<PAGE>
TEMPLETON SMALLER SUPPLEMENT DATED MAY 1, 1995
COMPANIES GROWTH PROSPECTUS -- JANUARY 1, 1995
FUND, INC.
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INTRODUCTION As of May 1, 1995, the Templeton Smaller Companies Growth
Fund, Inc. (the "Fund") offers two classes of shares to its
investors: Templeton Smaller Companies Growth Fund, Inc.--
Class I ("Class I") and Templeton Smaller Companies Growth
Fund, Inc.--Class II ("Class II"). Investors can choose
between Class I shares, which generally bear a higher front-
end sales charge and lower ongoing Rule 12b-1 distribution
fees ("Rule 12b-1 fees"), and Class II shares, which generally
have a lower front-end sales charge and higher ongoing Rule
12b-1 fees. Investors should consider the differences between
the two classes, including the impact of sales charges and
distribution fees, in choosing the more suitable class given
their anticipated investment amount and time horizon. The date
of the Prospectus for the Fund is hereby amended to be May 1,
1995.
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THIS All investment objectives and policies described in the
SUPPLEMENT Prospectus apply equally to both classes of shares in the new
MUST BE READ multiclass structure. Further, all operational procedures
IN apply equally to both classes, unless otherwise specified in
CONJUNCTION the following discussion. See "Deciding Which Class to
WITH THE Purchase" below.
PROSPECTUS
FOR THIS
FUND
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MULTICLASS The Fund has two classes of shares available for investment:
FUND Class I and Class II. All Fund shares outstanding before the
STRUCTURE implementation of the multiclass structure have been
redesignated as Class I shares, and will retain their previous
rights and privileges. See the Prospectus for more details
about Class I shares. Class II shares are explained in detail
in the following discussion. Except as described below, shares
of both classes represent identical interests in the Fund's
investment portfolio.
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- -------------------------------------------------------------------------------
THE NEW APPLICATION FORM INCLUDED WITH THIS SUPPLEMENT MUST BE USED FOR
ALL PURCHASES. DO NOT USE THE APPLICATION FORM INCLUDED IN THE PROSPECTUS.
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May 1, 1995 TL103 STKRB 05/95
<PAGE>
EXPENSE TABLE
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a Shareholder will bear directly or indirectly
in connection with an investment in the Fund. The figures are estimates of the
Fund's expenses for the current fiscal year, restated to reflect current sales
charges and 12b-1 fees for each class.
<TABLE>
<CAPTION>
CLASS I CLASS II
------- --------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage
of Offering Price)....................................... 5.75% 1.00%/1/
Deferred Sales Charge..................................... None/2/ 1.00%/3/
Exchange Fee (per transaction)............................ $5.00/4/ $5.00/4/
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees........................................... 0.75% 0.75%
Rule 12b-1 Fees/5/........................................ 0.24% 1.00%
Other Expenses (audit, legal, business management,
transfer agent and custodian)............................ 0.37% 0.37%
Total Fund Operating Expenses............................. 1.36% 2.12%/1/
</TABLE>
- -------
/1/Although Class II has a lower front-end sales charge than Class I, over time
the higher Rule 12b-1 fee for Class II may cause Shareholders to pay more
for Class II shares than for Class I shares. Given the maximum front-end
sales charge and the rate of Rule 12b-1 fees of each class, it is estimated
that this will take less than six years for Shareholders who maintain total
shares valued at less than $50,000 in the Franklin Templeton Funds.
Shareholders with larger investments in the Franklin Templeton Funds will
reach the cross-over point more quickly.
/2/Class I investments of $1 million or more are not subject to a front-end
sales charge; however, a contingent deferred sales charge of 1%, which has
not been reflected in the Example below, is generally imposed on certain
redemptions within a "contingency period" of 12 months of the calendar month
following such investments. See "How to Sell Shares of the Fund --
Contingent Deferred Sales Charge."
/3/Class II shares redeemed within a "contingency period" of 18 months of the
calendar month following such investments are subject to a 1% contingent
deferred sales charge. See "How to Sell Shares of the Fund -- Contingent
Deferred Sales Charge."
/4/$5.00 fee imposed only on Timing Accounts as described under "Exchange
Privilege" in the Prospectus. All other exchanges are processed without a
fee.
/5/Annual Rule 12b-1 fees may not exceed 0.25% of the Fund's average net assets
attributable to Class I shares and 1.00% of the Fund's average net assets
attributable to Class II shares. Consistent with the National Association of
Securities Dealers, Inc.'s rules, it is possible that the combination of
front-end sales charges and Rule 12b-1 fees could cause long-term
Shareholders to pay more than the economic equivalent of the maximum front-
end sales charges permitted under those same rules.
Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in the Fund. Rather the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of the Prospectus and this Supplement.
EXAMPLE
As required by SEC regulations, the following example illustrates the
expenses, including the maximum front-end sales charge and applicable
contingent deferred sales charge, that apply to a $1,000 investment in the
Fund over various time periods assuming (1) a 5% annual rate of return and (2)
redemption at the end of each time period.
