are covered by insurance
policies that guarantee the timely payment of principal and interest.
Generally, the fund buys insured municipal securities only if they are
covered by policies issued by AAA-rated municipal bond insurers. Currently,
there are four municipal bond insurers with a AAA rating. The fund pays
insurance premiums either directly or indirectly, which increases the credit
safety of its insured investments, but decreases its yield.
The fund may invest the balance of its assets in the following types of
securities: (i) uninsured 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 by U.S. nationally recognized rating services
(or comparable unrated securities), which may include uninsured securities
and insured securities covered by policies issued by insurers with a rating
below AAA but not below A; or (iii) uninsured short-term, tax-exempt
securities rated in the top rating, 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.
The manager selects securities that it believes will provide the best balance
between risk and return within the fund's range of allowable investments and
typically uses a buy and hold strategy. This means it holds securities in the
fund's portfolio for income purposes, rather than trading securities for
capital gains, although the manager may sell a security at any time if it
believes it could help the fund meet its goal. The manager also may consider
the cost of insurance when selecting securities for the fund.
The fund may invest in municipal lease obligations, which generally are
issued to finance the purchase of public property. The property is leased to
a state or local government and the lease payments are used to pay the
interest on the obligations. These differ from other municipal securities
because the money to make the lease payments must be set aside each year or
the lease can be cancelled without penalty. If this happens, investors who
own the obligations may not be paid. The fund also may invest up to 35% of
its assets in municipal securities issued by U.S. territories.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
unusual or adverse conditions exist. Under these circumstances, the fund may
be unable to pursue its investment goal, because it may not invest or may
invest substantially less in California tax-free municipal securities.
IT IS IMPORTANT TO NOTE THAT INSURANCE DOES NOT GUARANTEE THE MARKET VALUE OF
AN INSURED SECURITY, OR THE FUND'S SHARE PRICE OR DISTRIBUTIONS, AND SHARES
OF THE FUND ARE NOT INSURED.
[Insert graphic of chart with line going up and down] MAIN RISKS
INCOME Since the fund can only distribute what it earns, the fund's
distributions to shareholders may decline when interest rates fall.
CREDIT There is the possibility that an issuer will be unable to make
interest payments and repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect a security's value and,
thus, impact fund performance.
Many of the fund's portfolio securities are supported by credit enhancements,
which may be provided by either U.S. or foreign entities. These securities
have the credit risk of the entity providing the credit support. A change in
the credit rating of any one or more of the municipal bond insurers that
insure securities in the fund's portfolio may affect the value of the
securities they insure, the fund's share price and fund performance. 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 entity to meet its obligations.
[Begin callout]
Because interest rates and municipal security prices fluctuate, the amount of
the fund's distributions, the fund's yield, and the value of your investment
in the fund will go up and down. This means you could lose money over short
or even extended periods.
[End callout]
INTEREST RATE When interest rates rise, municipal security prices fall. The
opposite is also true: municipal security prices rise when interest rates
fall. In general, securities with longer maturities are more sensitive to
these price changes.
CALL There is the possibility that a security will be prepaid (called)
before maturity. An issuer is more likely to call its securities when
interest rates are falling, because the issuer can issue new securities with
lower interest payments. If a security is called, the fund may have to
replace it with a lower-yielding security. At any time, the 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 yield and its distributions
to shareholders.
MARKET A security's value may 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 rise.
The 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, thereby increasing market
risk.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS Municipal securities may be
issued on a when-issued or delayed delivery basis, where payment and delivery
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.
CALIFORNIA Since the fund invests heavily in California municipal
securities, events in California are likely to affect the fund's investments
and its performance. These events may include economic or political policy
changes, tax base erosion, state constitutional limits on tax increases,
budget deficits and other financial difficulties, and changes in the credit
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. The fund may involve more risk than an investment in
a fund that does not focus on securities of a single state.
U.S. TERRITORIES As with California municipal securities, events in any of
the territories where the fund is invested may affect the fund's investments
and its performance.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the manager considers.
Municipal issuers generally are not required to report on their Year 2000
readiness. This makes it more difficult for the manager to evaluate their
readiness. There have been reports, however, that many municipal issuers are
behind in their efforts to address the Year 2000 problem. The manager, of
course, cannot audit each issuer and its major suppliers to verify their Year
2000 readiness. The manager is making efforts, however, to contact the
issuers of municipal securities held by the fund to try to assess their Year
2000 readiness.
If an issuer in which the fund is invested is adversely affected by Year 2000
problems, it is possible that the issuer's ability to make timely interest
and principal payments also will be affected, at least temporarily. This may
affect both the amount and timing of the fund's distributions and the fund's
performance. It also is likely that the price of the issuer's securities will
be adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page 10 for more information.
More detailed information about the fund, its policies (including temporary
investments), risks and municipal securities ratings can be found in the
fund's Statement of Additional Information (SAI).
[Begin callout]
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.
[End callout]
[Insert graphic of bull and bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
10.06% 6.33% 10.80% 8.73% 13.00% -5.31% 16.30% 4.22% 8.21% 6.51%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '95
7.02%
WORST
QUARTER:
Q1 '94
- -4.98%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Franklin California Insured Tax-Free
Income Fund - Class A2 2.01% 4.84% 7.27%
Lehman Brothers Municipal Bond Index3 6.48% 6.22% 8.22%
SINCE
INCEPTION
1 YEAR (5/1/95)
Franklin California Insured Tax-Free
Income Fund - Class C2 3.80% 6.70%
Lehman Brothers Municipal Bond Index3 6.48% 8.10%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of September 30, 1999, the fund's year-to-date return was -2.11% for Class
A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers
Municipal Bond Index includes investment grade bonds issued within the last
five years as part of a deal of over $50 million and with a maturity of at
least two years. It includes reinvested interest. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A 1 CLASS C 1
Maximum sales charge (load) as a percentage
of offering price 4.25% 1.99%
Load imposed on purchases 4.25% 1.00%
Maximum deferred sales charge (load) None 2 0.99% 3
Exchange fee None None
Please see "Sales Charges" on page 39 for an explanation of how and when
these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A 1 CLASS C 1
Management fees 0.46% 0.46%
Distribution and service (12b-1) fees 4 0.09% 0.65%
Other expenses 0.05% 0.05%
------------------
Total annual fund operating expenses 0.60% 1.16%
==================
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. Except for investments of $1 million or more (see page 40).
3. This is equivalent to a charge of 1% based on net asset value.
4. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
If you sell your shares
at the end of the period:
CLASS A $484 1 $609 $746 $1,143
CLASS C $315 $465 $732 $1,495
If you do not sell your
shares:
CLASS C $217 $465 $732 $1,495
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $222 billion in assets.
The team responsible for the fund's management is:
THOMAS KENNY, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Kenny has been an analyst or portfolio manager of the fund since 1987. He
is the Director of Franklin's Municipal Bond Department. He joined the
Franklin Templeton Group in 1986.
BERNARD SCHROER, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Schroer has been an analyst or portfolio manager of the fund since 1987.
He joined the Franklin Templeton Group in 1987.
JOHN WILEY, VICE PRESIDENT OF ADVISERS
Mr. Wiley has been an analyst or portfolio manager of the fund since 1991. He
joined the Franklin Templeton Group in 1989.
The fund pays Advisers a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended June 30, 1999, the fund paid
0.46% of its average net assets to the manager.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a leap year
may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
[Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund declares dividends daily
from its net investment income and pays them monthly on or about the 20th day
of the month. Your account may begin to receive dividends on the day after we
receive your investment and will continue to receive dividends through the
day we receive a request to sell your shares. Capital gains, if any, may be
distributed annually. The amount of these distributions will vary and there
is no guarantee the fund will
pay dividends.
Please keep in mind that if you invest in the fund shortly before the fund
deducts a capital gains distribution from its net asset value, you will
receive some of your investment back in the form of a taxable distribution.
TAX CONSIDERATIONS Fund distributions will consist primarily of
exempt-interest dividends from interest earned on municipal securities. In
general, exempt-interest dividends are exempt from federal income tax. The
fund, however, may invest a portion of its assets in securities that pay
income that is not tax-exempt. Fund distributions from such income are
taxable to you as ordinary income. Any capital gains the fund distributes are
taxable to you as long-term capital gains no matter how long you have owned
your shares. Distributions of ordinary income or capital gains are taxable
whether you reinvest your distributions in additional fund shares or receive
them in cash.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct social security or taxpayer identification
number, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December
but paid in January are taxable as if they were paid
in December.
When you sell your shares of the fund, you may have a capital gain or loss.
For tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale. The individual tax rate on any
gain from the sale or exchange of your shares depends on how long you have
held your shares.
Exempt-interest dividends are taken into account when determining the taxable
portion of your social security or railroad retirement benefits. The fund may
invest a portion of its assets in private activity bonds. The income from
these bonds is a preference item when determining your alternative minimum
tax.
Exempt-interest dividends from interest earned on municipal securities of the
state of California, or its political subdivisions, generally are exempt from
California's personal income tax. Investments in municipal securities of
other states generally do not qualify for tax-free treatment in California.
Distributions of ordinary income and capital gains, and gains from the sale
or exchange of your fund shares generally will be subject to state and local
income tax. Non-U.S. investors may be subject to U.S. withholding and estate
tax. You should consult your tax advisor about the federal, state, local or
foreign tax consequences of your investment in the fund.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED JUNE 30,
- -----------------------------------------------------------------------------
1999 1998 1997 1996 1995 2
- -----------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 12.47 12.22 12.01 11.95 11.74
Net investment income .61 .64 .66 .67 .68
Net realized and unrealized
gains (losses) (.26) .37 .21 .06 .20
Total from investment operations .35 1.01 .87 .73 .88
Distributions from net
investment income (.62) (.64) (.66) (.67) (.67)
In excess of net investment income (.01) - - - -
Distributions from net realized
gains (.07) (.12) - - -
Total distributions (.70) (.76) (.66) (.67) (.67)
Net asset value, end of year 12.12 12.47 12.22 12.01 11.95
Total return (%)1 2.76 8.38 7.41 6.18 7.80
Ratios/supplemental data
Net assets, end of year
($ x 1 million) 1,775 1,717 1,636 1,589 1,468
Ratios to average net assets: (%)
Expenses .60 .60 .60 .60 .59
Net investment income 4.91 5.11 5.41 5.50 5.77
Portfolio turnover rate (%) 15.53 21.66 20.40 14.22 11.85
Class C
Per share data ($)
Net asset value, beginning of year 12.55 12.29 12.07 11.99 11.88
Net investment income .55 .58 .59 .60 .11
Net realized and unrealized
gains (losses) (.27) .37 .22 .08 .10
Total from investment operations .28 .95 .81 .68 .21
Distributions from net
investment income (.55) (.57) (.59) (.60) (.10)
In excess of net investment income (.01) - - - -
Distributions from net realized
gains (.07) (.12) - - -
Total distributions (.63) (.69) (.59) (.60) (.10)
Net asset value, end of year 12.20 12.55 12.29 12.07 11.99
Total return (%)1 2.16 7.80 6.86 5.70 1.79
Ratios/supplemental data
Net assets, end of year
($ x 1,000) 80,336 55,371 34,899 18,458 507
Ratios to average net assets: (%)
Expenses 1.16 1.16 1.16 1.17 1.17 3
Net investment income 4.35 4.55 4.81 4.96 5.03 3
Portfolio turnover rate (%) 15.53 21.66 20.40 14.22 11.85
1. Total return does not include sales charges, and is not annualized.
2. For the period May 1, 1995 (effective date) to June 30, 1995 for Class C.
3. Annualized.
Franklin California
Intermediate-Term Tax-Free
Income Fund
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal 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.
PRINCIPAL INVESTMENTS The fund normally invests predominately in investment
grade, California municipal securities whose interest is free from federal
income taxes, including the federal alternative minimum tax, and from
California personal income taxes. Although the fund tries to invest all of
its assets in tax-free securities, it is possible, although not anticipated,
that a significant amount of its assets may be in securities that pay taxable
interest, including interest that may be subject to the federal alternative
minimum tax.
[Begin callout]
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 and private
projects. The issuer pays a fixed, floating or variable rate of interest, and
must repay the amount borrowed (the principal) at maturity.
