Franklin
MicroCap
Value Fund
Franklin Value Investors Trust
PROSPECTUS
December 12, 1995
as amended July 11, 1996
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
This prospectus describes the Franklin MicroCap Value Fund (the "Fund"). 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
Advisory Services 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?"
As of July 5, 1996, the Fund is closed to new investors, except retirement plan
accounts. If you were a shareholder of record as of July 5, 1996, you may
continue to add to your existing open account through new purchases and
reinvestment of income dividends and capital gain distributions.
This prospectus contains information you should know before investing in the
Fund. Please keep it for future reference.
The Fund's SAI, dated December 12, 1995, as may be amended from time to time,
includes more information about the Fund's procedures and policies. It has been
filed with the SEC and is incorporated by reference into this prospectus. For a
free copy or a larger print version of this prospectus, call 1-800/DIAL BEN or
write the Fund at the address shown.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Shares of the Fund involve investment risks, including the possible
loss of principal.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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 Distributors.
TABLE OF CONTENTS
About the Fund
Expense Summary.......................................... 2
Financial Highlights..................................... 3
How Does the Fund Invest Its Assets?..................... 4
What Are the Fund's Potential Risks?..................... 9
Who Manages the Fund?.................................... 11
How Does the Fund Measure
Performance?............................................ 13
How Is the Trust Organized?.............................. 13
How Taxation Affects You and the Fund.................... 14
About Your Account
How Do I Buy Shares?..................................... 15
May I Exchange Shares for Shares
of Another Fund?........................................ 18
How Do I Sell Shares?.................................... 20
What Distributions Might
I Receive From the Fund?................................ 21
Transaction Procedures and
Special Requirements.................................... 22
Services to Help You
Manage Your Account..................................... 26
Glossary
Useful Terms and Definitions............................. 28
When reading this prospectus, you will see certain terms
in capital letters. This means the term is explained in our glossary section.
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the Fund's estimated expenses for the current fiscal year.
A. Shareholder Transaction Expenses+
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)................. 4.50%
Deferred Sales Charge............................... None++
B. Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees..................................... 0.75%
Rule 12b-1 Fees..................................... 0.25%*
Other Expenses...................................... 0.33%
Total Fund Operating Expenses....................... 1.33%
C. Example
Assume the Fund's annual return is 5% and its operating expenses are as
described above. For each $1,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.
1 Year 3 Years
$58** $85
This is just an example. It does not represent past or future expenses or
returns. Actual expenses and returns may be more or less than those shown. The
Fund pays its operating expenses. The effects of these expenses are reflected in
its Net Asset Value or dividends and are not directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more. A
Contingent Deferred Sales Charge of 1% may apply, however, if you sell the
shares within one year. See "How Do I Sell Shares? - Contingent Deferred Sales
Charge" for details.
*The combination of front-end sales charges and Rule 12b-1 fees could cause
long-term shareholders to pay more than the economic equivalent of the maximum
front-end sales charge permitted under the NASD's rules.
**Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has not been
audited.
December 12, 1995
to April 30, 1996
(unaudited)
Per Share Operating Performance
Net asset value at beginning of period...................... $15.00
Net investment income....................................... 0.003
Net realized & unrealized gain on securities................ 2.730
Total from investment operations............................ 2.733
Distributions from net investment income.................... (0.030)
Distributions from realized capital gains................... -
Total distributions......................................... (0.030)
Net asset value at end of period............................ $17.70
Total Return*............................................... 18.22%
Ratios/Supplemental Data
Net assets at end of period (in 000's)...................... $46,424
Ratio of expenses to average net assets..................... 0.97%**
Ratio of net investment income to average net assets........ 0.50%**
Portfolio turnover rate..................................... 3.88%
Average Commission Rate***.................................. 0.0497
*Total return measures the change in value of an investment over the period
indicated. It is not annualized. It does not include the maximum front-end sales
charge or contingent deferred sales charge, and assumes reinvestment of
dividends and capital gains at net asset value.
