FRANKLIN
MICROCAP
VALUE FUND
Franklin Value Investors Trust
PROSPECTUS December 12, 1995
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin MicroCap Value Fund (the "Fund") is a non-diversified, open-end series
of Franklin Value Investors Trust (the "Trust"), a management investment
company. The Fund's investment objective is to seek high total return, of which
capital appreciation and income are components. The Fund seeks to achieve its
objective by investing at least 65% of its total assets in securities of
companies with market capitalization under $100 million at the time of purchase
and which the Fund's investment manager believes possess intrinsic values in
excess of the current market price of such securities. The Fund may invest in
domestic and foreign securities as described under "How Does the Fund Invest Its
Assets?"
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that you should know before investing. After reading
the Prospectus, you should retain it for future reference; it contains
information about the purchase and sale of shares and other items which you will
find useful to have.
A Statement of Additional Information (the "SAI") concerning the Fund, dated
December 12, 1995 as may be amended from time to time, provides a further
discussion of certain areas in this Prospectus and other matters which may be of
interest to you. It has been filed with the Securities and Exchange Commission
("SEC") and is incorporated herein by reference. A copy is available without
charge from the Fund or the Fund's principal underwriter, Franklin/Templeton
Distributors, Inc. ("Distributors"), at the address or telephone number shown
above.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This Prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this Prospectus. Further
information may be obtained from the underwriter.
Contents Page
Expense Table.................... 2
What Is the Franklin
MicroCap Value Fund?............ 3
How Does the Fund Invest Its Assets? 4
What Are the Fund's Potential Risks? 9
Who Manages the Fund?............ 12
What Distributions Might I
Receive from the Fund?.......... 13
How Taxation Affects You and the Fund 15
How Do I Buy Shares?............. 15
What Programs and Privileges Are
Available to Me as a Shareholder? 21
What If My Investment Outlook
Changes? - Exchange Privilege... 23
How Do I Sell Shares?............ 25
Telephone Transactions........... 29
How Are Fund Shares Valued?...... 29
How Do I Get More Information
About My Investment?............ 30
How Does the Fund Measure Performance? 30
General Information.............. 31
Registering Your Account......... 33
Important Notice Regarding
Taxpayer IRS Certifications..... 33
Expense Table
The purpose of this table is to assist you in understanding the various costs
and expenses that you will bear directly or indirectly in connection with an
investment in the Fund. These figures are based on contractual management and
Rule 12b-1 fees and estimates of the other operating expenses of the Fund for
the current fiscal year.
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)
4.50%
Deferred Sales Charge............................................... NONE*
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees..................................................... 0.75%
Rule 12b-1 Fees..................................................... 0.25%**
Other Expenses:
Registration Fees.......................................... 0.10%
Reports to Shareholders.................................... 0.07%
Other Expenses............................................. 0.16%
Total Other Expenses................................................ 0.33%
Total Fund Operating Expenses....................................... 1.33%
*Investments of $1 million or more are not subject to a front-end sales charge;
however, a contingent deferred sales charge of 1% is generally imposed on
certain redemptions within a "contingency period" of 12 months of the calendar
month of such investments. See "How Do I Sell Shares? - Contingent Deferred
Sales Charge."
**Consistent with National Association of Securities Dealers, Inc.'s rules, it
is possible that the combination of front-end sales charges and Rule 12b-1 fees
could cause long-term shareholders to pay more than the economic equivalent of
the maximum front-end sales charges permitted under those same rules.
You should be aware that the above table is not intended to reflect in precise
detail the fees and expenses associated with an investment in the Fund. Rather,
the table has been provided only to assist you in gaining a more complete
understanding of fees, charges and expenses. For a more detailed discussion of
these matters, you should refer to the appropriate sections of this Prospectus.
Example
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge, that apply to a $1,000 investment
in the Fund over various time periods assuming (1) a 5% annual rate of return
and (2) redemption at the end of each time period.
One Year Three Years
$58* $85
*Assumes that a contingent deferred sales charge will not apply.
This example is based on the estimated annual operating expenses shown above,
including fees set by contract, and should not be considered a representation of
future expenses, which may be more or less than those shown. The operating
expenses are borne by the Fund and only indirectly by you as a result of your
investment in the Fund. See "Who Manages the Fund?" 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%.
What Is the Franklin MicroCap Value Fund?
The Fund is a non-diversified, open-end series of the Trust, a management
investment company, commonly called a "mutual fund." The Trust, formerly known
as the Franklin Balance Sheet Investment Fund, was organized as a Massachusetts
business trust on September 11, 1989, and registered with the SEC under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Trust currently
consists of two series, each of which issues a separate series of the Trust's
shares and maintains a totally separate investment portfolio.
The Board of Trustees of the Trust (the "Board") may determine at a future date,
without submitting the matter to shareholders, to offer shares of the Fund in
one or more "classes" to permit the Fund to take advantage of alternative
methods of selling Fund shares. "Classes" of shares represent proportionate
interests in the same portfolio of investment securities but with different
rights, privileges and attributes, as determined by the trustees. Certain funds
in the Franklin Templeton Funds, as that term is defined under "How Do I Buy
Shares?," currently offer their shares in two classes, designated "Class I" and
"Class II." Because the Fund's sales charge structure and plan of distribution
are similar to those of Class I shares, shares of the Fund may be considered
Class I shares for redemption, exchange and other purposes. The Fund also
reserves the right to convert to a master/feeder structure at a future date.
Please see "General Information - Conversion to Master/Feeder Structure."
You may purchase shares of the Fund (minimum investment of $2,500 initially and
$100 thereafter) at the current public offering price. The current public
offering price of the Fund's shares is equal to the net asset value (see "How
Are Fund Shares Valued?" in this Prospectus and the SAI), plus a variable sales
charge not exceeding 4.5% of the offering price depending upon the amount
invested. Please see "How Do I Buy Shares?"
Effective at such time as the Fund's assets total $100 million, no new accounts,
other than retirement plan accounts, will be accepted. If you are a shareholder
of record at that time, however, you will be able to continue to add to your
account through new purchases, including purchases through reinvestment of
dividends or capital gain distributions. The Fund reserves the right to modify
this policy at any time.
How Does the Fund Invest Its Assets?
The investment objective of the Fund is to seek high total return, of which
capital appreciation and income are components. The Fund will seek capital
appreciation primarily by investing in the securities of companies with market
capitalization under $100 million at the time of purchase and which the Fund's
investment manager believes are undervalued in the marketplace. Accordingly, a
focus on balance sheet items will be an important element in the investment
manager's analysis. The Fund will also seek income when consistent with its
objective. The investment objective is a fundamental policy of the Fund and may
not be changed without shareholder approval. The policies used to achieve the
objective are not fundamental, unless otherwise noted, and are subject to change
without shareholder approval. Of course, there is no assurance that the Fund's
objective will be achieved.
Types of Securities the Fund May Purchase
Under normal market conditions, the Fund will invest at least 65% of its total
assets in securities of companies with market capitalization under $100 million
at the time of purchase and which, in the opinion of the investment manager,
possess an opportunity for significant capital appreciation due to intrinsic
values in excess of the current market price of such securities. The securities
of these companies will typically be purchased at prices below the book value of
the company. The investment manager, however, will take into account a variety
of other factors in order to determine whether to purchase, and once purchased,
whether to hold or sell such securities. In addition to book value, the
investment manager may consider the following factors among others: valuable
franchises or other intangibles; ownership of valuable trademarks or trade
names; control of distribution networks or of market share for particular
products; ownership of real estate the value of which is understated; and
underutilized liquidity and other factors that would identify the issuer as a
potential takeover target or turnaround candidate. Investments in the securities
of companies with market capitalization under $100 million may involve special
risks. See "What Are the Fund's Potential Risks? - Small Companies." The Fund
may invest the remainder of its assets, up to 35%, in securities of companies
with similar characteristics but which have market capitalization over $100
million.
The Fund will generally invest in common stocks, although it has no limit on the
percentage of its assets which may be invested in preferred stock or debt
obligations, including securities convertible into common stocks, secured or
unsecured bonds, commercial paper and notes. The mixture of common stocks,
preferred stocks and debt obligations will vary from time to time based upon the
investment manager's assessment as to whether investments in each category will
contribute to meeting the Fund's investment objective.
In anticipation of and during temporary defensive periods or when investments of
the type in which the Fund intends to invest are not available at prices which
the investment manager believes are attractive, the Fund may invest up to 100%
of its total assets in: (1) securities of the U.S. government or its agencies or
instrumentalities which mature in one year or less from the date of purchase,
including U.S. Treasury bills, notes and bonds, as well as certain agency
securities issued by the Government National Mortgage Association, the Federal
Housing Administration and other agencies which may carry guarantees backed by
the full faith and credit of the U.S. government; (2) securities of other U.S.
government agencies or instrumentalities, such as certain securities issued by
the Federal Home Loan Banks and the Student Loan Marketing Association, which
may not be backed by the full faith and credit of the U.S. government but which
are supported by the right of the issuer to borrow from the U.S. government or
by the credit of the issuer; (3) bank obligations, including negotiable or
non-negotiable certificates of deposit (subject to the Fund's 10% limitation on
illiquid securities discussed under "Illiquid Investments" below), letters of
credit and bankers' acceptances, or instruments secured by such obligations,
issued by banks and savings institutions which are subject to regulation by the
U.S. government, its agencies or instrumentalities and which have assets of over
one billion dollars, unless such obligations are guaranteed by a parent bank
which has total assets in excess of five billion dollars; (4) commercial paper
considered by the investment manager to be of high quality and rated within the
two highest rating categories of Standard & Poor's Corporation ("S&P") or
Moody's Investors Service ("Moody's") or, if unrated, issued by a company having
an outstanding debt issue rated at least AA by S&P or Aa by Moody's; and (5)
corporate obligations including, but not limited to, corporate notes, bonds and
debentures considered by the investment manager to be of high quality and rated
within the two highest rating categories by S&P or Moody's. See "Appendix" in
the SAI for a discussion of ratings.
Lower Rated Securities. The Fund may invest up to 25% of its net assets at the
time of purchase in lower rated, fixed-income and convertible securities (those
rated BB or lower by S&P or Ba or lower by Moody's) and unrated securities of
comparable quality, commonly called "junk bonds," which the investment manager
believes possess intrinsic values in excess of the current market prices of such
securities. Lower rated securities in which the Fund may invest include
securities rated D, the lowest rating category of S&P, or unrated securities of
comparable quality. Lower rated securities are considered by S&P, on balance, to
be predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation and
generally involve more credit risk than securities in the higher rating
categories. Debt obligations rated D are in default and the payment of interest
and/or repayment of principal is in arrears. Although the Fund reserves the
right to invest up to 25% of its assets in lower rated securities, it currently
intends to limit such investments to no more than 5% of the Fund's net assets at
the time of purchase. See "What Are the Fund's Potential Risks? - High Yielding,
Fixed-Income Securities" in the SAI for further information concerning the risks
of lower rated securities.
Convertible Securities. The Fund may invest in debt obligations and preferred
stocks that are convertible within a specified period of time into a certain
quantity of the common stock of the same or different issuer. A convertible
security may be called by the issuer but only after a specified date and under
certain circumstances established at the time the security is issued.
Convertible securities provide a fixed-income stream and the opportunity,
through their conversion feature, to participate in any capital appreciation
resulting from a market price advance in the convertible security's underlying
common stock. Holders of a convertible security will have recourse only to the
issuer of the security, which will be either an operating company or an
investment bank.
Because convertible securities have features of both common stock and
fixed-income securities, their value can be influenced by both interest rate and
market movements. As with a fixed-income security, a convertible security tends
to increase in market value when interest rates decline and decrease in value
when interest rates rise. The price of a convertible security is also influenced
by the market value of the security's underlying common stock and tends to
increase as the market value of the underlying stock rises, whereas it tends to
decrease as the market value of the underlying stock declines.
When issued by an operating company, a convertible security tends to be senior
to common stock, but at the same time is often subordinate to other types of
fixed-income securities issued by the respective company. When convertible
securities issued by operating companies are converted, the operating company
typically issues new common stock to the holder of the security. However, if the
security is called by the issuer and the parity price of the convertible
security is less than the call price, the operating company will often pay out
cash instead of common stock. If the security is issued by an investment bank,
the security is an obligation of and is also convertible through such investment
bank.
The convertible debt obligations in which the Fund may invest are subject to the
same rating criteria as the Fund's investments in fixed-income securities.
However, unlike convertible debt obligations, convertible preferred stocks are
equity securities. Like common stocks, preferred stocks are subordinated to all
debt obligations in the event of insolvency, and an issuer's failure to make a
dividend payment is generally not an event of default entitling the preferred
shareholder to take action. Preferred stocks generally have no maturity date and
they pay dividends, rather than interest payments. For more information on
convertible securities, including enhanced convertible securities, please see
the SAI.
Foreign Securities. The Fund may invest in foreign securities, without
restriction, provided such investments are consistent with the Fund's investment
objective and policies. The Fund will ordinarily purchase foreign securities
which are traded in the United States or purchase sponsored or unsponsored
American Depositary Receipts, which are certificates issued by U.S. banks
representing the right to receive securities of a foreign issuer deposited with
that bank or a correspondent bank. The Fund may purchase the securities of
foreign issuers directly in foreign markets, and may purchase the securities of
issuers in developing nations. See "What Are the Fund's Potential Risks? -
Foreign Securities."
Options. When seeking high current income to achieve its investment objective of
high total return, the Fund may write call options on securities, which are
listed on a national securities exchange, and purchase listed call and put
options on securities and securities indices. The Fund may write a call option
only if the option is "covered," which means so long as the Fund is obligated as
the writer of a call option, it will own the underlying security subject to the
call or a call on the same security where the exercise price of the call held is
equal to or less than the exercise price of the call written. The Fund will not
invest in any stock options or stock index options, other than hedging or
covered positions, if the option premiums paid on its open positions exceed 5%
of the value of the Fund's total assets.
An option on a security is a contract that permits the purchaser of the option,
in return for the premium paid, the right to buy a specified security (in the
case of a call option) or to sell a specified security (in the case of a put
option) from or to the writer of the option at a designated price during the
term of the option. Options on securities indices are similar to options on
securities except, rather than the right to purchase or sell particular
securities at a specified price, options on a securities index give the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the underlying stock index is greater than (or less than, in
the case of a put) the exercise price of the option. The cash received is equal
to the difference between the closing price of the index and the exercise price
of the option, expressed in dollars, multiplied by a specified number. Thus,
unlike options on individual securities, all settlements are in cash, and gain
or loss depends on price movements in the stock market generally (or in a
particular industry or segment of the market) rather than on price movements in
individual securities. Transactions in options are generally considered
"derivative securities." The Fund's investment in options will be for portfolio
hedging purposes in an effort to stabilize principal fluctuations to achieve the
Fund's investment objective and not for speculation. For more information about
the Fund's investments in options, please see "What Are the Fund's Potential
Risks? - Options" below and in the SAI and "How Does the Fund Invest Its
Assets?" in the SAI.
The Fund's investment in options and certain securities transactions involving
actual or deemed short sales (discussed below) may be limited by the
requirements of the Internal Revenue Code of 1986, as amended (the "Code") for
qualification as a regulated investment company and are subject to special tax
rules that may affect the amount, timing, and character of distributions to
shareholders. These securities require the application of complex and special
tax rules and elections. For more information, please see "Additional
Information Regarding Taxation" in the SAI.
Other Policies of the Fund
Loans of Portfolio Securities. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors,
provided that such loans do not exceed 25% of the value of the Fund's total
assets at the time of the most recent loan. The borrower must deposit with the
Fund's custodian bank collateral with an initial market value of at least 102%
of the initial market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 100%. Such
collateral shall consist of cash, securities issued by the U.S. Government, its
agencies or instrumentalities, or irrevocable letters of credit. The lending of
securities is a common practice in the securities industry. The Fund may engage
in security loan arrangements with the primary objective of increasing the
Fund's income either through investing the cash collateral in short-term
interest bearing obligations or by receiving a loan premium from the borrower.
Under the securities loan agreement, the Fund continues to be entitled to all
dividends or interest on any loaned securities. As with any extension of credit,
there are risks of delay in recovery and loss of rights in the collateral should
the borrower of the security fail financially.