[End callout]
The fund maintains a dollar-weighted average portfolio maturity of three to
10 years and only buys securities rated in the top four ratings by U.S.
nationally recognized rating services (or comparable unrated securities). The
manager selects securities that it believes will provide the best balance
between risk and return within the fund's range of allowable investments and
typically uses a buy and hold strategy. This means it holds securities in the
fund's portfolio for income purposes, rather than trading securities for
capital gains, although the manager may sell a security at any time if it
believes it could help the fund meet its goal.
The fund may invest in municipal lease obligations, which generally are
issued to finance the purchase of public property. The property is leased to
a state or local government and the lease payments are used to pay the
interest on the obligations. These differ from other municipal securities
because the money to make the lease payments must be set aside each year or
the lease can be cancelled without penalty. If this happens, investors who
own the obligations may not be paid. The fund also may invest up to 35% of
its assets in municipal securities issued by U.S. territories.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
unusual or adverse conditions exist. Under these circumstances, the fund may
be unable to pursue its investment goal, because it may not invest or may
invest substantially less in California tax-free municipal securities.
[Insert graphic of chart with line going up and down]
MAIN RISKS
INCOME Since the fund can only distribute what it earns, the fund's
distributions to shareholders may decline when interest rates fall.
CREDIT There is the possibility that an issuer will be unable to make
interest payments and repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect a security's value and,
thus, impact fund performance.
Many of the fund's portfolio securities may be supported by credit
enhancements, which may be provided by either U.S. or foreign entities. These
securities have the credit risk of the entity providing the credit support.
To the extent the fund holds insured securities, a change in the credit
rating of any one or more of the municipal bond insurers that insure
securities in the fund's portfolio may affect the value of the securities
they insure, the fund's share price and fund performance. 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 entity to meet its obligations.
[Begin callout]
Because interest rates and municipal security prices fluctuate, the amount of
the fund's distributions, the fund's yield, and the value of your investment
in the fund will go up and down. This means you could lose money over short
or even extended periods.
[End callout]
INTEREST RATE When interest rates rise, municipal security prices fall. The
opposite is also true: municipal security prices rise when interest rates
fall. In general, securities with longer maturities are more sensitive to
these price changes.
CALL There is the possibility that a security will be prepaid (called)
before maturity. An issuer is more likely to call its securities when
interest rates are falling, because the issuer can issue new securities with
lower interest payments. If a security is called, the fund may have to
replace it with a lower-yielding security. At any time, the 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 yield and its distributions
to shareholders.
MARKET A security's value may 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 rise.
The 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, thereby increasing market
risk.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS Municipal securities may be
issued on a when-issued or delayed delivery basis, where payment and delivery
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 The fund is a non-diversified fund. It may invest a greater
portion of its assets in the municipal securities of one issuer than a
diversified fund. The fund may be more sensitive to economic, business,
political or other changes affecting similar issuers or securities, which may
result in greater fluctuation in the value of the fund's shares. The fund,
however, intends to meet certain tax diversification requirements.
CALIFORNIA Since the fund invests heavily in California municipal
securities, events in California are likely to affect the fund's investments
and its performance. These events may include economic or political policy
changes, tax base erosion, state constitutional limits on tax increases,
budget deficits and other financial difficulties, and changes in the credit
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. The fund may involve more risk than an investment in
a fund that does not focus on securities of a single state.
U.S. TERRITORIES As with California municipal securities, events in any of
the territories where the fund is invested may affect the fund's investments
and its performance.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the manager considers.
Municipal issuers generally are not required to report on their Year 2000
readiness. This makes it more difficult for the manager to evaluate their
readiness. There have been reports, however, that many municipal issuers are
behind in their efforts to address the Year 2000 problem. The manager, of
course, cannot audit each issuer and its major suppliers to verify their Year
2000 readiness. The manager is making efforts, however, to contact the
issuers of municipal securities held by the fund to try to assess their Year
2000 readiness.
If an issuer in which the fund is invested is adversely affected by Year 2000
problems, it is possible that the issuer's ability to make timely interest
and principal payments also will be affected, at least temporarily. This may
affect both the amount and timing of the fund's distributions and the fund's
performance. It also is likely that the price of the issuer's securities will
be adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page 22 for more information.
More detailed information about the fund, its policies (including temporary
investments), risks and municipal securities ratings can be found in the
fund's Statement of Additional Information (SAI).
[Begin callout]
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.
[End callout]
[Insert graphic of bull and bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past six calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
ANNUAL TOTAL RETURNS 1
[Insert bar graph]
11.52% -4.25% 15.92% 7.48% 5.83% 6.51%
93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '95
6.05%
WORST
QUARTER:
Q1 '94
- -4.45%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR 5 YEARS (9/21/92)
- -----------------------------------------------------------------------------
Franklin California Intermediate-Term
Tax-Free Income Fund 2 4.10% 5.62% 6.68%
Lehman Brothers 10 Year Municipal
Bond Index 3 6.76% 6.35% 7.53%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of September 30, 1999, the fund's year-to-date return was -0.41%.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Lehman Brothers 10-Year
Municipal Bond Index includes investment grade bonds issued within the last
five years as part of a deal of over $50 million and with a maturity of at
least 10 years. It includes reinvested interest. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge (load) as a percentage of
offering price 2.25%
Load imposed on purchases 2.25%
Maximum deferred sales charge (load) None 1
Exchange fee None
Please see "Sales Charges" on page 39 for an explanation of how and when
these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management fees 2 0.57%
Distribution and service (12b-1) fees 3 0.10%
Other expenses 0.08%
-----
Total annual fund operating expenses 2 0.75%
=====
1. Except for investments of $1 million or more (see page 40).
2. For the fiscal year ended June 30, 1999, the manager had agreed in advance
to limit its management fees. With this reduction, management fees were 0.42%
and total annual fund operating expenses were 0.60%. The manager may end this
arrangement at any time upon notice to the fund's Board of Trustees.
3. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
$300 1 $459 $633 $1,134
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $222 billion in assets.
The team responsible for the fund's management is:
THOMAS KENNY, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Kenny has been an analyst or portfolio manager of the fund since its
inception. He is the Director of Franklin's Municipal Bond Department. He
joined the Franklin Templeton Group in 1986.
BERNARD SCHROER, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Schroer has been an analyst or portfolio manager of the fund since its
inception. He joined the Franklin Templeton Group in 1987.
JOHN WILEY, VICE PRESIDENT OF ADVISERS
Mr. Wiley has been an analyst or portfolio manager of the fund since its
inception. He joined the Franklin Templeton Group in 1989.
The fund pays Advisers a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended June 30, 1999, management
fees, before any advance waiver, were 0.57% of the fund's average net assets.
Under an agreement by the manager to limit its fees, the fund paid 0.42% of
its average net assets to the manager. The manager may end this arrangement
at any time upon notice to the fund's Board
of Trustees.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a leap year
may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
[Insert graphic of dollar signs and stacks of coins]
DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund declares dividends daily
from its net investment income and pays them monthly on or about the 20th day
of the month. Your account may begin to receive dividends on the day after we
receive your investment and will continue to receive dividends through the
day we receive a request to sell your shares. Capital gains, if any, may be
distributed annually. The amount of these distributions will vary and there
is no guarantee the fund will
pay dividends.
Please keep in mind that if you invest in the fund shortly before the fund
deducts a capital gains distribution from its net asset value, you will
receive some of your investment back in the form of a taxable distribution.
TAX CONSIDERATIONS Fund distributions will consist primarily of
exempt-interest dividends from interest earned on municipal securities. In
general, exempt-interest dividends are exempt from federal income tax. The
fund, however, may invest a portion of its assets in securities that pay
income that is not tax-exempt. Fund distributions from such income are
taxable to you as ordinary income. Any capital gains the fund distributes are
taxable to you as long-term capital gains no matter how long you have owned
your shares. Distributions of ordinary income or capital gains are taxable
whether you reinvest your distributions in additional fund shares or receive
them in cash.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct social security or taxpayer identification
number, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December
but paid in January are taxable as if they were paid
in December.
When you sell your shares of the fund, you may have a capital gain or loss.
For tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale. The individual tax rate on any
gain from the sale or exchange of your shares depends on how long you have
held your shares.
Exempt-interest dividends are taken into account when determining the taxable
portion of your social security or railroad retirement benefits. The fund may
invest a portion of its assets in private activity bonds. The income from
these bonds is a preference item when determining your alternative minimum
tax.
Exempt-interest dividends from interest earned on municipal securities of the
state of California, or its political subdivisions, generally are exempt from
California's personal income tax. Investments in municipal securities of
other states generally do not qualify for tax-free treatment in California.
Distributions of ordinary income and capital gains, and gains from the sale
or exchange of your fund shares generally will be subject to state and local
income tax. Non-U.S. investors may be subject to U.S. withholding and estate
tax. You should consult your tax advisor about the federal, state, local or
foreign tax consequences of your investment in the fund.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
YEAR ENDED JUNE 30,
- -----------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 11.24 10.93 10.67 10.38 10.20
-----------------------------------
Net investment income .51 .53 .53 .53 .54
Net realized and unrealized
gains (losses) (.21) .31 .26 .29 .17
-----------------------------------
Total from investment operations .30 .84 .79 .82 .71
Distributions from net
investment income (.52) (.53) (.53) (.53) (.53)
-----------------------------------
Net asset value, end of year 11.02 11.24 10.93 10.67 10.38
===================================
Total return (%)1 2.63 7.76 7.58 7.96 7.19
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 192,547 155,664 117,666 101,199 88,785
Ratios to average net assets: (%)
Expenses .60 .52 .47 .45 .33
Expenses excluding waiver and
payments by affiliate .75 .78 .80 .81 .83
Net investment income 4.50 4.76 4.96 4.99 5.34
Portfolio turnover rate (%) 5.48 9.58 6.29 10.13 10.90
1. Total return does not include sales charges.
FRANKLIN CALIFORNIA
TAX-EXEMPT MONEY FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's investment goal is to provide investors with as high a
level of income exempt from federal income taxes and California personal
income taxes as is consistent with prudent investment management and the
preservation of shareholders' capital. The fund also seeks liquidity in its
investments and tries to maintain a stable $1 share price.
PRINCIPAL INVESTMENTS The fund normally invests predominately in
high-quality, short-term, California municipal securities whose interest is
free from federal income taxes, including the federal alternative minimum
tax, and from California personal income taxes. Although the fund tries to
invest all of its assets in tax-free securities, it is possible, although not
anticipated, that up to 20% of its assets may be in securities that pay
taxable interest, including interest that may be subject to the federal
alternative minimum tax.
[Begin callout]
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 and private
projects. The issuer pays a fixed, floating or variable rate of interest, and
must repay the amount borrowed (the principal) at maturity.
[End callout]
The fund maintains a dollar-weighted average portfolio maturity of 90 days or
less and only buys securities:
o with remaining maturities of 397 days or less, and
o that the manager determines present minimal credit risks and are rated in
the top two ratings by U.S. nationally recognized rating services (or
comparable unrated securities).
The fund may invest in variable and floating rate securities, whose interest
rates change either at specific intervals or whenever a benchmark rate
changes. While this feature helps protect against a decline in the security's
market price when interest rates rise, it lowers the fund's income when
interest rates fall. The fund also may invest up to 35% of its assets in
municipal securities issued by U.S. territories.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
unusual or adverse conditions exist. Under these circumstances, the fund may
be unable to pursue its investment goals, because it may not invest or may
invest substantially less in California tax-free municipal securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
INCOME Since the fund can only distribute what it earns, the fund's
distributions to shareholders may decline when interest rates fall. Because
the fund limits its investments to high-quality, short-term securities, its
portfolio generally will earn lower yields than a portfolio with
lower-quality, longer-term securities subject to more risk.
CREDIT There is the possibility that an issuer will be unable to make
interest payments and repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect a security's value.
Many of the fund's portfolio securities may be supported by credit
enhancements, which may be provided by either U.S. or foreign entities. These
securities have the credit risk of the entity providing the credit support.