**Annualized.
***Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
HOW DOES THE FUND INVEST ITS ASSETS?
The Fund's Investment Objective
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 Advisory
Services believes are undervalued in the marketplace. Accordingly, a focus on
balance sheet items will be an important element in Advisory Services' analysis.
The Fund will also seek income when consistent with its objective. The 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 INVEST IN
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 Advisory Services, 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. Advisory Services, 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, Advisory Services
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
Advisory Services' 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
Advisory Services 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 Advisory Services 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 Advisory Services 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 Advisory Services
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 buy foreign securities that are
traded in the U.S. or buy 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 buy the securities of foreign issuers directly in foreign markets,
and may buy 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 buy 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 buyer 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 buy 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.
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 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 INVESTMENT 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 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 buys 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 Advisory
Services. 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 buying 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. The Fund may not invest more than 10% of its net assets,
at the time of purchase, in illiquid securities. Illiquid securities are
generally securities that cannot be sold within seven days in the normal course
of business at approximately the amount at which the Fund has valued them and
securities with legal or contractual restrictions on resale.
Portfolio Turnover. The Fund anticipates its annual portfolio turnover rate
generally will not exceed 50%, but you should not consider this rate a limiting
factor in the operation of the Fund's portfolio.
Other Policies and Restrictions. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How Does the Fund Invest Its Assets?" and "Investment Restrictions" in the
SAI.
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 buy shares of the
Fund.
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
Diversification. 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 buy 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 that 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. These benefits may include the opportunity to invest
in foreign issuers that appear, in the opinion of Advisory Services, 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 buy 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 foreign securities trade may also have less
volume and liquidity. Securities acquired by the Fund outside the U.S. and that
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 Advisory Services'
ability to correctly predict movements in the securities markets and no
assurance can be given that Advisory Services' 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.
Interest Rate and Market Risk. To the extent the Fund invests in debt
securities, changes in interest rates in any country where the Fund is invested
will affect the value of the Fund's portfolio and its share price. Rising
interest rates, which often occur during times of inflation or a growing
economy, are likely to have a negative effect on the value of the Fund's shares.
To the extent the Fund invests in common stocks, a general market decline, in
any country where the Fund is invested, may also cause the Fund's share price to
decline. The value of worldwide stock markets and interest rates has increased
and decreased in the past. These changes are unpredictable and may happen again
in the future.
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. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations.
Investment Manager. As of July 1, 1996, Advisory Services is the investment
manager of the Fund. It is wholly owned by Resources, a publicly owned company
engaged in the financial services industry through its subsidiaries. Charles B.
Johnson and Rupert H. Johnson, Jr. are the principal shareholders of Resources.
Advisory Services will employ the same individuals to manage the Fund's
portfolio as the previous manager. The terms and conditions of the management
services provided to the Fund will also remain the same.
Management Team. The team responsible for the day-to-day management of the
Fund's portfolio since its inception is:
William Lippman
Portfolio Manager of Advisory Services
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
Advisory Services or an affiliate since 1988.
Bruce C. Baughman
Portfolio Manager of Advisory Services
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 Advisory Services or an affiliate since 1988.
Margaret McGee
Portfolio Manager of Advisory Services
Ms. McGee holds a bachelor of arts degree from William Paterson College. She has
been with Advisory Services or an affiliate since 1988.
Services Provided. Advisory Services manages the Fund's assets and makes its
investment decisions. Advisers, the Fund's former investment manager, provides
certain administrative services and facilities for the Fund. Both Advisory
Services and Advisers perform similar services for other funds. Please see
"Investment Advisory and Other Services" and "General Information" in the SAI
for information on securities transactions and a summary of the Fund's Code of
Ethics.
Management Fees. The Fund pays its own operating expenses. These expenses
include Advisory Services' management fees; taxes, if any; custodian, legal and
auditing fees; the fees and expenses of Board members who are not members of,
affiliated with, or interested persons of Advisory Services; salaries of any
personnel not affiliated with Advisory Services; insurance premiums; trade
association dues; expenses of obtaining quotations for calculating the Fund's
Net Asset Value; and printing and other expenses that are not expressly assumed
by Advisory Services.