Repurchase Agreements. The Fund may engage in repurchase transactions in which
the Fund purchases a U.S. government security subject to resale to a bank or
dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Fund in each agreement, with the value of the
underlying security marked-to-market daily to maintain coverage of at least
100%. A default by the seller might cause the Fund to experience a loss or delay
in the liquidation of the collateral securing the repurchase agreement. The Fund
might also incur disposition costs in liquidating the collateral. The Fund,
however, intends to enter into repurchase agreements only with financial
institutions such as broker-dealers and banks which are deemed creditworthy by
the Fund's investment manager. A repurchase agreement is deemed to be a loan by
the Fund under the 1940 Act. The U.S. government security subject to resale (the
collateral) will be held on behalf of the Fund by a custodian approved by the
Board and will be held pursuant to a written agreement.
Borrowing. As a fundamental policy, the Fund may not borrow money, except in the
form of reverse repurchase agreements or from banks in order to meet redemption
requests or for other temporary or emergency purposes in an amount up to 15% of
its total assets (including the amount borrowed). The Fund will not make any
additional investments while any borrowings exceed 5% of its total assets. The
Fund may also not mortgage or pledge any of its assets, except to secure
borrowings for temporary or emergency purposes and permissible options, short
selling or other hedging transactions.
Short-Selling. The Fund may make short sales, which are transactions in which
the Fund sells a security it does not own in anticipation of a decline in the
market value of that security. The security sold must be listed on a national
exchange. To complete the transaction, the Fund must borrow the security to make
delivery to the buyer. The Fund is then obligated to replace the security
borrowed by purchasing it at the market price at the time of replacement. Until
the security is replaced, the Fund must pay the lender any dividends or interest
which accrue during the period of the loan. To borrow the security, the Fund may
also be required to pay a premium, which would increase the cost of the security
sold. The proceeds of the short sale will be retained by the broker, to the
extent necessary to meet margin requirements, until the short position is closed
out.
The Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security and will realize a gain if the security
declines in price between those same dates. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of any premium,
dividends or interest the Fund is required to pay in connection with the short
sale.
No securities will be sold short if, after the sale, the total market value of
all the Fund's open short positions would exceed 25% of the value of the Fund's
net assets. In addition, short sales of the securities of any one issuer may not
exceed the lesser of 2% of the Fund's net assets or 2% of the securities of any
class of the issuer.
The Fund will place in a segregated account with its custodian bank an amount of
cash or U.S. government securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short and
(b) any cash or U.S. government securities required to be deposited as
collateral with the broker in connection with the short sale (not including the
proceeds from the short sale). The segregated account will be marked-to-market
daily and at no time will the amount deposited in the segregated account and
with the broker as collateral be less than the market value of the securities at
the time they were sold short.
In addition to the short sales discussed above, the Fund may also make short
sales "against the box," which occurs when a security identical to one owned by
the Fund is borrowed and sold short. The Fund at no time will have more than 15%
of the value of its net assets in deposits on short sales against the box.
Illiquid Investments. It is the policy of the Fund that illiquid securities
(securities that cannot be disposed of within seven days in the normal course of
business at approximately the amount at which the Fund has valued the securities
and securities with legal or contractual restrictions on resale) may not
constitute, at the time of purchase, more than 10% of the value of the total net
assets of the Fund.
Portfolio Turnover. The Fund anticipates that its annual portfolio turnover rate
generally will not exceed 50% but this rate should not be construed as a
limiting factor in the operation of the Fund's portfolio.
The Fund is subject to a number of additional investment restrictions, some of
which may be changed only with the approval of shareholders, which limit its
activities to some extent. For a list of these restrictions and more information
concerning the policies discussed herein, please see "How Does the Fund Invest
Its Assets?" and "Investment Restrictions" in the SAI.
How You Participate in
the Results of the Fund's Activities
The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
you own will increase. If the securities owned by the Fund decrease in value,
the value of your shares will also decline. In this way, you participate in any
change in the value of the securities owned by the Fund.
In addition to the factors which affect the value of individual securities, as
described in the preceding sections, you may anticipate that the value of Fund
shares will fluctuate with movements in the broader equity and bond markets.
To the extent the Fund's investments consist of debt securities, changes in the
prevailing interest rates in any of the countries in which the Fund is invested
will likely affect the value of the Fund's portfolio and thus its share price.
Increased rates of interest which frequently accompany higher inflation and/or a
growing economy are likely to have a negative effect on the value of Fund
shares. To the extent the Fund's investments consist of common stocks, a decline
in the stock market of any country in which the Fund is invested may also be
reflected in declines in the Fund's share price. Changes in currency valuations
will also affect the price of Fund shares. History reflects both increases and
decreases in interest rates and in the valuation of the market and these may
reoccur unpredictably in the future.
What Are the Fund's Potential Risks?
An investment in the Fund involves certain speculative considerations and may
involve a higher degree of risk than an investment in shares of more traditional
open-end, diversified investment companies. The Fund is designed for long-term
investors, not as a trading vehicle, and is not intended to present a complete
investment program. You should consider your individual investment objectives,
as well as your other investments, when deciding whether to purchase shares of
the Fund.
The Fund is non-diversified under the federal securities laws. As a
non-diversified Fund, there is no restriction under the 1940 Act on the
percentage of the Fund's assets that may be invested in the securities of any
one issuer. The Fund, however, intends to comply with the diversification and
other requirements of the Code applicable to regulated investment companies,
such as the Fund, so that it will not be subject to U.S. federal income tax on
income and capital gain distributions to shareholders. Accordingly, the Fund
will not purchase securities if, as a result, more than 25% of its total assets
would be invested in the securities of any one issuer and, with respect to 50%
of its total assets, more than 5% would be invested in the securities of any one
issuer or more than 10% would be invested in the outstanding voting securities
of any one issuer. These limitations do not apply to investments in securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities.
To the extent the Fund is not fully diversified, it may be more susceptible than
a fully diversified fund to adverse economic, political or regulatory
developments affecting a single issuer.
Small Companies. The Fund may invest in companies which have relatively small
revenues, limited product lines, and a small share of the market for their
products or services. Small companies may lack depth of management, they may be
unable to internally generate funds necessary for growth or potential
development or to generate such funds through external financing on favorable
terms, and they may be developing or marketing new products or services for
which markets are not yet established and may never become established. Due to
these and other factors, small companies may suffer significant losses, as well
as realize substantial growth.
Historically, small capitalization stocks have been more volatile than larger
capitalization stocks and are therefore more speculative than investments in
larger companies. Among the reasons for the greater price volatility are the
less certain growth prospects of smaller firms, the lower degree of liquidity in
the markets for such stocks, and the greater sensitivity of small companies to
changing economic conditions. Besides exhibiting greater volatility, small
company stocks may, to a degree, fluctuate independently of larger company
stocks. Small company stocks may decline in price as large company stocks rise,
or rise in price as large company stocks decline. You should therefore expect
that the value of the Fund's shares may be more volatile than the shares of a
fund that invests in larger capitalization stocks. The Fund should not be
considered suitable if you are unable or unwilling to assume the risks of loss
inherent in investments in small companies.
Foreign Securities. Investments in the securities of companies organized outside
the U.S. or whose securities are principally traded outside the U.S. ("foreign
issuers") may offer potential benefits not available from investments solely in
securities of U.S. issuers. Such benefits may include the opportunity to invest
in foreign issuers that appear, in the opinion of the investment manager, to
offer more potential for long-term capital appreciation or current earnings than
investments in U.S. issuers, the opportunity to invest in foreign countries with
economic policies or business cycles different from those of the U.S. and the
opportunity to reduce fluctuations in portfolio value by taking advantage of
foreign securities markets that do not necessarily move in a manner parallel to
U.S. markets.
Investments in securities of foreign issuers involve significant risks,
including possible losses, that are not typically associated with investments in
securities of U.S. issuers. These risks include political, social or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of the imposition of exchange
controls, expropriation, limits on removal of currency or other assets,
nationalization of assets, foreign withholding and income taxation and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Changes in government administrations and economic or
monetary policies in the U.S. or abroad, changes in circumstances surrounding
dealings between nations, and changes in currency convertibility or exchange
rates could result in investment losses for the Fund. In addition, public
information may not be as readily available for a foreign company as it is for a
U.S. domiciled company, foreign companies are generally not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to U.S. companies, and there is usually less government regulation of
securities exchanges, brokers and listed companies. Confiscatory taxation or
diplomatic developments could also affect these investments.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with applicable U.S. and foreign currency
restrictions and other laws limiting the amount and type of foreign investments.
The Fund may purchase securities in any foreign country, developed or
developing, but investments will not be made in any securities issued without
stock certificates or comparable stock documents.
Foreign securities may be subject to greater fluctuations in price than U.S.
securities. The markets on which such securities trade may also have less volume
and liquidity. Securities acquired by the Fund outside the U.S. and which are
publicly traded in the U.S. or on a foreign securities exchange or in a foreign
securities market will not be considered illiquid so long as the Fund acquires
and holds the security with the intention of reselling the security in the
foreign trading market, the Fund reasonably believes it can readily dispose of
the security for cash in the U.S. or foreign market, and current market
quotations are readily available.
You should carefully consider the substantial risks involved in investing in
securities of foreign issuers, risks that are often heightened for investments
in developing markets. For example, the small size, inexperience and limited
volume of trading on securities markets in certain developing countries may make
the Fund's investments in developing countries illiquid and more volatile than
investments in more developed countries, and the Fund may be required to
establish special custody or other arrangements before making certain
investments in such countries. The laws of some foreign countries may also limit
the ability of the Fund to invest in securities of certain issuers located in
those countries.
Options. The purchase and sale of stock options and stock index options,
including the writing of covered call options, involve risks different from
those involved with direct investments in securities. A liquid secondary market
for any particular option may not be available when a position is sought to be
closed and the inability to close a position may have an adverse impact on the
Fund's ability to effectively hedge securities. In addition, there may be an
imperfect correlation between movements in the securities on which an option
contract is based and movements in the securities in the Fund's portfolio.
Successful use of option contracts is further dependent on the investment
manager's ability to correctly predict movements in the securities markets and
no assurance can be given that the manager's judgment will be correct. In
addition, by writing covered call options, the Fund gives up the opportunity to
profit from any price increase in the underlying security above the option
exercise price while the option is in effect.
For more information on the potential risks of the Fund, please see "What Are
the Fund's Potential Risks?" in the SAI.
Who Manages the Fund?
The Board has the primary responsibility for the overall management of the Fund
and for electing the officers of the Fund who are responsible for administering
its day-to-day operations.
Franklin Advisers, Inc. ("Advisers" or "Manager") serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin Resources,
Inc. ("Resources"), a publicly owned holding company, the principal shareholders
of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its subsidiaries (the "Franklin Templeton Group"). Advisers acts as
investment manager or administrator to 34 U.S. registered investment companies
(116 separate series) with aggregate assets of over $77 billion.
The team responsible for the day-to-day management of the Fund's portfolio since
its inception is:
William Lippman
Portfolio Manager of Advisers
Mr. Lippman holds a bachelor of business administration degree from City College
New York and a master's degree in business administration from the Graduate
School of Business Administration of New York University. He has been with
Advisers since 1988.
Bruce C. Baughman
Portfolio Manager of Advisers
Mr. Baughman holds a bachelor of arts degree from Stanford University and a
master of science degree in accounting from New York University. He has been
with Advisers since 1988.
Margaret McGee
Portfolio Manager of Advisers
Ms. McGee holds a bachelor of arts degree from William Paterson College. She has
been with Advisers since 1988.
Pursuant to the management agreement with the Fund, the Manager supervises and
implements the Fund's investment activities and provides certain administrative
services and facilities which are necessary to conduct the Fund's business. The
Manager performs similar services for other funds and there may be times when
the actions taken with respect to the Fund's portfolio will differ from those
taken by the Manager on behalf of other funds. Neither the Manager (including
its affiliates) nor its officers, directors or employees nor the officers and
trustees of the Fund are prohibited from investing in securities held by the
Fund or other funds which are managed or administered by the Manager to the
extent such transactions comply with the Fund's Code of Ethics. Please see
"Investment Advisory and Other Services" and "General Information" in the SAI
for further information on securities transactions and a summary of the Fund's
Code of Ethics.
The Fund is responsible for its own operating expenses including, but not
limited to, the Manager's fee; taxes, if any; custodian, legal and auditing
fees; fees and expenses of trustees who are not members of, affiliated with, or
interested persons of the Manager; salaries of any personnel not affiliated with
the Manager; insurance premiums; trade association dues; expenses of obtaining
quotations for calculating the value of the Fund's net assets; and printing and
other expenses which are not expressly assumed by the Manager.
Under the management agreement, the Fund is obligated to pay the Manager a fee
computed daily and paid monthly at the annual rate of 0.75% of the Fund's
average daily net assets. The management fee is higher than the management fees
paid by most mutual funds because of the additional research required for
investments in companies with low market capitalization, which are not widely
followed. The Board, however, believes the Fund's management fee is comparable
to fees paid by other funds having a similar investment objective and policies.
The management agreement specifies that the management fee will be reduced to
the extent necessary to comply with the most stringent limits on the expenses
which may be borne by the Fund as prescribed by any state in which the Fund's
shares are offered for sale. Currently, the most restrictive of such provisions
limits a fund's allowable expenses as a percentage of its average net assets for
each fiscal year to 2.5% of the first $30 million in assets, 2% of the next $70
million, and 1.5% of assets in excess of $100 million.
Among the responsibilities of the Manager under the management agreement is the
selection of brokers and dealers through whom transactions in the Fund's
portfolio securities will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more than one broker is
able to provide the best execution, the Manager will consider the furnishing of
quotations and of other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of shares of the Fund,
as factors in selecting a broker. Further information is included under "How
Does the Fund Purchase Securities For Its Portfolio?" in the SAI.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent"), in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
Plan of Distribution
A plan of distribution has been approved and adopted for the Fund (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act. The maximum amount which may be paid
under the Plan is 0.25% per annum of the average daily net assets of the Fund,
payable on a quarterly basis. The fees payable under the Plan will be used
primarily to pay Distributors or others who have executed a servicing agreement
with the Fund, Distributors or its affiliates a service fee to reimburse such
parties for personal services provided to shareholders of the Fund and/or the
maintenance of shareholder accounts. To the extent authorized by the Board, the
fees payable under the Plan may be used to reimburse Distributors or others in
the promotion and distribution of Fund shares.
The payments under the Plan are included in the maximum operating expenses which
may be borne by the Fund. For more information, please see "The Fund's
Underwriter" in the SAI.
What Distributions Might I Receive from the Fund?
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income in the form of dividends, interest
and other income derived from its investments. This income, less the expenses
incurred in the Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of dividends paid per
share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed net capital gains from the prior fiscal year. The Fund may
make more than one distribution derived from net short-term and net long-term
capital gains in any year or adjust the timing of these distributions for
operational or other reasons.
Distribution Date
Although subject to change by the Board without prior notice to or approval by
shareholders, the Fund's current policy is to declare income dividends
quarterly, payable in March, June, September and December, for shareholders of
record on the first business day preceding the 15th of the month, payable on or
about the last business day of that month.
The amount of income dividend payments by the Fund is dependent upon the amount
of net income received by the Fund from its portfolio holdings, is not
guaranteed and is subject to the discretion of the Board. Fund shares are quoted
ex-dividend on the first business day following the record date (generally the
15th day of the month or prior business day depending on the record date.) The
Fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
In order to be entitled to a dividend, you must have acquired Fund shares prior
to the close of business on the record date. If you are considering purchasing
Fund shares shortly before the record date of a distribution, you should be
aware that because the value of the Fund's shares is based directly on the
amount of its net assets, rather than on the principle of supply and demand, any
distribution of income or capital gain will result in a decrease in the value of
the Fund's shares equal to the amount of the distribution. While a dividend or
capital gain distribution received shortly after purchasing shares represents,
in effect, a return of a portion of your investment, it may be taxable as
dividend income or capital gain.
Distribution Options
You may choose to receive your distributions from the Fund in any of these ways:
1. Purchase additional shares of the Fund - You may purchase additional shares
of the Fund (without a sales charge or imposition of a contingent deferred sales
charge) by reinvesting capital gain distributions, or both dividend and capital
gain distributions. This is a convenient way to accumulate additional shares and
maintain or increase your earnings base.
