282 STKR 9/96o
SUPPLEMENT DATED SEPTEMBER 1, 1996
TO THE PROSPECTUS FOR
FRANKLIN VALUE FUND
dated March 11, 1996
I. The section titled "Expense Table" is replaced with the following:
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the contractual management and Rule 12b-1 fees for the
current fiscal year and annualized operating expenses for the period March 11,
1996, to June 30, 1996. Your actual expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+ Class IClass II
Maximum Sales Charge Imposed on Purchases
(as a percentage of Offering Price)..................... 4.50% 1.00%++
Deferred Sales Charge+++................................. None 1.00%
B. ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees.......................................... 0.49%* 0.49%*
Rule 12b-1 Fees.......................................... 0.35%** 1.00%**
Other Expenses........................................... 0.51% 0.51%
Total Fund Operating Expenses............................ 1.35%* 2.00%*
C. EXAMPLE
Assume the annual return for each class is 5% and 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
Class I $58*** $86
Class II $40 $72
For the same Class II investment, you would pay projected expenses of $30 if
you did not sell your shares at the end of the first year. Your projected
expenses for the remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The Fund pays its operating expenses. The effects of these expenses are
reflected in the net asset value or dividends of each class 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.
++Although Class II has a lower front-end sales charge than Class I, its
Rule 12b-1 fees are higher. Over time you may pay more for Class II shares.
Please see "How Do I Buy Shares? - Deciding Which Class to Buy."
+++A contingent deferred sales charge of 1% may apply to Class I purchases
of $1 million or more if you sell the shares within one year and any Class
II purchase if you sell the shares within 18 months. There is no front-end
sales charge if you invest $1 million or more in Class I shares. See "How Do
I Sell Shares? - Contingent Deferred Sales Charge" for details.
*The investment manager has agreed in advance to limit its management fees
so that total operating expenses for Class I do not exceed 1.35% for the
current fiscal year. Without this reduction, contractual and expected
management fees would represent 0.75% of the Fund's average net assets and
total operating expenses for Class I and Class II would represent 1.61% and
2.26%, respectively. After October 31, 1996, the investment manager may end
this arrangement at any time.
**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.
II. This section is added following the Expense Summary.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has not
been audited.
March 11, 1996
to June 30, 1996
(unaudited)
PER SHARE OPERATING PERFORMANCE
Net asset value at beginning of period..................... $15.00
Net investment income...................................... .045
Net realized & unrealized gain on securities............... 1.025
Total from investment operations........................... 1.070
Distributions from net investment income................... (.03)
Distributions from realized capital gains................... --
Total distributions........................................ (.03)
Net asset value at end of period........................... $16.04
Total Return*.............................................. 7.13%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in 000's)...................... $3,950
Ratio of expenses to average net assets.................... 1.340%+
Ratio of expenses to average net assets
(before fee waiver and expense reduction)
(Note 6).................................................. 1.530%++
Ratio of net investment income to average net assets....... 1.480%++
Portfolio turnover rate.................................... 1.940%++
Average Commission Rate**.................................. .0396
+During the period indicated, the investment manager agreeed in advance to
waive all or a portion of its management fees and pay all or a portion of the
other expenses of the Fund.
++Annualized.
*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.
**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.
III. WHO MANAGES THE FUND?
The following sentence is added to the end of the first paragraph.
The Board monitors the Fund to ensure no material conflicts exist between the
two classes of shares. While none is expected, the Board will act appropriately
to resolve any material conflict that may arise.
The following paragraph replaces the second paragraph of this section.
As of July 1, 1996, Franklin Advisory Services, Inc. ("Advisory Services"),
with offices located at One Parker Plaza, Sixteenth Floor, Fort Lee, New
Jersey, 07024, 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.
The following sentence is added to the end of the second full paragraph on page
15:
Each class will pay its proportionate share of the management fee.
PLAN OF DISTRIBUTION
The second paragraph currently in this section applies to Class I only. The
following paragraphs are added:
Under the Class II plan, the Fund may pay Distributors up to 0.75% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the Class II
purchase.
The Fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
securities dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class.
IV. WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
This section is revised to add:
Dividends and capital gains are calculated and distributed the same way for
each class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of each class.
DISTRIBUTION OPTIONS
The first sentence of option 1 is replaced with the following:
You may buy additional shares of the same class 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. If
you own Class II shares, you may also reinvest your distributions in Class I
shares of the Fund.
The following sentence is added to option 2.
If you own Class II shares, you may also direct your distribution to buy Class
I shares of another Franklin Templeton Fund.
The second sentence of the last paragraph in this section is replaced with the
following.
IF YOU DO NOT SELECT AN OPTION, WE WILL AUTOMATICALLY REINVEST DIVIDEND AND
CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS OF THE FUND.
V. HOW DO I BUY SHARES?
The following discussion replaces the section titled "How Do I Buy Shares?"
OPENING YOUR ACCOUNT
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check. PLEASE INDICATE WHICH CLASS OF SHARES YOU WANT TO BUY. IF YOU DO NOT
SPECIFY A CLASS, YOUR PURCHASE WILL BE AUTOMATICALLY INVESTED IN CLASS I
SHARES.
Minimum
Investments*
To Open Your Account........ $2,500
To Add to Your Account...... $ 100
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares. Currently, the Fund does not allow investments by Market Timers.
DECIDING WHICH CLASS TO BUY
You should consider a number of factors when deciding which class of shares to
buy. IF YOU PLAN TO BUY $1 MILLION OR MORE IN A SINGLE PAYMENT OR YOU QUALIFY
TO BUY CLASS I SHARES WITHOUT A SALES CHARGE, YOU MAY NOT BUY CLASS II SHARES.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds; and
o you plan to sell a substantial number of your shares within approximately six
years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you
to buy Class I shares since there is no front-end sales charge, even though
these purchases may be subject to a contingent deferred sales charge. Any
purchase of $1 million or more is therefore automatically invested in Class I
shares. You may accumulate more than $1 million in Class II shares through
purchases over time, but if you plan to do this you should determine whether it
would be more beneficial for you to buy Class I shares through a Letter of
Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
PURCHASE PRICE OF FUND SHARES
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
Total Sales Charge Amount Paid
as a Percentage of to Dealer as a
Amount of Purchase Offering Net Amount Percentage of
at Offering Price Price Invested Offering Price*
CLASS I
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
CLASS II
Under $1,000,000**.................... 1.00% 1.01% 1.00%
*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.
Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated.
**A contingent deferred sales charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares?
Contingent Deferred Sales Charge." Please also see "Other Payments to
Securities Dealers" below for a discussion of payments Distributors may make
out of its own resources to securities dealers for certain purchases. Purchases
of Class II shares are limited to purchases below $1 million. Please see
"Deciding Which Class to Buy."
SALES CHARGE REDUCTIONS AND WAIVERS
- - If you qualify to buy shares under one of the sales charge reduction or
waiver categories described below, please include a written statement with
each purchase order explaining which privilege applies. If you don't
include this statement, we cannot guarantee that you will receive the sales
charge reduction or waiver.
Cumulative Quantity Discounts - Class I Only. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your Class I and Class II
shares in the Franklin Templeton Funds, as well as those of your spouse,
children under the age of 21 and grandchildren under the age of 21. If you are
the sole owner of a company, you may also add any company accounts, including
retirement plan accounts. 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 - Class I Only. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. 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 - Class I Only. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include 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.
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.
Sales Charge Waivers. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (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 Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 4:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. 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.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The contingent
deferred sales charge will not be waived if the shares reinvested were subject
to a contingent deferred sales charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
contingent deferred sales charge paid in connection with the earlier
redemption, but a new contingency period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within
365 days from the date the CD matures, including any rollover.
5. 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 Class I purchases by:
6. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
7. Group annuity separate accounts offered to retirement plans
8. 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 Class I Only" above.
9. 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.
10. Broker-dealers and qualified registered investment advisors who have
entered into a supplemental agreement with Distributors for their clients
who are participating in comprehensive fee programs, sometimes known as
wrap fee programs
11. Registered securities dealers and their affiliates, for their investment
accounts only
12. Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
13. 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
14. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
15. Accounts managed by the Franklin Templeton Group
16. 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 Class II purchases and certain Class I 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 may receive up to 1% of the purchase price for Class II
purchases. During the first year after the purchase, Distributors may keep a
part of the Rule 12b-1 fees associated with that purchase.
2. Securities dealers will receive up to 1% of the purchase price for Class I
purchases of $1 million or more.
3. Securities dealers may, in the sole discretion of Distributors, receive up
to 1% of the purchase price for Class I purchases made under waiver category 8
above. Please see "How Do I Buy and Sell Shares? - Other Payments to Securities
Dealers" in the SAI for any breakpoints that may apply.
4. Securities dealers may receive up to 0.25% of the purchase price for Class I
purchases made under waiver categories 6 and 9 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 where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as securities Dealers.
VI. WHAT IF MY INVESTMENT OUTLOOK CHANGES? - EXCHANGE PRIVILEGE
The following paragraphs are added after the first paragraph in the current
discussion.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no
drafts (checks) may be written on Money Fund II accounts.
Some Franklin Templeton Funds do not offer Class II shares.
The second paragraph under "ADDITIONAL INFORMATION REGARDING EXCHANGES" is
deleted and the following paragraphs are added:
Contingent Deferred Sales Charge - Class I. For accounts with Class I shares
subject to a contingent deferred sales charge, shares are exchanged into the
new fund in the order they were purchased. If you exchange Class I shares into
one of our money funds, the time your shares are held in that fund will not
count towards the completion of any contingency period.
Contingent Deferred Sales Charge - Class II. For accounts with Class II shares
subject to a contingent deferred sales charge, shares are exchanged into the
new fund proportionately based on the amount of shares subject to a contingent
deferred sales charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
CDSC, such as shares from the reinvestment of dividends and capital gains
("free shares"), $2,000 in shares that are no longer subject to a CDSC because
you have held them for longer than 18 months ("matured shares"), and $3,000 in
shares that are still subject to a CDSC ("CDSC liable shares"). If you exchange
$3,000 into a new fund, $500 will be exchanged from free shares, $1,000 from
matured shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged
into a new fund proportionately. For example, assume you purchased $1,000 in
shares 3 months ago, 6 months ago, and 9 months ago. If you exchange $1,500
into a new fund, $500 will be exchanged from shares purchased at each of these
three different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a contingent deferred sales charge if
they were sold. We believe the proportional method of exchanging Class II
shares more closely reflects the expectations of Class II shareholders if
shares are sold during the contingency period. The tax consequences of a sale
or exchange are determined by the Code and not by the method used by the Fund
to transfer shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
contingency period.
VII. HOW DO I SELL SHARES?
The first paragraph under the subsection titled "CONTINGENT DEFERRED SALES
CHARGE" is replaced with the following:
A contingent deferred sales charge may apply to Class I purchases of $1 million
or more if you sell all or a portion of the shares within one year and any
Class II purchase if you sell the shares within 18 months. The charge is 1% of
the value of the shares sold or the net asset value at the time of purchase,
whichever is less.
VIII. HOW ARE FUND SHARES VALUED?
The following paragraphs replace this section in its entirety.
The Fund is open for business each day the Exchange is open. We determine the
net asset value per share of each class 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 for each class in many newspapers.
The net asset value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate net
asset value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.
IX. HOW DO I GET MORE INFORMATION ABOUT MY INVESTMENT?
The first sentence of the third paragraph is replaced with the following.
You will need the code number for each class to use TeleFACTS. The code numbers
for Class I and Class II are 282 and 582, respectively.
X. HOW DOES THE FUND MEASURE PERFORMANCE?
The following sentence is added to the end of the first paragraph.
The Fund may advertise performance for both Class I and Class II shares.
XI. GENERAL INFORMATION
The following paragraphs are added under the subsection "Organization and Voting
Rights."
The Fund began offering two classes of shares on September 1, 1996: Franklin
Value Fund-Class I and Franklin Value Fund-Class II. All shares purchased
before that time are considered Class I shares.
Shares of each class represent proportionate interests in the assets of the
Fund and have the same voting and other rights and preferences as the other
class of the Fund for matters that affect the Fund as a whole. For matters that
only affect one class, however, only shareholders of that class may vote. Each
class will vote separately on matters (1) affecting only that class, (2)
expressly required to be voted on separately by state business trust law, or
(3) required to be voted on separately by the 1940 Act. Shares of each class of
a series have the same voting and other rights and preferences as the other
classes and series of the Trust for matters that affect the Trust as a whole.
XII. USEFUL TERMS AND DEFINITIONS
The following terms and definitions are revised or added as appropriate.