Under its management agreement, the Fund pays Advisory Services a management fee
equal to an annual rate of 0.75%. The fee is computed daily and paid monthly.
Advisory Services will pay a portion of the management fee it receives from the
Fund to Advisers for providing certain administrative services and facilities to
the Fund.
The management fee will be reduced as necessary to comply with the most
stringent limits on Fund expenses of any state where the Fund offers its shares.
Currently, the most restrictive limitation on a fund's allowable expenses for
each fiscal year, as a percentage of its average net assets, is 2.5% of the
first $30 million in assets, 2% of the next $70 million, and 1.5% of assets over
$100 million.
Portfolio Transactions. Advisory Services tries to obtain the best execution on
all transactions. If Advisory Services believes more than one broker or dealer
can provide the best execution, it may consider research and related services
and the sale of Fund shares when selecting a broker or dealer. Please see "How
Does the Fund Purchase Securities For Its Portfolio?" in the SAI for more
information.
The Fund's Rule 12b-1 Plan
The Fund has a distribution plan or "Rule 12b-1 Plan." Payments by the Fund
under the plan may not exceed 0.25% per year of the Fund's average daily net
assets. 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 them for personal
services provided to shareholders of the Fund and/or the maintenance of
shareholder accounts. To the extent authorized by the Board, these fees may be
used to reimburse Distributors or others in the promotion and distribution of
Fund shares. For more information, please see "The Fund's Underwriter" in the
SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, the Fund advertises its performance. The more commonly used
measures of performance are total return, current yield and current distribution
rate. Performance figures are usually calculated using the maximum sales charge,
but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield shows the
income per share earned by the Fund. The current distribution rate shows the
dividends or distributions paid to shareholders by the Fund. This rate is
usually computed by annualizing the dividends paid per share during a certain
period and dividing that amount by the current Offering Price. Unlike current
yield, the current distribution rate may include income distributions from
sources other than dividends and interest received by the Fund.
The Fund's investment results will vary. Performance figures are always based on
past performance and do not indicate future results. For a more detailed
description of how the Fund calculates its performance figures, please see
"General Information" in the SAI.
HOW IS THE TRUST ORGANIZED?
The Fund is a non-diversified series of Franklin Value Investors Trust (the
"Trust"), an open-end 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 1940 Act. Shares of each series of the Trust
have equal and exclusive rights to dividends and distributions declared by that
series and the net assets of the series in the event of liquidation or
dissolution. Shares of the Fund are considered Class I shares for redemption,
exchange and other purposes. In the future, additional series and classes of
shares may be offered.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
electing or removing members of the Board.
Conversion to a Master/Feeder Structure
The Fund currently invests directly in securities. Certain Franklin Templeton
Funds, however, are "feeder funds" in a master/feeder fund structure. This means
they invest their assets in a "master fund" that, in turn, invests its assets
directly in securities. The Fund's investment objective and other fundamental
policies allow it to invest either directly in securities or indirectly in
securities through a master fund. In the future, the Board may decide to convert
the Fund to a master/feeder structure.
Various states have adopted certain guidelines for registering master/feeder
funds. If the Board decides to convert the Fund to a master/feeder structure,
the Fund will seek shareholder approval before the conversion if required by the
applicable guidelines or law at that time. If shareholder approval is not
required, your purchase of Fund shares will be considered your consent to a
conversion and we will not seek further shareholder approval. We will, however,
notify you in advance of the conversion. If the Fund converts to a master/feeder
structure, its fees and total operating expenses are not expected to increase.
HOW TAXATION AFFECTS YOU AND THE FUND
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information 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 advisor regarding the applicability of U.S.
withholding or other taxes on distributions received by you from the Fund and
the application of foreign tax laws to these distributions.