2. Purchase shares of other Franklin Templeton Funds - You may direct your
distributions to purchase the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a contingent deferred sales
charge). Many shareholders find this a convenient way to diversify their
investments.
3. Receive distributions in cash - You may choose to receive dividends, or both
dividend and capital gain distributions in cash. You may have the money sent
directly to you, to another person, or to a checking account. If you choose to
send the money to a checking account, please see "Electronic Fund Transfers"
under "What Programs and Privileges Are Available to Me as a Shareholder?"
To select one of these options, please complete sections 6 and 7 of the
Shareholder Application included with this Prospectus or tell your investment
representative which option you prefer. If no option is selected, dividend and
capital gain distributions will be automatically reinvested in the Fund. You may
change the distribution option selected at any time by notifying the Fund by
mail or by telephone. Please allow at least seven days prior to the record date
for the Fund to process the new option.
How Taxation Affects You and the Fund
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For additional information on tax matters
relating to the Fund and its shareholders, see "Additional Information Regarding
Taxation" in the SAI.
The Fund intends to qualify and elect to be treated as a regulated investment
company under Subchapter M of the Code. By distributing all of its income and
meeting certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will not be liable for federal income or
excise taxes.
For federal income tax purposes, any income dividends which you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or a loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to such shares.
Corporate shareholders should note that dividends paid by the Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividends-received deduction. For example, any interest income and net
short-term capital gain (in excess of any net long-term capital loss or capital
loss carryover) included in investment company taxable income and distributed by
the Fund as a dividend will not qualify for the dividends-received deduction.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid, and will promptly after the close of each calendar year
advise you of the tax status for federal income tax purposes of such dividends
and distributions.
If you are not a U.S. person for purposes of federal income taxation you should
consult with your financial or tax advisors regarding the applicability of U.S.
withholding or other taxes on distributions received by you from the Fund and
the application of foreign tax laws to these distributions.
You should consult your tax advisors with respect to the applicability of state
and local intangible property or income taxes to your shares in the Fund and to
distributions and redemption proceeds received from the Fund.
How Do I Buy Shares?
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors. The use of the term "securities dealer"
shall include other financial institutions which, either directly or through
affiliates, have an agreement with Distributors to handle customer orders and
accounts with the Fund. Such reference, however, is for convenience only and
does not indicate a legal conclusion of capacity. The minimum initial investment
is $2,500 and subsequent investments must be $100 or more. These minimums may be
waived when shares are purchased through retirement plans established by the
Franklin Templeton Group. The Fund and Distributors reserve the right to refuse
any order for the purchase of shares. The Fund currently does not permit
investment by market timing or allocation services ("Timing Accounts"), which
generally include accounts administered so as to buy or sell shares based upon
certain predetermined market indicators.
Limited Offering
Effective when the Fund's assets total $100 million, no new accounts, other than
retirement plan accounts, will be accepted. If you are a shareholder of record
at that time, however, you will be able to continue to add to your account
through new purchases, including purchases through reinvestment of dividends or
capital gain distributions.
Purchase Price of Fund Shares
Shares of the Fund are offered at the public offering price, which is determined
by adding the net asset value per share plus a front-end sales charge, next
computed (1) after your securities dealer receives the order which is promptly
transmitted to the Fund or (2) after receipt of an order by mail from you
directly in proper form (which generally means a completed Shareholder
Application accompanied by a negotiable check). The sales charge is a variable
percentage of the offering price depending upon the amount of the sale. The
offering price will be calculated to two decimal places using standard rounding
criteria. A description of the method of calculating net asset value per share
is included under "How Are Fund Shares Valued?"
Set forth below is a table showing front-end sales charges and dealer
concessions.
Total Sales Charge
As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount as a Percentage
at Offering Price of Offering Price Invested of Offering Price*
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 or more None None (see below)**
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. At the discretion of Distributors,
all sales charges may at times be allowed to the securities dealer. A securities
dealer who receives 90% or more of the sales commission may be deemed to be an
underwriter under the Securities Act of 1933, as amended.
**Distributors will pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of $1 million
or more: 1% 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 or more. Dealer
concession breakpoints are reset every 12 months for purposes of additional
purchases.
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 Do I Sell Shares? - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of your current
purchase plus the cost or current value (whichever is higher) of your existing
investments in one or more of the funds in the Franklin Group of Funds(R) and
the Templeton Group 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 Distributors or its affiliates, and (c) the
U.S. registered mutual funds in the Templeton Group 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
Fund(s)." Sales charge reductions based upon aggregate holdings of (a), (b) and
(c) above ("Franklin Templeton Investments") may be effective only after
notification to Distributors that the investment qualifies for a discount.
Other Payments to Securities Dealers. Either Distributors 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
"Description of Special Net Asset Value Purchases" below and "How Do I Buy and
Sell Shares?" in the SAI.
Either Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with sales
of shares of the Franklin Templeton Funds. Compensation may include financial
assistance to securities dealers and payments made in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising, sales campaigns and/or shareholder services and programs
regarding one or more of the Franklin Templeton Funds and other dealer-sponsored
programs or events. In some instances this compensation may be made available
only to certain securities dealers whose representatives have sold or are
expected to sell significant amounts of shares of the Franklin Templeton Funds.
Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. Securities dealers may not
use sales of the Fund's shares to qualify for this compensation to the extent
such may be prohibited by the laws of any state or any self-regulatory agency,
such as the National Association of Securities Dealers, Inc. None of the
aforementioned additional compensation is paid for by the Fund or its
shareholders.
Additional terms concerning the offering of the Fund's shares are included in
the SAI under "How Do I Buy and Sell Shares?".
Certain officers and trustees of the Fund are also affiliated with Distributors.
A detailed description is included under "Officers and Trustees" in the SAI.
Quantity Discounts in Sales Charges
Shares may be purchased under a variety of plans which provide for a reduced
sales charge. To be certain to obtain the reduction of the sales charge, you or
your securities dealer should notify Distributors at the time of each purchase
of shares which qualifies for the reduction. In determining whether a purchase
qualifies for a discount, an investment in any of the Franklin Templeton
Investments may be combined with those of your spouse, children under the age of
21 and grandchildren under the age of 21. The value of Class II shares you own
may also be included for this purpose.
In addition, an investment in the Fund may qualify for a reduction in the sales
charge under the following programs:
1. Rights of Accumulation. The cost or current value (whichever is higher) of
existing investments in the Franklin Templeton Investments may be combined with
the amount of the current purchase in determining the sales charge to be paid.
2. Letter of Intent. You may immediately qualify for a reduced sales charge on a
purchase of shares of the Fund by completing the Letter of Intent section of the
Shareholder Application (the "Letter"). By completing the Letter, you (i)
express an intention to invest during the next 13 months a specified amount
which, if made at one time, would qualify for a reduced sales charge, (ii) grant
to Distributors a security interest in the reserved shares discussed below, and
(iii) irrevocably appoint Distributors as attorney-in-fact with full power of
substitution to surrender for redemption any or all shares for the purpose of
paying any additional sales charge due. You or your securities dealer must
inform Investor Services or Distributors that this Letter is in effect each time
a purchase is made.
You acknowledge and agree to the following provisions by completing the Letter
of Intent section of the Shareholder Application: Five percent (5%) of the
amount of the total intended purchase will be reserved in shares of the Fund,
registered in your name, to assure that the full applicable sales charge will be
paid if the intended purchase is not completed. The reserved shares will be
included in the total shares owned as reflected on periodic statements. Income
and capital gain distributions on the reserved shares will be paid as you have
directed. You will not be able to liquidate the reserved shares until the Letter
has been completed or the higher sales charge paid. This policy of reserving
shares does not apply to certain benefit plans described under "Description of
Special Net Asset Value Purchases." For more information, see "How Do I Buy and
Sell Shares?" in the SAI.
The value of Class II shares you own may be included in determining a reduced
sales charge to be paid on shares of the Fund pursuant to the Letter of Intent
and Rights of Accumulation programs.
Group Purchases
If you are a member of a qualified group you may purchase shares of the Fund at
the reduced sales charge applicable to the group as a whole. The sales charge is
based upon the aggregate dollar value of shares previously purchased and still
owned by the members of the group, plus the amount of the current purchase. For
example, if members of the group had previously invested and still held $80,000
of Fund shares and now were investing $25,000, the sales charge would be 3.75%.
Information concerning the current sales charge applicable to a group may be
obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount, and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, agree to include
sales and other materials related to the Fund in its publications and mailings
to members at reduced or no cost to Distributors, and seek to arrange for
payroll deduction or other bulk transmission of investments to the Fund.
If you select a payroll deduction plan, subsequent investments will be automatic
and will continue until such time as you notify the Fund and your employer to
discontinue further investments. Due to the varying procedures used to prepare,
process and forward the payroll deduction information to the Fund, there may be
a delay between the time of the payroll deduction and the time the money reaches
the Fund. The investment in the Fund will be made at the offering price per
share determined on the day that both the check and payroll deduction data are
received in required form by the Fund.
Purchases at Net Asset Value
Shares of the Fund may be purchased without the imposition of 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 Franklin Templeton Group, and by their
spouses and family members, including subsequent investments made by such
parties after cessation of employment; (2) companies exchanging shares or
selling assets pursuant to a merger, acquisition or exchange offer; (3) accounts
managed by the Franklin Templeton Group; (4) certain unit investment trusts and
unit holders of such trusts reinvesting their distributions from the trusts in
the Fund; (5) registered securities dealers and their affiliates, for their
investment account only; (6) current employees of securities dealers and their
affiliates and by their family members, in accordance with the internal policies
and procedures of the employing securities dealer and affiliate; (7) insurance
company separate accounts for pension plan contracts; and (8) shareholders of
Templeton Institutional Funds, Inc. reinvesting redemption proceeds from that
fund under an employee benefit plan qualified under Section 401 of the Code, in
shares of the Fund.
Shares of the Fund may be purchased at net asset value and without a contingent
deferred sales charge by persons who have received dividends and capital gain
distributions from investments in the Fund or another Franklin Templeton Fund
within 365 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 Shareholder Services
at 1-800/632-2301. See "Distribution Options" under "What Distributions Might I
Receive from the Fund?"
Shares of the Fund 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 was subject to a front-end sales charge
or a contingent deferred sales charge and which has an investment objective
similar to that of the Fund.
Shares of the Fund 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 Distributors, 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).
Shares of the Fund 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 "Trust Company"), the Fund or
Investor Services within 365 days after the plan distribution.
Shares of the Fund 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 the 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. In connection with investments by eligible governmental
authorities at net asset value made through a securities dealer who has executed
a dealer agreement with Distributors, either Distributors 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 the
Franklin Templeton Institutional Services Department for additional information.
Description of Special Net Asset Value Purchases
Shares of the Fund may 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 Distributors. 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 criteria for qualified groups
previously described under "Group Purchases," which enable Distributors to
realize economies of scale in its sales efforts and sales related expenses.
Shares of the Fund 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 the amount to be purchased, which may be
established by Distributors. Currently, those criteria require that the amount
invested or to be invested during the subsequent 13-month period in the 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.
Shares of the Fund 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.
Please see "How Do I Buy and Sell Shares?" in the SAI for further information
regarding net asset value purchases.
How Do I Buy Shares in Connection with
Tax-Deferred Retirement Plans?
Shares of the Fund may be used for individual or employer-sponsored retirement
plans involving tax-deferred investments. The Fund may be used as an investment
vehicle for an existing retirement plan, or Trust Company may provide the plan
documents and serve as custodian or trustee. A plan document must be adopted in
order for a retirement plan to be in existence.
Brochures for Trust Company plans contain important information regarding
eligibility, contribution and deferral limits and distribution requirements.
Please note that an application other than the one contained in this Prospectus
must be used to establish a retirement plan account with Trust Company. To
obtain a retirement plan brochure or application, call 1-800/DIAL BEN
(1-800/342-5236).
Please see "How Do I Sell Shares?" for specific information regarding
redemptions from retirement plan accounts. Specific forms are required to be
completed for distributions from Trust Company retirement plans.
Individuals and plan sponsors should consult with legal, tax or benefits and
pension plan consultants before choosing a retirement plan. In addition,
retirement plan investors should consider consulting their investment
representatives or advisers concerning investment decisions within their plans.
General
Securities laws of states in which the Fund's shares are offered for sale may
differ from federal law, and banks and financial institutions selling Fund
shares may be required to register as dealers pursuant to state law.
What Programs and Privileges
Are Available to Me as a Shareholder?
Certain of the programs and privileges described in this section may not be
available directly from the Fund if your shares are held, of record, by a
financial institution or in a "street name" account or networked account through
the National Securities Clearing Corporation ("NSCC") (see "Registering Your
Account" in this Prospectus).
Share Certificates
Shares from an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in your name on the books of the Fund, without the
issuance of a share certificate. Maintaining shares in uncertificated form (also
known as "plan balance") minimizes the risk of loss or theft of a share
certificate. A lost, stolen or destroyed certificate cannot be replaced without
obtaining a sufficient indemnity bond. The cost of such a bond, which is
generally borne by you, can be 2% or more of the value of the lost, stolen or
destroyed certificate. A certificate will be issued if requested by you or by
your securities dealer.
Confirmations
A confirmation statement will be sent to you quarterly to reflect the dividends
reinvested during the period and after each other transaction which affects your
account. This statement will also show the total number of shares you own,
including the number of shares in "plan balance" for your account.
Automatic Investment Plan
The Automatic Investment Plan offers a convenient way to invest in the Fund.
Under the plan, you can arrange to have money transferred automatically from
your checking account to the Fund each month to purchase additional shares. If
you are interested in this program, please refer to the Automatic Investment
Plan Application at the back of this Prospectus for the requirements of the
program or contact your investment representative. Of course, the market value
of the Fund's shares may fluctuate and a systematic investment plan such as this
will not assure a profit or protect against a loss. You may terminate the
program at any time by notifying Investor Services by mail or by phone.
Systematic Withdrawal Plan
The Systematic Withdrawal Plan allows you to receive regular payments from your
account on a monthly, quarterly, semiannual or annual basis. To establish a
Systematic Withdrawal Plan, the value of your account must be at least $5,000
and the minimum payment amount for each withdrawal must be at least $50. Please
keep in mind that $50 is merely the minimum amount and is not a recommended
amount. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply.
If you would like to establish a Systematic Withdrawal Plan, please complete the
Systematic Withdrawal Plan section of the Shareholder Application included with
this Prospectus and indicate how you would like to receive your payments. You
may choose to receive your payments in any of the following ways:
1. Purchase shares of other Franklin Templeton Funds - You may direct your
payments to purchase the same class of shares of another Franklin Templeton
Fund.
2. Receive payments in cash - You may choose to receive your payments in cash.
You may have the money sent directly to you, to another person, or to a checking
account. If you choose to have the money sent to a checking account, please see
"Electronic Fund Transfers" below.
There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once your plan is established, any distributions paid by the
Fund will be automatically reinvested in your account. Payments under the plan
will be made from the redemption of an equivalent amount of shares in your
account, generally on the first business day of the month in which a payment is
scheduled. You will generally receive your payments within three to five days
after the shares are redeemed.
Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the
shares in 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. Redemptions under a
Systematic Withdrawal Plan are considered a sale for federal income tax
purposes. Because the amount withdrawn under the plan may be more than your
actual yield or income, part of the payment may be a return of your investment.
While a Systematic Withdrawal Plan is in effect, no share certificates will be
issued. You should ordinarily not make additional investments in the Fund of
less than $5,000 or three times the amount of annual withdrawals under the plan
because of the sales charge on additional purchases. Shares redeemed under the
plan may also be subject to a contingent deferred sales charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may terminate a Systematic Withdrawal Plan, change the amount and schedule
of withdrawal payments, or suspend a payment by notifying Investor Services in
writing at least seven business days prior to the end of the month preceding a
scheduled payment. The Fund may also terminate a Systematic Withdrawal Plan by
notifying you in writing and will automatically terminate a Systematic
Withdrawal Plan if all shares in your account are withdrawn or if the Fund
receives notification of the shareholder's death or incapacity.
Electronic Fund Transfers
You may choose to have distributions from the Fund or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the checking
account is maintained at a bank that is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
you choose this option, please allow at least fifteen days for initial
processing. Any payments made during that time will be sent to the address of
record on your account.