To the extent the fund holds insured securities, a change in the credit
rating of any one or more of the municipal bond insurers that insure
securities in the fund's portfolio may affect the value of the securities
they insure and fund performance. 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 entity
to meet its obligations. The fund's ability to maintain a stable share price
may depend on these credit supports, which are not backed by federal deposit
insurance.
INTEREST RATE When interest rates rise, municipal security prices fall. The
opposite is also true: municipal security prices rise when interest rates
fall. In general, securities with longer maturities are more sensitive to
these price changes.
MARKET A security's value may 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 rise.
The 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, thereby increasing market
risk.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS Municipal securities may be
issued on a when-issued or delayed delivery basis, where payment and delivery
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.
CALIFORNIA Since the fund invests heavily in California municipal
securities, events in California are likely to affect the fund's investments
and its performance. These events may include economic or political policy
changes, tax base erosion, state constitutional limits on tax increases,
budget deficits and other financial difficulties, and changes in the credit
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. The fund may involve more risk than an investment in
a fund that does not focus on securities of a single state.
U.S. TERRITORIES As with California municipal securities, events in any of
the territories where the fund is invested may affect the fund's investments
and its performance.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the manager considers.
Municipal issuers generally are not required to report on their Year 2000
readiness. This makes it more difficult for the manager to evaluate their
readiness. There have been reports, however, that many municipal issuers are
behind in their efforts to address the Year 2000 problem. The manager, of
course, cannot audit each issuer and its major suppliers to verify their Year
2000 readiness. The manager is making efforts, however, to contact the
issuers of municipal securities held by the fund to try to assess their Year
2000 readiness.
If an issuer in which the fund is invested is adversely affected by Year 2000
problems, it is possible that the issuer's ability to make timely interest
and principal payments also will be affected, at least temporarily.
This may affect both the amount and timing of the fund's distributions and
the fund's performance. It also is likely that the price of the issuer's
securities will be adversely affected. Please see page 34 for more
information.
More detailed information about the fund, its policies (including temporary
investments), risks and municipal securities ratings can be found in the
fund's Statement of Additional Information (SAI).
[Begin callout]
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. Although the fund tries to maintain a $1 share price, it is
possible to lose money by investing in the fund.
[End callout]
[Insert graphic of bull and bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows the fund's average annual total returns. Of course,
past performance cannot predict or guarantee future results.
ANNUAL TOTAL RETURNS 1
[Insert bar graph]
5.88% 5.37% 3.86% 2.37% 1.89% 2.22% 3.15% 2.75% 2.91% 2.62%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST
QUARTER:
Q2 '89
1.51%
WORST
QUARTER:
Q1 '94
0.40%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------
Franklin California Tax-Exempt Money Fund 2.62% 2.73% 3.29%
1. As of September 30, 1999, the fund's year-to-date return was 1.73%.
All fund performance assumes reinvestment of dividends.
To obtain the fund's current yield information, please call 1-800/DIAL BEN(R).
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge (load) on purchases None
Exchange fee1 $5.00
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management fees 0.49%
Other expenses 0.10%
-----
Total annual fund operating expenses 0.59%
=====
1. This fee is only for market timers (see page 53).
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------
$60 $189 $329 $738
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $222 billion in assets.
The team responsible for the fund's management is:
THOMAS KENNY, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Kenny has been an analyst or portfolio manager of the fund since 1987. He
is the Director of Franklin's Municipal Bond Department. He joined the
Franklin Templeton Group in 1986.
CARRIE HIGGINS, PORTFOLIO MANAGER OF ADVISERS
Ms. Higgins has been an analyst or portfolio manager of the fund since 1992.
She joined the Franklin Templeton Group in 1990.
JOHN POMEROY, VICE PRESIDENT OF ADVISERS
Mr. Pomeroy has been an analyst or portfolio manager of the fund since 1989.
He joined the Franklin Templeton Group in 1986.
The fund pays Advisers a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended June 30, 1999, the fund paid
0.49% of its average daily net assets to the manager.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a leap year
may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and the manager may have no control.
[Insert graphic of dollar signs and stacks of coins]
DISTRIBUTIONS AND TAXES
INCOME DISTRIBUTIONS The fund typically pays income dividends each day that
its net asset value is calculated. Your account may begin to receive
dividends on the day after we receive your investment and will continue to
receive dividends through the day we receive a request to sell your shares.
The amount of these dividends will vary and there is no guarantee the fund
will pay dividends.
TAX CONSIDERATIONS Fund distributions will consist primarily of
exempt-interest dividends from interest earned on municipal securities. In
general, exempt-interest dividends are exempt from federal income tax. The
fund, however, may invest a portion of its assets in securities that pay
income that is not tax-exempt. Fund distributions from such income are
taxable to you as ordinary income. Distributions of ordinary income are
taxable whether you reinvest your distributions in additional fund shares or
receive them in cash.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct social security or taxpayer identification
number, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
For tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale. Because the fund expects to
maintain a stable $1 share price, you should not have any gain or loss if you
sell your fund shares.
Exempt-interest dividends are taken into account when determining the taxable
portion of your social security or railroad retirement benefits. The fund may
invest a portion of its assets in private activity bonds. The income from
these bonds is a preference item when determining your alternative minimum
tax.
Exempt-interest dividends from interest earned on municipal securities of the
state of California, or its political subdivisions, generally are exempt from
California's personal income tax. Investments in municipal securities of
other states generally do not qualify for tax-free treatment in California.
Distributions of ordinary income generally will be subject to state and local
income tax. Non-U.S. investors may be subject to U.S. withholding and estate
tax. You should consult your tax advisor about the federal, state, local or
foreign tax consequences of your investment in the fund.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
YEAR ENDED JUNE 30,
1999 1998 1997 1996 1995
PER SHARE DATA ($)
Net asset value, beginning
of year 1.00 1.00 1.00 1.00 1.00
Net investment income .02 .03 .03 .03 .03
Distributions from net
investment income (.02) (.03) (.03) (.03) (.03)
Net asset value, end of year 1.00 1.00 1.00 1.00 1.00
Total return (%) 2.39 2.85 2.85 2.85 2.94
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 706,877 656,725 639,791 597,819 642,157
Ratios to average net assets: (%)
Expenses .59 .60 .60 .63 .64
Net investment income 2.36 2.82 2.83 2.83 2.88
YOUR ACCOUNT
[Insert graphic of percentage sign] SALES CHARGES
You may buy shares of the Money Fund without a sales charge. Shares of the
Insured and Intermediate Funds are sold with a sales charge. The rest of this
section describes the sales charges that apply to the Insured and
Intermediate Funds and does not apply to the Money Fund.
Each class of the Insured Fund has its own sales charge and expense
structure, allowing you to choose the class that best meets your situation.
Your investment representative can help you decide. The Intermediate Fund
only offers Class A shares.
CLASS A CLASS C (INSURED FUND ONLY)
- --------------------------------------------------------------------------------
o Initial sales charge of 4.25% or o Initial sales charge of 1%
less (Insured Fund) or 2.25% or
less (Intermediate Fund)
o Deferred sales charge of 1% on o Deferred sales charge of 1% on
purchases of $1 million or more shares you sell within 18 months
sold within 12 months
o Lower annual expenses than Class C o Higher annual expenses than Class A
due to lower distribution fees due to higher distribution fees
BEFORE JANUARY 1, 1999, CLASS A SHARES WERE DESIGNATED CLASS I AND CLASS C
SHARES WERE DESIGNATED CLASS II.
SALES CHARGES - CLASS A
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING PRICE OF YOUR NET INVESTMENT
- ----------------------------------------------------------------------------
INSURED FUND
Under $100,000 4.25 4.44
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
INTERMEDIATE FUND
Under $100,000 2.25 2.30
$100,000 but under $250,000 1.75 1.78
$250,000 but under $500,000 1.25 1.26
$500,000 but under $1 million 1.00 1.01
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either
as a lump sum or through our cumulative quantity discount or letter of intent
programs (see page 42), you can buy Class A shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC
is the same for each class (please see page 41).
DISTRIBUTION AND SERVICE (12B-1) FEES Class A of both the Insured and
Intermediate Funds has a distribution plan, sometimes known as a Rule 12b-1
plan, that allows each fund to pay distribution fees of up to 0.10% per year
to those who sell and distribute Class A shares and provide other services to
shareholders. Because these fees are paid out of Class A's assets on an
on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
SALES CHARGES - CLASS C
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING PRICE OF YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $1 million 1.00 1.01
WE PLACE ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS A SHARES, SINCE THERE
IS NO INITIAL SALES CHARGE AND CLASS A'S ANNUAL EXPENSES ARE LOWER.
CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C
shares you sell within 18 months of purchase. The way we calculate the CDSC
is the same for each class (please see page 41).
DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution and other fees of up to 0.65% per year for the sale of Class C
shares and for services provided to shareholders. Because these fees are paid
out of Class C's assets on an on-going basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A & C
The CDSC for each class is based on the current value of the shares being
sold or their net asset value when purchased, whichever is less. There is no
CDSC on shares you acquire by reinvesting your dividends or capital gains
distributions.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one
month on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to
a CDSC. If there are not enough of these to meet your request, we will sell
the shares in the order they were purchased. We will use this same method if
you exchange your shares into another Franklin Templeton Fund (please see
page 47 for exchange information).
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below,
please let us know at the time you make your investment to help ensure you
receive the lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases
in the Franklin Templeton Funds to take advantage of the lower sales charges
for large purchases of Class A shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Templeton Variable Insurance
Products Trust, Templeton Capital Accumulator Fund, Inc., and Templeton
Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
also may combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts also may be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar
amount of shares over a 13-month period and lets you receive the same
sales charge as if all shares had been purchased at one time. We will
reserve a portion of your shares to cover any additional sales charge that
may apply if you do not buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE SECTION OF YOUR
ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you
may reinvest some or all of the proceeds within 365 days without an initial
sales charge. The proceeds must be reinvested within the same share class,
except proceeds from the sale of Class B shares will be reinvested in Class A
shares.
If you paid a CDSC when you sold your Class A or C shares, we will credit
your account with the amount of the CDSC paid but a new CDSC will apply. For
Class B shares reinvested in Class A, a new CDSC will not apply, although
your account will not be credited with the amount of any CDSC paid when you
sold your Class B shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD)
also may be reinvested without an initial sales charge if you rein-
vest them within 365 days from the date the CD matures, including
any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject
to a sales charge.
SALES CHARGE WAIVERS Class A shares may be purchased without an initial
sales charge or CDSC by various individuals and institutions or by investors
who reinvest certain distributions and proceeds within 365 days. Certain
investors also may buy Class C shares without an initial sales charge. The
CDSC for each class may be waived for certain redemptions and distributions.
If you would like information about available sales charge waivers, call your
investment representative or call Shareholder Services at 1-800/632-2301. A
list of available sales charge waivers also may be found in the Statement of
Additional Information (SAI).
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors
to invest as a group. For sales charge purposes, the group's investments are
added together. There are certain other requirements and the group must have
a purpose other than buying fund shares at a discount.
[Insert graphic of paper with lines and someone writing]
BUYING SHARES
MINIMUM INVESTMENTS
- ---------------------------------------------------------------------------
INITIAL ADDITIONAL
- ---------------------------------------------------------------------------
Regular Accounts $1,000 $50
- ---------------------------------------------------------------------------
UGMA/UTMA accounts $100 $50
- ---------------------------------------------------------------------------
Broker-dealer sponsored wrap
account programs $250 $50
- ---------------------------------------------------------------------------
Full-time employees, officers, trustees
and directors of Franklin Templeton
entities, and their immediate family
members $100 $50
PLEASE NOTE THAT YOU MAY ONLY BUY SHARES OF A FUND ELIGIBLE FOR SALE IN YOUR
STATE OR JURISDICTION.
Certain Franklin Templeton Funds, like the Insured Fund, offer multiple share
classes not offered by the Intermediate Fund or Money Fund. Please note that
for selling or exchanging your shares, or for other purposes, the
Intermediate and Money Funds' shares are considered Class A shares. Before
January 1, 1999, these funds' shares were considered Class I shares.