CD - Certificate of deposit
Class I and Class II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
Contingency Period - For Class I shares, the 12 month period during which a
contingent deferred sales charge may apply. For Class II shares, the
contingency period is 18 months. 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 the contingency period.
Designated Retirement Plans - this term is deleted.
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.
Letter - Letter of Intent
Manager - Advisory Services, the Fund's investment manager
NASD - National Association of Securities Dealers, Inc.
Offering Price - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
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
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
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.
FRANKLIN
VALUE FUND
Franklin Value Investors Trust
PROSPECTUS March 11, 1996
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin 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 long-term total return. It seeks to
achieve this objective by investing in the securities of companies that the
Fund's Manager believes are undervalued. The Fund may invest in domestic and
foreign securities as described under "How Does the Fund Invest Its Assets?"
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that you should know before investing. After reading
the Prospectus, you should retain it for future reference; it contains
information about the purchase and sale of shares and other items which you will
find useful.
An SAI concerning the Fund, dated March 11, 1996, as may be amended from time to
time, provides a further discussion of certain areas in this Prospectus and
other matters which may be of interest to you. It has been filed with the SEC
and is incorporated herein by reference. A copy is available without charge from
the Fund or from Distributors, at the address or telephone number shown above.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES REPRESENTATIVE, DEALER,
OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM THE UNDERWRITER.
CONTENTS PAGE
Expense Table.................... 2
What Is the Franklin Value Fund?. 4
How Does the Fund Invest Its Assets? 4
What Are the Fund's Potential Risks? 9
How You Participate in the
Results of the Fund's Activities 14
Who Manages the Fund?............ 14
What Distributions Might I
Receive from the Fund?.......... 16
How Taxation Affects You and the Fund 18
How Do I Buy Shares?............. 18
What Programs and Privileges
Are Available to Me as a Shareholder? 24
What If My Investment Outlook Changes? -
Exchange Privilege.............. 26
How Do I Sell Shares?............ 28
Telephone Transactions........... 32
How Are Fund Shares Valued?...... 33
How Do I Get More Information
About My Investment?............ 33
How Does the Fund Measure Performance? 34
General Information.............. 34
Registering Your Account......... 36
Important Notice Regarding
Taxpayer IRS Certifications..... 37
Useful Terms and Definitions..... 37
Appendix......................... 38
EXPENSE TABLE
The purpose of this table is to assist you in understanding the various costs
and expenses that you will bear directly or indirectly in connection with an
investment in the Fund. These figures are based on contractual management and
Rule 12b-1 fees and estimates of the other operating expenses of the Fund for
the current fiscal year.
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)................................ 4.50%
Deferred Sales Charge............................................... None+
+Investments of $1 million or more are not subject to a front-end sales charge;
however, a contingent deferred sales charge of 1% is generally imposed on
certain redemptions within a "contingency period" of 12 months of the calendar
month of such investments. See "How Do I Sell Shares? - Contingent Deferred
Sales Charge."
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees (after expense waiver).............................. 0.67%*
Rule 12b-1 Fees..................................................... 0.35%**
Other Expenses:
Registration Fees............................................ 0.10%
Reports to Shareholders...................................... 0.07%
Other Expenses............................................... 0.16%
Total Other Expenses................................................ 0.33%
Total Fund Operating Expenses....................................... 1.35%*
*The Manager has agreed in advance to waive a portion of its management fee so
that the Fund's aggregate annual operating expenses do not exceed 1.35% of the
Fund's average net assets for the current fiscal year. Absent this reduction,
management fees and total operating expenses are expected to represent 0.75% and
1.43% of the Fund's average net assets. After October 31, 1996, the Manager may
terminate this arrangement at any time.
**The maximum amount of Rule 12b-1 fees allowed pursuant to the Fund's
distribution plan is 0.35%. See "Who Manages the Fund? - Plan of Distribution."
Consistent with National Association of Securities Dealers, Inc.'s rules, it is
possible that the combination of front-end sales charges and Rule 12b-1 fees
could cause long-term shareholders to pay more than the economic equivalent of
the maximum front-end sales charges permitted under those same rules.
You should be aware that the above table is not intended to reflect in precise
detail the fees and expenses associated with an investment in the Fund. Rather,
the table has been provided only to assist you in gaining a more complete
understanding of fees, charges and expenses. For a more detailed discussion of
these matters, you should refer to the appropriate sections of this Prospectus.
EXAMPLE
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge, that apply to a $1,000 investment
in the Fund over various time periods assuming (1) a 5% annual rate of return
and (2) redemption at the end of each time period.
One Year Three Years
$58* $86
*Assumes that a contingent deferred sales charge will not apply.
This example is based on the aggregate annual operating expenses shown above and
should not be considered a representation of past or future expenses, which may
be more or less than those shown. The operating expenses are borne by the Fund
and only indirectly by you as a result of your investment in the Fund. See "Who
Manages the Fund?" for a description of the Fund's expenses. In addition,
federal securities regulations require the example to assume an annual return of
5%, but the Fund's actual return may be more or less than 5%.
WHAT IS THE FRANKLIN VALUE FUND?
The Fund is a non-diversified, open-end series of the Trust, a management
investment company, commonly called a "mutual fund." The Trust, formerly known
as the Franklin Balance Sheet Investment Fund, was organized as a Massachusetts
business trust on September 11, 1989, and registered with the SEC under the 1940
Act.
Shares of the Fund may be considered Class I shares, as described under "Useful
Terms and Definitions," for redemption, exchange and other purposes. The Fund
reserves the right to convert to a master/feeder structure at a future date.
Please see "General Information Conversion to Master/Feeder Structure."
HOW DOES THE FUND INVEST ITS ASSETS?
The investment objective of the Fund is to seek long-term total return. This
objective is a fundamental policy of the Fund and may not be changed without
shareholder approval. The Fund seeks to achieve this objective by investing at
least 65% of its assets in the securities of companies that the Manager believes
are undervalued. The securities in which the Fund may invest include common and
preferred stocks, warrants, secured and unsecured bonds, and notes. As with any
other investment, there is no assurance that the Fund's investment objective
will be achieved. Income is a secondary consideration of the Fund, although it
is not part of the Fund's investment objective.