Institutional Accounts
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
the Franklin Templeton Institutional Services Department at 1-800/321-8563.
What If My Investment Outlook Changes? - Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these funds are
offered to the public with a sales charge. If your investment objective or
outlook for the securities markets changes, Fund shares may be exchanged for the
same class of shares of other Franklin Templeton Funds which are eligible for
sale in your state of residence and in conformity with such fund's stated
eligibility requirements and investment minimums.
No exchanges between different classes of shares will be allowed. Shareholders
may choose to redeem shares of the Fund and purchase Class II shares of another
Franklin Templeton Fund but such purchase will be subject to that fund's Class
II front-end and contingent deferred sales charges. Although there are no
exchanges between different classes of shares, Class II shareholders of a
Franklin Templeton Fund may elect to direct their dividends and capital gain
distributions to the Fund at net asset value.
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 the
contingency period, a contingent deferred sales charge will be imposed.
Before making an exchange, you should review the prospectus of the fund you wish
to exchange from and the fund you wish to exchange into for all specific
requirements or limitations on exercising the exchange privilege, for example,
limitations on a fund's sale of its shares, minimum holding periods for
exchanges at net asset value, or applicable sales charges.
You may exchange shares in any of the following ways:
By Mail
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
By Telephone
You or your investment representative of record, if any, may exchange shares of
the Fund by calling Investor Services at 1-800/632-2301 or the automated
Franklin TeleFACTS(R) system (day or night) at 1-800/247-1753. If you do not
wish this privilege extended to a particular account, you should notify the Fund
or Investor Services.
The telephone exchange privilege allows you to effect exchanges from the Fund
into an identically registered account of the same class of shares in one of the
other available Franklin Templeton Funds. The telephone exchange privilege is
available only for uncertificated shares or those which have previously been
deposited in your account. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Please see "Telephone Transactions - Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, you should follow the other exchange
procedures discussed in this section, including the procedures for processing
exchanges through securities dealers.
Through Securities Dealers
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "By Telephone" above.
Such a dealer-ordered exchange will be effective only for uncertificated shares
on deposit in your account or for which certificates have previously been
deposited. A securities dealer may charge a fee for handling an exchange.
Additional Information Regarding Exchanges
Exchanges are made on the basis of the net asset value of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the original
investment in the Franklin Templeton Funds was made pursuant to the privilege
permitting purchases at net asset value, as discussed under "How Do I Buy
Shares?" Exchanges of shares of the Fund which were purchased with a lower sales
charge into a fund which has a higher sales charge will be charged the
difference, unless the shares were held in the Fund for at least six months
prior to executing the exchange.
The contingency period during which a contingent deferred sales charge may be
assessed will be tolled (or stopped) for the period shares are exchanged into
and held in a Franklin or Templeton money market fund. If your account has
shares subject to a contingent deferred sales charge, shares will be exchanged
into the new account on a "first-in, first-out" basis. See "How Do I Sell
Shares? - Contingent Deferred Sales Charge" for a discussion of investments
subject to a contingent deferred sales charge.
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be transferred to
the fund being exchanged into and will be invested at net asset value. Because
the exchange is considered a redemption and purchase of shares, you may realize
a gain or loss for federal income tax purposes. Backup withholding and
information reporting may also apply. Information regarding the possible tax
consequences of such an exchange is included in the tax section in this
Prospectus and under "Additional Information Regarding Taxation" in the SAI.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions.
No exchanges into the Fund from other Franklin Templeton Funds will be accepted.
The exchange privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
Retirement Plan Accounts
Franklin Templeton IRA and 403(b) retirement plan accounts may exchange shares
directly. Certain restrictions may apply, however, to other types of retirement
plans. See "Restricted Accounts" under "Telephone Transactions."
Timing Accounts
The Fund currently will not accept investments from Timing Accounts.
How Do I Sell Shares?
You may liquidate your shares at any time and receive from the Fund the value of
the shares. If you completely redeem your account after the Fund's assets have
reached $100 million, your account will be closed and you will not be allowed to
buy additional shares of the Fund or to reopen your account. This policy does
not apply to retirement plans.
You may redeem shares in any of the following ways:
By Mail
Send a written request signed by all registered owners to Investor Services, at
the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. You will then receive from the Fund the
value of the shares redeemed based upon the net asset value per share (less a
contingent deferred sales charge, if applicable) next computed after the written
request in proper form is received by Investor Services. Redemption requests
received after the time at which the net asset value is calculated will receive
the price calculated on the following business day. The net asset value per
share is determined as of the scheduled close of the New York Stock Exchange
(the "Exchange") (generally 1:00 p.m. Pacific time) each day that the Exchange
is open for trading. You are requested to provide a telephone number where you
may be reached during business hours, or in the evening if preferred. Investor
Services' ability to contact you promptly when necessary will speed the
processing of the redemption.
To be considered in proper form, signatures must be guaranteed if the redemption
request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owners of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
address of record, preauthorized bank account or brokerage firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated or
may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.
Signatures must be guaranteed by an "eligible guarantor institution" as defined
under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered owners exactly as the account is
registered, with the signatures guaranteed as referenced above. You are advised,
for your own protection, to send the share certificate and assignment form in
separate envelopes if they are being mailed in for redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officers of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustees and (2)
a copy of the pertinent pages of the trust document listing the trustees or a
Certification for Trust if the trustees are not listed on the account
registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and applicable state
law since these accounts have varying requirements, depending upon the state of
residence.
Payment for redeemed shares will be sent to you within seven days after receipt
of the request in proper form.
By Telephone
If you complete the Franklin Templeton Telephone Redemption Authorization
Agreement (the "Agreement"), included with this Prospectus, you may redeem
shares of the Fund by telephone, subject to the Restricted Account exception
noted under "Telephone Transactions - Restricted Accounts." You may obtain
additional information about telephone redemptions by writing to the Fund or
Investor Services at the address shown on the cover or by calling
1-800/632-2301. The Fund and Investor Services will employ reasonable procedures
to confirm that instructions given by telephone are genuine. You, however, bear
the risk of loss in certain cases as described under "Telephone Transactions -
Verification Procedures."
If your account has a completed Agreement on file, redemptions of uncertificated
shares or shares which have previously been deposited with the Fund or Investor
Services may be made for up to $50,000 per day per Fund account. Telephone
redemption requests received before the scheduled close of the Exchange
(generally 1:00 p.m. Pacific time) on any business day will be processed that
same day. The redemption check will be sent within seven days, made payable to
all the registered owners on the account, and will be sent only to the address
of record.
Redemption requests by telephone will not be accepted within 30 days following
an address change by telephone. In that case, you should follow the other
redemption procedures set forth in this Prospectus. Institutional accounts
(certain corporations, bank trust departments, qualified retirement plans and
government entities which qualify to purchase shares at net asset value pursuant
to the terms of this Prospectus) that wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which is
available from the Franklin Templeton Institutional Services Department by
calling 1-800/321-8563.
Through Securities Dealers
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if you redeem
shares through a dealer, the redemption price will be the net asset value next
calculated after your dealer receives the order which is promptly transmitted to
the Fund, rather than on the day the Fund receives your written request in
proper form. The documents described under "By Mail" above, as well as a signed
letter of instruction, are required regardless of whether you redeem shares
directly or submit such shares to a securities dealer for repurchase. Your
letter should reference the Fund, the account number, the fact that the
repurchase was ordered by a dealer and the dealer's name. Details of the
dealer-ordered trade, such as trade date, confirmation number, and the amount of
shares or dollars, will help speed processing of the redemption. The seven-day
period within which the proceeds of your redemption will be sent will begin when
the Fund receives all documents required to complete ("settle") the repurchase
in proper form. The redemption proceeds will not earn dividends or interest
during the time between receipt of the dealer's repurchase order and the date
the redemption is processed upon receipt of all documents necessary to settle
the repurchase. Thus, it is in your best interest to have the required
documentation completed and forwarded to the Fund as soon as possible. Your
dealer may charge a fee for handling the order. See "How Do I Buy and Sell
Shares?" in the SAI for more information on the redemption of shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers, all or a portion of
investments of $1 million or more redeemed within the contingency period of 12
months of the calendar month of such investment will be assessed a contingent
deferred sales charge, unless one of the exceptions described below applies. The
charge is 1% of the lesser of the value of the shares redeemed (exclusive of
reinvested dividends and capital gain distributions) or the net asset value at
the time of purchase of such shares, and is retained by Distributors. The
contingent deferred sales charge is waived in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation on shares held less than the contingency
period; (ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than the contingency period.
Shares subject to a contingent deferred sales charge will then be redeemed on a
"first-in, first-out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
The contingent deferred sales charge is waived, as applicable, for: exchanges;
any account fees; distributions from an individual retirement account due to
death or disability or upon periodic distributions based on life expectancy;
tax-free returns of excess contributions from employee benefit plans;
distributions from employee benefit plans, including those due to termination or
plan transfer; redemptions initiated by the Fund due to an account falling below
the minimum specified account size; redemptions following the death of the
shareholder or beneficial owner; and 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). For example, if an
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% contingent deferred sales
charge.
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.
Unless otherwise specified, requests for redemptions of a specified dollar
amount will result in additional shares being redeemed to cover any applicable
contingent deferred sales charge, while requests for redemption of a specific
number of shares will result in the applicable contingent deferred sales charge
being deducted from the total dollar amount redeemed.
Additional Information Regarding Redemptions
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption.
The right of redemption may be suspended or the date of payment postponed if the
Exchange is closed (other than customary closing) or upon the determination of
the SEC that trading on the Exchange is restricted or an emergency exists, or if
the SEC permits it, by order, for the protection of shareholders. Of course, the
amount received may be more or less than the amount you invested, depending on
fluctuations in the market value of securities owned by the Fund.
Retirement Plan Accounts
Retirement plan account liquidations require the completion of certain
additional forms to ensure compliance with IRS regulations. To liquidate a
retirement plan account, you or your securities dealer may call Franklin's
Retirement Plans Department to obtain the necessary forms.
Tax penalties will generally apply to any distribution from such plans to a
participant under age 591/2, unless the distribution meets one of the exceptions
set forth in the Code.
Other Information
Distribution or redemption checks sent to you do not earn interest or any other
income during the time such checks remain uncashed and neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
For any information required about a proposed liquidation, you may call
Franklin's Shareholder Services Department. Securities dealers may call
Franklin's Dealer Services Department.
Telephone Transactions
By calling Investor Services at 1-800/632-2301, you or your investment
representative of record, if any, may be able to execute various telephone
transactions, including to: (i) effect a change in address, (ii) change a
dividend option (see "Restricted Accounts" below), (iii) transfer Fund shares in
one account to another identically registered account in the Fund, (iv) request
the issuance of certificates (to be sent to the address of record only), and (v)
exchange Fund shares as described in this Prospectus by telephone. In addition,
if you complete and file an Agreement as described under "How Do I Sell Shares?
- - By Telephone" you will be able to redeem shares of the Fund.
Verification Procedures
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to you caused by an unauthorized transaction. The Fund and
Investor Services may be liable for any losses due to unauthorized or fraudulent
instructions in the event such reasonable procedures are not followed. You are,
of course, under no obligation to apply for or accept telephone transaction
privileges. In any instance where the Fund or Investor Services is not
reasonably satisfied that instructions received by telephone are genuine, the
requested transaction will not be executed, and neither the Fund nor Investor
Services will be liable for any losses which may occur because of a delay in
implementing a transaction.
Restricted Accounts
Telephone redemptions and dividend option changes may not be accepted on
Franklin Templeton retirement accounts. To assure compliance with all applicable
regulations, special forms are required for any redemption, distribution or
dividend payment changes. While the telephone exchange privilege is extended to
Franklin Templeton IRA and 403(b) retirement accounts, certain restrictions may
apply to other types of retirement plans.
To obtain further information regarding distribution or transfer procedures,
including any required forms, retirement account shareholders may call to speak
to a Retirement Plan Specialist at 1-800/527-2020.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privilege will be difficult to execute because of heavy
telephone volume. In such situations, you may wish to contact your investment
representative for assistance or send written instructions to the Fund as
detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from your inability to execute a telephone transaction.
How Are Fund Shares Valued?
The net asset value per share of the Fund is determined as of the scheduled
close of the Exchange (generally 1:00 p.m. Pacific time) each day that the
Exchange is open for trading. Many newspapers carry daily quotations of the
prior trading day's closing "bid" (net asset value) and "ask" (offering price,
which includes the maximum front-end sales charge of the Fund).
The net asset value per share of the Fund is determined by deducting the
aggregate gross value of all liabilities from the aggregate gross value of all
assets, and then dividing the difference by the number of shares outstanding.
Assets in the Fund's portfolio are valued as described under "How Are Fund
Shares Valued?" in the SAI.
How Do I Get More Information About My Investment?
Any questions or communications regarding your account should be directed to
Investor Services at the address shown on the back cover of this Prospectus.
From a touch-tone phone, you may access an automated system (day or night) which
offers the following features.
By calling the Franklin TeleFACTS(R) system at 1-800/247-1753, you may obtain
account information, current price and, if available, yield or other performance
information specific to the Fund or any Franklin Templeton Fund. In addition,
you may process an exchange, within the same class, into an identically
registered Franklin account and request duplicate confirmation or year-end
statements and deposit slips.
The Fund Code, which will be needed to access system information, is 189. The
system's automated operator will prompt you with easy to follow step-by-step
instructions from the main menu. Other features may be added in the future.
To assist you and securities dealers wishing to speak directly with a
representative, the following list of Franklin departments, telephone numbers
and hours of operation is provided. The same numbers may be used when calling
from a rotary phone.
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
How Does the Fund Measure Performance?
Advertisements, sales literature and communications to you may contain several
measures of the Fund's performance, including current yield, various expressions
of total return and current distribution rate. They may also occasionally cite
statistics to reflect the Fund's volatility or risk.
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five- and
ten-year periods, or portion thereof, to the extent applicable, through the end
of the most recent calendar quarter, assuming reinvestment of all distributions.
The Fund may also furnish total return quotations for other periods or based on
investments at various sales charge levels or at net asset value. For such
purposes, total return equals the total of all income and capital gain paid to
shareholders, assuming reinvestment of all distributions, plus (or minus) the
change in the value of the original investment, expressed as a percentage of the
purchase price.
Current yield reflects the income per share earned by the Fund's portfolio
investments. It is calculated by dividing the Fund's net investment income per
share during a recent 30-day period by the maximum public offering price on the
last day of that period and annualizing the result.
Current yield for the Fund, which is calculated according to a formula
prescribed by the SEC (see "General Information" in the SAI), is not indicative
of the dividends or distributions which were or will be paid to the Fund's
shareholders. Dividends or distributions paid to shareholders of the Fund are
reflected in the current distribution rate, which may be quoted to you. The
current distribution rate is computed by dividing the total amount of dividends
per share paid by the Fund during the past 12 months by a current maximum
offering price. Under certain circumstances, such as when there has been a
change in the amount of dividend payout or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid during the
period such policies were in effect, rather than using the dividends during the
past 12 months. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing
and short-term capital gain, and is calculated over a different period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against Fund income and will assume the payment of the maximum
sales charge on the purchase of shares. When there has been a change in the
sales charge structure, the historical performance figures will be restated to
reflect the new rate. The investment results of the Fund, like all other
investment companies, will fluctuate over time; thus, performance figures should
not be considered to represent what an investment may earn in the future or what
the Fund's total return, current yield or distribution rate may be in any future
period.
General Information
Reports to Shareholders
The Fund's fiscal year ends October 31. Annual Reports containing audited
financial statements of the Trust, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to each household, as
well as to reduce Fund expenses, Investor Services will attempt to identify
related shareholders within a household and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to the Fund at
the telephone number or address set forth on the cover page of this Prospectus.
Additional information on Fund performance is included in the Trust's Annual
Report to Shareholders and under "General Information" in the SAI.
Organization and Voting Rights
The Agreement and Declaration of Trust permits the trustees to issue an
unlimited number of full and fractional shares of beneficial interest of $.01
par value, which may be issued in any number of series or classes. Shares issued
will be fully paid and non-assessable and will have no preemptive, conversion,
or sinking rights. Shares of each series have equal and exclusive rights as to
dividends and distributions as declared by such series and the net assets of
such series upon liquidation or dissolution. Additional series or classes may be
added in the future by the Board.