Many of the Money Fund's investments must be paid for in federal funds, which
are monies held by the fund's custodian on deposit at the Federal Reserve
Bank of San Francisco and elsewhere. The fund generally cannot invest money
it receives from you until it is available to the fund in federal funds,
which may take up to two days. Until then, your purchase may not be
considered in proper form. If the fund is able to make investments within one
business day, it may accept your order with payment in other than federal
funds.
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. For the Insured Fund, make sure you
indicate the share class you have chosen. If you do not indicate a class, we
will place your purchase in Class A shares. To save time, you can sign up now
for services you may want on your account by completing the appropriate
sections of the application (see the next page).
BUYING SHARES
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------
[Insert graphic of hands
shaking]
THROUGH YOUR INVESTMENT Contact your investment Contact your investment
REPRESENTATIVE representative representative
- --------------------------------------------------------------------------------
[Insert graphic of Make your check payable Make your check payable
envelope] to the fund. For the to the fund. Include
Money Fund, you may also your account number on
BY MAIL send a Federal Reserve the check.
Draft or negotiable bank
draft. Instruments drawn Fill out the deposit
on other mutual funds may slip from your account
not be accepted. statement. For the Money
Fund, you may also use
Mail the check or draft the deposit slip from
and your signed your checkbook. If you
application to Investor do not have a slip,
Services. include a note with your
name, the fund name, and
your account number.
Mail the check and
deposit slip or note to
Investor Services.
- -------------------------------------------------------------------------------
[Insert graphic of three Call to receive a wire Call to receive a wire
lightning bolts] control number and wire control number and wire
instructions. instructions.
BY WIRE
Wire the funds and mail To make a same day wire
1-800/632-2301 your signed application investment in the
(or 1-650/312-2000 to Investor Services. Insured or Intermediate
collect) Please include the wire Fund, please call us by
control number or your 1:00 p.m. pacific time
new account number on the and make sure your wire
application. arrives by 3:00 p.m. To
make a same day wire
To make a same day wire investment in the Money
investment in the Insured Fund, please make sure
or Intermediate Fund, we receive your order by
please call us by 1:00 3:00 p.m. pacific time.
p.m. pacific time and
make sure your wire
arrives by 3:00 p.m. To
make a same day wire
investment in the Money
Fund, please make sure we
receive your order by
3:00 p.m. pacific time.
- --------------------------------------------------------------------------------
[Insert graphic of two Call Shareholder Services Call Shareholder
arrows pointing in at the number below, or Services at the number
opposite directions] send signed written below or our automated
instructions. The TeleFACTS system, or
BY EXCHANGE TeleFACTS system cannot send signed written
be used to open a new instructions.
TeleFACTS(R) account.
1-800/247-1753 (Please see page 47 for
(around-the-clock access) (Please see page 47 for information on
information on exchanges.) exchanges.)
- --------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with headdset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in the fund by automatically transferring money from your checking or
savings account each month to buy shares. The minimum investment to open an
account with an automatic investment plan is $50. To sign up, complete the
appropriate section of your account application.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in Class
A shares of the fund by transferring money from your paycheck to the fund by
electronic funds transfer. If you are interested, indicate on your
application that you would like to receive an Automatic Payroll Deduction
Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the
fund in an existing account in the same share class* of the fund or another
Franklin Templeton Fund. Initial sales charges and CDSCs will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund. For Money Fund shareholders who choose not to reinvest their
distributions, the Money Fund will distribute distributions paid during the
month as directed on the last business day of each month.
*Class C shareholders may reinvest their distributions in Class A shares of
any Franklin Templeton money fund.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
CHECK WRITING PRIVILEGES - MONEY FUND You may request redemption drafts
(checks) free of charge on your account application or, for an existing
account, by calling our TeleFACTS system. Check writing privileges allow you
to write checks against your account and are available unless you hold share
certificates.
For security reasons and reasons related to the requirements of check
processing systems, the fund can only accept checks ordered from the fund.
The fund cannot be responsible for any check not ordered from the fund that
is returned unpaid to the payee.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class*. For the Insured and Intermediate Funds, you can
exchange shares generally without paying any additional sales charges. If you
exchange shares held for less than six months, however, you may be charged
the difference between the initial sales charge of the two funds you are
exchanging between if the difference is more than 0.25%. If you exchange
shares from a money fund, a sales charge may apply no matter how long you
have held the shares, unless you acquired your money fund shares by exchange
or through the reinvestment of dividends, or you otherwise qualify to buy
shares without an initial sales charge.
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may
exchange into Class A without any sales charge. Advisor Class shareholders of
another Franklin Templeton Fund also may exchange into Class A without any
sales charge. Advisor Class shareholders who exchange their shares for Class
A shares and later decide they would like to exchange into another fund that
offers Advisor Class may do so.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC
will continue to be calculated from the date of your initial investment and
will not be charged at the time of the exchange. The purchase price for
determining a CDSC on exchanged shares will be the price you paid for the
original shares. If you exchange shares subject to a CDSC into a Class A
money fund, the time your shares are held in the money fund will not count
towards the CDSC holding period.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page 53).
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of certificate] SELLING SHARES
You can sell your shares at any time. Please keep in mind that a contingent
deferred sales charge (CDSC) may apply.
SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can
be made over the phone or with a simple letter. Sometimes, however, to
protect you and the fund we will need written instructions signed by all
registered owners, with a signature guarantee for each owner, if:
A signature guarantee helps protect your account against fraud. You can
obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of record,
or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
fund against potential claims based on the instructions received.
SELLING SHARES BY CHECK - MONEY FUND For accounts with check writing
privileges, you may make checks payable to any person and for any amount of
$100 or more. Since you will not know the exact amount in your account on the
day a check clears, a check should not be used to close your account.
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. The shares will be
redeemed at the net asset value next determined after we receive the check,
as long as the check 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.
The checks are drawn through Bank of America N.A. Bank of America may end
this service at any time upon notice to you. You generally will not be able
to convert a check drawn on your fund account into a certified or cashier's
check by presenting it at the bank. Since the fund is not a bank, the fund
cannot assure that a stop payment order you write will be effective. The fund
will use its best efforts, however, to see that these orders are carried out.
SELLING RECENTLY PURCHASED SHARES If you sell shares 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.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
CONTINGENT DEFERRED SALES CHARGE (CDSC) Most Franklin Templeton Funds impose
a 1% CDSC on certain investments of Class A shares sold within 12 months of
purchase. While the Money Fund generally does not have a CDSC, it will impose
one if you sell shares exchanged into the Money Fund from another Franklin
Templeton Fund and those shares would have been assessed a CDSC in the other
fund. Please keep in mind that the time the shares are held in the Money Fund
does not count towards the CDSC holding period.
The CDSC is based on the current value of the shares being sold or their net
asset value when purchased, whichever is less. To keep your CDSC as low as
possible, each time you place a request to sell shares we will first sell any
shares in your account that are not subject to a CDSC. If there are not
enough of these to meet your request, we will sell the shares in the order
they were purchased.
For information on the CDSC that may apply when you sell shares of the
Insured or Intermediate Funds, please see "Sales Charges" on page 39.
SELLING SHARES
- -------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- -------------------------------------------------------------------------
[Insert graphic of
hands shaking]
THROUGH YOUR INVESTMENT Contact your investment representative
REPRESENTATIVE
- -------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
BY MAIL or trust accounts may need to send additional
documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. Be sure to include all necessary
signatures and any additional documents, as
well as signature guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise according
to your written instructions.
- -------------------------------------------------------------------------
[Insert graphic of As long as your transaction is for $100,000 or
phone] less, you do not hold share certificates and
you have not changed your address by phone
BY PHONE within the last 15 days, you can sell your
shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and
address on the account. Written instructions,
with a signature guarantee, are required to
send the check to another address or to make
it payable to another person.
- -------------------------------------------------------------------------
[Insert graphic of You can call or write to have redemption
three lightning bolts] proceeds sent to a bank account. See the
policies above for selling shares by mail or
BY ELECTRONIC FUNDS phone.
TRANSFER (ACH)
Before requesting to have redemption proceeds
sent to a bank account, please make sure we
have your bank account information on file. If
we do not have this information, you will need
to send written instructions with your bank's
name and address, a voided check or savings
account deposit slip, and a signature
guarantee if the ownership of the bank and
fund accounts is different.
If we receive your request in proper form by
1:00 p.m. pacific time for the Insured and
Intermediate Funds and 3:00 p.m. pacific time
for the Money Fund, proceeds sent by ACH
generally will be available within two to
three business days.
- -------------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund you
arrows pointing in are considering.
opposite directions]
Call Shareholder Services at the number below
BY EXCHANGE or our automated TeleFACTS system, or send
signed written instructions. See the policies
TeleFACTS(R) above for selling shares by mail or phone.
1-800/247-1753
(around-the-clock If you hold share certificates, you will need
access) to return them to the fund before your
exchange can be processed.
- -------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE The Money Fund calculates its net asset value per
share (NAV) at 3:00 p.m. pacific time, each day the New York Stock Exchange
is open, by dividing its net assets by the number of shares outstanding. The
fund's assets are generally valued at their amortized cost.
[Begin callout]
When you buy shares,you pay the offering price. The offering price is the NAV
plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
The Insured and Intermediate Funds calculate their NAV each business day at
the close of trading on the New York Stock Exchange (normally 1:00 p.m.
pacific time). Each class's NAV is calculated by dividing its net assets by
the number of its shares outstanding.
The assets of the Insured and Intermediate Funds are generally valued at
their market value. If market prices are unavailable, or if an event occurs
after the close of the trading market that materially affects the values,
assets may be valued at their fair value.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250
($50 for employee and UGMA/UTMA accounts) because you sell some of your
shares, we may mail you a notice asking you to bring the account back up to
its applicable minimum investment amount. If you choose not to do so within
30 days, we may close your account and mail the proceeds to the address of
record. You will not be charged a CDSC if your account is closed for this
reason.
STATEMENTS AND REPORTS You will receive statements that show your account
transactions. You also will receive the fund's financial reports every six
months. To reduce fund expenses, we try to identify related shareholders in a
household and send only one copy of the financial reports. If you need
additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive statements and other information about
your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with
two or more owners are registered as "joint tenants with rights of
survivorship" (shown as "Jt Ten" on your account statement). To make any
ownership changes to a joint account, all owners must agree in writing,
regardless of the law in your state.
MARKET TIMERS The Money Fund may restrict or refuse exchanges by market
timers. If accepted, each exchange by a market timer will be charged $5 by
Franklin/Templeton Investor Services, Inc., the Money Fund's transfer agent.
The Insured and Intermediate Funds do not allow investments by market timers.
You will be considered a market timer if you have (i) requested an exchange
out of the fund within two weeks of an earlier exchange request, or (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, or (iv) otherwise seem to follow a timing pattern. Shares
under common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies
and reserves certain rights, including:
o The fund may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the fund may change its investment minimums or waive or lower
its minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days'
notice.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right to make
payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check, wire or electronic funds transfer
would be harmful to existing shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.
o If you buy shares with a check or draft that is returned to the fund
unpaid, the fund may impose a $10 charge against your account for each
returned item.
o When you buy shares of the Money Fund, it does not create a checking or
other bank account relationship with the fund or any bank.
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive
sales commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and
service (12b-1) fees and its other resources.
INSURED FUND CLASS A CLASS C
- -------------------------------------------------------------------
COMMISSION (%) - 2.00
Investment under $100,000 4.00 -
$100,000 but under $250,000 3.25 -
$250,000 but under $500,000 2.25 -
$500,000 but under $1 million 1.85 -
$1 million or more up to 0.75 1 -
12B-1 FEE TO DEALER 0.10 0.65 2
INTERMEDIATE FUND
COMMISSION (%) -
Investment under $100,000 2.00
$100,000 but under $250,000 1.50
$250,000 but under $500,000 1.00
$500,000 but under $1 million 0.85
$1 million or more up to 0.75 1
12B-1 FEE TO DEALER 0.10
A dealer commission of up to 1% may be paid on Class C NAV purchases. A
dealer commission of up to 0.25% may be paid on Class A NAV purchases by
certain trust companies and bank trust departments, eligible governmental
authorities, and broker-dealers or others on behalf of clients participating
in comprehensive fee programs.
1. During the first year after purchase, dealers may not be eligible to
receive the 12b-1 fee.