The Fund invests at least 65% of its assets in companies of various sizes that
the Manager believes are selling substantially below the underlying value of
their assets or their private market value. Private market value is what a
sophisticated investor would pay for the entire company. The Manager may take
into account a variety of factors in order to determine whether to purchase or
hold securities, including: low price to earnings ratio relative to the market,
industry group or earnings growth; low price relative to book value or cash
flow; valuable franchises, patents, trademarks, trade names, distribution
channels or market share for particular products or services, tax loss
carry-forwards, or other intangibles that may not be reflected in stock prices;
ownership of understated or underutilized tangible assets such as land, timber
or minerals; underutilized cash or investment assets; and unusually high current
income. These criteria and others, alone and in combination, may identify
companies that are attractive to financial or strategic acquirers (i.e. takeover
candidates). Purchases may include companies in cyclical businesses, turnarounds
and companies emerging from bankruptcy. Purchase decisions may also be
influenced by company and its insiders' stock buy-backs.
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 that
the Manager believes are attractive, the Fund may invest up to 100% of its total
assets in: (1) securities of the U.S. government and certain of its agencies or
instrumentalities that mature in one year or less from the date of purchase,
including U.S. Treasury bills, notes and bonds, and securities of the Government
National Mortgage Association, the Federal Housing Administration and other
agency or instrumentality issues or guarantees which are supported by the full
faith and credit of the U.S. government; (2) obligations issued or guaranteed by
other U.S. government agencies or instrumentalities, some of which are supported
by the right of the issuer to borrow from the U.S. government (e.g., obligations
of the Federal Home Loan Banks) and some of which are backed by the credit of
the issuer itself (e.g., obligations of the Student Loan Marketing Association);
(3) bank obligations, including negotiable and non-negotiable certificates of
deposit (subject to the 10% aggregate limit on the Fund's investment in illiquid
securities), letters of credit and bankers' acceptances, or instruments secured
by these types of obligations, issued by banks and savings institutions that are
subject to regulation by the U.S. government, its agencies or instrumentalities
and that have assets of over one billion dollars, unless these types of
obligations are guaranteed by a parent bank which has total assets in excess of
five billion dollars; (4) commercial paper considered by the Manager to be of
high quality, which must be rated within the two highest rating categories by
Standard & Poor's Corporation ("S&P") or Moody's Investors Service ("Moody's")
or, if unrated, issued by a company having an outstanding debt issue rated at
least AA by S&P or Aa by Moody's; and (5) corporate obligations including, but
not limited to, corporate notes, bonds and debentures considered by the Manager
to be high grade or that are rated within the two highest rating categories by
S&P or Moody's. See "Appendix" for a discussion of ratings.
TYPES OF SECURITIES THE FUND MAY PURCHASE
Whether investing for value or for other reasons, the Manager may purchase any
of the types of securities described below and in the SAI. The Fund currently
intends to invest primarily in domestic securities, but it may also invest its
assets in foreign securities.
Common and Preferred Convertible Securities. The Fund may invest in convertible
securities, which are, in general, debt obligations or preferred stocks that may
be converted within a specified period of time into a certain amount of common
stock of the same or a different issuer. A convertible security provides a
fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance in
its underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Like a common stock, the
value of a convertible security tends to increase as the market value of the
underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because its value can be influenced by both interest
rate and market movements, a convertible security is not as sensitive to
interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock. The Fund may also invest in
convertible preferred stocks that offer enhanced yield features, such as
Preferred Equity Redemption Cumulative Stock ("PERCS"), and in synthetic
convertible securities. For more information regarding these investments, see
the discussion of convertible securities under "How Does the Fund Invest Its
Assets?" in the SAI.
Foreign Securities. As indicated above, the Fund may invest in foreign
securities, provided these investments are consistent with the Fund's investment
objective. The Fund may buy sponsored or unsponsored American Depositary
Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), and European Depositary
Receipts ("EDRs"). ADRs 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, while GDRs and EDRs are typically issued by foreign banks or
trust companies and evidence ownership of underlying securities issued by either
a foreign or a U.S. corporation. The Fund may also purchase the securities of
foreign issuers directly in foreign markets, and may purchase the securities of
issuers in developing nations. See "What Are the Fund's Potential Risks? -
Foreign Securities" in this Prospectus and "How Does the Fund Invest Its
Assets?" in the SAI.
Options. The Fund may write call options on securities that are listed on a
national securities exchange or traded over-the-counter ("OTC") and purchase
listed and OTC 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 either own
(i) the underlying security subject to the call or (ii) 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 for hedging or in covered positions,
if the option premiums paid on its open positions exceed 5% of the value of the
Fund's total assets. The Fund may enter into closing purchase transactions with
respect to its open option positions.
An option on a security is a contract that permits the purchaser of the option,
in return for the premium paid, the right to buy a specified security (call
option) or to sell a specified security (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 that, rather than
the right to purchase or sell particular securities at a specified price,
options on a securities index give the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of the underlying
stock index is greater than (for calls, or less than, for puts) the exercise
price of the option. The Fund may also engage in spread and straddle
transactions, although it intends to limit these transactions to no more than 5%
of the Fund's net assets at the time of purchase. See "What Are the Fund's
Potential Risks?" below for more information about options and "How Does the
Fund Invest Its Assets?" in the SAI for more information about options, spreads
and straddles.
Futures. The Fund may enter into contracts (i) for the purchase or sale for
future delivery of securities, (ii) based on securities indices and (iii)
options on these contracts, but at the present time the Fund intends to limit
these investments to no more than 5% of the Fund's net assets at the time of
purchase. See the discussion of futures under "How Does the Fund Invest Its
Assets?" in the SAI for more information.
Transactions in options, futures and options on futures are generally considered
"derivative securities." The Fund's investment in options, futures and options
on futures will be for portfolio hedging or other appropriate risk management
purposes in an effort to stabilize principal fluctuations to achieve the Fund's
investment objective and not for speculation.
Structured Notes. The Fund may invest in structured notes. Structured notes
entitle their holders to receive some portion of the principal or interest
payments that would be due on traditional debt obligations. A zero coupon bond,
which is the right to receive only the principal portion of a debt security, is
a simple form of structured note. A structured note's performance or value may
be linked to a change in return, interest rate, or value at maturity of the
change in an identified or "linked" equity security, currency, interest rate,
index or other financial indicator. The holder's right to receive principal or
interest payments on a structured note may also vary in timing or amount,
depending upon changes in certain rates of interest or other external events.