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Class I............................... $71 $98 $128 $212
Class II.............................. $41 $76 $123 $253
</TABLE>
This example is based on the estimated annual operating expenses, including
fees set by contract, shown above and should not be considered a
representation of past or future expenses, which may be more or less than
those shown. The operating expenses are
2
<PAGE>
borne by the Fund and only indirectly by Shareholders as a result of their
investment in the Fund. (See "Management of the Fund" in the Prospectus for a
description of the Fund's expenses.) In addition, federal securities
regulations require the example to assume an annual return of 5%, but the
Fund's actual return may be more or less than 5%.
DECIDING WHICH CLASS TO PURCHASE. Investors should carefully evaluate their
anticipated investment amount and time horizon prior to determining which
class of shares to purchase. Generally, an investor who expects to invest less
than $50,000 in the Franklin Templeton Funds and who expects to make
substantial redemptions within approximately six years or less of investment
should consider purchasing Class II shares. However, the higher annual Rule
12b-1 fees on Class II shares will result in slightly higher operating
expenses and lower income dividends for Class II shares, which will accumulate
over time to outweigh the difference in initial sales charges. For this
reason, Class I shares may be more attractive to long-term investors even if
no sales charge reductions are available to them.
Investors who qualify to purchase Class I shares at reduced sales charges
definitely should consider purchasing Class I shares, especially if they
intend to hold their shares for six years or more. Investors who qualify to
purchase Class I shares at reduced sales charges but who intend to hold their
shares less than six years should evaluate whether it is more economical to
purchase Class I shares through a Letter of Intent or under Cumulative
Quantity Discount or other means rather than purchasing Class II shares.
Investors investing $1 million or more in a single payment and other investors
who qualify to purchase Class I shares at net asset value will be precluded
from purchasing Class II shares. See "How to Buy Shares of the Fund" in the
Prospectus.
Each class represents the same interest in the investment portfolio of the
Fund and has the same rights, except that each class has a different sales
charge, bears the separate expenses of its Rule 12b-1 distribution plan, and
has exclusive voting rights with respect to such plan. The two classes also
have separate exchange privileges.
ALTERNATIVE PURCHASE ARRANGEMENTS. The difference between Class I and Class
II shares lies primarily in their front-end and contingent deferred sales
charges and Rule 12b-1 fees as described below.
A separate Plan of Distribution has been approved and adopted for each class
("Class I Plan" and "Class II Plan," respectively) pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended (the "1940 Act"). The
Rule 12b-1 fees charged to each class will be based solely on the distribution
and servicing fees attributable to that particular class. Any portion of fees
remaining from either plan after distribution to securities dealers up to the
maximum amount permitted under each Plan may be used by the class to reimburse
Franklin Templeton Distributors, Inc. ("FTD") for routine ongoing promotion
and distribution expenses incurred with respect to such class. See "Plan of
Distribution" in the Prospectus for a description of such expenses.
CLASS I. Class I shares are generally subject to a variable sales charge
upon purchase and not subject to any sales charge upon redemption. Class I
shares are subject to Rule 12b-1 fees of up to an annual maximum of 0.25% of
average daily net assets of such shares. With this multiclass structure, Class
I shares have higher front-end sales charges than Class II shares and
comparatively lower Rule 12b-1 fees.
Plan of Distribution. Under the Class I Plan, the Fund will reimburse FTD or
other securities dealers for expenses incurred in the promotion, servicing,
and distribution of Class I Fund shares. (See "Plan of Distribution" in the
Prospectus and "Distribution Plan" in the Statement of Additional Information
("SAI")).
Quantity Discounts and Purchases At Net Asset Value. Class I shares may be
purchased at a reduced front-end sales charge or at net asset value if certain
conditions are met. See "How to Buy Shares of the Fund."
Contingent Deferred Sales Charge. In most circumstances, a contingent
deferred sales charge will not be assessed against redemptions of Class I
shares. A contingent deferred sales charge will be imposed on Class I shares
only if shares valued at $1 million
3
<PAGE>
or more are purchased without a sales charge and are subsequently redeemed
within 12 months of the calendar month following their purchase. See
"Contingent Deferred Sales Charge" under "How to Sell Shares of the Fund" in
this Supplement.
CLASS II. The current public offering price of Class II shares is equal to
the net asset value, plus a front-end sales charge of 1% of the amount
invested. Class II shares are also subject to a contingent deferred sales
charge of 1.0% if shares are redeemed within 18 months of the calendar month
following purchase. In addition, Class II shares are subject to Rule 12b-1
fees of up to a maximum of 1.0% of average daily net assets of such shares.
Class II shares have lower front-end sales charges than Class I shares and
comparatively higher Rule 12b-1 fees.
Purchases of Class II shares are limited to amounts below $1 million. Any
purchases of $1 million or more will automatically be invested in Class I
shares, since that is more beneficial to investors. Such purchases, however,
may be subject to a contingent deferred sales charge. Investors may exceed $1
million in Class II shares by cumulative purchases over a period of time.