2. Dealers may be eligible to receive up to 0.15% during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the
13th month.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the fund or your account, you can write to us
at P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one of
the following numbers. For your protection and to help ensure we provide you
with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- -------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m. (Saturday)
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.
Dealer Services 1-800/524-4040 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.
FOR MORE INFORMATION
You can learn more about each fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about each fund, its investments and policies. It
is incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklintempleton.com
You can also obtain information about each fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, D.C. 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file #811-4356 CAT P 11/99
FRANKLIN CALIFORNIA
TAX-FREE TRUST
FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND - CLASS A & C
FRANKLIN CALIFORNIA INTERMEDIATE-TERM
TAX-FREE INCOME FUND - CLASS A
FRANKLIN CALIFORNIA TAX-EXEMPT MONEY FUND - CLASS A
[INSERT FRANKLIN TEMPLETON BEN HEAD]
STATEMENT OF ADDITIONAL INFORMATION
P.O. BOX 997151, SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
NOVEMBER 1, 1999
- ------------------------------------------------------------------------------
This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the funds' prospectus.
The funds' prospectus, dated November 1, 1999, which we may amend from time
to time, contains the basic information you should know before investing in
the funds. You should read this SAI together with the funds' prospectus.
The audited financial statements and auditor's report in the funds' Annual
Report to Shareholders, for the fiscal year ended June 30, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call
1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies ........................ 2
Risks ....................................... 8
Officers and Trustees ....................... 9
Management and Other Services ............... 11
Portfolio Transactions ...................... 13
Distributions and Taxes ..................... 13
Organization, Voting Rights
and Principal Holders ...................... 15
Buying and Selling Shares ................... 16
Pricing Shares .............................. 22
The Underwriter ............................. 23
Performance ................................. 25
Miscellaneous Information ................... 28
Description of Ratings ...................... 29
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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.
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GOALS AND STRATEGIES
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Each fund's investment goal 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 it may not be
changed without shareholder approval. Of course, there is no assurance that
any fund will meet its goal. The Money Fund also seeks liquidity in its
investments and tries to maintain a stable $1 share price.
As a fundamental policy, each fund normally invests at least 80% of its
assets in securities that pay interest free from federal income taxes,
including the federal alternative minimum tax. Each fund applies this test to
its net assets, except for the Intermediate Fund, which applies the test to
its total assets. Also as a fundamental policy, the Insured and Money Funds
normally invest at least 80% of their net assets in securities that pay
interest free from California personal income taxes. As nonfundamental
policies, the Intermediate Fund normally invests at least 65% of its total
assets in securities that pay interest free from California personal income
taxes, and each fund normally invests at least 65% of its total assets in
California municipal securities.
Municipal securities issued by California or its counties, municipalities,
authorities, agencies, or other subdivisions, as well as municipal securities
issued by U.S. territories such as Guam, Puerto Rico, the Mariana Islands or
the U.S. Virgin Islands, generally pay interest free from federal income tax
and from California personal income taxes for California residents.
Each fund tries 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.
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
also may invest, if consistent with its investment goals 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.
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
generally is 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. While this feature helps protect against a decline in the security's
market price when interest rates rise, it lowers the fund's income when
interest rates fall. Of course, the fund's income from its variable rate
investments also may increase if interest rates rise.
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 one to 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 Insured Fund may invest in top rated variable and floating rate
securities and the Intermediate Fund may invest in investment grade variable
and floating rate securities. The Insured and Intermediate Funds generally
use variable or floating rate securities as short-term investments while
waiting for long-term investment opportunities.
The Money Fund's investment in variable or floating rate securities is
subject to certain rules under federal securities laws on the quality and
maturity of the securities, as well as to procedures adopted by the fund's
board of trustees designed to minimize credit risks. 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 Each fund may invest in municipal lease
obligations, including certificates of participation. Municipal lease
obligations generally 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
appropriate (set aside) the money to make the lease payments each year. If
the money is not appropriated, 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. The board of trustees reviews each fund's
municipal lease obligations to try to assure that they are liquid investments
based on various factors reviewed by the fund's manager and monitored by the
board.
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.
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.
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 may receive
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. When pricing callable bonds, the call feature is factored into the
price of the bonds and may impact the fund's net asset value.
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. A call of some or all of these securities may lower a fund's
income, its yield and its distributions to shareholders. 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 the 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.
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.
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.
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 the 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 do not believe their net
asset value or income will be negatively affected by their purchase of
municipal securities on a when-issued basis. The funds will not engage in
when-issued transactions for investment leverage purposes.
Although a fund generally will 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 enter into repurchase agreements for
temporary defensive purposes. Under a repurchase agreement, the fund agrees
to buy securities guaranteed as to payment of principal and interest by the
U.S. government or its agencies from a qualified bank or broker-dealer and
then to sell the securities back to the bank or broker-dealer after a short
period of time (generally, less than seven days) at a higher price. The bank
or broker-dealer must transfer to the fund's custodian securities with an
initial market value of at least 102% of the dollar amount invested by the
fund in each repurchase agreement. The manager will monitor the value of such
securities daily to determine that the value equals or exceeds the repurchase
price.
Repurchase agreements may involve risks in the event of default or insolvency
of the bank or broker-dealer, including possible delays or restrictions upon
the fund's ability to sell the underlying securities. The fund will enter
into repurchase agreements only with parties who meet certain
creditworthiness standards, i.e., banks or broker-dealers that the manager
has determined present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the repurchase transaction.
To the extent it invests in repurchase agreements, the Money Fund may not
invest in repurchase agreements with a term of more than one year, and
usually would invest 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 generally are not 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. Generally, to meet federal tax
requirements at the close of each quarter, a fund may not invest more than
25% of its total assets in any one issuer and, with respect to 50% of total
assets, may not invest more than 5% of its total assets in any one issuer.
These limitations do not apply to U.S. government securities and may be
revised if applicable federal income tax requirements are revised. The Money
Fund also must meet certain diversification requirements under federal
securities laws that are more restrictive than those required for tax
purposes.
TEMPORARY INVESTMENTS When the manager believes the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other unusual or adverse conditions exist, including the
unavailability of securities that meet a fund's investment criteria, 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; (ii) high quality commercial paper;
or (iii) securities issued by or guaranteed by the full faith and credit of
the U.S. government. Each fund also may invest all of its assets in municipal
securities issued by a U.S. territory such as Guam, Puerto Rico, the Mariana
Islands or the U.S. Virgin Islands. For temporary purposes, the Money Fund
also may invest in obligations of U.S. banks with assets of $1 billion or
more.
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.
CREDIT 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 Investors Service Inc. (Fitch), Moody's Investors
Service, Inc. (Moody's), and Standard & Poor's Corporation (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. 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 at the end of this SAI
under "Description of Ratings."
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 guarantees 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.
As discussed in the prospectus, each fund has different limitations on the
credit quality of the securities it may buy. These limitations generally are
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.
In addition to considering ratings in its selection of each fund's portfolio
securities, the manager considers, among other things, information about the
financial history and condition of the issuer, revenue and expense prospects
and, in the case of revenue bonds, the financial history and condition of the
source of revenue to service the bonds. Securities that depend on the credit
of the U.S. government are regarded as having a triple A or equivalent rating.
INSURANCE The Insured Fund invests primarily in insured municipal securities.
The Intermediate and Money Funds also may invest in insured municipal
securities.
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 Insured 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 guarantees the scheduled payment of principal and interest,
but does not guarantee (i) the market value of the insured municipal
security, (ii) the value of a fund's shares, or (iii) a fund's distributions.
TYPES OF INSURANCE. There are three types of insurance: new issue, secondary
and portfolio. A new issue insurance policy is purchased by the issuer when
the security is issued. A secondary insurance policy may be purchased by the
fund after a security is issued. With both new issue and secondary policies,
the insurance continues in force for the life of the security and, thus, may
increase the credit rating of the security, as well as its resale value.
The Insured Fund may buy a secondary insurance policy at any time, if the
manager believes the insurance would be in the best interest of the fund. The
fund is likely to buy a secondary insurance policy if, in the manager's
opinion, the fund could sell a security at a price that exceeds the current
value of the security, without insurance, plus the cost of the insurance. The
purchase of a secondary policy, if available, may enable the fund to sell a
defaulted security at a price similar to that of comparable securities that
are not in default. The fund would value a defaulted security covered by a
secondary insurance policy at its market value.
The Insured Fund also may buy a portfolio insurance policy. Unlike new issue
and secondary insurance, which continue in force for the life of the
security, portfolio insurance only covers securities while they are held by
the fund. If the fund sells a security covered by portfolio insurance, the
insurance protection on that security ends and, thus, cannot affect the
resale value of the security. As a result, the fund may continue to hold any
security insured under a portfolio insurance policy that is in default or in
significant risk of default and, absent any unusual or unforeseen
circumstances as a result of the portfolio insurance policy, would likely
value the defaulted security, or security for which there is a significant
risk of default, at the same price as comparable securities 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 insurance premium the fund pays for a portfolio insurance policy is a
fund expense. The premium is payable monthly and is adjusted for purchases
and sales of covered securities during the month. If the fund fails to pay
its premium, the insurer may take action against the fund to recover any
premium payments that are 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.
QUALIFIED MUNICIPAL BOND INSURERS. Insurance policies may be issued by any
one of several qualified municipal bond insurers. The Insured Fund generally
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. Currently, there are four primary,
triple A rated municipal bond insurers. The fund, however, may invest a
portion of its assets in insured municipal securities covered by policies
issued by insurers with a rating below triple A or its equivalent.
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
funds nor the manager makes any representations as to the ability of any
insurance company to meet its obligation to a fund if called upon to do so.
Currently, to the best of our knowledge, there are no securities in the
funds' portfolios on which an insurer is paying the principal or interest
otherwise payable by the issuer of the bond.
If an insurer is called upon to pay the principal or interest on an insured
security that is due for payment but that has not been paid by the issuer,
the terms of payment would be governed by the provisions of the insurance
policy. After payment, the insurer becomes the owner of the security,
appurtenant coupon, or right to payment of principal or interest on the
security and is fully subrogated to all of the fund's rights with respect to
the security, including the right to payment. The insurer's rights to the
security or to payment of principal or interest are limited, however, to the
amount the insurer has paid.
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. The Insured Fund has no
restrictions on the maturity of the securities it may buy or on its average
portfolio maturity. The Intermediate Fund may buy securities with any
maturity but must maintain a dollar-weighted average portfolio maturity of
three to 10 years. 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.
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.
INVESTMENT RESTRICTIONS Each fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by
(i) more than 50% of the fund's outstanding shares or (ii) 67% or more of the
fund's shares present at a shareholder meeting if more than 50% of the fund's
outstanding shares 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 thereof) 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 the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus 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. If a
percentage restriction or limitation 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 will not be considered a violation of the
restriction or limitation.
RISKS
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CALIFORNIA Since each fund mainly invests in California municipal securities,
its 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 municipal
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 and is
subject to change. The information below is based on data available to the
funds from 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 their ability 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 the need for infrastructure improvements, increased costs for
education and other services, current debt levels, and the existence of
accumulated budget deficits. The following provides some information on these
and other factors.
California's economy has been the largest of all the states in the nation.
Like many other states, however, 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. In March
1999, California's employment was up 3%, with growth in construction (8.5%),
services (4.5%), government (3%), finance, insurance and real estate (2.3%)
and trade (2%). Despite strong employment growth, California's unemployment
rate has remained above the national average. Recent economic problems in
Asia have adversely affected the state's high tech manufacturing and related
industries, resulting in slower growth than in previous years. Further
weakening of the economies of California's international trade partners could
have a negative impact on the state.
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. At the end of fiscal 1998, general fund balances were a positive $547
million or 1.1% of expenditures on a GAAP basis.
California's debt levels have grown in recent years. In 1990, the state's
debt per capita was below the median for all states. By 1998, debt per capita
had risen to $675, above the $446 median for all states. California's debt
levels may increase further as the state attempts to address its
infrastructure needs and school improvements.