Loan Participations. Through a loan participation, the Fund can purchase from a
lender a portion of a larger loan that it has made to a borrower. By purchasing
loan participations, the Fund may be able to acquire interests in loans from
financially strong borrowers that the Fund could not otherwise acquire. These
instruments are typically interests in floating or variable rate senior loans to
U.S. corporations, partnerships, and other entities. Generally, loan
participations are sold without guarantee or recourse to the lending institution
and are subject to the credit risks of both the borrower and the lending
institution. While loan participations generally trade at par value, if the
borrowers have credit problems, some may sell at discounts. To the extent the
borrower's credit problems are resolved, the loan participations may then
appreciate in value. These loan participations, however, carry substantially the
same risk as that for defaulted debt obligations and may cause loss of the
entire investment. Most loan participations are illiquid and therefore will be
included in the Fund's percentage limitation for illiquid securities.
Mortgage-Backed and Asset-Backed Securities. The Fund may invest in
mortgage-backed securities, including collateralized mortgage obligations, which
represent direct or indirect participation in, or are collateralized by and
payable from, mortgage loans secured by real property. In addition, the Fund may
buy asset-backed securities, which represent participation in, or are secured by
and payable from, assets such as motor vehicle installment sale contracts,
installment loan contracts, leases of various types of real and personal
property, receivables from revolving credit (credit card) agreements and other
categories of receivables. These securities are generally issued by trusts and
special purpose corporations. Please see "What Are the Fund's Potential Risks? -
Mortgage-Backed and Asset-Backed Securities" below for more information.
Trade Claims. The Fund may invest in trade claims, which are purchased from
creditors of companies in financial difficulty who seek to reduce the number of
debt obligations they are owed. At the present time, however, the Fund intends
to limit these investments to no more than 5% of the Fund's net assets at the
time of purchase. See "How Does the Fund Invest Its Assets? - Trade Claims" in
the SAI for more information.
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, the ability
to internally generate funds necessary for growth or potential development, or
the ability to generate funds through external financing on favorable terms.
They may also attempt to develop or market 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. See "What Are the Fund's Potential Risks? - Small
Companies" below for more information.
High Yielding, Fixed-Income Securities. The Fund may invest up to 35% 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, which the Manager believes possess
intrinsic values in excess of the current market prices of such securities.
Lower rated bonds are commonly called "junk bonds." 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 they generally involve more credit risk than
securities in the higher rating categories. 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. Debt obligations rated D are in
default and the payment of interest and/or repayment of principal is in arrears.
See "What Are the Fund's Potential Risks?" below for more information.
Zero Coupon Securities and Pay-in-Kind Bonds. Zero coupon or deferred interest
securities are debt obligations which do not entitle the holder to any periodic
payments of interest prior to maturity or a specified date when the securities
begin paying current interest (the "cash payment date") and therefore are
generally issued and traded at a discount from their face amounts or par value.
The discount varies depending on the time remaining until maturity or cash
payment date, prevailing interest rates, liquidity of the security and the
perceived credit quality of the issuer. The discount, in the absence of
financial difficulties of the issuer, typically decreases as the final maturity
or cash payment date of the security approaches. The market prices of zero
coupon securities are generally more volatile than the market prices of
securities that pay interest periodically and are likely to respond to changes
in interest rates to a greater degree than do non-zero coupon or deferred
interest securities having similar maturities and credit quality. Current
federal income tax law requires that a holder of a zero coupon security report
as income each year the portion of the original issue discount on such security
that accrues that year, even though the holder receives no cash payments of
interest during the year.
Pay-in-kind bonds are securities which pay interest through the issuance of
additional bonds. The Fund will be deemed to receive interest over the life of
such bonds and be treated as if interest were paid on a current basis for
federal income tax purposes, although no cash interest payments are received by
the Fund until the cash payment date or until the bonds mature. Further
information is included under "What Are the Fund's Potential Risks?" and in the
tax section of the SAI.
Restricted Securities. Some of the securities the Fund purchases are considered
"restricted securities." Restricted securities are securities with legal or
contractual restrictions on resale, including securities that are not registered
under the 1933 Act. Securities not registered under the 1933 Act may not be sold
without first being registered, unless there is an available exemption under the
Act. Normally the costs of registering these securities is borne by the issuer.
Restricted securities involve certain risks, including the risk that a secondary
market may not exist when a holder wants to sell them. In addition, the price
and valuation of these securities may reflect a discount because they are
perceived as having less liquidity than the same securities that are not
restricted.
As with other securities in the Fund's portfolio, if no readily available market
quotations exist for any restricted securities, they will be valued at fair
value in accordance with the procedures adopted by the Board. If the Fund
suddenly has to sell restricted securities, time constraints or a lack of
interested, qualified buyers may prevent the Fund from receiving the carrying
value of the securities at the time of the sale. Alternatively, the Manager may
sell unrestricted securities it might have retained if the Fund had only held
unrestricted securities. See "How Does the Fund Invest Its Assets?" in the SAI
for more information.
OTHER INVESTMENT POLICIES OF 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%. This
collateral shall consist of cash, securities issued by the U.S. Government, its
agencies or instrumentalities, or irrevocable letters of credit.
Repurchase Agreements. The Fund may engage in repurchase transactions in which
the Fund purchases a U.S. government security subject to resale to a bank or
dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Fund in each agreement, with the value of the
underlying security marked-to-market daily to maintain coverage of at least
100%. A default by the seller might cause the Fund to experience a loss or delay
in the liquidation of the collateral securing the repurchase agreement. The Fund
might also incur disposition costs in liquidating the collateral. The Fund,
however, intends to enter into repurchase agreements only with financial
institutions such as broker-dealers and banks which are deemed creditworthy by
the Manager. A repurchase agreement is deemed to be a loan by the Fund under the
1940 Act. The U.S. government security subject to resale (the collateral) will
be held on behalf of the Fund by a custodian approved by the Board and will be
held pursuant to a written agreement.
Borrowing. The Fund does not borrow money or mortgage or pledge any of its
assets, except that it may borrow up to 331/3 of its total assets (including the
amount borrowed) in order to meet redemption requests that might otherwise
require the untimely disposition of portfolio securities or for other temporary
or emergency purposes and may pledge its assets in connection therewith. The
Fund will not make any additional investments while any borrowings exceed 5% of
its total assets.
Illiquid Investments. It is the policy of the Fund that illiquid securities
(securities that cannot be disposed of within seven days in the normal course of
business at approximately the amount at which the Fund has valued the
securities) may not constitute, at the time of purchase, more than 10% of the
value of the total net assets of the Fund.
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.
Portfolio Turnover. The Fund anticipates that its annual portfolio turnover rate
generally will not exceed 100%, but this rate should not be construed as a
limiting factor in the operation of the Fund's portfolio.