Investors who intend to make investments exceeding $1 million, however, should
consider purchasing Class I shares through a Letter of Intent instead of
purchasing Class II shares. See "How to Buy Shares of the Fund" in the
Prospectus for more information.
Plan of Distribution. Class II's operating expenses will generally be higher
than Class I's under the Class II Plan. During the first year following a
purchase of Class II shares, FTD will keep a portion of the Plan fees
attributable to those shares to partially recoup fees FTD pays to securities
dealers. FTD, or its affiliates, may pay, from its own resources, a commission
of up to 1% of the amount invested to securities dealers who initiate and are
responsible for purchases of Class II shares.
Contingent Deferred Sales Charge. Unless a waiver applies, a contingent
deferred sales charge will be imposed on Class II shares redeemed within 18
months of their purchase. See "Contingent Deferred Sales Charges" under "How
to Sell Shares of the Fund" in this Supplement.
MANAGEMENT OF THE FUND
The Board of Directors has carefully reviewed the multiclass structure to
ensure that no material conflict exists between the two classes of shares.
Although the Board does not expect to encounter material conflicts in the
future, the Board will continue to monitor the Fund and will take appropriate
action to resolve such conflicts if any should later arise.
In developing the multiclass structure, the Fund has retained the authority
to establish additional classes of shares. It is the Fund's present intention
to offer only two classes of shares, but new classes may be offered in the
future.
For more information regarding the responsibilities of the Board and the
management of the Fund, please see "Management of the Fund" in the Prospectus.
CLASS II PLAN OF DISTRIBUTION. Under the Class II Plan, the maximum amount
which the Fund is permitted to pay to FTD or others for distribution and
related expenses is 0.75% per annum of Class II shares' average daily net
assets, payable quarterly. All expenses of distribution, marketing and related
services over that amount will be borne by FTD or others who have incurred
them without reimbursement by the Fund. In addition, the Class II Plan
provides for an additional payment by the Fund of up to 0.25% per annum of
Class II shares' average daily net assets as a servicing fee, payable
quarterly. This fee will be used to pay securities dealers or others for,
among other things, assisting in establishing and maintaining customer
accounts and records; assisting with purchase and redemption requests;
receiving and answering correspondence; monitoring dividend payments from the
Fund on behalf of their customers, or similar activities related to furnishing
personal services and/or maintaining Shareholder accounts.
4
<PAGE>
The Class II Plan also covers any payments to or by the Fund, the Investment
Manager, FTD, or other parties on behalf of the Fund, the Investment Manager
or FTD, to the extent such payments are deemed to be for the financing of any
activity primarily intended to result in the sale of Class II shares issued by
the Fund within the context of Rule 12b-1. The payments under the Plan are
included in the maximum operating expenses which may be borne by Class II of
the Fund.
During the first year after the purchase of Class II shares, FTD will keep a
portion of the Plan fees assessed on Class II shares to partially recoup fees
FTD pays to securities dealers.
See the "Plan of Distribution" discussion in the "Management of the Fund"
section in the Prospectus and in the SAI for more information about both Class
I and Class II Plans.
DIVIDENDS AND DISTRIBUTIONS
According to the requirements of the Internal Revenue Code of 1986, as
amended (the "Code"), dividends and capital gains will be calculated and
distributed in the same manner for Class I and Class II shares. The per share
amount of any income dividends will generally differ only to the extent that
each class is subject to different Rule 12b-1 fees.
Unless otherwise requested, income dividends and capital gain distributions,
if any, will be automatically reinvested in the Shareholder's account in the
form of additional shares, valued at the closing net asset value (without a
front-end sales charge) on the ex-dividend date. Dividend and capital gain
distributions are only eligible for reinvestment at net asset value in the
same class of Shares of the Fund or the same class of another of the Franklin
Templeton Funds. See "Dividends and Distributions" in the Prospectus and the
SAI for more information.
HOW TO BUY SHARES OF THE FUND
The following discussion supplements the one included in the Prospectus
under "How to Buy Shares of the Fund."
THE APPLICATION FORM INCLUDED WITH THIS SUPPLEMENT MUST ACCOMPANY ANY PURCHASE
OF SHARES. DO NOT USE THE APPLICATION INCLUDED IN THE PROSPECTUS.
OFFERING PRICE. Shares of both classes of the Fund are offered at their
respective public Offering Prices, which are determined by adding the net
asset value per share plus a front-end sales charge, next computed (1) after
the Shareholder's securities dealer receives the order which is promptly
transmitted to the Fund, or (2) after receipt of an order by mail from the
Shareholder directly in proper form (which generally means a completed
Shareholder Application accompanied by a negotiable check).
CLASS I. The sales charge for Class I shares is a variable percentage of the
Offering Price depending upon the amount of the sale. A description of the
method of calculating net asset value per share is included under the caption
"Net Asset Value" in the Prospectus.