While the state's financial performance has improved in recent years, its
fiscal operations have remained vulnerable. Increased funding for schools and
infrastructure improvements and various tax cuts 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, also
has hampered the state's financial flexibility, as has its lack of a
formalized mid-year budget correction process. The state's relatively low
budget reserves and reduced flexibility make the state vulnerable to a future
economic downturn. Overall, however, S&P considered California's outlook to
be positive as of June 14, 1999.
U.S. TERRITORIES Since each fund may invest up to 35% of its assets in
municipal securities issued by U.S. territories, the ability of municipal
issuers in U.S. territories to continue to make principal and interest
payments also may affect a fund's performance. As with California municipal
issuers, 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 invest. 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 and is subject
to change. It is based on data available to the funds from historically
reliable sources, but it has not been independently verified by the funds.
GUAM. Guam's economy has been heavily dependent on tourism. 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. The recent Asian economic crisis and Typhoon Paka, which hit Guam in
December 1997, negatively affected both tourism and other economic activities
in Guam and contributed to a decline of 1.8% in gross island product between
1997 and 1998.
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. For fiscal 1998, however,
Guam incurred a $21 million deficit and ended the year with a negative
unreserved general fund balance of $158.9 million. Another deficit is
expected in 1999.
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 also may 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 May 20, 1999, S&P's outlook for Guam was negative due to
Guam's continued weak financial position and inability to meet the goals of
the financial plan.
PUERTO RICO. Overall, Moody's considered Puerto Rico's outlook stable as of
January 1999. In recent years, Puerto Rico's financial performance has
improved. Relatively strong revenue growth and more aggressive tax collection
procedures resulted in a general fund surplus for fiscal 1998 (unaudited).
For fiscal 1999, spending increases of 11% are budgeted, which may create an
operating deficit and deplete the commonwealth's unreserved fund balance.
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 also will need to address its large
unfunded pension liability of more than $6 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
Internal Revenue Code. This 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 also may have broad implications for Puerto Rico and its financial
and credit position.
OFFICERS AND TRUSTEES
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The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of each
fund's investment activities. The board, in turn, elects the officers of the
trust who are responsible for administering the trust's day-to-day
operations. The board also monitors the Insured Fund to ensure no material
conflicts exist among share classes. While none is expected, the board will
act appropriately to resolve any material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (78)
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) (until 1996) and Vacu-Dry Co. (food
processing) (until 1996).
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 47 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) (until 1998).
*Harmon E. Burns (54)
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 Investment
Advisory Services, Inc. and 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 51 of the investment
companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or
trustee, as the case may be, of 49 of the investment companies in the
Franklin Templeton Group of Funds.
*Charles B. Johnson (66)
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
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 48 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
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.
and Franklin Investment Advisory Services, Inc.; Senior Vice President,
Franklin Advisory Services, LLC; 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 51 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (70)
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); 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), Digital Transmission Systems, Inc. (wireless communications) and
Quarterdeck Corporation (software firm), and General Partner, Peregrine
Associates, which was the General Partner of Peregrine Ventures (venture
capital firm).
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 47 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 (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President, Chief Financial Officer 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, LLC and Franklin Investment Advisory Services,
Inc.; President and Director, Franklin Templeton 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 51 of
the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
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, LLC and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 52 of the investment
companies in the Franklin Templeton Group of Funds.
Thomas J. Kenny (36)
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 (60)
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 (62)
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.
*This board member is considered an "interested person" under federal
securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
The trust pays noninterested board members $830 per month plus $640 per
meeting attended. Board members who serve on the audit committee of the trust
and other funds in the Franklin Templeton Group of Funds receive a flat fee
of $2,000 per committee meeting attended, a portion of which is allocated to
the trust. Members of a committee are not compensated for any committee
meeting held on the day of a board meeting. Noninterested board members also
may serve as directors or trustees of other funds in the Franklin Templeton
Group of Funds and may receive fees from these funds for their services. The
fees payable to noninterested board members by the trust are subject to
reductions resulting from fee caps limiting the amount of fees payable to
board members who serve on other boards within the Franklin Templeton Group
of Funds. The following table provides the total fees paid to noninterested
board members by the trust and by the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM THE GROUP ON WHICH
NAME TRUST 1 ($) OF FUNDS 2 ($) EACH SERVES 3
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Frank H. Abbott, III 12,390 166,641 27
Harris J. Ashton 13,534 361,157 47
S. Joseph Fortunato 12,608 367,835 49
Frank W.T. LaHaye 13,030 171,536 27
Gordon S. Macklin 13,534 361,157 47
1. For the fiscal year ended June 30, 1999.
2. For the calendar year ended December 31, 1998.
3. 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 157 U.S. based funds or series.
Noninterested board members are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or board members who are shareholders of Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February
1998, this policy was formalized through adoption of a requirement that each
board member invest one-third of fees received for serving as a director or
trustee of a Templeton fund in shares of one or more Templeton funds and
one-third of fees received for serving as a director or trustee of a Franklin
fund in shares of one or more Franklin funds until the value of such
investments equals or exceeds five times the annual fees paid such board
member. Investments in the name of family members or entities controlled by a
board member constitute fund holdings of such board member for purposes of
this policy, and a three year phase-in period applies to such investment
requirements for newly elected board members. In implementing such policy, a
board member's fund holdings existing on February 27, 1998, are valued as of
such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED Each fund's manager is Franklin Advisers, Inc.
The manager is a wholly owned subsidiary of Franklin Resources, Inc.
(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.
The manager provides investment research and portfolio management services,
and selects the securities for each fund to buy, hold or sell. The manager's
extensive research activities include, as appropriate, traveling to meet with
issuers and to review project sites. The manager also selects the brokers who
execute the funds' portfolio transactions. The manager provides periodic
reports to the board, which reviews and supervises the manager's investment
activities. To protect the funds, the manager and its officers, directors and
employees are covered by fidelity insurance.
The manager and its affiliates manage 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 applicable federal securities laws, 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 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.
Under the funds' code of ethics, employees of the Franklin Templeton Group
who are access persons may 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.
MANAGEMENT FEES The Insured and Intermediate Funds each pay the manager a fee
equal to a monthly rate of:
o 5/96 of 1% (approximately 5/8 of 1% per year) of the value of net assets up
to and including $100 million; and
o 1/24 of 1% (approximately 1/2 of 1% per year) of the value of net assets
over $100 million up to and including $250 million; and
o 9/240 of 1% (approximately 45/100 of 1% per year) of the value of net
assets in excess of $250 million.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of the
Insured Fund's shares pays its proportionate share of the fee.
The Money Fund pays the manager a fee equal to a daily rate of:
o 1/584 of 1% of the value of net assets up to and including $100 million; and
o 1/730 of 1% of the value of net assets over $100 million up to and
including $250 million; and
o 1/811 of 1% of the value of net assets in excess of $250 million.
The fee is payable at the request of the manager according to the terms of
the management agreement.
For the last three fiscal years ended June 30, the funds paid the following
management fees:
MANAGEMENT FEES PAID ($)
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1999 1998 1997
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Insured Fund 8,667,397 8,057,731 7,686,324
Intermediate Fund1 775,173 454,104 311,342
Money Fund 3,211,214 3,224,282 3,127,809
1. For the fiscal years ended June 30, 1999, 1998 and 1997, management fees,
before any advance waiver, totaled $1,057,716, $794,091 and $673,288,
respectively. Under an agreement by the manager to limit its fees, the fund
paid the management fees shown.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for each fund. FT Services is wholly owned by
Resources and is an affiliate of the funds' manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of each fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion; and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended June 30, the manager paid FT
Services the following administration fees:
ADMINISTRATION FEES PAID ($)
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1999 1998 1997 1
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Insured Fund 1,975,011 1,872,018 1,364,513
Intermediate Fund 276,982 198,693 125,005
Money Fund 918,170 922,214 676,600
1. For the period from October 1, 1996, through June 30, 1997.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/
Templeton Investor Services, Inc. (Investor Services) is each fund's
shareholder servicing agent and acts as the fund's transfer agent and
dividend-paying agent. Investor Services is located at 777 Mariners Island
Blvd., San Mateo, CA 94404. Please send all correspondence to Investor
Services to P.O. Box 997151, Sacramento, CA 95899-9983.
For its services, Investor Services receives a fixed fee per account. Each
fund also will 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 will 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, NY 10286, acts as custodian of each fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the funds' independent auditor. The auditor gives an opinion on the
financial statements included in the trust's Annual Report to Shareholders
and reviews the trust's registration statement filed with the U.S. Securities
and Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
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Since most purchases by the funds are principal transactions at net prices,
the funds incur little or no brokerage costs. Each fund deals directly with
the selling or buying principal or market maker without incurring charges for
the services of a broker on its behalf, unless it is determined that a better
price or execution may be obtained by using the services of a broker.
Purchases of portfolio securities from underwriters will include a commission
or concession paid by the issuer to the underwriter, and purchases from
dealers will include a spread between the bid and ask prices. As a general
rule, the funds do not buy securities 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 allows 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, also may 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, 1999, 1998 and 1997, the funds did not
pay any brokerage commissions.
As of June 30, 1999, the funds did not own securities of their regular
broker-dealers.
DISTRIBUTIONS AND TAXES
- ------------------------------------------------------------------------------
The Insured Fund calculates dividends and capital gains the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the distribution and service (Rule 12b-1)
fees of each class. Distributions are subject to approval by the board. The
funds do not pay "interest" or guarantee any fixed rate of return on an
investment in their shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME Each fund receives income generally in
the form of interest on its investments. This income, less expenses incurred
in the operation of the fund, constitutes the fund's net investment income
from which dividends may be paid to you.
The Money Fund's daily net income includes accrued interest and any original
issue or acquisition discount, plus or minus any gain or loss on the sale of
portfolio securities and changes in unrealized appreciation or depreciation
in portfolio securities (to the extent required to maintain a stable $1 share
price), less the estimated expenses of the fund.
By meeting certain requirements of the Internal Revenue Code, the funds have
qualified and continue to qualify to pay exempt-interest dividends to you.
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 also may be exempt from California's personal income taxes.
California generally does not grant tax-free treatment to interest on state
and municipal securities of other states.
The funds 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, or on ordinary income derived
from the sale of market discount bonds. Any fund distributions from such
income will be taxable to you as ordinary income, whether you receive them in
cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The funds may derive capital gains and losses
in connection with sales or other dispositions of their portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in a fund. Any net capital gains realized by the funds
generally will be distributed once each year, and may be distributed more
frequently, if necessary, in order to reduce or eliminate excise or income
taxes on the funds. Because the Money Fund is a money fund, it does not
anticipate realizing any long-term capital gains.
MAINTAINING A $1 SHARE PRICE - MONEY FUND Gains and losses on the sale of
portfolio securities and unrealized appreciation or depreciation in the value
of these securities may require the fund to adjust distributions to maintain
a $1 share price. These procedures may result in under- or over-distributions
by the fund of its net investment income.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds will inform you
of the amount of your ordinary income dividends and capital gains
distributions at the time they are paid, and will advise you of their tax
status for federal income tax purposes shortly after the close of each
calendar year, 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, a fund may designate and distribute to you, as taxable, tax-exempt
or tax preference income, 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.
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
Internal Revenue Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. As regulated
investment companies, the funds generally pay no federal income tax on the
income and gains they distribute to you. 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, a 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 earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires each fund to distribute to you by December 31
of each year, at a minimum, the following amounts: 98% of its taxable
ordinary income earned during the calendar year; 98% of its capital gain net
income earned during the twelve month period ending October 31; and 100% of
any undistributed amounts from the prior year. Each fund intends to declare
and pay these amounts in December (or in January that are treated by you as
received in December) to avoid these excise taxes, but can give no assurances
that its distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. If you redeem
your fund shares, or exchange your fund shares for shares of a different
Franklin Templeton Fund, the IRS will require that you report a gain or loss
on your redemption or exchange. 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 or short-term, generally depending on how long you hold your
shares. 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 fund shares 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 the 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 share price, you should
not expect to realize a capital gain or loss on the sale or exchange of your
Money Fund shares.