Other. The Fund is subject to a number of additional investment restrictions,
some of which may be changed only with the approval of shareholders, which limit
its activities to some extent. For a list of these restrictions and more
information about the policies discussed herein, please see "How Does the Fund
Invest Its Assets?" and "Investment Restrictions" in the SAI.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The Fund's Approach to Value Investing. The Fund will invest principally in the
securities of companies believed by the Manager to be undervalued. Securities of
a company may be undervalued as a result of overreaction by investors to
unfavorable news about a company, industry, the stock market in general, or as a
result of a market decline, poor economic conditions, tax-loss selling or actual
or anticipated unfavorable developments affecting a company. Often these
companies are attempting to recover from business setbacks or adverse events
(turnarounds), cyclical downturns, or, in certain cases, bankruptcy.
Cyclical stocks in which the Fund may invest tend to increase in value more
quickly during economic upturns than noncyclical stocks, but they also tend to
lose value more quickly in economic downturns. As with all investments, there is
always the possibility when investing in these securities that the Manager may
be incorrect in its assessment of a particular industry or company or that the
Manager may not purchase these securities at their lowest possible prices or
sell them at their highest.
The Fund's purchase of securities of companies emerging from bankruptcy may
present risks that do not exist with other investments. Companies emerging from
bankruptcy may have some difficulty retaining customers and suppliers who prefer
transacting with solvent organizations. If new management is installed in a
company emerging from bankruptcy, the management may be considered untested; if
the existing management is retained, the management may be considered
incompetent. Further, even when a company has emerged from bankruptcy with a
lower level of debt, it may still retain a relatively weak balance sheet. During
economic downturns these companies may not have sufficient cash flow to pay
their debt obligations and may also have difficulty finding additional
financing. In addition, reduced liquidity in the secondary market may make it
difficult for the Fund to sell the securities or to value them based on actual
trades.
The Fund's policy of investing in securities that may be out of favor, including
turnarounds, cyclicals and companies emerging from bankruptcy, companies
reporting poor earnings, and companies whose share prices have declined sharply
or which are not widely followed, differs from the approach followed by many
other mutual funds. The Manager believes, however, that these securities may
provide a greater total investment return than securities whose prices appear to
reflect anticipated favorable developments.
Non-diversification. As a non-diversified investment company under the 1940 Act,
the Fund may concentrate its investments in the securities of a smaller number
of issuers than if it were a diversified company under the 1940 Act. An
investment in the Fund therefore will entail greater risk than an investment in
a diversified investment company because a higher percentage of investments
among fewer issuers may result in greater fluctuation in the total market value
of the Fund's portfolio, and economic, political or regulatory developments may
have a greater impact on the value of the Fund's portfolio than would be the
case if the portfolio were diversified among more issuers. All securities in
which the Fund may invest are inherently subject to market risk, and the market
value of the Fund's investments will fluctuate. The Fund intends to comply with
the diversification and other requirements applicable to regulated investment
companies under the Code. For more information, please see the SAI.
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 the Manager, to offer more
potential for long-term capital appreciation or current earnings than
investments in U.S. issuers, the opportunity to invest in foreign countries with
economic policies or business cycles different from those of the U.S., and the
opportunity to reduce fluctuations in portfolio value by taking advantage of
foreign securities markets that do not necessarily move in a manner parallel to
U.S. markets.
Investments in securities of foreign issuers involve significant risks,
including possible losses that are not typically associated with investments in
securities of U.S. issuers. These risks include political, social or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of the imposition of exchange
controls, expropriation, limits on removal of currency or other assets,
nationalization of assets, foreign withholding and income taxation and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Changes in government administrations and economic or
monetary policies in the U.S. or abroad, changes in circumstances surrounding
dealings between nations, and changes in currency convertibility or exchange
rates could also result in investment losses for the Fund. Other risks include
the possibility that public information may not be as readily available for a
foreign company as it is for a U.S.-domiciled company, that foreign companies
are generally not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to U.S. companies, and that
there is usually less government regulation of securities exchanges, brokers and
listed companies. Confiscatory taxation or diplomatic developments could also
affect these investments.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with applicable U.S. and foreign currency
restrictions and other laws limiting the amount and type of foreign investments.
The Fund may purchase securities in any foreign country, developed or
developing, but investments will not be made in any securities issued without
stock certificates or comparable stock documents.
Foreign securities may be subject to greater fluctuations in price than U.S.
securities. The markets on which these securities trade may also have less
volume and liquidity. Securities acquired by the Fund outside the U.S. and which
are publicly traded in the U.S. or on a foreign securities exchange or in a
foreign securities market will not be considered illiquid so long as the Fund
acquires and holds the security with the intention of reselling the security in
the foreign trading market, the Fund reasonably believes it can readily dispose
of the security for cash in the U.S. or foreign market, and current market
quotations are readily available.
You should carefully consider the substantial risks involved in investing in
securities of foreign issuers - risks that are often heightened for investments
in developing markets. For example, the small size, inexperience and limited
volume of trading on securities markets in certain developing countries may make
the Fund's investments in developing countries illiquid and more volatile than
investments in more developed countries, and the Fund may be required to
establish special custody or other arrangements before making certain
investments in these countries. The laws of some foreign countries may also
limit the ability of the Fund to invest in securities of certain issuers located
in those countries.
Options. The purchase and sale of stock options and stock index options,
including the writing of covered call options, involve risks different from
those involved with direct investments in securities. A liquid secondary market
for any particular option may not be available when a position is sought to be
closed and the inability to close a position may have an adverse impact on the
Fund's ability to effectively hedge securities. In addition, there may be an
imperfect correlation between movements in the securities on which an option
contract is based and movements in the securities in the Fund's portfolio.
Successful use of option contracts is further dependent on the Manager's ability
to correctly predict movements in the securities markets, but no assurance can
be given that the Manager's judgment will be correct.