You should consult your tax advisor 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.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
As of July 5, 1996, the Fund is closed to new investors, except retirement plan
accounts. If you were a shareholder of record as of July 5, 1996, you may
continue to add to your account with as little as $100 or buy additional shares
through the reinvestment of dividend or capital gain distributions. We may waive
the minimum for retirement plans. We may also refuse any order to buy shares.
Currently, the Fund does not allow investments by Market Timers.
Sales Charge Reductions and Waivers
- - If you qualify to buy shares under one of the sales charge reduction or
waiver categories described below, please include a written statement with each
purchase order explaining which privilege applies. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
Quantity Discounts. The sales charge you pay depends on the dollar amount you
invest, as shown in the table below.
<TABLE>
<CAPTION>
Total Sales Charge
as a Percentage of
Amount Paid to
Net Amount Dealer as a Percentage
Amount of Purchase at Offering Price Offering Price Invested of Offering Price*
<S> <C> <C> <C>
Under $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 None
</TABLE>
*The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities Dealers may at times receive the entire
sales charge. A Securities Dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
**If you invest $1 million or more, a Contingent Deferred Sales Charge may be
imposed on an early redemption. Please see "How Do I Sell Shares? - Contingent
Deferred Sales Charge." Please also see "Other Payments to Securities Dealers"
below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases.
Cumulative Quantity Discounts. To determine if you may pay a reduced sales
charge, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your Class I and Class II shares in other
Franklin Templeton Funds, as well as those of your spouse, children under the
age of 21 and grandchildren under the age of 21. If you are the sole owner of a
company, you may also add any company accounts, including retirement plan
accounts. Companies with one or more retirement plans may add together the total
plan assets invested in the Franklin Templeton Funds to determine the sales
charge that applies.
Letter of Intent. You may buy shares at a reduced sales charge by completing the
Letter of Intent section of the shareholder application. A Letter of Intent is a
commitment by you to invest a specified dollar amount during a 13 month period.
The amount you agree to invest determines the sales charge you pay.
By completing the Letter of Intent section of the shareholder application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Fund shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy and Sell Shares? Letter of Intent" in the SAI or call
Shareholder Services.
Group Purchases. If you are a member of a qualified group, you may buy Fund
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
Sales Charge Waivers. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1 or 2: (i)
the distributions or payments must be reinvested within 365 days of their
payment date, and (ii) Class II distributions may be reinvested in either Class
I or Class II shares. Class I distributions may only be reinvested in Class I
shares.
The Fund's sales charges will not apply if you are buying shares with money from
the following sources:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a REIT sponsored or advised by Franklin Properties, Inc.
2. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
3. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front-end or contingent deferred sales charges at the
time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to purchases by:
4. Trust companies and bank trust departments agreeing to invest at least $1
million in Franklin Templeton Funds over a 13 month period of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following the order.
5. Group annuity separate accounts offered to retirement plans
6. Retirement plans that (i) are sponsored by an employer with at least 100
employees, (ii) have plan assets of $1 million or more, or (iii) agree to invest
at least $500,000 in the Franklin Templeton Funds over a 13 month period.
Retirement plans that are not Qualified Retirement Plans or SEPS, such as 403(b)
or 457 plans, must also meet the requirements described under "Group Purchases"
above.
7. An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is permissible and suitable
for you and the effect, if any, of payments by the Fund on arbitrage rebate
calculations.
8. Broker-dealers who have entered into a supplemental agreement with
Distributors for clients who are participating in comprehensive fee programs.
These programs, sometimes known as wrap fee programs, are sponsored by the
broker-dealer and either advised by the broker-dealer or by another registered
investment advisor affiliated with that broker.
9. Registered Securities Dealers and their affiliates, for their investment
accounts only
10. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
11. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
12. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
13. Accounts managed by the Franklin Templeton Group
14. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
How Do I Buy Shares in Connection
with Retirement Plans?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
Other Payments to Securities Dealers
The payments below apply to Securities Dealers who initiate and are responsible
for certain purchases made without a sales charge. A Securities Dealer may only
receive one of the following payments for each qualifying purchase. The payments
described below are paid by Distributors or one of its affiliates, at its own
expense, and not by the Fund or its shareholders.