DEFERRAL OF BASIS If you redeem some or all of your shares in a fund, and
then reinvest the sales proceeds in the fund or in another Franklin Templeton
Fund within 90 days of buying the original shares, the sales charge that
would otherwise apply to your reinvestment may be reduced or eliminated. The
IRS will require you to report gain or loss on the redemption of your
original shares in a fund. In doing so, all or a portion of the sales charge
that you paid for your original shares in a fund will be excluded from your
tax basis in the shares sold (for the purpose of determining gain or loss
upon the sale of such shares). The portion of the sales charge excluded 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. Because shares of the Money Fund may be purchased without a
sales charge, this deferral of basis rule should not apply to the sale of
Money Fund shares.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because the funds' income is
derived primarily from interest rather than dividends, generally no portion
of their distributions will 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.
INVESTMENT IN COMPLEX SECURITIES Each fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by a fund are
treated as ordinary income or capital gains, accelerate the recognition of
income to a fund and/or defer a fund's ability to recognize losses. In turn,
these rules may affect the amount, timing or character of the income
distributed to you by a fund.
TREATMENT OF PRIVATE ACTIVITY BOND INTEREST Interest on certain private
activity bonds, while still exempt from regular federal income tax, is a
preference item for taxpayers when determining their alternative minimum tax
under the Internal Revenue 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. Persons who are
defined in the Internal Revenue 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 fund shares.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- ------------------------------------------------------------------------------
Each fund is a series of Franklin California Tax-Free 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.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations.
The Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the fund's assets if you are held personally liable for
obligations of the fund. The Declaration of Trust provides that the fund
shall, upon request, assume the defense of any claim made against you for any
act or obligation of the fund and satisfy any judgment thereon. All such
rights are limited to the assets of the fund. The Declaration of Trust
further provides that the fund may maintain appropriate insurance (for
example, fidelity bonding and errors and omissions insurance) for the
protection of the fund, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. Furthermore, the
activities of the fund as an investment company, as distinguished from an
operating company, would not likely give rise to liabilities in excess of the
fund's total assets. Thus, the risk 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.
Certain funds in the Franklin Templeton Funds offer multiple classes of
shares. The different classes have proportionate interests in the same
portfolio of investment securities. They differ, however, primarily in their
sales charge structures and Rule 12b-1 plans.
The Insured Fund currently offers two classes of shares, Class A and Class C.
Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II. The full title of each class is:
o Franklin California Insured Tax-Free Income Fund - Class A
o Franklin California Insured Tax-Free Income Fund - Class C
The Intermediate Fund and the Money Fund each offer only one share class.
Because the Intermediate Fund's sales charge structure and Rule 12b-1 plan
are similar to those of Class A shares, shares of the fund are considered
Class A shares for redemption, exchange and other purposes. Shares of the
Money Fund also are considered Class A shares for redemption, exchange and
other purposes. Before January 1, 1999, these funds' shares were considered
Class I shares.
The funds may offer additional classes of shares in the future.
Shares of each class of the Insured Fund represent proportionate interests in
the fund's assets. On matters that affect the fund as a whole, each class has
the same voting and other rights and preferences as any other class. On
matters that affect only one class, only shareholders of that class may vote.
Each class votes 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. Additional series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, 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 be called by the board to consider the
removal of a board member if requested in writing 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. A special meeting also may be called by the board in its
discretion.
As of August 6, 1999, the principal shareholders of the funds, beneficial or
of record, were:
NAME AND ADDRESS PERCENTAGE (%)
- -------------------------------------------------------------------------
MONEY FUND
Kenneth Rainin Ttee 6
U/D/T Dated 03/26/90
5400 Hollis St.
Emeryville, CA 94608-2508
From time to time, the number of fund shares held in the "street name"
accounts of various securities dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding.
As of August 6, 1999, the officers and board members, as a group, owned of
record and beneficially 3.9% of the Money Fund's shares and less than 1% of
the outstanding shares of the other funds. The board members may own shares
in other funds in the Franklin Templeton Group of Funds.
BUYING AND SELLING SHARES
- ------------------------------------------------------------------------------
The fund continuously offers its shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial
institutions that sell shares of the fund may be required by state law to
register as securities dealers.
For investors outside the U.S., 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.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank. All checks, drafts, wires and other
payment mediums used to buy or sell Money Fund shares 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 to accrue until the proceeds are collected, which
may take a long period of time. We may deduct any applicable banking charges
imposed by the bank from your account.
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.
INITIAL SALES CHARGES The maximum initial sales charge for the Insured Fund
is 4.25% for Class A and 1% for Class C. The maximum initial sales charge for
the Intermediate Fund is 2.25%. There is no initial sales charge for the
Money Fund.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of
the lower sales charges for large purchases. The Franklin Templeton Funds
include the U.S. registered mutual funds in the Franklin Group of Funds(R) and
the Templeton Group of Funds except Franklin Templeton Variable Insurance
Products Trust, Templeton Capital Accumulator Fund, Inc., and Templeton
Variable Products Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You also may combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you also may add any company accounts, including
retirement plan accounts.
LETTER OF INTENT (LOI). You may buy shares of the Intermediate Fund and Class
A shares of the Insured Fund at a reduced sales charge by completing the
letter of intent section of your account 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.
By completing the letter of intent section of the application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
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 LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy Class A shares at the
sales charge applicable to the amount specified in your LOI. 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. Any Class A purchases you made within 90 days
before you filed your LOI also may qualify for a retroactive reduction in the
sales charge. If you file your LOI with the fund before a change in the
fund's sales charge, you may complete the LOI at the lower of the new sales
charge or the sales charge in effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days
before you filed your LOI will be counted towards the completion of the LOI,
but they will not be entitled to a retroactive reduction 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 LOI have been completed.
If the terms of your LOI are met, 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, is more than the amount specified in
your LOI and is an amount that would qualify for a further sales charge
reduction, a retroactive price adjustment will be made by Distributors and
the securities dealer through whom purchases were made. The price adjustment
will be made on purchases made within 90 days before and on those made after
you filed your LOI and will be applied towards 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 in your LOI, the sales charge will be adjusted upward,
depending on the actual amount purchased (less redemptions) during the
period. You will need to send Distributors an amount equal to the difference
in the actual dollar amount of sales charge paid and the amount of sales
charge that would have applied to the total purchases if the total of the
purchases had been made at one time. Upon payment of this amount, 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, we will redeem an
appropriate number of reserved shares to realize the difference. If you
redeem the total amount in your account before you fulfill your LOI, we will
deduct the additional sales charge due from the sale proceeds and forward the
balance to you.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class
A 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.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be
purchased without an initial sales charge or contingent deferred sales charge
(CDSC) by investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same share class.
Certain exceptions apply, however, to Class C shareholders who chose to
reinvest their distributions in Class A 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 the fund's Class A
shares. This waiver category also applies to Class C shares.
o Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option
the Franklin Templeton Variable Insurance Products Trust or the Templeton
Variable Products Series Fund. You should contact your tax advisor for
information on any tax consequences that may apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
o 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.
o Redemption proceeds from the sale of Class A shares of any of the Templeton
Global Strategy Funds if you are a qualified investor.
o If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund
shares and the CDSC holding period will begin again. We will, however,
credit your fund account with additional shares based on the CDSC you
previously paid and the amount of the redemption proceeds that you
reinvest.
o 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.
WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without
an initial sales charge or CDSC by various individuals and institutions due
to anticipated economies in sales efforts and expenses, including:
o 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.
o 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 fund shares without paying sales charges.
Please consult your legal and investment advisors to determine if an
investment in the fund is permissible and suitable for you and the effect,
if any, of payments by the fund on arbitrage rebate calculations.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer or
service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o 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
o Any investor who is currently a Class Z shareholder of Franklin Mutual
Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31,
1996, or who sold his or her shares of Mutual Series Class Z within the
past 365 days
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting distributions
from the trusts
In addition, effective January 1, 2000, Class C shares may be purchased
without an initial sales charge by any investor who buys Class C shares
through Merrill Lynch Pierce Fenner & Smith, Inc. A CDSC may apply, however,
if the shares are sold within 18 months of purchase.
SALES IN TAIWAN. 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 A 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, these shares may be offered with the
following schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE (%)
- --------------------------------------------------------------
Under $30,000 3.0
$30,000 but less than $100,000 2.0
$100,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION 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. Financial institutions or their
affiliated brokers may receive an agency transaction fee in the percentages
indicated in the dealer compensation table in the funds' prospectus.
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 A 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.
In addition to the payments above, Distributors and/or its affiliates may
provide financial support to 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 and/or total assets with the Franklin
Templeton Group of Funds. 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
rules of the National Association of Securities Dealers, Inc.
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.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
shares of the Intermediate Fund or Class A shares of the Insured Fund, either
as a lump sum or through our cumulative quantity discount or letter of intent
programs, a CDSC may apply on any shares you sell within 12 months of
purchase. For Class C shares of the Insured Fund, a CDSC may apply if you
sell your shares within 18 months of purchase. The CDSC is 1% of the value of
the shares sold or the net asset value at the time of purchase, whichever is
less.
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Account fees
o Redemptions of Class A shares by investors who purchased $1 million or more
without an initial sales charge if the securities dealer of record waived
its commission in connection with the purchase
o Redemptions by the fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12%
annually of your account's net asset value depending on the frequency of
your plan
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
Insured or Intermediate Fund account, accrued but unpaid income dividends and
capital gain distributions will be reinvested in the fund at 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.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money. If this
occurs, it is the Insured and Intermediate Funds' general policy to initially
invest this money in short-term, tax-exempt municipal securities, unless it
is believed that attractive investment opportunities consistent with the
funds' investment goals 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.
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. 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. 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 also may be subject to a CDSC.
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.
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. The funds 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 funds receive notification of the shareholder's death or
incapacity.
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 U.S. Securities
and Exchange Commission (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.
Redemptions in kind are taxable transactions. The fund does not intend to
redeem illiquid securities in kind. If this happens, however, you may not be
able to recover your investment in a timely manner.
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.
All purchases of Money Fund shares will be credited to you, in full and
fractional fund shares (rounded to the nearest 1/100 of a share), in an
account maintained for you by the fund's transfer agent. No share
certificates will be issued for fractional shares at any time. No
certificates will be issued to you if you have elected to redeem shares by
check or by preauthorized bank or brokerage firm account methods.
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.
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.
Sending redemption proceeds by wire or electronic funds transfer (ACH) is a
special service that we make available whenever possible. By offering this
service to you, the funds 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 or ACH is not processed as described in the
prospectus.
Franklin Templeton Investor Services, Inc. (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, the funds may reimburse Investor Services an amount not to
exceed the per account fee that the funds normally pay Investor Services.
These financial institutions also may charge a fee for their services
directly to their clients.
Investor Services may charge you separate fees, negotiated directly with you,
for providing special services in connection with your Money Fund account,
such as processing a large number of checks each month. Fees for special
services will not increase the fund's expenses.
Special procedures have been designed for banks and other institutions
wishing to open multiple accounts in the Money Fund. 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 Money 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.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. 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. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
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.
The offering of fund shares may be suspended at any time and resumed at any
time thereafter.
PRICING SHARES
- ------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the
net asset value (NAV) per share plus any applicable sales charge, calculated
to two decimal places using standard rounding criteria. When you sell shares,
you receive the NAV minus any applicable CDSC.
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.
The Intermediate Fund and each class of the Insured Fund calculate the NAV
per share each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. pacific time). The Money Fund calculates its NAV
per share each business day at 3:00 p.m. pacific time. The funds do not
calculate their NAV on days the New York Stock Exchange (NYSE) is closed for
trading, which include 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 When determining its NAV, each fund values
cash and receivables at their realizable amounts, and records interest as
accrued. Each fund values over-the-counter portfolio securities within the
range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, each fund
values them 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 NAV 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 NAV.
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, each fund 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 using 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 using 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 a $1 share
price, is permitted by a rule adopted by the U.S. Securities and Exchange
Commission (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 with remaining
maturities of 397 calendar days or less. The fund also must invest only in
those U.S. dollar-denominated securities that the manager, in accordance with
procedures adopted by the board, determines present minimal credit risks and
that are rated in one of the top two ratings by U.S. nationally recognized
rating services (or comparable unrated securities), 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 ratings. Securities subject to floating or variable interest
rates with demand features that comply with applicable SEC rules may have
stated maturities in excess of 397 days.