Voting rights are noncumulative, so that in any election of trustees, the
holders of more than 50% of the shares voting can elect all of the trustees, if
they choose to do so, and in such event the holders of the remaining shares
voting will not be able to elect any person or persons to the Board.
The Trust does not intend to hold annual shareholders meetings. The Trust may,
however, hold a special shareholders meeting of a series for such purposes as
changing fundamental investment restrictions, approving a new management
agreement or any other matters which are required to be acted on by shareholders
under the 1940 Act. A meeting may also be called by the trustees in their
discretion or by shareholders holding at least ten percent of the outstanding
shares of the Trust. Shareholders will receive assistance in communicating with
other shareholders in connection with the election or removal of trustees such
as that provided in Section 16(c) of the 1940 Act.
Conversion to Master/Feeder Structure
The Board reserves the right to convert the Fund to a master/feeder structure at
a future date. Currently, the Fund invests directly in a portfolio of securities
primarily of companies with market capitalization less than $100 million.
Certain funds administered by the Manager participate as feeder funds in
master/feeder fund structures. Under a master/feeder structure, one or more
feeder funds, such as the Fund, invests its assets in a master fund which, in
turn, invests its assets directly in the securities. Various state governments
have adopted the North American Securities Administrators Association Guidelines
for registration of master/feeder funds. If required by those guidelines, as
then in effect, the Fund will seek shareholder approval prior to converting the
Fund to a master/feeder structure, subject to there not being adopted a
superseding contrary provision or ruling under federal law. If it is determined
by the requisite regulatory authorities that such approval is not required, you
will be deemed to have consented to such conversion by your purchase of Fund
shares and no further shareholder approval will be sought or needed. You will,
however, be informed in writing in advance of the conversion. The determination
to convert the Fund to a master/feeder fund structure will not result in an
increase in the fees or expenses paid by you or the Fund. The investment
objective and other fundamental policies of the Fund, which can be changed only
with shareholder approval, are structured so as to permit the Fund to invest
directly in securities or indirectly in securities through a master/feeder fund
structure.
Redemptions by the Fund
The Fund reserves the right to redeem your shares, at net asset value, if your
account has a value of less than $1,250, but only where the value of your
account has been reduced by the prior voluntary redemption of shares and has
been inactive (except for the reinvestment of distributions) for a period of at
least six months, provided you are given advance notice. For more information,
see "How Do I Buy and Sell Shares?" in the SAI.
Registering Your Account
An account registration should reflect your intentions as to ownership. Where
there are two co-owners on the account, the account will be registered as "Owner
1" and "Owner 2"; the "or" designation is not used except for money market fund
accounts. If co-owners wish to have the ability to redeem or convert on the
signature of only one owner, a limited power of attorney may be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, you may transfer an account in the Fund carried in "street"
or "nominee" name by your securities dealer to a comparably registered Fund
account maintained by another securities dealer. Both the delivering and
receiving securities dealers must have executed dealer agreements on file with
Distributors. Unless a dealer agreement has been executed and is on file with
Distributors, the Fund will not process the transfer and will so inform your
delivering securities dealer. To effect the transfer, you should instruct the
securities dealer to transfer the account to a receiving securities dealer and
sign any documents required by the securities dealers to evidence consent to the
transfer. Under current procedures, the account transfer may be processed by the
delivering securities dealer and the Fund after the Fund receives authorization
in proper form from your delivering securities dealer. Account transfers may be
effected electronically through the services of the NSCC.
The Fund may conclusively accept instructions from you or your nominee listed in
publicly available nominee lists, regardless of whether the account was
initially registered in the name of or by you, your nominee, or both. If a
securities dealer or other representative is of record on your account, you will
be deemed to have authorized the use of electronic instructions on the account,
including, without limitation, those initiated through the services of the NSCC,
to have adopted as instruction and signature any such electronic instructions
received by the Fund and Investor Services, and to have authorized them to
execute the instructions without further inquiry. At the present time, such
services which are available include the NSCC's "Networking," "Fund/SERV," and
"ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment, or by calling Franklin's Fund
Information Department.
Important Notice Regarding
Taxpayer IRS Certifications
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the IRS any taxable dividend, capital gain distribution, or other
reportable payment (including share redemption proceeds) and withhold 31% of any
such payments made to individuals and other non-exempt shareholders who have not
provided a correct taxpayer identification number ("TIN") and made certain
required certifications that appear in the Shareholder Application. You may also
be subject to backup withholding if the IRS or a securities dealer notifies the
Fund that the number furnished by you is incorrect or that you are subject to
backup withholding for previous under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by you is in
fact incorrect or upon the failure of a shareholder who has completed an
"awaiting TIN" certification to provide the Fund with a certified TIN within 60
days after opening the account.
FRANKLIN
MICROCAP
VALUE FUND
STATEMENT OF
ADDITIONAL INFORMATION
777 Mariners Island Blvd., P.O. Box 7777 DECEMBER 12, 1995
San Mateo, CA 94403-7777 1-800/DIAL BEN
Contents Page
How Does the Fund Invest Its Assets? 2
What Are the Fund's Potential Risks? 4
Investment Restrictions........... 6
Officers and Trustees............. 7
Investment Advisory and Other Services 9
How Does the Fund Purchase
Securities For Its Portfolio?.... 10
How Do I Buy and Sell Shares?..... 11
How Are Fund Shares Valued?....... 14
Additional Information
Regarding Taxation............... 15
The Fund's Underwriter............ 17
General Information............... 18
Appendix.......................... 21
Financial Statements.............. 23
Franklin MicroCap Value Fund (the "Fund") is a non-diversified, open-end series
of Franklin Value Investors Trust (the "Trust"), a management investment
company. The Fund's investment objective is to seek high total return, of which
capital appreciation and income are components. The Fund seeks to achieve its
objective by investing at least 65% of its total assets in securities of
companies with market capitalization under $100 million at the time of purchase
and which the Fund's investment manager believes possess intrinsic values in
excess of the current market price of such securities.
A Prospectus for the Fund, dated December 12, 1995 as may be amended from time
to time, provides the basic information you should know before investing in the
Fund and may be obtained without charge from the Fund or the Fund's principal
underwriter, Franklin/Templeton Distributors, Inc. ("Distributors"), at the
address or telephone number shown above.
This Statement of Additional Information (the "SAI") is not a prospectus. It
contains information in addition to and in more detail than set forth in the
Prospectus. This SAI is intended to provide you with additional information
regarding the activities and operations of the Fund, and should be read in
conjunction with the Fund's Prospectus.
How Does the Fund Invest Its Assets?
As noted in the Prospectus, the Fund seeks to provide high total return, of
which capital appreciation and income are components. This objective is a
fundamental policy and may not be changed without approval of shareholders. The
Fund seeks to accomplish its objective by investing primarily in securities of
companies with market capitalization under $100 million at the time of purchase
and which the Fund's investment manager believes possess intrinsic values in
excess of the current market price of such securities.
The Fund's emphasis on securities believed to be undervalued by the market uses
a technique followed by certain very wealthy investors and a number of private
partnerships with very high minimum investments. It requires not only the
resources to undertake exhaustive research of little followed, out-of-favor
securities, but also the patience and discipline to hold these investments until
their intrinsic values are ultimately recognized by others in the marketplace.
There can be no assurance that such technique will be successful for the Fund or
that the Fund will achieve its investment objective.
The following information supplements and should be read in conjunction with the
section in the Fund's Prospectus entitled "How Does the Fund Invest Its Assets?"
Loans of Portfolio Securities. As stated in the Prospectus, the Fund may make
loans of its portfolio securities up to 25% of its total assets, in accordance
with guidelines adopted by the Fund's Board of Trustees. The Fund will not lend
its portfolio securities if such loans are not permitted by the laws or
regulations of any state in which its shares are qualified for sale. Loans will
be subject to termination by the Fund in the normal settlement time, currently
three business days after notice, or by the borrower on one day's notice.
Borrowed securities must be returned when the loan is terminated. Any gain or
loss in the market price of the borrowed securities which occurs during the term
of the loan inures to the Fund and its shareholders. The Fund may pay reasonable
finders', borrowers', administrative and custodial fees in connection with a
loan of its securities.
Enhanced Convertible Securities. The Fund may invest in convertible preferred
stocks that offer enhanced yield features, such as Preferred Equity Redemption
Cumulative Stock ("PERCS"), which provide an investor, such as the Fund, with
the opportunity to earn higher dividend income than is available on a company's
common stock. A PERCS is a preferred stock which generally features a mandatory
conversion date, as well as a capital appreciation limit that is usually
expressed in terms of a stated price. Most PERCS expire three years from the
date of issue, at which time they are convertible into common stock of the
issuer. PERCS are generally not convertible into cash at maturity. Under a
typical arrangement, if after three years the issuer's common stock is trading
at a price below that set by the capital appreciation limit, each PERCS would
convert to one share of common stock. If, however, the issuer's common stock is
trading at a price above that set by the capital appreciation limit, the holder
of the PERCS would receive less than one full share of common stock. The amount
of that fractional share of common stock received by the PERCS holder is
determined by dividing the price set by the capital appreciation limit of the
PERCS by the market price of the issuer's common stock. PERCS can be called at
any time prior to maturity. If called early, however, the issuer must pay a call
premium over the market price to the investor. This call premium declines at a
preset rate daily, up to the maturity date of the PERCS.
The Fund may also invest in other classes of enhanced convertible securities.
These include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities), and DECS (Dividend Enhanced Convertible
Securities), all of which have the following features. They are company issued
convertible preferred stock; unlike PERCS they do not have a capital
appreciation limit; they seek to provide the investor with high current income
with some prospect of future capital appreciation; they are typically issued
with three or four-year maturities; they typically have some built-in call
protection for the first two to three years; investors have the right to convert
them into shares of common stock at a preset conversion ratio or hold them until
maturity; and upon maturity they will mandatorily convert into either cash or a
specified number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company or by a different issuer, such as an investment bank. These
securities may be identified by names such as ELKS (Equity Linked Securities).
Typically they share most of the characteristics of an enhanced convertible
preferred stock but will be ranked as senior or subordinated debt in the
issuer's capital structure according to the terms of the debt indenture.
There may be additional types of convertible securities which are similar to
those described above in which the Fund may invest, consistent with its
objective and policies.
American Depositary Receipts. The Fund may purchase sponsored or unsponsored
American Depositary Receipts ("ADRs"), which are certificates issued by U.S.
banks representing the right to receive securities of a foreign issuer deposited
with that bank or a correspondent bank. A sponsored ADR is an ADR where
establishment of the issuing facility is brought about by the participation of
the issuer and the depositary institution pursuant to a deposit agreement that
sets out the rights and responsibilities of the issuer, the depositary and the
ADR holder. Under the terms of most sponsored arrangements, depositaries agree
to distribute notices of shareholder meetings and voting instructions, thereby
ensuring that ADR holders will be able to exercise voting rights through the
depositary with respect to the deposited securities.
An unsponsored ADR has no sponsorship by the issuing facility and more than one
depositary institution may be involved in its issuance. An unsponsored ADR
typically clears through a depository, such as the Depository Trust Company, and
therefore, there should be no additional delays in selling the security or in
obtaining dividends. Although not required, the depositary normally requests a
letter of non-objection from the issuer and is not required to distribute
notices of shareholder's meetings or financial information to the holder.
Options. As noted in the Prospectus, the Fund may write covered call options on
securities listed on a national securities exchange, and purchase listed call
and put options on securities and securities indices for portfolio hedging
purposes.
The writer of an option may have no control over when the underlying securities
must be sold, in the case of a call option, since the writer may be assigned an
exercise notice at any time prior to the termination of the obligation. Whether
or not an option expires unexercised, the writer retains the amount of the
premium paid by the purchaser of the option, which amount reflects, among other
things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand and interest rates. This amount may, in the case of a covered call
option, be offset by a decline in the market value of the underlying security
during the option period. If a call option is exercised, the writer experiences
a profit or loss from the sale of the underlying security.
The writer of an option that wants to terminate its obligation may effect a
"closing purchase transaction." This is done by buying an option of the same
series as the option previously written. The effect of the purchase is the
writer's position will be canceled by the clearing corporation. A writer may not
effect a closing purchase transaction, however, after being notified of the
exercise of an option. Likewise, an investor who is the holder of an option may
liquidate its position by effecting a "closing sale transaction." This is done
by selling an option of the same series as the option previously purchased.
There is no guarantee that either a closing purchase or a closing sale
transaction can be effected.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both. In addition, effecting a
closing transaction will permit the cash or proceeds from the sale of any
securities subject to the option to be used for other Fund investments. If the
Fund desires to sell a particular security from its portfolio on which it has
written a call option, it will effect a closing transaction prior to or at the
same time as the sale of the security.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option. The Fund will realize a loss from
a closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to purchase
the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
The Fund may purchase call options on securities it intends to purchase in order
to limit the risk of a substantial increase in the market price of such security
or on securities indices. The Fund may also purchase call options on securities
held in its portfolio and on which it has written call options. Prior to its
expiration, a call option may be sold in a closing sale transaction. Profit or
loss from such a sale will depend on whether the amount received is more or less
than the premium paid for the call option plus any related transaction costs.
The Fund may also purchase put options on securities and securities indices and
enter into closing sale transactions with respect to such options, exercise them
or permit them to expire. The Fund may purchase a put option on an underlying
security (a "protective put") owned by the Fund as a hedging technique in order
to protect against an anticipated decline in the value of the security. Such
hedge protection is provided only during the life of the put option when the
Fund, as the holder of the put option, is able to sell the underlying security
at the put exercise price, regardless of any decline in the underlying
security's market price. For example, a put option may be purchased in order to
protect unrealized appreciation of a security when the investment manager deems
it desirable to continue to hold the security because of tax considerations. The
premium paid for the put option and any transaction costs would reduce any
capital gain otherwise available for distribution when the security is
eventually sold.
What Are the Fund's Potential Risks?
High Yielding, Fixed-Income Securities. The Fund may invest up to 25% of its net
assets, at the time of investment, in lower rated, fixed-income securities and
unrated securities of comparable quality, commonly known as "junk bonds,"
although the Fund's current investment strategy is to limit such investments to
less than 5% of the Fund's net assets. Because of the Fund's policy of investing
in higher yielding, higher risk securities, an investment in the Fund is
accompanied by a higher degree of risk than is present with an investment in
higher rated, lower yielding securities. Accordingly, an investment in the Fund
should not be considered a complete investment program and should be carefully
evaluated for its appropriateness in light of your overall investment needs and
goals. If you are on a fixed-income or retired, you should also consider the
increased risk of loss to principal which is present with an investment in
higher risk securities such as those in which the Fund invests.
The market value of lower rated, fixed-income securities tends to reflect
individual developments affecting the issuer to a greater extent than the market
value of higher rated securities, which react primarily to fluctuations in the
general level of interest rates. Lower rated securities also tend to be more
sensitive to economic conditions than higher rated securities. These lower rated
fixed-income securities are considered by the rating agencies, on balance, to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation and will
generally involve more credit risk than securities in the higher rating
categories. Even bonds rated BBB by Standard & Poor's Corporation ("S&P") or Baa
by Moody's Investors Service ("Moody's"), ratings which are considered
investment grade, possess some speculative characteristics.
Issuers of high yielding, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with acquiring the securities of such issuers is generally
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of high yielding securities may experience financial stress.
During these periods, such issuers may not have sufficient cash flow to meet
their interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific developments affecting
the issuer, the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss due
to default by the issuer may be significantly greater for the holders of high
yielding securities because such securities are generally unsecured and are
often subordinated to other creditors of the issuer. The Fund may retain an
issue that has defaulted because such issue may present an opportunity for
subsequent price recovery.
High yielding, fixed-income securities frequently have call or buy-back features
which permit an issuer to call or repurchase the securities from the Fund.
Although such securities are typically not callable for a period from three to
five years after their issuance, if a call were exercised by the issuer during
periods of declining interest rates, the Fund would likely have to replace such
called securities with lower yielding securities, thus decreasing the net
investment income to the Fund and dividends to shareholders. The premature
disposition of a high yielding security due to a call or buy-back feature, the
deterioration of the issuer's creditworthiness, or a default may also make it
more difficult for the Fund to manage the timing of its receipt of income, which
may have tax implications.