1. Securities Dealers will receive up to 1% of the purchase price for purchases
of $1 million or more as follows: 1% on sales of $1 million to $2 million, plus
0.80% on sales over $2 million to $3 million, plus 0.50% on sales over $3
million to $50 million, plus 0.25% on sales over $50 million. These breakpoints
are reset every 12 months for purposes of additional purchases.
2. Securities Dealers may, in the sole discretion of Distributors, receive up to
1% of the purchase price for purchases made under waiver category 6 above.
Please see "How Do I Buy and Sell Shares? - Special Net Asset Value Purchases"
in the SAI for any breakpoints that may apply.
3. Securities Dealers may receive up to 0.25% of the purchase price for
purchases made under waiver categories 4 and 7 above.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. Securities Dealers may not use sales of the Fund's shares to qualify for
this compensation if prohibited by the laws of any state or self-regulatory
agency, such as the NASD.
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.
MAY I EXCHANGE SHARES FOR
SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums.
No exchanges into the Fund from other Franklin Templeton Funds will be accepted.
Method Steps to Follow
By Mail 1. Send us written instructions signed by all account
owners
2. Include any outstanding share certificates for the
shares you're exchanging
By Phone Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to exchange by phone
to apply to your account, please let us know.
Through Your Call your investment
Dealer representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions.
Will Sales Charges Apply to My Exchange?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. These charges may not apply if you qualify to buy shares
without a sales charge.
Contingent Deferred Sales Charge. We will not impose a Contingent Deferred Sales
Charge when you exchange shares. Any shares subject to a Contingent Deferred
Sales Charge at the time of exchange, however, will remain so in the new fund.
For accounts with shares subject to a Contingent Deferred Sales Charge, shares
are exchanged into the new fund in the order they were purchased. If you
exchange shares into one of our money funds, the time your shares are held in
that fund will not count towards the completion of any Contingency Period. For
more information about the Contingent Deferred Sales Charge, please see that
section under "How Do I Sell Shares?"
Exchange Restrictions
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class.
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically registered
money fund account requiring only one signature for all transactions. Please
notify us in writing if you do not want this option to be available on your
account(s). Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time. If you sell all the shares in
your account, 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.
Method Steps to Follow
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may
have additional requirements.
By Phone
(Only available if you have completed and sent to us the telephone redemption
agreement included with this prospectus)
Call Shareholder Services
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts may
exceed $50,000 by completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for the shares you want
to sell or you have already returned them to the Fund
o Unless you are selling shares in a Trust Company retirement plan
account
o Unless the address on your account was changed by phone within
the last 30 days
Through Your Dealer Call your investment representative
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
Trust Company Retirement Plan Accounts
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
591/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
Contingent Deferred Sales Charge
If you did not pay a front-end sales charge because you invested $1 million or
more, a Contingent Deferred Sales Charge may apply if you sell all or a part of
your investment within the Contingency Period. The charge is 1% of the value of
the shares sold or the Net Asset Value at the time of purchase, whichever is
less. Distributors keeps the charge to recover payments made to Securities
Dealers.
We will first redeem shares not subject to the charge in the following order:
1) A calculated number of shares equal to the capital appreciation on shares
held less than the Contingency Period,
2) Shares purchased with reinvested dividends and capital gain distributions,
and
3) Shares held longer than the Contingency Period.
We then redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated dollar amount, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated number of shares, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
Waivers. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up after February 1,
1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual
balance of $1 million, you can withdraw up to $120,000 annually through a
systematic withdrawal plan free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to
termination or plan transfer
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 generally 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.
The Fund declares dividends from its net investment income quarterly, payable in
March, June, September and December, for shareholders of record on the first
business day before the 15th of the month and pays them on or about the last day
of that month.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution.