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 $1 per share based on amortized cost. The
extent of any deviation will be examined by the board. If a deviation exceeds
1/2 of 1%, the board will promptly consider what action, if any, will be
initiated. If the board determines that a deviation exists that may result in
material dilution or other unfair results to investors or existing
shareholders, it will take corrective action that it regards as necessary and
appropriate, which may include selling portfolio instruments before maturity
to realize capital gains or losses or to shorten average portfolio maturity,
withholding dividends, redeeming shares in kind, or establishing a net asset
value per share by using available market quotations.
THE UNDERWRITER
- ------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of each fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. Each fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the funds' shares, the net
underwriting discounts and commissions Distributors retained after allowances
to dealers, and the amounts Distributors received in connection with
redemptions or repurchases of shares for the last three fiscal years ended
June 30:
AMOUNT
RECEIVED IN
CONNECTION
WITH
TOTAL AMOUNT REDEMPTIONS
COMMISSIONS RETAINED BY AND
RECEIVED DISTRIBUTORS REPURCHASES
($) ($) ($)
- ------------------------------------------------------------------------------
1999
Insured Fund 5,145,522 345,317 107,014
Intermediate Fund 589,660 81,929 3,973
Money Fund 0 0 0
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
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the funds for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES The Intermediate Fund and each class of
the Insured Fund have separate distribution or "Rule 12b-1" plans. Under each
plan, the funds shall pay or may reimburse Distributors or others for the
expenses of activities that are primarily intended to sell shares of the
class. These expenses may include, among others, distribution or service fees
paid to securities dealers or others who have executed a servicing agreement
with the funds, 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.
The distribution and service (12b-1) fees charged to each class are based
only on the fees attributable to that particular class.
THE CLASS A PLANS. Payments by the Insured and Intermediate Funds under their
Class A plans may not exceed 0.10% per year of Class A's average daily net
assets, payable quarterly. All distribution expenses over this amount will be
borne by those who have incurred them.
In implementing the Class A 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 the fund's Class A shares 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 the fund's Class A shares 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, the fee is a Class A expense. This means that all Class
A 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 A and, as Class A
shares are sold on or after May 1, 1994, will increase over time. Thus, as
the proportion of Class A shares purchased on or after May 1, 1994, increases
in relation to outstanding Class A shares, the expenses attributable to
payments under the plan also will 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 A 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 A plan.
THE CLASS C PLAN. Under the Class C plan, the Insured Fund pays Distributors
up to 0.50% per year of the class's average daily net assets, payable
quarterly, to pay Distributors or others for providing distribution and
related services and bearing certain expenses. All distribution expenses over
this amount will be borne by those who have incurred them. The fund also may
pay a servicing fee of up to 0.15% per year of the class's average daily net
assets, payable quarterly. 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 expenses relating to the Class C plan also are used to pay Distributors
for advancing the commission costs to securities dealers with respect to the
initial sale of Class C shares.
THE CLASS A AND C PLANS. 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
fund shares within the context of Rule 12b-1 under the Investment Company Act
of 1940, as amended, 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 National Association of Securities Dealers, Inc.
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
noninterested members of the fund's board. The plans and any related
agreement may be terminated at any time, without penalty, by vote of a
majority of the noninterested 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 plan for
the Intermediate Fund also may be terminated by any act that constitutes an
assignment of the underwriting agreement with Distributors. Distributors or
any dealer or other firm also may 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 noninterested board members, 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, 1999, Distributors' eligible expenditures
for advertising, printing, payments to underwriters and broker-dealers and
other expenses pursuant to the plans and the amounts the funds paid
Distributors under the plans were:
DISTRIBUTORS' AMOUNT
ELIGIBLE PAID BY THE
EXPENSES ($) FUND ($)
- -----------------------------------------------------------------------------
Insured Fund - Class A 3,010,071 1,622,968
Insured Fund - Class C 814,259 421,449
Intermediate Fund - Class A 311,413 177,024
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.
Performance figures reflect Rule 12b-1 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
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 initial 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 initial sales charge currently in effect.
When considering the average annual total return quotations, you should keep
in mind that the maximum initial sales charge reflected in each quotation is
a one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the fund.
The average annual total returns for the indicated periods ended June 30,
1999, were:
1 YEAR (%) 5 YEARS (%) 10 YEARS (%)
- --------------------------------------------------------------------------
Insured Fund - Class A -1.58 5.57 6.43
SINCE
INCEPTION
1 YEAR (%) (5/1/95) (%)
- --------------------------------------------------------------------------
Insured Fund - Class C 0.15 - 5.58
SINCE
INCEPTION
1 YEAR (%) 5 YEARS (%) (9/21/92) (%)
- --------------------------------------------------------------------------
Intermediate Fund 0.31 6.13 6.00
The following SEC formula was used to calculate these figures:
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 initial sales charge is deducted from the initial
$1,000 purchase, income dividends and capital gain distributions are
reinvested at net asset value, the account was completely redeemed at the end
of each period and the deduction of all applicable charges and fees.
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 returns for the indicated periods ended June 30,
1999, were:
1 YEAR (% 5 YEARS (%) 10 YEARS (%)
- -----------------------------------------------------------------------------
Insured Fund - Class A -1.58 31.15 86.41
SINCE
INCEPTION
1 YEAR (%) (5/1/95) (%)
- -----------------------------------------------------------------------------
Insured Fund - Class C 0.15 - 25.37
SINCE
INCEPTION
1 YEAR (%) 5 YEARS (%) (9/21/92) (%)
- -----------------------------------------------------------------------------
Intermediate Fund 0.31 34.64 48.36
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 a class during the
base period. The yields for the 30-day period ended June 30, 1999, were:
CLASS A (%) CLASS C (%)
- -----------------------------------------------------------------------------
Insured Fund 4.04 3.62
Intermediate Fund 4.18 -
The following SEC formula was used to calculate these figures:
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 Each fund also may 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. 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 yields for the 30-day period ended June 30, 1999, were:
CLASS A (%) CLASS C (%)
- -----------------------------------------------------------------------------
Insured Fund 7.37 6.61
Intermediate Fund 7.63 -
CURRENT DISTRIBUTION RATE Current yield and taxable-equivalent yield, which
are calculated according to a formula prescribed by the SEC, are not
indicative of the amounts which were or will be paid to shareholders. Amounts
paid to shareholders are reflected in the quoted current distribution rate or
taxable-equivalent distribution rate. The current distribution rate is
usually computed by annualizing the dividends paid per share by a class
during a certain period and dividing that amount by the current maximum
offering price. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than interest, if any, and is calculated over a different period of
time. The current distribution rates for the 30-day period ended June 30,
1999, were:
CLASS A (%) CLASS C (%)
- -----------------------------------------------------------------------------
Insured Fund 4.79 4.36
Intermediate Fund 4.47 -
A taxable-equivalent distribution rate shows the taxable distribution rate
equivalent to the 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 rates for the 30-day period ended June 30, 1999, were:
CLASS A (%) CLASS C (%)
- -----------------------------------------------------------------------------
Insured Fund 8.74 7.96
Intermediate Fund 8.16 -
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.
MONEY FUND
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 income dividends 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.
The average annual total returns for the indicated periods ended June 30,
1999, were:
1 YEAR (%) 5 YEARS (%) 10 YEARS (%)
- -----------------------------------------------------------------------------
Money Fund 2.39 2.78 3.11
The following SEC formula was used to calculate these figures:
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
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 with 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 current yield for the seven day period ended June 30,
1999, was 3.01%.
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 effective yield for the
seven day period ended June 30, 1999, was 3.05%.
The following SEC formula was used to calculate this figure:
365/7
Effective yield = [(Base period return + 1) ] - 1
TAXABLE-EQUIVALENT YIELD The fund also may 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 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 based on the fund's
current yield for the seven day period ended June 30, 1999, was 5.49%. The
taxable-equivalent effective yield based on the fund's effective yield for
the seven day period ended June 30, 1999, was 5.57%.
ALL FUNDS
As of June 30, 1999, the combined federal and state income tax rate upon
which the taxable-equivalent yield quotations were based was 45.2%. From time
to time, as any changes to the rate become effective, taxable-equivalent
yield quotations advertised by the funds will be updated to reflect these
changes. The funds expect updates may be necessary as tax rates are changed
by federal and state 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.
OTHER PERFORMANCE QUOTATIONS The Insured and Intermediate Funds also may
quote the performance of shares without a sales charge. Sales literature and
advertising may quote a cumulative total return, average annual total return
and other measures of performance with the substitution of net asset value
for the public offering price.
Each fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. is the parent
company of the advisors and underwriter of the Franklin Templeton Group of
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 also may 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:
o Salomon Brothers Broad Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate and mortgage
bonds.
o Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage
and Yankee bonds.
o IBC Money Fund Report(R)- industry averages for seven day annualized and
compounded yields of taxable, tax-free and government money funds.
o Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.
o Bond Buyer 20 Index - an index of municipal bond yields based upon yields
of 20 general obligation bonds maturing in 20 years.
o 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.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK,
FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines - provide
performance statistics over specified time periods.
o 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.
o 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.
o 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.
o 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.
o 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.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
o 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.
o 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.
o Bank Rate Monitor - a weekly publication that reports various bank
investments such as CD rates, average savings account rates and average
loan rates.
o 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.
o 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 each fund may include a
discussion of certain attributes or benefits to be derived from an investment
in the fund. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or sales material issued by each fund also may discuss or be
based upon information in a recent issue of the Special Report on Tax Freedom
Day published by the Tax Foundation, a Washington, D.C. based nonprofit
research and public education organization. The report illustrates, among
other things, the 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 also may compare each fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of
fluctuation of principal value, a risk generally not present in an investment
in a CD issued by a bank. For example, as the general level of interest rates
rise, the value of 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 fall. 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 any fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by a fund to calculate its figures. In
addition, there can be no assurance that a fund will continue its performance
as compared to these other averages.
MISCELLANEOUS INFORMATION
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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 the funds cannot guarantee that these goals will be met.
The funds are members 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 is one of
the oldest mutual fund organizations and now services more than 4 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 $222 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 106 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 $48 billion in municipal security 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 14, 1999.
Under current tax laws, municipal securities remain one of the few
investments offering the potential for tax-free income. In 1999, 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 1999). 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 also may 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 municipal securities, however, may
fluctuate. This fluctuation will have a direct impact on the net asset value
of the fund's shares.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the fund are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has been
making necessary software changes to help the computer systems that service
the funds and their shareholders to be Year 2000 compliant. After completing
these modifications, comprehensive tests are conducted in one of Resources'
U.S. test labs to verify their effectiveness. Resources continues to seek
reasonable assurances from all major hardware, software or data-services
suppliers that they will be Year 2000 compliant on a timely basis. Resources
is also developing a contingency plan, including identification of those
mission critical systems for which it is practical to develop a contingency
plan. However, in an operation as complex and geographically distributed as
Resources' business, the alternatives to use of normal systems, especially
mission critical systems, or supplies of electricity or long distance voice
and data lines are limited.
DESCRIPTION OF RATINGS
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MUNICIPAL BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (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.
Ca: Municipal bonds rated Ca represent obligations that are speculative to a
high degree. These issues are often in default or have other marked
shortcomings.
C: Municipal bonds rated C are the lowest-rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Con.(-): Municipal bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned in operation experience, (c) rentals 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.
STANDARD & POOR'S CORPORATION (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.
C: This rating is reserved for income bonds on which no interest is being
paid.
D: Debt rated "D" is in default and payment of interest and/or repayment of
principal is in arrears.
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 INVESTORS SERVICE, INC. (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.
CC: Municipal bonds rated CC are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C: Municipal bonds rated C are in imminent default in the payment of interest
or principal.
DDD, DD and D: Municipal bonds rated DDD, DD and D are in default on interest
and/or principal payments. Such bonds are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential for
recovery while D represents the lowest potential for recovery.
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, DDD, DD or D categories.
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.
SHORT-TERM DEBT & COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's commercial
paper ratings, which are also applicable to municipal paper investments, 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 for both short-term debt and commercial
paper, 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, certificates of deposit, medium-term notes, and municipal
and investment notes. The short-term rating places greater emphasis than a
long-term rating on the existence of liquidity necessary to meet the issuer's
obligations in a timely manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. 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.