Mortgage-backed and Asset-backed Securities. Mortgage-backed and asset-backed
securities are often subject to more rapid repayment than their stated maturity
dates would indicate because of the pass-through of prepayments of principal on
the underlying loans. During periods of declining interest rates, prepayment of
loans underlying mortgage-backed and asset-backed securities can be expected to
accelerate, and thus impair the Fund's ability to reinvest the returns of
principal at comparable yields. Accordingly, the market values of these
securities will vary with changes in market interest rates generally and in
yield differentials among various kinds of U.S. Government Securities and other
mortgage-backed and asset-backed securities. Asset-backed securities present
certain additional risks that are not presented by mortgage-backed securities
because asset-backed securities generally do not have the benefit of a security
interest in collateral that is comparable to mortgage assets. There is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
Small Companies. Historically, small capitalization stocks have been more
volatile in price than larger capitalization stocks. Among the reasons for the
greater price volatility of these securities are the less certain growth
prospects of smaller firms, the lower degree of liquidity in the markets for
these 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
shares of a fund that invests a substantial portion of its net assets in small
company stocks to be more volatile than the shares of a fund that invests solely
in larger capitalization stocks.
High Yielding, Fixed-Income Securities. 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 and unrated securities
of comparable quality, including those commonly known as junk bonds, 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 securities rated BBB by S&P or
Baa by 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, these 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. Current prices for
defaulted bonds are generally significantly lower than their purchase price, and
the Fund may have unrealized losses on such defaulted securities that are
reflected in the price of the Fund's shares. In general, securities that default
lose much of their value in the time period prior to the actual default so that
the Fund's net assets are impacted prior to the default. 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 Manager may find it necessary to
replace such securities with lower yielding securities, which could result in
less net investment income to the Fund.
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. 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. For more information, see "How Are Fund Shares
Valued?" in the 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. The Fund may also acquire high yielding,
fixed-income securities during an initial underwriting. These securities involve
special risks because they are new issues. The Fund has no arrangement with its
underwriters or any other person concerning the acquisition of such securities,
and the Manager will carefully review the credit and other characteristics
pertinent to such new issues. See the risk section of the SAI for more
information.
Zero Coupon Securities and Pay-in-Kind Bonds. The credit risk factors pertaining
to lower rated securities also apply to lower rated zero coupon, deferred
interest and pay-in-kind bonds. These bonds carry an additional risk in that,
unlike bonds which pay interest throughout the period to maturity, the Fund will
realize no cash until the cash payment date and, if the issuer defaults, the
Fund may obtain no return at all on its investment. During periods when the Fund
receives no cash interest payments on its zero coupon securities or deferred
interest or pay-in-kind bonds, it may be required to dispose of portfolio
securities to meet the distribution requirements and such sales may be subject
to the risk factors discussed above. Zero coupon, deferred interest and
pay-in-kind bonds involve additional special considerations. The Fund is not
limited in the amount of its assets that may be invested in such securities.
HOW YOU PARTICIPATE IN THE
RESULTS OF THE FUND'S ACTIVITIES
The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
you own will increase. If the securities owned by the Fund decrease in value,
the value of your shares will also decline. In this way, you participate in any
change in the value of the securities owned by the Fund.
In addition to the factors which affect the value of individual securities, as
described in the preceding sections, you may anticipate that the value of Fund
shares will fluctuate with movements in the broader equity and bond markets.
To the extent the Fund's investments consist of debt securities, changes in the
prevailing interest rates in any of the countries in which the Fund is invested
will likely affect the value of the Fund's portfolio and thus its share price.
Increased rates of interest which frequently accompany higher inflation and/or a
growing economy could have a negative effect on the value of Fund shares. To the
extent the Fund's investments consist of common stocks, a decline in the stock
market of any country in which the Fund is invested may also be reflected in
declines in the Fund's share price. Changes in currency valuations will also
affect the price of Fund shares. History reflects both increases and decreases
in interest rates and in the valuation of the market and these may recur
unpredictably in the future.
WHO MANAGES THE FUND?
The Board has the primary responsibility for the overall management of the Fund
and for electing the officers of the Fund who are responsible for administering
its day-to-day operations.
Advisers serves as the Fund's investment manager. Advisers is a wholly-owned
subsidiary of Resources, a publicly owned holding company, the principal
shareholders of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its subsidiaries. Advisers acts as investment manager or administrator
to 36 U.S. registered investment companies (118 separate series) with aggregate
assets of over $80 billion.
The team responsible for the day-to-day management of the Fund's portfolio since
its inception is:
William Lippman
Portfolio Manager of Advisers
Mr. Lippman holds a bachelor of business administration degree from City College
New York and a master's degree in business administration from the Graduate
School of Business Administration of New York University. He has been with
Advisers since 1988.
Margaret McGee
Portfolio Manager of Advisers
Ms. McGee holds a bachelor of arts degree from William Paterson College. She has
been with Advisers since 1988.
Bruce C. Baughman
Portfolio Manager of Advisers
Mr. Baughman holds a bachelor of arts degree from Stanford University and a
master of science degree in accounting from New York University. He has been
with Advisers since 1988.
Pursuant to a management agreement, the Manager supervises and implements the
Fund's investment policies and provides certain administrative services and
facilities which are necessary to conduct the Fund's business. The Manager
performs similar services for other funds and there may be times when the
actions taken with respect to the Fund's portfolio will differ from those taken
by the Manager on behalf of other funds. Neither the Manager (including its
affiliates) nor its officers, directors or employees nor the officers and
trustees of the Fund are prohibited from investing in securities held by the
Fund or other funds which are managed or administered by the Manager to the
extent such transactions comply with the Fund's Code of Ethics. Please see
"Investment Advisory and Other Services" and "General Information" in the SAI
for further information on securities transactions and a summary of the Fund's
Code of Ethics.
The Fund is responsible for its own operating expenses including, but not
limited to, the Manager's fee; taxes, if any; custodian, legal and auditing
fees; fees and expenses of trustees who are not members of, affiliated with, or
interested persons of the Manager; salaries of any personnel not affiliated with
the Manager; insurance premiums; trade association dues; expenses of obtaining
quotations for calculating the value of the Fund's net assets; and printing and
other expenses which are not expressly assumed by the Manager.
Under the management agreement, the Fund is obligated to pay the Manager a fee
computed daily at the following annual rates: 0.75% per year on the first $500
million of the average daily net assets of the Fund, 0.625% per year on the next
$500 million of the average daily net assets of the Fund, and 0.50% per year on
the average daily net assets of the Fund in excess of $1 billion.
During the start-up period of the Fund, Advisers has agreed in advance to waive
a portion of its management fees so that the Fund's aggregate annual operating
expenses do not exceed 1.35% of the Fund's average net assets for the current
fiscal year. After October 31, 1996, the Manager may terminate this arrangement
at any time.