Distribution Options
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy additional shares of the Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge) by
reinvesting capital gain distributions, or both dividend and capital gain
distributions. This is a convenient way to accumulate additional shares and
maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy 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 receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
To select one of these options, please complete sections 6 and 7 of the
shareholder application included with this prospectus or tell your investment
representative which option you prefer. If you do not select an option, we will
automatically reinvest dividend and capital gain distributions in the Fund. For
Trust Company retirement plans, special forms are required to receive
distributions in cash. You may change your distribution option at any time by
notifying us by mail or phone. Please allow at least seven days prior to the
record date for us to process the new option.
TRANSACTION PROCEDURES AND
SPECIAL REQUIREMENTS
How and When Shares Are Priced
The Fund is open for business each day the Exchange is open. We determine the
Net Asset Value per share as of the scheduled close of the Exchange, generally
1:00 p.m. Pacific time. You can find the prior day's closing Net Asset Value and
Offering Price of the Fund in many newspapers.
To calculate Net Asset Value per share, the Fund's assets are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares outstanding. The Fund's assets are valued as
described under "How Are Fund Shares Valued?" in the SAI.
The Price We Use When You Buy or Sell Shares
You buy shares at the Offering Price, unless you qualify to buy shares at a
reduced sales charge or with no sales charge. The Offering Price is based on the
Net Asset Value per share and includes the maximum sales charge. We calculate it
to two decimal places using standard rounding criteria. You sell shares at Net
Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
Proper Form
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
Written Instructions
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. You should
verify that the institution is an eligible guarantor prior to signing. A
notarized signature is not sufficient.
Share Certificates
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
Telephone Transactions
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
We may only be liable for losses resulting from unauthorized telephone
transactions if we do not follow reasonable procedures designed to verify the
identity of the caller. When you call, we will request personal or other
identifying information, and will also record calls. For your protection, we may
delay a transaction or not implement one if we are not reasonably satisfied that
telephone instructions are genuine. If this occurs, we will not be liable for
any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by telephone, we will not be liable for any loss.
Trust Company Retirement Plan Accounts. You may not sell shares or change
distribution options on Trust Company retirement plans by phone. While you may
exchange shares of Trust Company IRA and 403(b) retirement accounts by phone,
certain restrictions may be imposed on other retirement plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
Account Registrations and Required Documents
You need to tell us how you want your shares registered. How you register your
account will affect your ownership rights and ability to make certain
transactions. If you have questions about how to register your account, you
should consult your investment representative or legal advisor. Please keep the
following information in mind when registering your account.
Joint Ownership. For accounts with two or more owners, we register the account
as "joint tenants with rights of survivorship" unless you tell us otherwise. An
account registered as "joint tenants with rights of survivorship" is shown as
"Jt Ten" on your account statement. For any account with two or more owners, all
owners must sign instructions to process transactions and changes to the
account. Even if the law in your state says otherwise, you will not be able to
change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Trusts. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
Required Documents. For corporate, partnership and trust accounts, we should
have the following documents on file for your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
Type of Account Documents Required
Corporation Corporate Resolution
Partnership 1. The pages from the partnership agreement that identify
the general partners, or
2. A certification for a partnership agreement
Trust 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
Street or Nominee Accounts. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
Electronic Instructions. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We can accept electronic instructions directly from your dealer or
representative without further inquiry. Electronic instructions may be processed
through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
Tax Identification Number
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $1,250. We will only do
this if the value of your account fell below this amount because you voluntarily
sold your shares and your account has been inactive (except for the reinvestment
of distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $2,500.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the 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
discontinue the program at any time by notifying Investor Services by mail or
phone.
Automatic Payroll Deduction
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. 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 direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" 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 payment by the fifth business day of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
Because of the Fund's front-end sales charge, you may not want to set up a
systematic withdrawal plan if you plan to buy shares on a regular basis. Shares
sold under the plan may also be subject to a Contingent Deferred Sales Charge.