The Fund may have difficulty disposing of certain high yielding securities
because there may be a thin trading market for a particular security at any
given time. The market for lower rated, fixed-income securities generally tends
to be concentrated among a smaller number of dealers than is the case for
securities which trade in a broader secondary retail market. Generally,
purchasers of these securities are predominantly dealers and other institutional
buyers, rather than individuals. To the extent the secondary trading market for
a particular high yielding, fixed-income security does exist, it is generally
not as liquid as the secondary market for higher rated securities. Reduced
liquidity in the secondary market may have an adverse impact on market price and
the Fund's ability to dispose of particular issues, when necessary, to meet the
Fund's liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of the issuer. Reduced liquidity in the
secondary market for certain securities may also make it more difficult for the
Fund to obtain market quotations based on actual trades for purposes of valuing
the Fund's portfolio. Current values for these high yield issues are obtained
from pricing services and/or a limited number of dealers and may be based upon
factors other than actual sales. (See "How Are Fund Shares Valued?" in the
Prospectus and this SAI.)
The Fund is authorized to acquire high yielding, fixed-income securities that
are sold without registration under the federal securities laws and therefore
carry restrictions on resale. While many high yielding securities have been sold
with registration rights, covenants and penalty provisions for delayed
registration, if the Fund is required to sell such restricted securities before
the securities have been registered, it may be deemed an underwriter of such
securities under the Securities Act of 1933, which entails special
responsibilities and liabilities. The Fund may incur special costs in disposing
of such securities. The Fund, however, will generally incur no costs when the
issuer is responsible for registering the securities.
The Fund may acquire high yielding, fixed-income securities during an initial
underwriting. Such securities involve special risks because they are new issues.
The Fund has no arrangement with its underwriter or any other person concerning
the acquisition of such securities, and the investment manager will carefully
review the credit and other characteristics pertinent to such new issues.
The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recent recession disrupted the
market for high yielding securities and adversely affected the value of
outstanding securities and the ability of issuers of such securities to meet
their obligations. Those adverse effects may continue even as the economy
recovers. Factors adversely impacting the market value of high yielding
securities will, to the extent the Fund has invested in such securities,
adversely impact the Fund's net asset value. For example, adverse publicity
regarding lower rated bonds, which appeared during 1989 and 1990, along with
highly publicized defaults by some high yield issuers, and concerns regarding a
sluggish economy which continued in 1993, depressed the prices for many of these
securities. In addition, the Fund may also incur additional expenses to the
extent it is required to seek recovery upon a default in the payment of
principal or interest on its portfolio holdings. The Fund will rely on the
investment manager's judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, the investment manager will
take into consideration, among other things, the issuer's financial resources,
its sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
Options. The Fund's ability to hedge effectively all or a portion of its
securities through transactions in options on securities and securities indices
depends on the degree to which price movements in the underlying indices or
securities correlate with price movements in the relevant portion of the Fund's
portfolio. Inasmuch as such securities will not duplicate the components of any
index or underlying securities, the correlation will not be perfect.
Consequently, the Fund bears the risk that the prices of the securities being
hedged will not move in the same amount as the hedging instrument. It is also
possible that there may be a negative correlation between the index or other
securities underlying the hedging instrument and the hedged securities which
would result in a loss on both the securities and the hedging instrument.
Accordingly, successful use by the Fund of options on securities and securities
indices will be subject to the investment manager's ability to predict correctly
movements in the direction of the securities markets generally or of a
particular segment. This requires different skills and techniques than
predicting changes in the price of individual stocks.
Positions in stock index options and options on securities may be closed out
only on an exchange which provides a secondary market. There can be no assurance
that a liquid secondary market will exist for any particular option at any
specific time. Thus, it may not be possible to close such an option. The
inability to close an option position could also have an adverse impact on the
Fund's ability to effectively hedge its securities. The Fund will enter into an
option position only if there appears to be a liquid secondary market for such
option.
Investment Restrictions
The Fund has adopted the following numbered restrictions as fundamental
policies, which means that they may not be changed without the approval of a
majority of the outstanding voting securities of the Fund. Under the Investment
Company Act of 1940, as amended (the "1940 Act"), a "vote of a majority of the
outstanding voting securities" of the Fund means the affirmative vote of the
lesser of (i) more than 50% of the outstanding voting securities of the Fund or
(ii) 67% or more of the shares of the Fund present at a shareholders meeting if
more than 50% of the outstanding voting securities of the Fund are represented
at the meeting in person or by proxy. The Fund may not:
1. Invest in securities for purposes of exercising management or control of the
issuer, except that all or substantially all of the assets of the Fund may be
invested in another registered investment company having the same investment
objective and policies as the Fund.
2. Borrow money, except in the form of reverse repurchase agreements or from
banks in order to meet redemption requests or for other temporary or emergency
purposes in an amount up to 15% of the value of the Fund's total assets
(including the amount borrowed) based on the lesser of cost or market, less
liabilities (not including the amount borrowed) at the time the borrowing is
made. While borrowings exceed 5% of the Fund's total assets, the Fund will not
make any additional investments.
3. Pledge, hypothecate, mortgage or otherwise encumber its assets, except to
secure borrowings to meet redemption requests or for temporary or emergency
purposes and permissible options, short selling or other hedging transactions.
4. Purchase securities on margin or underwrite securities of other issuers,
except insofar as the Fund may be technically deemed an underwriter under the
federal securities laws in connection with the disposition of portfolio
securities. (This does not preclude the Fund from obtaining such short-term
credit as may be necessary for the clearance of purchases and sales of its
portfolio securities.)
5. Invest directly in interests in real estate, oil, gas or other mineral
leases, exploration or development programs, including limited partnership
interests. (This restriction does not preclude investments in marketable
securities of issuers engaged in such activities.)
6. Make loans to other persons, except by the purchase of debt obligations, or
through loans of the Fund's portfolio securities, or to the extent the entry
into a repurchase agreement or similar transaction may be deemed a loan.
7. Purchase or sell commodities or commodity futures contracts or financial
futures contracts; or invest in put, call, straddle or spread options on
financial or other futures contracts or stock index futures contracts.
8. Invest directly in warrants (valued at the lower of cost or market) in
excess of 5% of the value of the Fund's net assets. No more than 2% of the value
of the Fund's net assets may be invested in warrants (valued at the lower of
cost or market) which are not listed on the New York or American Stock
Exchanges.
9. Purchase from or sell to its officers and trustees, or any firm of which any
officer or trustee is a member, as principal, any securities, but the Fund may
deal with such persons or firms as brokers and pay a customary brokerage
commission; nor invest in securities of any issuer if any officer, director or
trustee of the Fund or the investment advisor owns beneficially more than
one-half of 1% of the outstanding securities of such issuer and all such
officers, directors and trustees together own beneficially more than 5% of such
securities.
10. Invest in the securities of other investment companies, except where there
is no commission other than the customary brokerage commission or sales charge,
or except that securities of another investment company may be acquired pursuant
to a plan of reorganization, merger, consolidation or acquisition; or except
further that all or substantially all of the assets of the Fund may be invested
in another registered investment company having the same investment objective
and policies as the Fund. Pursuant to available exemptions from the 1940 Act,
the Fund may invest in shares of one or more money market funds managed by
Franklin Advisers, Inc. or its affiliates.
In addition to the restrictions above, the Fund does not intend to invest more
than 5% of its assets in securities of issuers with less than three years
continuous operation, including the operations of any predecessor companies or
to purchase or hold securities of any issuer if, as a result, in the aggregate,
more than 10% of the value of the Fund's total assets would be invested in
securities that are subject to legal or contractual restrictions on resale, in
securities that are not readily marketable (including over-the-counter options)
or in repurchase agreements maturing in more than seven days. As required by the
state of Ohio and so long as required to sell shares in Ohio, the Fund may not
purchase the securities of any issuer if, as to 75% of its assets at the time of
purchase, more than 10% of the voting securities of any issuer would be held by
the Fund. The Fund may not issue senior securities, as defined in the 1940 Act,
except that this restriction shall not be deemed to prohibit the Fund from (i)
making any permitted borrowings, mortgages or pledges or (ii) entering into
repurchase transactions or engage in the short sales of securities, except short
sales "against the box," if the cash or securities deposited in the segregated
account with the Fund's custodian to collateralize its short positions in the
aggregate exceed 25% of the Fund's net assets.
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
value of assets will not constitute a violation of that restriction, except as
otherwise noted.
Officers and Trustees
The Board of Trustees (the "Board") has the responsibility for the overall
management of the Fund, including general supervision and review of its
investment activities. The trustees, in turn, elect the officers of the Fund who
are responsible for administering day-to-day operations of the Fund. The
affiliations of the officers and trustees and their principal occupations for
the past five years are listed below. Trustees who are deemed to be "interested
persons" of the Fund, as defined in the 1940 Act, are indicated by an asterisk
(*).
Positions and Offices
Name, Age and Address with the Trust Principal Occupations
During Past Five Years
Frank T. Crohn (71) Trustee
7251 West Palmetto Park Road
Boca Raton, FL 33433
Chairman and Chief Executive Officer, Financial Benefit Life Insurance Company
and Financial Benefit Group, Inc.; Director, Unity Mutual Life Insurance
Company; and trustee of three of the investment companies in the Franklin Group
of Funds.
*William J. Lippman (70) President, Chief
One Parker Plaza Executive Officer
Fort Lee, NJ 07024 and Trustee
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc.,
Franklin Templeton Distributors, Inc. and Franklin Management, Inc.; officer
and/or director or trustee of six of the investment companies in the Franklin
Group of Funds.
Charles Rubens II (65) Trustee
18 Park Road
Scarsdale, NY 10583
Private Investor; and trustee of three of the investment companies in the
Franklin Group of Funds.
Leonard Rubin (70) Trustee
501 Broad Avenue
Ridgefield, NJ 07657
Chairman of the Board, Carolace Embroidery Co., Inc.; President, F.N.C.
Textiles, Inc.; Vice President, Trimtex Co. Inc.; and trustee of three of the
investment companies in the Franklin Group of Funds.
Harmon E. Burns (50) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 43 of the investment companies in the Franklin Templeton Group of Funds.
Kenneth V. Domingues (63) Vice President -
777 Mariners Island Blvd. Financial Reporting
San Mateo, CA 94404 and Accounting Standards
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and
Franklin Templeton Distributors, Inc.; officer and/or director, as the case may
be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of 37 of the investment companies
in the Franklin Group of Funds.
Martin L. Flanagan (35) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and
officer of 61 of the investment companies in the Franklin Templeton Group of
Funds.
Deborah R. Gatzek (47) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President - Legal, Franklin Resources, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and officer of 37 of
the investment companies in the Franklin Group of Funds.
Rupert H. Johnson, Jr. (55) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director, trustee or managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 43 of the investment companies
in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (56) Treasurer
777 Mariners Island Blvd. and Principal
San Mateo, CA 94404 Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey (58) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 32 of the investment companies in the Franklin Group of
Funds.
R. Martin Wiskemann (68) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President, Portfolio Manager and Director, Franklin Advisers, Inc.;
Senior Vice President, Franklin Management, Inc.; Vice President, Treasurer and
Director, ILA Financial Services, Inc. and Arizona Life Insurance Company of
America; and officer and/or director, as the case may be, of 20 of the
investment companies in the Franklin Group of Funds.
The preceding table indicates those officers and trustees who are also
affiliated persons of Distributors and the investment manager. Trustees not
affiliated with the investment manager ("nonaffiliated trustees") are currently
paid fees of $600 per quarter plus $300 per meeting attended. As indicated
above, certain of the Trust's nonaffiliated trustees also serve as directors,
trustees or managing general partners of other investment companies in the
Franklin Group of Funds(R) from which they may receive fees for their services.
The following table indicates the total fees paid to nonaffiliated trustees by
the Trust and by other funds in the Franklin Group of Funds.
Total Fees Number of Boards
Total Fees Received from in the Franklin
Received from the Franklin Group of Funds on
N the Trust* Group of Funds**which Each Serves***
Frank T. Crohn............. $3,900 $14,700 3
Charles Rubens, II......... $3,900 $15,900 3
Leonard Rubin.............. $3,900 $15,900 3
*For the fiscal year ended October 31, 1995.
**For the calendar year ended December 31, 1994.
***The number of boards is based on the number of registered investment
companies in the Franklin Group of Funds and does not include the total number
of series or funds within each investment company for which the trustees are
responsible.
Nonaffiliated trustees 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, trustee or managing general
partner. No officer or trustee received any other compensation directly from the
Trust. Certain officers or trustees 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.
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 the
date of this document, Franklin Resources, Inc. owned substantially all of the
outstanding shares of the Fund as a result of having provided the Fund's initial
capitalization.
Investment Advisory and Other Services
The investment manager of the Fund is Franklin Advisers, Inc. ("Advisers" or
"Manager"). Advisers is a wholly-owned subsidiary of Franklin Resources, Inc.
("Resources"), a publicly owned holding company whose shares are listed on the
New York Stock Exchange (the "Exchange"). Resources owns several other
subsidiaries which are involved in investment management and shareholder
services.
Pursuant to a management agreement with the Fund, the Manager provides
investment research and portfolio management services, including the selection
of securities for the Fund to purchase, hold or sell and the selection of
brokers through whom the Fund's portfolio transactions are executed. The
Manager's activities are subject to the review and supervision of the Board to
whom the Manager renders periodic reports of the Fund's investment activities.
Under the terms of the management agreement, the Manager provides office space
and office furnishings, facilities and equipment required for managing the
business affairs of the Fund; maintains all internal bookkeeping, clerical,
secretarial and administrative personnel and services; and provides certain
telephone and other mechanical services. The Manager is covered by fidelity
insurance on its officers, directors and employees for the protection of the
Fund.
The Manager also provides management services to numerous other investment
companies or funds pursuant to management agreements with each fund. The Manager
may give advice and take action with respect to any of the other funds it
manages, or for its own account, which may differ from action taken by the
Manager on behalf of the Fund. Similarly, with respect to the Fund, the Manager
is not obligated to recommend, purchase or sell, or to refrain from
recommending, purchasing or selling any security that the Manager and access
persons, as defined by the 1940 Act, may purchase or sell for its or their own
account or for the accounts of any other fund. Furthermore, the Manager is not
obligated to refrain from investing in securities held by the Fund or other
funds which it manages or administers. Of course, any transactions for the
accounts of the Manager and other access persons will be made in compliance with
the Fund's Code of Ethics.
Pursuant to the management agreement, the Fund is obligated to pay the Manager a
fee computed and accrued daily and paid monthly at the annual rate of 0.75% of
the Fund's average daily net assets.
The management agreement is in effect until December 11, 1997. Thereafter, it
may continue in effect for successive annual periods providing such continuance
is specifically approved at least annually by a vote of the Board or by a vote
of the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the trustees who are not parties to the
management agreement or interested persons of any such party (other than as
trustees of the Fund), cast in person at a meeting called for that purpose. The
management agreement may be terminated without penalty at any time by the Board
or by a vote of the holders of a majority of the Fund's outstanding voting
securities or by the Manager on 60 days' written notice and will automatically
terminate in the event of its assignment, as defined in the 1940 Act.
Franklin/Templeton Investor Services, Inc. ("Investor Services" or "Shareholder
Services Agent"), a wholly-owned subsidiary of Resources, is the shareholder
servicing agent for the Fund and acts as the Fund's transfer agent and
dividend-paying agent. Investor Services is compensated on the basis of a fixed
fee per account.
Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian of the securities and other assets of the
Fund. Citibank Delaware, One Penn's Way, New Castle, Delaware 19720, acts as
custodian in connection with transfer services through bank automated clearing
houses. The custodians do not participate in decisions relating to the purchase
and sale of portfolio securities.
Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California 94105,
are the Fund's independent auditors.
How Does the Fund Purchase
Securities For Its Portfolio?
Under the current management agreement with Advisers, the selection of brokers
and dealers to execute transactions in the Fund's portfolio is made by the
Manager in accordance with criteria set forth in the management agreement and
any directions which the Board may give.