5
<PAGE>
Set forth below is a table of total front-end sales charges or underwriting
commissions and dealer concessions for Class I shares:
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
--------------------------------------------
AS A PERCENTAGE OF AS A PERCENTAGE OF NET PORTION OF TOTAL
AMOUNT OF SALE OFFERING PRICE OF THE ASSET VALUE OF THE OFFERING PRICE
AT OFFERING PRICE SHARES PURCHASED SHARES PURCHASED RETAINED BY DEALERS/1/,/3/
- ----------------- --------------------- ---------------------- --------------------------
<S> <C> <C> <C>
Less than $50,000....... 5.75% 6.10% 5.00%
$50,000 but less than
$100,000............... 4.50% 4.71% 3.75%
$100,000 but less than
$250,000............... 3.50% 3.63% 2.80%
$250,000 but less than
$500,000............... 2.50% 2.56% 2.00%
$500,000 but less than
$1,000,000............. 2.00% 2.04% 1.60%
$1,000,000 or more...... none none (see below)/2/
</TABLE>
- -------
/1/Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
/2/The following commissions will be paid by FTD, out of its own resources, to
securities dealers who initiate and are responsible for purchases of $1
million or more: 1.00% on sales of $1 million but less than $2 million, plus
0.80% on sales of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales of $50 million
but less than $100 million, plus 0.15% on sales of $100 million or more.
Dealer concession breakpoints are reset every 12 months for purposes of
additional purchases.
/3/At the discretion of FTD, all sales charges may at times be allowed to the
securities dealer. If 90% or more of the sales commission is allowed, such
securities dealer may be deemed to be an underwriter as that term is defined
in the Securities Act of 1933, as amended.
No front-end sales charge applies on investments of $1 million or more, but
a contingent deferred sales charge of 1% is imposed on certain redemptions of
all or a portion of investments of $1 million or more within the contingency
period. See "How to Sell Shares of the Fund -- Contingent Deferred Sales
Charge," in this Supplement.
The size of a transaction which determines the applicable sales charge on
the purchase of Class I shares is determined by adding the amount of the
Shareholder's current purchase plus the cost or current value (whichever is
higher) of a Shareholder's existing investment in one or more of the funds in
the Franklin Group of Funds(R) and the Templeton Family of Funds. Included for
these aggregation purposes are (a) the mutual funds in the Franklin Group of
Funds except Franklin Valuemark Funds and Franklin Government Securities Trust
(the "Franklin Funds"), (b) other investment products underwritten by FTD or
its affiliates (although certain investments may not have the same schedule of
sales charges and/or may not be subject to reduction) and (c) the U.S.
registered mutual funds in the Templeton Family of Funds except Templeton
Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton
Variable Products Series Fund (the "Templeton Funds"). (Franklin Funds and
Templeton Funds are collectively referred to as the "Franklin Templeton
Funds.") Sales charge reductions based upon aggregate holdings of (a), (b) and
(c) above ("Franklin Templeton Investments") may be effective only after
notification to FTD that the investment qualifies for a discount.
Other Payments to Securities Dealers. FTD, or one of its affiliates, may
make payments, out of its own resources, of up to 1% of the amount purchased
to securities dealers who initiate and are responsible for purchases made at
net asset value by certain designated retirement plans (excluding IRA and IRA
rollovers), certain non-designated plans, certain trust companies and trust
departments of banks and certain retirement plans of organizations with
collective retirement plan assets of $10 million or more. See definitions
under "Purchases at Net Asset Value," and as set forth in the SAI.
6
<PAGE>
CLASS II. Unlike Class I shares, the front-end sales charges and dealer
concessions for Class II shares do not vary depending on the amount of
purchase. See table below:
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
--------------------------------------------
AS A PERCENTAGE OF AS A PERCENTAGE OF NET PORTION OF THE TOTAL
AMOUNT OF SALE OFFERING PRICE OF THE ASSET VALUE OF THE OFFERING PRICE
AT OFFERING PRICE SHARES PURCHASED SHARES PURCHASED RETAINED BY DEALERS*
- ----------------- --------------------- ---------------------- --------------------
<S> <C> <C> <C>
any amount (less than $1
million)............... 1.00% 1.01% 1.00%
</TABLE>
- -------
* FTD, or one of its affiliates, may make additional payments to the
securities dealer, from its own resources, of up to 1% of the amount
invested. During the first year following a purchase of Class II shares, FTD
will keep a portion of the Rule 12b-1 fees assessed to those shares to
partially recoup fees FTD pays to securities dealers.
Class II shares redeemed within 18 months of their purchase will be assessed
a contingent deferred sales charge of 1.0% on the lesser of the then-current
net asset value or the net asset value of such shares at the time of purchase,
unless such charge is waived as described under "How to Sell Shares of the
Fund -- Contingent Deferred Sales Charge."