Please see "Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
Electronic Fund Transfers
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TeleFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips.
You will need the Fund's code number to use TeleFACTS. The Fund's code is 189.
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. Please verify the
accuracy of your statements when you receive them.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
Institutional Accounts
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. For further information, call Institutional
Services.
Availability of These Services
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you.
Please contact your investment representative.
What If I Have Questions About My Account?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. Advisory
Services is located at One Parker Plaza, Sixteenth Floor, Fort Lee, New Jersey
07024. You may also contact us by phone at one of the numbers listed below.
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's administrator
Advisory Services - Franklin Advisory Services, Inc., the Fund's investment
manager
Board - The Board of Trustees of the Trust
CD - Certificate of deposit
Class I and Class II - Certain funds in the Franklin Templeton Funds offer two
classes of shares, designated "Class I" and "Class II." The two classes have
proportionate interests in the same portfolio of investment securities. They
differ, however, primarily in their sales charge structures and Rule 12b-1
plans. Because the Fund's sales charge structure and Rule 12b-1 plan are similar
to those of Class I shares, shares of the Fund are considered Class I shares for
redemption, exchange and other purposes.
Code - Internal Revenue Code of 1986, as amended
Contingency Period - The 12 month period during which a Contingent Deferred
Sales Charge may apply. Regardless of when during the month you purchased
shares, they will age one month on the last day of that month and each following
month.
Contingent Deferred Sales Charge (CDSC) - A sales charge of 1% that may apply if
you sell your shares within one year.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
Eligible Governmental Authority - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
Exchange - New York Stock Exchange
Franklin Funds - The mutual funds in the Franklin Group of Funds(R)except
Franklin Valuemark Funds and the Franklin Government Securities Trust
Franklin Templeton Funds - The Franklin Funds and the Templeton Funds
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
Market Timer(s) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
Offering Price - The public offering price is based on the Net Asset Value per
share and includes the 4.50% sales charge.
Qualified Retirement Plan(s) - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TeleFACTS(R) - Franklin Templeton's automated customer servicing system
Templeton Funds - 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
Trust Company - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or another wholly owned
subsidiary of Resources.
SUPPLEMENT DATED
July 11, 1996
TO THE
STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN MICROCAP VALUE FUND
Dated December 12, 1995
I. The section "Officers and Trustees" is revised to add the following:
As of June 3, 1996, the officers and trustees, as a group, owned of record and
beneficially approximately 12,925 shares, or less than 1% of the Fund's total
outstanding shares. Many of the officers and trustees also own shares in other
funds in the Franklin Templeton Group of Funds.
II. The following is added as the last paragraph on page 22:
FINANCIAL STATEMENTS
The unaudited financial statements contained in the Semi-Annual Report to
Shareholders of the Trust, for the six month period ended April 30, 1996, are
incorporated herein by reference.
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?
What Are the Fund's Potential Risks?
Investment Restrictions
Officers and Trustees
Investment Advisory and Other Services
How Does the Fund Purchase
Securities For Its Portfolio?
How Do I Buy and Sell Shares?
How Are Fund Shares Valued?
Additional Information
Regarding Taxation
The Fund's Underwriter
General Information
Appendix
Financial Statements
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)
7251 West Palmetto Park Road
Boca Raton, FL 33433
Trustee
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)
One Parker Plaza
Fort Lee, NJ 07024
President, Chief
Executive Officer
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)
18 Park Road
Scarsdale, NY 10583
Trustee
Private Investor; and trustee of three of the investment companies in the
Franklin Group of Funds.
Leonard Rubin (70)
501 Broad Avenue
Ridgefield, NJ 07657
Trustee
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)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
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)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President -
Financial Reporting
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)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
and Chief
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)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
and Secretary
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)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
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)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer
and Principal
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)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
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)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
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
Name 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:
P(1+T)n = 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:
Yield = 2 [( a-b + 1)6 -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."