When placing a portfolio transaction, the Manager attempts to obtain the best
net price and execution of the transaction. On portfolio transactions which are
done on a securities exchange, the amount of commission paid by the Fund is
negotiated between the Manager and the broker executing the transaction. The
Manager seeks to obtain the lowest commission rate available from brokers which
are felt to be capable of efficient execution of the transactions. The
determination and evaluation of the reasonableness of the brokerage commissions
paid in connection with portfolio transactions are based to a large degree on
the professional opinions of the persons responsible for the placement and
review of such transactions. These opinions are formed on the basis of, among
other things, the experience of these individuals in the securities industry and
information available to them concerning the level of commissions being paid by
other institutional investors of comparable size. The Manager will ordinarily
place orders for the purchase and sale of over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in the
opinion of the Manager, a better price and execution can otherwise be obtained.
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 price. The Fund seeks to obtain
prompt execution of orders at the most favorable net price.
The amount of commission is not the only relevant factor to be considered in the
selection of a broker to execute a trade. If it is felt to be in the Fund's best
interest, the Manager may place portfolio transactions with brokers who provide
the types of services described below, even if it means the Fund will have to
pay a higher commission than would be the case if no weight were given to the
broker's furnishing of these services. This will be done only if, in the opinion
of the Manager, the amount of any additional commission is reasonable in
relation to the value of the services. Higher commissions will be paid only when
the brokerage and research services received are bona fide and produce a direct
benefit to the Fund or assist the Manager in carrying out its responsibilities
to the Fund, or when it is otherwise in the best interest of the Fund to do so,
whether or not such data may also be useful to the Manager in advising other
clients.
When it is felt that several brokers are equally able to provide the best net
price and execution, the Manager may decide to execute transactions through
brokers who provide quotations and other services to the Fund, specifically
including the quotations necessary to determine the value of the Fund's net
assets, in such amount of total brokerage as may reasonably be required in light
of such services, and through brokers who supply research, statistical and other
data to the Fund and Manager in such amount of total brokerage as may reasonably
be required.
It is not possible to place a dollar value on the special executions or on the
research services received by Advisers from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staff 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. Provided that
the officers of the Trust are satisfied that the best execution is obtained, the
sale of Fund shares may also be considered as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the National Association of Securities
Dealers, it is sometimes entitled to obtain certain fees when the Fund tenders
portfolio securities pursuant to a tender-offer solicitation. As a means of
recapturing brokerage for the benefit of the Fund, any portfolio securities
tendered by the Fund will be tendered through Distributors if it is legally
permissible to do so. In turn, the next management fee payable to Advisers under
the management agreement will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection
therewith.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by the Manager are considered at or about the
same time, transactions in such 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. It is recognized that in some cases this
procedure could possibly have a detrimental effect on the price or volume of the
security so far as the Fund is concerned. In other cases it is possible that the
ability to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Fund.
How Do I Buy and Sell Shares?
All checks, drafts, wires and other payment mediums used for purchasing or
redeeming shares of the Fund must be denominated in U.S. dollars. The Fund
reserves the right, in its sole discretion, to either (a) reject any order for
the purchase or sale of 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.
In connection with exchanges (see the Prospectus "What If My Investment Outlook
Changes? - Exchange Privilege"), it should be noted that since the proceeds from
the sale of shares of an investment company generally are not available until
the fifth business day following the redemption, the funds into which you are
seeking to exchange reserve the right to delay issuing shares pursuant to an
exchange until said fifth business day. The redemption of shares of the Fund to
complete an exchange will be effected at the close of business on the day the
request for exchange is received in proper form at the net asset value then
effective.
The Fund may impose a $10 charge for each returned item, against your account
if, in connection with the purchase of Fund shares, you submit a check or a
draft which is returned unpaid to the Fund.
Dividend checks which are returned to the Fund marked "unable to forward" by the
postal service will be deemed to be a request by you to change the dividend
option and the proceeds will be reinvested in additional shares at net asset
value until new instructions are received.
The Fund may deduct from your account the cost of its efforts to locate you if
mail is returned as undeliverable or the Fund is otherwise unable to locate you
or verify your current mailing address. These costs may include a percentage of
the account when a search company charges a percentage fee in exchange for its
location services.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to such banks' discretionary trust funds at net asset
value. The banks may charge service fees to their customers who participate in
the discretionary trusts. Pursuant to agreements, a portion of such service fees
may be paid to Distributors, or an affiliate of Distributors, to help defray
expenses of maintaining a service office in Taiwan, including expenses related
to local literature fulfillment and communication facilities.
Shares of the Fund may be offered to investors in Taiwan through securities
firms known locally as Securities Investment Consulting Enterprises. In
conformity with local business practices in Taiwan, shares of the Fund will be
offered with the following schedule of sales charges:
Sales
Size of Purchase - in U.S. dollars Charge
Up to $100,000 3%
$100,000 to $1,000,000 2%
Over $1,000,000 1%
Purchases and Redemptions
through Securities Dealers
Orders for the purchase of shares of the Fund received in proper form prior to
the scheduled close of the Exchange (generally 1:00 p.m. Pacific time) any
business day that the Exchange is open for trading and promptly transmitted to
the Fund will be based upon the public offering price determined that day.
Purchase orders received by securities dealers or other financial institutions
after the scheduled close of the Exchange will be effected at the Fund's public
offering price on the day it is next calculated. The use of the term "securities
dealer" herein shall include other financial institutions which, either directly
or through affiliates, have an agreement with Distributors to handle customer
orders and accounts with the Fund. Such reference, however, is for convenience
only and does not indicate a legal conclusion of capacity.
Orders for the redemption of shares are effected at net asset value subject to
the same conditions concerning time of receipt in proper form. It is the
securities dealer's responsibility to transmit the order in a timely fashion and
any loss to the customer resulting from failure to do so must be settled between
the customer and the securities dealer.
Special Net Asset Value Purchases
As discussed in the Prospectus under "How Do I Buy Shares? - Description of
Special Net Asset Value Purchases," certain categories of investors may purchase
shares of the Fund without a front-end sales charge ("net asset value") or a
contingent deferred sales charge. Either Distributors or one of its affiliates
may make payments, out of its own resources, to securities dealers who initiate
and are responsible for such purchases, as indicated below. Distributors may
make these payments in the form of contingent advance payments, which may be
recovered from the securities dealer, or set off against other payments due to
the securities dealer, in the event of investor redemptions made within 12
months of the calendar month of purchase. Other conditions may apply. All terms
and conditions may be imposed by an agreement between Distributors, or its
affiliates, and the securities dealer.
The following amounts may be paid by Distributors or one of its affiliates, out
of its own resources, to securities dealers who initiate and are responsible for
purchases of shares of the Fund made at net asset value by certain designated
retirement plans (excluding IRA and IRA rollovers): 1% 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. These payment breakpoints are reset every 12 months for
purposes of additional purchases. With respect to purchases made at net asset
value by certain trust companies and trust departments of banks and certain
retirement plans of organizations with collective retirement plan assets of $10
million or more, either Distributors or one of its affiliates, out of its own
resources, may pay up to 1% of the amount invested.
Letter of Intent
You may qualify for a reduced sales charge on the purchase of shares of the
Fund, as described in the Prospectus. At any time within 90 days after the first
investment which you want to qualify for the reduced sales charge, a signed
Shareholder Application, with the Letter of Intent (the "Letter") section
completed, may be filed with the Fund. After the Letter is filed, each
additional investment will be entitled to the sales charge applicable to the
level of investment indicated on the Letter. Sales charge reductions based upon
purchases in more than one of the Franklin Templeton Funds will be effective
only after notification to Distributors that the investment qualifies for a
discount. Your holdings in the Franklin Templeton Funds, including Class II
shares, acquired more than 90 days before the Letter is filed will be counted
towards completion of the Letter but will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions made, other than by a
designated benefit plan, during the 13-month period will be subtracted from the
amount of the purchases for purposes of determining whether the terms of the
Letter have been completed. If the Letter is not completed within the 13-month
period, there will be an upward adjustment of the sales charge, depending upon
the amount actually purchased (less redemptions) during the period. The upward
adjustment does not apply to designated benefit plans. If you execute a Letter
prior to a change in the sales charge structure for the Fund you will be
entitled to complete the Letter at the lower of the new sales charge structure
or the sales charge structure in effect at the time the Letter was filed with
the Fund.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in your
name, unless you are a designated benefit plan. If the total purchases, less
redemptions, equal the amount specified under the Letter, the reserved shares
will be deposited to an account in your name or delivered to you or your order.
If the total purchases, less redemptions, exceed the amount specified under the
Letter and is an amount which would qualify for a further quantity discount, a
retroactive price adjustment will be made by Distributors and the securities
dealer through whom purchases were made pursuant to the Letter (to reflect such
further quantity discount) on purchases made within 90 days before and on those
made after filing the Letter. The resulting difference in offering price will be
applied to the purchase of additional shares at the offering price applicable to
a single purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified under the
Letter, you will remit to Distributors an amount equal to the difference in the
dollar amount of sales charge actually paid and the amount of sales charge which
would have applied to the aggregate purchases if the total of such purchases had
been made at a single time. Upon such remittance the reserved shares held for
your account will be deposited to an account in your name or delivered to you or
your order. If within 20 days after written request such difference in sales
charge is not paid, the redemption of an appropriate number of reserved shares
to realize such difference will be made. In the event of a total redemption of
the account prior to fulfillment of the Letter, the additional sales charge due
will be deducted from the proceeds of the redemption, and the balance will be
forwarded to you.
If a Letter of Intent is executed on behalf of a designated benefit plan (such
plans are described under "Description of Special Net Asset Value Purchases" in
the Prospectus), the level and any reduction in sales charge for these
designated benefit plans will be based on actual plan participation and the
projected investments in the Franklin Templeton Funds under the Letter. Benefit
plans are not subject to the requirement to reserve 5% of the total intended
purchase, or to any penalty as a result of the early termination of a plan, nor
are benefit plans entitled to receive retroactive adjustments in price for
investments made before executing the Letter.
Redemptions in Kind
The Fund has committed itself to pay in cash (by check) all requests for
redemption by any shareholder of record, limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Fund's net
assets at the beginning of such period. Such commitment is irrevocable without
the prior approval of the Securities and Exchange Commission ("SEC"). In the
case of requests for redemption in excess of such amounts, the trustees reserve
the right to make payments in whole or in part in securities or other assets of
the Fund from which you are redeeming, 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 such circumstances, the securities distributed
would be valued at the price used to compute the Fund's net assets. Should the
Fund do so, you may incur brokerage fees in converting the securities to cash.
The Fund does not intend to redeem illiquid securities in kind; however, should
it happen, you may not be able to timely recover your investment and may also
incur brokerage costs in selling such securities.
Redemptions by the Fund
Due to the relatively high cost of handling small investments, the Fund reserves
the right to redeem, involuntarily, at net asset value, your shares if your
account has a value of less than one-half of your required initial minimum
investment but only where the value of such account has been reduced by the
prior voluntary redemption of shares. Until further notice, it is the present
policy of the Fund not to exercise this right if your account has a value of
$1,250 or more. In any event, before the Fund redeems such shares and sends you
the proceeds, it will notify you that the value of the shares in your account is
less than the minimum amount and allow you 30 days to make an additional
investment in an amount which will increase the value of the account to at least
$2,500.
Reinvestment Date
Shares acquired through the reinvestment of dividends will be purchased at the
net asset value determined on the business day following the dividend record
date (sometimes known as "ex-dividend date"). The processing date for the
reinvestment of dividends may vary from month to month and does not affect the
amount or value of the shares acquired.
Reports to Shareholders
The Fund sends annual and semiannual reports to you regarding the Fund's
performance and its portfolio holdings. If you would like to receive an interim
quarterly report you may phone Fund Information at 1-800/DIAL BEN.
Special Services
The Franklin Templeton Institutional Services Department provides specialized
services, including recordkeeping, for institutional investors of the Fund. The
cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions which maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such beneficial owners. For each beneficial
owner in the omnibus account, the Fund may reimburse Investor Services an amount
not to exceed the per account fee which the Fund normally pays Investor
Services. Such financial institutions may also charge a fee for their services
directly to their clients.
How Are Fund Shares Valued?
As noted in the Prospectus, the Fund calculates net asset value as of the
scheduled close of the Exchange (generally 1:00 p.m. Pacific time) each day that
the Exchange is open for trading. As of the date of this SAI, the Fund is
informed that the Exchange observes the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. The value of a foreign security is
determined as of the close of trading on the foreign exchange on which it is
traded or as of the scheduled close of trading on the Exchange, if that is
earlier, and that value is then converted into its U.S. dollar equivalent at the
foreign exchange rate in effect at noon, New York time, on the day the value of
the foreign security is determined. If no sale is reported at that time, the
mean between the current bid and ask price is used. Occasionally, events which
affect the values of foreign securities and foreign exchange rates may occur
between the times at which they are determined and the close of the exchange and
will, therefore, not be reflected in the computation of the Fund's net asset
value. If events materially affecting the value of these foreign securities
occur during such period, then these securities will be valued in accordance
with procedures established by the Board.
Over-the-counter securities are valued within the range of the most recent
quoted bid and ask price. Portfolio securities which are traded both in the
over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market as determined by the Manager. Portfolio
securities underlying actively traded call options are valued at their market
price as determined above. The current market value of any option held by the
Fund is its last sale price on the relevant exchange prior to the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, the options are valued within the range of the
current closing bid and ask prices if such valuation is believed to fairly
reflect the contract's market value. 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 trustees, the Fund may utilize a pricing
service, bank or securities dealer to perform any of the above described
functions.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times prior to
the scheduled close of the Exchange. The value of such securities used in
computing the net asset value of the Fund's shares is determined as of such
times. Occasionally, events affecting the value of such securities may occur
between the times at which they are determined and the scheduled close of the
Exchange which will not be reflected in the computation of the Fund's net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities will be valued at their fair value as
determined in good faith by the Board.
Additional Information Regarding Taxation
As stated in the Prospectus, the Fund intends to qualify and elect to be treated
as a regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). The trustees reserve the right not to
maintain the qualification of the Fund as a regulated investment company if they
determine such course of action to be beneficial to shareholders. In such case,
the Fund will be subject to federal and possibly state corporate taxes on its
taxable income and gains, and distributions to shareholders will be taxable to
the extent of the Fund's available earnings and profits.
Subject to the limitations discussed below, all or a portion of the income
distributions paid by the Fund may be treated by corporate shareholders as
qualifying dividends for purposes of the dividends-received deduction under
federal income tax law. If the aggregate qualifying dividends received by the
Fund (generally, dividends from U.S. domestic corporations, the stock in which
is not debt-financed by the Fund and is held for at least a minimum holding
period) is less than 100% of its distributable income, then the amount of the
Fund's dividends paid to corporate shareholders which may be designated as
eligible for such deduction will not exceed the aggregate qualifying dividends
received by the Fund for the taxable year. The amount or percentage of income
qualifying for the corporate dividends-received deduction will be provided by
the Fund annually in a notice to shareholders mailed shortly after the end of
the Fund's fiscal year.
Corporate shareholders should note that dividends paid by the Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividend-received deduction. For example, any interest income and net short-term
capital gain (in excess of any net long-term capital loss or capital loss
carryover) included in investment company taxable income and distributed by the
Fund as a dividend will not qualify for the dividends-received deduction.
Corporate shareholders should also note that the availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless Fund shares have been held (or deemed held)
for at least 46 days in a substantially unhedged manner. The dividends-received
deduction may also be reduced to the extent interest paid or accrued by a
corporate shareholder is directly attributable to its investment in Fund shares.
The entire dividend, including the portion which is treated as a deduction, is
includable in the tax base on which the federal alternative minimum tax is
computed and may also result in a reduction in the shareholder's tax basis in
its Fund shares, under certain circumstances, if the shares have been held for
less than two years. Corporate shareholders whose investment in the Fund is
"debt financed" for these tax purposes should consult with their tax advisors
concerning the availability of the dividends-received deduction.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. Under these rules, certain distributions
which are declared in October, November or December but which, for operational
reasons, may not be paid to the shareholder until the following January, will be
treated for tax purposes as if paid by the Fund and received by the shareholder
on December 31 of the calendar year in which they are declared. The Fund intends
as a matter of policy to declare such dividends, if any, in December and to pay
these dividends in December or January to avoid the imposition of this tax, but
does not guarantee that its distributions will be sufficient to avoid any or all
federal excise taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between the shareholder's basis
in the shares and the amount received, subject to the rules described below. If
such shares are a capital asset in the hands of the shareholder, gain or loss
will be capital gain or loss and will be long-term for federal income tax
purposes if the shares have been held for more than one year.