The following section, which supersedes that included in the Prospectus,
describes the categories of investors who may purchase Class I shares of the
Fund at net asset value and when Class I and Class II shares may be purchased
at net asset value. The sections in the Prospectus titled "Cumulative Quantity
Discount" and "Group Purchases" only apply to Class I shares. Although sales
charges on Class II shares may not be reduced by a Letter of Intent or
Cumulative Quantity Discount as described under "Cumulative Quantity
Discount," the value of Class II shares owned by an investor may be included
in determining the appropriate sales charges for Class I shares.
PURCHASES AT NET ASSET VALUE. Class I shares may be purchased without the
imposition of either a front-end sales charge ("net asset value") or a
contingent deferred sales charge by (1) officers, trustees, directors and
full-time employees of the Fund, any of the Franklin Templeton Funds, or of
the Investment Manager or its affiliates, and by their spouses and family
members, including any subsequent payments by such parties after cessation of
employment; (2) companies exchanging Shares with or selling assets pursuant to
a merger, acquisition or exchange offer; (3) insurance company separate
accounts for pension plan contracts; (4) accounts managed by the Investment
Manager or its affiliates; (5) shareholders of Templeton Institutional Funds,
Inc. reinvesting redemption proceeds from that fund under an employee benefit
plan qualified under Section 401 of the Internal Revenue Code of 1986, as
amended, in shares of the Fund; (6) certain unit investment trusts and unit
holders of such trusts reinvesting their distributions from the trusts in the
Fund;(7) registered securities dealers and their affiliates, for their
investment account only; and (8) registered personnel and employees of
securities dealers and by their spouses and family members, in accordance with
the internal policies and procedures of the employing securities dealer.
For either Class I or Class II, the same class of shares of the Fund may be
purchased at net asset value by persons who have redeemed, within the previous
120 days, their shares of the Fund or another of the Franklin Templeton Funds
which were purchased with a front-end sales charge or assessed a contingent
deferred sales charge on redemption. If a different class of shares is
purchased, the full front-end sales charge must be paid at the time of
purchase of the new shares. An investor may reinvest an amount not exceeding
the redemption proceeds. While credit will be given for any contingent
deferred sales charge paid on the shares redeemed and subsequently
repurchased, a new contingency period will begin. Shares of the Fund redeemed
in connection with an exchange into another fund (see "Exchange Privilege")
are not considered "redeemed" for this privilege. In order to exercise this
privilege, a written order for the purchase of Shares of the Fund must be
received by the Fund or Franklin Templeton Investor Services, Inc. (the
"Transfer Agent") within 120 days after the redemption. The 120 days, however,
do not begin to run on redemption proceeds placed immediately after redemption
in a Franklin Bank Certificate of Deposit ("CD") until the CD (including any
rollover) matures. Reinvestment at net asset value may also be handled by a
securities dealer or other financial institution, who may charge the
Shareholder a fee for this
7
<PAGE>
service. The redemption is a taxable transaction but reinvestment without a
sales charge may affect the amount of gain or loss recognized and the tax
basis of the shares reinvested. If there has been a loss on the redemption,
the loss may be disallowed if a reinvestment in the same fund is made within a
30-day period. Information regarding the possible tax consequences of such a
reinvestment is included in the tax section of the Prospectus and the SAI.
For either Class I or Class II, the same class of shares of the Fund or of
another of the Franklin Templeton Funds may be purchased at net asset value
and without a contingent deferred sales charge by persons who have received
dividends and capital gain distributions in cash from investments in that
class of shares of the Fund within 120 days of the payment date of such
distribution. To exercise this privilege, a written request to reinvest the
distribution must accompany the purchase order. Additional information may be
obtained from Account Services at 1-800-393-3001. See "General Information --
Dividends and Distributions."
Class I shares may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by investors who have, within
the past 60 days, redeemed an investment in a mutual fund which is not part of
the Franklin Templeton Funds and which charged the investor a contingent
deferred sales charge upon redemption and which has investment objectives
similar to those of the Fund.
Class I shares may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by broker-dealers who have
entered into a supplemental agreement with FTD, or by registered investment
advisors affiliated with such broker-dealers, on behalf of their clients who
are participating in a comprehensive fee program (sometimes known as a wrap
fee program).
Class I shares may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by anyone who has taken a
distribution from an existing retirement plan already invested in the Franklin
Templeton Funds (including former participants of the Franklin Templeton
Profit Sharing 401(k) plan), to the extent of such distribution. In order to
exercise this privilege a written order for the purchase of shares of the Fund
must be received by Franklin Templeton Trust Company, the Fund or the Transfer
Agent, within 120 days after the plan distribution.
Class I shares may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or
city, or any instrumentality, department, authority or agency thereof which
has determined that the Fund is a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any,
of various payments made by the Fund or its Investment Manager on arbitrage
rebate calculations. If an investment by an eligible governmental authority at
net asset value is made through a securities dealer who has executed a dealer
agreement with FTD, FTD or one of its affiliates may make a payment, out of
its own resources, to such securities dealer in an amount not to exceed 0.25%
of the amount invested. Contact Franklin Templeton Institutional Services for
additional information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES. Class I shares may also be
purchased at net asset value and without the imposition of a contingent
deferred sales charge by certain designated retirement plans, including profit
sharing, pension, 401(k) and simplified employee pension plans ("designated
plans"), subject to minimum requirements with respect to number of employees
or amount of purchase, which may be established by FTD. Currently those
criteria require that the employer establishing the plan have 200 or more
employees or that the amount invested or to be invested during the subsequent
13-month period in the Fund or in any of the Franklin Templeton Investments
totals at least $1,000,000. Employee benefit plans not designated above or
qualified under Section 401 of the Code ("non-designated plans") may be
afforded the same privilege if they meet the above requirements as well as the
uniform
8
<PAGE>
criteria for qualified groups previously described under "Group Purchases"
which enable FTD to realize economies of scale in its sales efforts and sales
related expenses.
Class I shares may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trust companies and bank
trust departments for funds over which they exercise exclusive discretionary
investment authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of purchase, which may be established by
FTD. Currently, those criteria require that the amount invested or to be
invested during the subsequent 13-month period in this Fund or any of the
Franklin Templeton Investments must total at least $1,000,000. Orders for such
accounts will be accepted by mail accompanied by a check or by telephone or
other means of electronic data transfer directly from the bank or trust
company, with payment by federal funds received by the close of business on
the next business day following such order.
Class I shares may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trustees or other
fiduciaries purchasing securities for certain retirement plans of
organizations with collective retirement plan assets of $10 million or more,
without regard to where such assets are currently invested.
For a complete understanding of how to buy shares of the Fund, this
Supplement must be read in conjunction with the Prospectus. Refer to the SAI
for further information regarding net asset value purchases of Class I shares.
PURCHASING CLASS I AND CLASS II SHARES. When placing purchase orders,
investors should clearly indicate which class of shares they intend to
purchase. A purchase order that fails to specify a class will automatically be
invested in Class I shares. Purchases of $1 million or more in a single
payment will be invested in Class I shares. There are no conversion features
attached to either class of shares.
Investors who qualify to purchase Class I shares at net asset value should
purchase Class I rather than Class II shares. See the section "Purchases at
Net Asset Value" and "Description of Special Net Asset Value Purchases" above
for a discussion of when shares may be purchased at net asset value.
OTHER PROGRAMS AND PRIVILEGES AVAILABLE TO FUND SHAREHOLDERS
With the exception of Systematic Withdrawal Plans, all programs and
privileges detailed in the Prospectus will remain in effect for the new
multiclass structure.
SYSTEMATIC WITHDRAWAL PLANS. Subject to the requirements outlined in the
Prospectus, a Shareholder may establish a Systematic Withdrawal Plan for his
or her account. With respect to Class I shares, the contingent deferred sales
charge is waived for redemptions through a Systematic Withdrawal Plan set up
prior to February 1, 1995. With respect to Systematic Withdrawal Plans set up
on or after February 1, 1995, the applicable contingent deferred sales charge
is waived for Class I and Class II share redemptions of up to 1% monthly of an
account's net asset value (12% annually, 6% semi-annually, 3% quarterly). For
example, if a Class I account maintained an annual balance of $1,000,000, only
$120,000 could be withdrawn through a once-yearly Systematic Withdrawal Plan
free of charge; any amount over that $120,000 would be assessed a 1% (or
applicable) contingent deferred sales charge. Likewise, if a Class II account
maintained an annual balance of $10,000, only $1,200 could be withdrawn
through a once-yearly Systematic Withdrawal Plan free of charge.
EXCHANGE PRIVILEGE
Shareholders are entitled to exchange their shares for shares of the same
class of other Franklin Templeton Funds which are eligible for sale in the
Shareholder's state of residence and in conformity with such fund's stated
eligibility requirements and investment
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minimums. Some funds, however, may not offer Class II shares. Class I shares
may be exchanged for Class I shares of any Franklin Templeton Funds. Class II
shares may be exchanged for Class II shares of any Franklin Templeton Funds.
No exchanges between different classes of shares will be allowed. A contingent
deferred sales charge will not be imposed on exchanges. If, however, the
exchanged shares were subject to a contingent deferred sales charge in the
original fund purchased and shares are subsequently redeemed within 12 months
(Class I shares) or 18 months (Class II shares) of the calendar month of the
original purchase date, a contingent deferred sales charge will be imposed.
Investors should review the Prospectus of the fund they wish to exchange from
and the fund they wish to exchange into for all specific requirements or
limitations on exercising the exchange privilege, for example, minimum holding
periods or applicable sales charges.
EXCHANGE OF CLASS I SHARES. The contingency period of Class I shares will be
tolled (or stopped) for the period such shares are exchanged into and held in
a Franklin or Templeton money market fund. If a Class I account has shares
subject to a contingent deferred sales charge, Class I shares will be
exchanged into the new account on a "first-in, first-out" basis. See also "How
to Sell Shares of the Fund -- Contingent Deferred Sales Charge."