All or a portion of the sales charge incurred in purchasing shares of the Fund
will not be included in the federal tax basis of such shares sold or exchanged
within 90 days of their purchase (for purposes of determining gain or loss with
respect to such shares) if the sales proceeds are reinvested in the Fund or in
another fund in the Franklin Group of Funds and the Templeton Funds and a sales
charge which would otherwise apply to the reinvestment is reduced or eliminated.
Any portion of such sales charge excluded from the tax basis of the shares sold
will be added to the tax basis of the shares acquired in the reinvestment.
Shareholders should consult with their tax advisors concerning the tax rules
applicable to the redemption or exchange of Fund shares.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares purchased.
The Fund's investment in options and certain transactions involving actual or
deemed short sales are subject to many complex and special tax rules. For
example, over-the-counter options on debt securities and equity options,
including options on stock and on narrow-based stock indices, will be subject to
tax under Section 1234 of the Code, generally producing a long-term or
short-term capital gain or loss upon exercise, lapse or closing out of the
option or sale of the underlying stock or security. The Fund's treatment of
certain other options entered into by the Fund is generally governed by Section
1256 of the Code. These Section 1256 positions generally include listed options
on debt securities, options on broad-based stock indexes, and options on
securities indexes.
Absent a tax election to the contrary, each such Section 1256 position held by
the Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Fund's fiscal year, and all gain
or loss associated with fiscal year transactions and mark-to-market positions at
fiscal year end (except certain foreign currency gain or loss covered by Section
988 of the Code) will generally be treated as 60% long-term capital gain or loss
and 40% short-term capital gain or loss. The effect of Section 1256
mark-to-market rules may be to accelerate income or to convert what otherwise
would have been long-term capital gains into short-term capital gains or
short-term capital losses into long-term capital losses within the Fund. The
acceleration of income on Section 1256 positions may require the Fund to accrue
taxable income without the corresponding receipt of cash. In order to generate
cash to satisfy the distribution requirements of the Code, the Fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares. In these ways, any or all of these rules may affect both the
amount, character and time of income distributed to shareholders by the Fund.
When the Fund holds an option or contract which substantially diminishes the
Fund's risk of loss with respect to another position of the Fund (as might occur
in some hedging transactions), this combination of positions could be treated as
a "straddle" for tax purposes, resulting in possible deferral of losses,
adjustments in the holding periods of Fund securities and conversion of
short-term capital losses into long-term capital losses.
As a regulated investment company, the Fund is also subject to the requirement
that less than 30% of its annual gross income be derived from the sale or other
disposition of securities and certain other investments held for less than three
months ("short-short income"). This requirement may limit the Fund's ability to
engage in options and hedging transactions because these transactions are often
consummated in less than three months, may require the sale of portfolio
securities held less than three months and may, as in the case of short sales of
portfolio securities, reduce the holding periods of certain securities within
the Fund, resulting in additional short-short income for the Fund.
The Fund will monitor its transactions in such options and contracts and may
make certain other tax elections in order to mitigate the effect of the above
rules and prevent disqualification of the Fund as a regulated investment company
under Subchapter M of the Code.
Gain realized by the Fund from transactions that are deemed to constitute
"conversion transactions" under the Code and which would otherwise produce
capital gain may be recharacterized as ordinary income to the extent that such
gain does not exceed an amount defined by the Code as the "applicable imputed
income amount." A conversion transaction is any transaction in which
substantially all of the Fund's expected return is attributable to the time
value of the Fund's net investment in such transaction and any one of the
following criteria are met: 1) there is an acquisition of property with a
substantially contemporaneous agreement to sell the same or substantially
identical property in the future; 2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the Fund on the basis that it would
have the economic characteristics of a loan but would be taxed as capital gain;
or 4) the transaction is specified in Treasury regulations to be promulgated in
the future. The applicable imputed income amount, which represents the deemed
return on the conversion transaction based upon the time value of money, is
computed using a yield equal to 120 percent of the applicable federal rate,
reduced by any prior recharacterizations under this provision or Section 263(g)
of the Code concerning capitalized carrying costs.
The Fund's Underwriter
Pursuant to an underwriting agreement in effect until March 31, 1996,
Distributors acts as principal underwriter in a continuous public offering for
shares of the Fund. The underwriting agreement will continue in effect for
successive annual periods provided that its continuance is specifically approved
at least annually by a vote of the Board or by a vote of the holders of a
majority of the Fund's outstanding voting securities, and in either event by a
majority vote of the trustees who are not parties to the underwriting agreement
or interested persons of any such party (other than as trustees of the Fund),
cast in person at a meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may be terminated by
either party on 90 days' written notice.
Distributors pays the expenses of distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Distribution Plan
The Fund has adopted a distribution plan pursuant to Rule 12b-1 under the 1940
Act (the "Plan") whereby the Fund may pay up to a maximum of 0.25% per annum of
its average daily net assets, payable quarterly, primarily as a service fee to
reimburse Distributors or others for personal services to shareholders of the
Fund and/or the maintenance of shareholder accounts and also, to the extent
authorized by the Board, for other marketing purposes.
In addition to the payments to which Distributors or others are entitled under
the Plan, the 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 payments for the financing of
any activity primarily intended to result in the sale of shares of the Fund
within the context of Rule 12b-1 under the 1940 Act, then such payments shall be
deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include payments
made under the Plan, plus any other payments deemed to be made pursuant to the
Plan, exceed the amount permitted to be paid pursuant to the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., Article III,
Section 26(d)4.
The terms and provisions of the Plan relating to required reports, term, and
approval are consistent with Rule 12b-1.
Certain banking institutions are permitted to receive fees under the Plan for
administrative servicing or for agency transactions. If a bank were prohibited
from providing such services, its customers who are shareholders would be
permitted to remain shareholders of the Fund, and alternate means for continuing
the servicing of such shareholders would be sought. In such an event, changes in
the services provided might occur and such shareholders might no longer be able
to avail themselves of any automatic investment or other services then being
provided by the bank. It is not expected that shareholders would suffer any
adverse financial consequences as a result of any of these changes.
The Plan has been approved in accordance with the provisions of Rule 12b-1. The
Plan is effective through December 11, 1996, and renewable annually by a vote of
the Board, including a majority vote of the trustees who are non-interested
persons of the Trust and who have no direct or indirect financial interest in
the operation of the Plan, cast in person at a meeting called for that purpose.
It is also required that the selection and nomination of such trustees be done
by the non-interested trustees. The Plan and any related agreement may be
terminated at any time, without any penalty, by vote of a majority of the
non-interested trustees 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 Fund's outstanding shares. Distributors or any dealer
or other firm may also terminate their respective distribution or service
agreement at any time upon written notice.
The Plan 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 Fund's outstanding shares, and all material amendments to the Plan or any
related agreements shall be approved by a vote of the non-interested trustees,
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 Plan 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 Plan should be continued.
General Information
Performance
As noted in the Prospectus, the Fund may from time to time quote various
performance figures to illustrate the Fund's past performance. It may
occasionally cite statistics to reflect its volatility or risk.
Performance quotations by investment companies are subject to rules adopted by
the SEC. These rules require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation furnished by
the Fund be accompanied by certain standardized performance information computed
as required by the SEC. Current yield and average annual compounded total return
quotations used by the Fund are based on the standardized methods of computing
performance mandated by the SEC. An explanation of those and other methods used
by the Fund to compute or express performance follows.
Total Return
The average annual total return is determined by finding the average annual
compounded rates of return over one-, five- and ten-year periods, or fractional
portion thereof, that would equate an initial hypothetical $1,000 investment to
its ending redeemable value. The calculation assumes the maximum front-end sales
charge is deducted from the initial $1,000 purchase order, and income dividends
and capital gains are reinvested at net asset value. The quotation assumes the
account was completely redeemed at the end of each one-, five- and ten-year
period and the deduction of all applicable charges and fees. If a change is made
on the sales charge structure, historical performance information will be
restated to reflect the maximum front-end sales charge in effect currently.
The average annual compounded rates of return for the Fund will be calculated
according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five- or ten-year periods at the end of the one-, five-
or ten-year periods (or fractional portion thereof).
As discussed in the Prospectus, the Fund may quote total rates of return in
addition to its average annual total return. Such quotations are computed in the
same manner as the Fund's average annual compounded rate, except that such
quotations will be based on the Fund's actual return for a specified period
rather than on its average return over one-, five- and ten-year periods, or
fractional portion thereof.
Yield
Current yield reflects the income per share earned by the Fund's portfolio
investments.
Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the 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 during the base period.
Current yield figures will be obtained using the following SEC formula:
6
Yield = 2 [( a-b + 1) -1]
------
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period
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
Current Distribution Rate
Yield, which is calculated according to a formula prescribed by the SEC, is not
indicative of the amounts which were or will be paid to the Fund's shareholders.
Amounts paid to shareholders are reflected in the quoted "current distribution
rate." The current distribution rate is computed by dividing the total amount of
dividends per share paid by the Fund during the past 12 months by a current
maximum offering price. Under certain circumstances, such as when there has been
a change in the amount of dividend payout or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid over the
period such policies were in effect, rather than using the dividends during the
past 12 months. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing
and short-term capital gains, and is calculated over a different period of time.
Volatility
Occasionally statistics may be used to specify Fund volatility or risk. Measures
of volatility or risk are generally used to compare Fund net asset value or
performance relative 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 the
Standard & Poor's 500 Stock Index. 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 premise is that
greater volatility connotes greater risk undertaken in achieving performance.
Other Performance Quotations
With respect to those categories of investors who are permitted to purchase
shares of the Fund at net asset value, sales literature pertaining to the Fund
may quote a current distribution rate, yield, total return, average annual total
return and other measures of performance as described elsewhere in this SAI with
the substitution of net asset value for the public offering price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
Regardless of the method used, past performance is not necessarily indicative of
future results, but is an indication of the return to shareholders only for the
limited historical period used.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Templeton Group of Funds. Resources is the parent company of the advisors and
underwriter of both the Franklin Group of Funds and Templeton Group of Funds.
Comparisons
To help investors better evaluate how an investment in the Fund might satisfy
their investment objective, advertisements and other materials regarding the
Fund may discuss various measures of Fund performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
Such comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - unmanaged
indices of all industrial, utilities, transportation, and finance stocks listed
on the New York Stock Exchange.
d) Wilshire 5000 Equity Index - represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - 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.
f) 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.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for equity funds.
h) Financial publications: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) 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.
k) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
l) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Pierce, Fenner & Smith, Lehman Brothers and Bloomberg L.P.
m) Standard & Poor's 100 Stock Index - an unmanaged index based on the prices of
100 blue-chip stocks, including 92 industrials, one utility, two transportation
companies, and 5 financial institutions. The S&P 100 Stock Index is a smaller
more flexible index for options trading.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived by an investment in
the Fund. Such advertisements or information may include symbols, headlines or
other material which highlight or summarize the information discussed in more
detail in the communication.
Such advertisements and sales literature may also note that deeply discounted
securities offer growth potential, but that finding these deeply discounted
securities involves expensive and extensive research generally available only to
large institutional investors and very affluent investors.
Advertisements or information may also compare the Fund's performance to the
return on certificates of deposit 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 certificate
of deposit issued by a bank. For example, as the general level of interest rates
rise, the value of the Fund's fixed-income investments, as well as the value of
its shares which are based upon the value of such portfolio investments, can be
expected to decrease. Conversely, when interest rates decrease, the value of the
Fund's shares can be expected to increase. Certificates of deposit are
frequently insured by an agency of the U.S. government. An investment in the
Fund is not insured by any federal, state or private entity.
In assessing such comparisons of performance you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, that the indices and averages are generally
unmanaged, and that the items included in the calculations of such averages may
not be identical to the formula used by the Fund to calculate its figures. In
addition there can be no assurance that the Fund will continue this performance
as compared to such other averages.
Other Features and Benefits
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college cost and/or
other long-term goals. The Franklin College Costs Planner may assist you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that such goals will be met.
Miscellaneous Information
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the United States and may be considered in
a program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 47 years and
now services more than 2.5 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 Worldwide, Inc., a pioneer
in international investing. Together, the Franklin Templeton Group has over $130
billion in assets under management for more than 3.9 million U.S. based mutual
fund shareholder and other accounts. The Franklin Group of Funds and the
Templeton Group of Funds offer to the public 114 U.S. based mutual funds. The
Fund may identify itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past seven years.
Access persons of the Franklin Templeton Group, as defined in SEC Rule 17(j)
under the 1940 Act, who are employees of Resources or its subsidiaries, are
permitted to engage in personal securities transactions subject to the following
general restrictions and procedures: (1) the trade must receive advance
clearance from a compliance officer and must be completed within 24 hours after
this clearance; (2) copies of all brokerage confirmations must be sent to the
compliance officer and within 10 days after the end of each calendar quarter, a
report of all securities transactions must be provided to the compliance
officer; (3) in addition to items (1) and (2), access persons involved in
preparing and making investment decisions must file annual reports of their
securities holdings each January and also 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.
Shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations. The
Fund's Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the Fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the Fund's assets for any shareholder 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 any shareholder for
any act or obligation of the Fund and satisfy any judgment thereon. All such
rights are limited to the assets of the Fund. The Declaration of Trust further
provides that the Fund may maintain appropriate insurance (for example, fidelity
bonding and errors and omissions insurance) for the protection of the Fund, its
shareholders, trustees, officers, employees and agents to cover possible tort
and other liabilities. Furthermore, the activities of the Fund as an investment
company, as distinguished from an operating company, would not likely give rise
to liabilities in excess of the Fund's total assets. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to the unlikely circumstances in which both inadequate insurance exists
and the Fund itself is unable to meet its obligations.
Ownership and Authority Disputes
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, prior to
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 Internal Revenue Service in response to a
Notice of Levy.
Appendix
Corporate Bond Ratings
Moody's
Aaa - Bonds which are 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 by an 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 - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large, fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have predominantly speculative
elements; their future cannot be considered as 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 - Bonds which are 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 - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are 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.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit 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 - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D - Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Commercial Paper Ratings
Moody's
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original investment
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers.
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the A category are delineated with the numbers
1, 2 and 3 to indicate the relative degree of safety as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong. The
relative degree of safety is, however, not as overwhelming as for issues
designated A-1.
FRANKLIN MICROCAP VALUE FUND
Report of Independent Auditors
To the Shareholders and Board of Trustees
of Franklin Value Investors Trust:
We have audited the accompanying statement of assets and liabilities of Franklin
MicroCap Value Fund (one of the funds constituting the Franklin Value Investors
Trust) as of November 29, 1995. This financial statement is the responsibility
of the Fund's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. Our procedures included
confirmation of cash held as of November 29, 1995 with the custodian. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of Franklin MicroCap Value Fund as
of November 29, 1995 in conformity with generally accepted accounting
principles.
COOPERS& LYBRAND, L.L.P.
San Francisco, California
November 30, 1995
FRANKLIN MICROCAP VALUE FUND
Franklin Value Investors Trust
Statement of Assets and Liabilities
November 29, 1995
Assets:
Cash held by custodian............................................... $100,000
Unamortized organization costs....................................... 3,000
Total assets.................................................... 103,000
Liabilities:
Accrued expenses for organization costs.............................. 3,000
Net assets............................................................ $100,000
Shares of beneficial interest outstanding,
$0.01 par value, unlimited shares
authorized............................................................ 6,667
Net asset value per share............................................. $15.00
Computation of net asset value and offering price per share:
Net asset value, and redemption price per share ($100,000/6,667)..... $15.00
Maximum offering price (100/95.5 of $15.00).......................... $15.71
Note: Franklin MicroCap Value Fund ("the Fund") is an open-end, non-diversified
series of the Franklin Value Investors Trust, a management investment company
registered under the Investment Company Act of 1940 and organized as a
Massachusetts business trust on September 11, 1989. Organization expenses are
being amortized over a five-year period from the effective date of its
registration under the Securities Act of 1933. As part of its organization, the
Fund has issued, in a private placement, 6,667 shares of beneficial interest to
Franklin Resources, Inc. at $15.00 per share. These shares have been designated
as "initial shares."