EXCHANGES OF CLASS II SHARES. When an account is composed of Class II shares
subject to the contingent deferred sales charge, and shares that are not, the
shares will be transferred proportionately into the new fund. Shares received
from reinvestment of dividends and capital gains are referred to as "free
shares," shares which were originally subject to a contingent deferred sales
charge but to which the contingent deferred sales charge no longer applies are
called "matured shares," and shares still subject to the contingent deferred
sales charge are referred to as "CDSC liable shares." CDSC liable shares held
for different periods of time are considered different types of CDSC liable
shares. For instance, if a Shareholder has $1,000 in free shares, $2,000 in
matured shares, and $3,000 in CDSC liable shares, and the Shareholder
exchanges $3,000 into a new fund, $500 will be exchanged from free shares,
$1,000 from matured shares, and $1,500 from CDSC liable shares. Similarly, if
CDSC liable shares have been purchased at different periods, a proportionate
amount will be taken from shares held for each period. If, for example, a
Shareholder holds $1,000 in shares bought 3 months ago, $1,000 bought 6 months
ago, and $1,000 bought 9 months ago, and the Shareholder exchanges $1,500 into
a new fund, $500 from each of these shares will be deemed exchanged into the
new fund.
The only money market fund exchange option available to Class II
Shareholders is the Franklin Templeton Money Fund II ("Money Fund II"), a
series of the Franklin Templeton Money Fund Trust. No drafts (checks) may be
written on Money Fund II accounts, nor may Shareholders purchase shares of
Money Fund II directly. Class II shares exchanged for shares of Money Fund II
will continue to age and a contingent deferred sales charge will be assessed
if CDSC liable shares are redeemed. No other money market funds are available
for Class II Shareholders for exchange purposes. Class I shares may be
exchanged for shares of any of the money market funds in the Franklin
Templeton Funds except Money Fund II. Draft writing privileges and direct
purchases are allowed on these other money market funds as described in their
respective Prospectuses.
To the extent shares are exchanged proportionately, as opposed to another
method, such as first-in first-out, or free-shares followed by CDSC liable
shares, the exchanged shares may, in some instances, be CDSC liable even
though a redemption of such shares, as discussed elsewhere herein, may no
longer be subject to a CDSC. The proportional method is believed by management
to more closely meet and reflect the expectations of Class II Shareholders in
the event shares are redeemed during the contingency period. For federal
income tax purposes, the cost basis of shares redeemed or exchanged is
determined under the Code without regard to the method of transferring shares
chosen by the Fund for purposes of exchanging or redeeming shares.
TRANSFERS. Transfers between identically registered accounts in the same
fund and class are treated as non-monetary and non-taxable events, and are not
subject to a contingent deferred sales charge. The transferred shares will
continue to age from the date of original purchase. Like exchanges, CLASS II
shares will be moved proportionately from each type of shares in the original
account.
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CONVERSION RIGHTS. It is not presently anticipated that Class II shares will
be converted to Class I shares. A Shareholder may, however, sell his Class II
shares and use the proceeds to purchase Class I shares, subject to all
applicable sales charges.
See "Exchange Privilege" in the Prospectus for more information.
HOW TO SELL SHARES OF THE FUND
For a discussion regarding the sale of either class of Fund shares, refer to
the section in the Prospectus titled "How to Sell Shares of the Fund." In
addition, the charges described in this Supplement will also apply to the sale
of all Fund shares.
CONTINGENT DEFERRED SALES CHARGE Class I. In order to recover commissions
paid to securities dealers on investments of $1 million or more, a contingent
deferred sales charge of 1% applies to redemptions of those investments within
the contingency period of 12 months of the calendar month following their
purchase. The charge is 1% of the lesser of the then-current net asset value
of the shares redeemed (exclusive of reinvested dividends and capital gain
distributions) or the net asset value of such shares at the time of purchase,
and is retained by FTD. The contingent deferred sales charge is waived in
certain instances. See below and "Purchases at Net Asset Value" under "How To
Buy Shares of the Fund."
Class II. Class II shares redeemed within the contingency period of 18
months of the calendar month following their purchase will be assessed a
contingent deferred sales charge, unless one of the exceptions described below
applies. The charge is 1% of the lesser of the then-current net asset value of
the shares redeemed (exclusive of reinvested dividends and capital gain
distributions) or the net asset value of such shares at the time of purchase,
and is retained by FTD. The contingent deferred sales charge is waived in
certain instances. See below.
Class I and Class II. In determining if a contingent deferred sales charge
applies, shares not subject to a contingent deferred sales charge are deemed
to be redeemed first, in the following order: (i) shares representing amounts
attributable to capital appreciation of those shares held less than the
contingency period (12 months in the case of Class I shares and 18 months in
the case of Class II shares); (ii) shares purchased with reinvested dividends
and capital gain distributions; and (iii) other shares held longer than the
contingency period; and followed by any shares held less than the contingency
period, on a "first in, first out" basis. For tax purposes, a contingent
deferred sales charge is treated as either a reduction in redemption proceeds
or an adjustment to the cost basis of the shares redeemed.
The contingent deferred sales charge on each class of shares is waived, as
applicable, for: exchanges; any account fees; distributions to participants or
beneficiaries in Franklin Templeton Trust Company individual retirement plan
accounts due to death, disability or attainment of age 59 1/2; tax-free
returns of excess contributions from employee benefit plans; distributions
from employee benefit plans, including those due to plan termination or plan
transfer; redemptions through a Systematic Withdrawal Plan set up for shares
prior to February 1, 1995, and for Systematic Withdrawal Plans set up
thereafter, redemptions of up to 1% monthly of an account's net asset value
(3% quarterly, 6% semiannually or 12% annually); redemptions initiated by the
Fund due to a Shareholder's account falling below the minimum specified
account size; and redemptions following the death of the Shareholder.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that
month and each subsequent month.
Requests for redemptions for a specified dollar amount, unless otherwise
specified, will result in additional shares being redeemed to cover any
applicable contingent deferred sales charge, while requests for redemption of
a specific number of shares will result in the applicable contingent deferred
sales charge being deducted from the total dollar amount redeemed.
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NET ASSET VALUE
The following sentence replaces the first sentence of the first paragraph in
this section; the subsequent paragraph is added to the end of this section.
The net asset value per share of each class of the Fund is determined as of
the scheduled close of trading of the New York Stock Exchange ("Exchange")
(generally 4:00 p.m., New York time) each day that the Exchange is open for
trading.
Each of the Fund's classes will bear, pro-rata, all of the common expenses
of the Fund. The net asset value of all outstanding shares of each class of
the Fund will be computed on a pro-rata basis for each outstanding share based
on the proportionate participation in the Fund represented by the value of
shares of such classes, except that the Class I and Class II shares will bear
the Rule 12b-1 expenses payable under their respective plans. Due to the
specific distribution expenses and other costs that will be allocable to each
class, the dividends paid to each class of the Fund may vary.
TEMPLETON STAR SERVICE
Replace the Section captioned "How to Buy Shares of the Fund -- Templeton
STAR Service" with the following language:
From a touch tone phone, Templeton and Franklin Shareholders may access an
automated system (day or night) which offers the following features.
By calling the Templeton STAR Service, Shareholders may obtain current price
and yield information specific to a Templeton fund, regardless of class, or
Franklin Class II shares; obtain account information, request duplicate
confirmation or year-end statements and money fund checks, if applicable.
By calling the Franklin TeleFACTS system, Class I shareholders may obtain
current price, yield or other performance information specific to a Franklin
fund; process an exchange into an identically registered Franklin account;
obtain account information and request duplicate confirmation or year-end
statements, money fund checks, if applicable, and deposit slips.
Share prices and account information specific to Templeton Class I or II
shares and Franklin Class II shares may also be accessed on TeleFACTS by
Franklin Class I and Class II shareholders.
The STAR Service is accessible by calling 1-800-654-0123. The TeleFACTS
system is accessible by calling 1-800-247-1753. Templeton Class I and Class II
share codes for the Fund, which will be needed to access system information,
are 103 and 203, respectively. The system's automated operator will prompt the
caller with easy to follow step-by-step instructions from the main menu. Other
features may be added in the future.
PERFORMANCE (CLASS II)
Because Class II shares were not offered prior to May 1, 1995, no
performance data is available for these shares. After a sufficient period of
time has passed, Class II performance data as described in the "Performance"
section of the Prospectus will be available.
GENERAL INFORMATION
With the exception of Voting Rights, all rights and privileges detailed
under the discussion of "General Information" will remain in effect as
described in the Prospectus for the new multiclass structure. For a complete
discussion of these rights and privileges, see "General Information" in the
Prospectus.
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VOTING RIGHTS. Shares of each class represent proportionate interests in the
assets of the Fund and have the same voting and other rights and preferences
as the other class of the Fund for matters that affect the Fund as a whole.
For matters that only affect a certain class of the Fund's shares, however,
only Shareholders of that class will be entitled to vote. Therefore, each
class of shares will vote separately on matters (1) affecting only that class,
(2) expressly required to be voted on separately by state law, or (3) required
to be voted on separately by the 1940 Act or the rules adopted thereunder. For
instance, if a change to the Rule 12b-1 plan relating to Class I shares
requires Shareholder approval, only Shareholders of Class I may vote on
changes to the Rule 12b-1 plan affecting that class. Similarly, if a change to
the Rule 12b-1 plan relating to Class II shares requires Shareholder approval,
only Shareholders of Class II may vote on the change to such plan. On the
other hand, if there is a proposed change to the investment objective of the
Fund, this affects all Shareholders, regardless of which class of shares they
hold, and therefore, each share has the same voting rights. For more
information regarding voting rights, see the "Voting Rights" discussion in the
Prospectus under the heading "General Information."
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