The management agreement specifies that the management fee will be reduced to
the extent necessary to comply with the most stringent limits on the expenses
which may be borne by the Fund as prescribed by any state in which the Fund's
shares are offered for sale. Currently, the most restrictive of such provisions
limits a fund's allowable expenses as a percentage of its average net assets for
each fiscal year to 2.5% of the first $30 million in assets, 2% of the next $70
million, and 1.5% of assets in excess of $100 million.
Among the responsibilities of the Manager under the management agreement is the
selection of brokers and dealers through whom transactions in the Fund's
portfolio securities will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more than one broker is
able to provide the best execution, the Manager will consider the furnishing of
quotations and of other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of shares of the Fund,
as factors in selecting a broker. Further information is included under "How
Does the Fund Purchase Securities For Its Portfolio?" in the SAI.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Investor Services, in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
PLAN OF DISTRIBUTION
A plan of distribution has been approved and adopted for the Fund (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, the Fund may
reimburse Distributors or others for all expenses incurred by Distributors or
others in the promotion and distribution of the Fund's shares. Such expenses may
include, but are not limited to, the printing of prospectuses and reports used
for sales purposes, expenses of preparing and distributing sales literature and
related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of Distributors' overhead expenses attributable to
the distribution of Fund shares, as well as any distribution or service fees
paid to securities dealers or their firms or others who have executed a
servicing agreement with the Fund, Distributors or its affiliates.
The maximum amount which the Fund may reimburse to Distributors or others for
such distribution expenses is 0.25% per annum of its average daily net assets,
payable on a quarterly basis. The Fund is also permitted to pay Distributors up
to an additional 0.10% per annum of its average daily net assets for
reimbursement of distribution expenses, also payable quarterly. All expenses of
distribution in excess of 0.35% per annum will be borne by Distributors, or
others who have incurred them, without reimbursement from the Fund.
The Plan also covers any payments to or by the Fund, Advisers, Distributors, or
other parties on behalf of the Fund, Advisers or Distributors, to the extent
such payments are deemed to be for the financing of any activity primarily
intended to result in the sale of shares issued by the Fund within the context
of Rule 12b-1. The payments under the Plan are included in the maximum operating
expenses which may be borne by the Fund. For more information, please see "The
Fund's Underwriter" in the SAI.
WHAT DISTRIBUTIONS MIGHT I
RECEIVE FROM THE FUND?
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income 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 capital gains from the prior fiscal year. The Fund may
make more than one distribution derived from net short-term and net long-term
capital gains in any year or adjust the timing of these distributions for
operational or other reasons.
DISTRIBUTION DATE
Although subject to change by the Board without prior notice to or approval by
shareholders, the Fund's current policy is to declare income dividends
quarterly, payable in March, June, September and December, for shareholders of
record on the first business day preceding the 15th of the month, payable on or
about the last business day of that month.
The amount of income dividend payments by the Fund is dependent upon the amount
of net income received by the Fund from its portfolio holdings, is not
guaranteed and is subject to the discretion of the Board. Fund shares are quoted
ex-dividend on the first business day following the record date (generally the
15th day of the month or prior business day depending on the record date). The
Fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
In order to be entitled to a dividend, you must have acquired Fund shares prior
to the close of business on the record date. If you are considering purchasing
Fund shares shortly before the record date of a distribution, you should be
aware that because the value of the Fund's shares is based directly on the
amount of its net assets, rather than on the principle of supply and demand, any
distribution of income or capital gain will result in a decrease in the value of
the Fund's shares equal to the amount of the distribution. While a dividend or
capital gain distribution received shortly after purchasing shares represents,
in effect, a return of a portion of your investment, it may be taxable as
dividend income or capital gain.
Distribution Options
You may choose to receive your distributions from the Fund in any of these ways:
1. Purchase additional shares of the Fund - You may purchase additional shares
of the Fund (without a sales charge or imposition of a contingent deferred sales
charge) by reinvesting capital gain distributions, or both dividend and capital
gain distributions. This is a convenient way to accumulate additional shares and
maintain or increase your earnings base.
2. Purchase shares of other Franklin Templeton Funds - You may direct your
distributions to purchase the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a contingent deferred sales
charge). Many shareholders find this a convenient way to diversify their
investments.
3. Receive distributions in cash - You may choose to receive dividends, or both
dividend and capital gain distributions in cash. You may have the money sent
directly to you, to another person, or to a checking account. If you choose to
send the money to a checking account, please see "Electronic Fund Transfers"
under "What Programs and Privileges Are Available to Me as a Shareholder?"
To select one of these options, please complete sections 6 and 7 of the
Shareholder Application included with this Prospectus or tell your investment
representative which option you prefer. If no option is selected, dividend and
capital gain distributions will be automatically reinvested in the Fund. You may
change the distribution option selected at any time by notifying the Fund by
mail or by telephone. Please allow at least seven days prior to the record date
for the Fund to process the new option.
HOW TAXATION AFFECTS YOU AND THE FUND
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For additional information on tax matters
relating to the Fund and its shareholders, see "Additional Information Regarding
Taxation" in the SAI.
The Fund intends to qualify and elect to be treated as a regulated investment
company under Subchapter M of the Code. By distributing all of its income and
meeting certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will not be liable for federal income or
excise taxes.
For federal income tax purposes, any income dividends which you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated for tax purposes as if paid by the
Fund and received by you on December 31 of the calendar year in which they are
declared.
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.
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 these dividends
and distributions.
If you are not a U.S. person for purposes of federal income taxation, you should
consult with your financial or tax advisors regarding the applicability of U.S.
withholding or other taxes on distributions received by you from the Fund and
the application of foreign tax laws to these distributions.
You should consult your tax advisors with respect to the applicability of state
and local intangible property or income taxes to your shares in the Fund and to
distributions and redemption proceeds received from the Fund.
HOW DO I BUY SHARES?
You may buy shares to open a Fund account with as little as $2,500 and make
additional investments at any time with as little as $100. These minimums may be
waived when shares are purchased by retirement plans. To open your account,
contact your investment representative or complete and sign the enclosed
Shareholder Application and return it to the Fund with your check.
PURCHASE PRICE OF FUND SHARES
You may buy shares at the public offering price, unless you qualify to purchase
shares at a discount or without a sales charge as discussed below. The offering
price will be calculated to two decimal places using standard rounding criteria.
QUANTITY DISCOUNTS IN SALES CHARGES
The sales charge you pay when you buy shares may be reduced based upon the size
of your purchase, as shown in the table below.
<TABLE>
<CAPTION>
Total Sales Charge
As a Percentage of
Amount Allowed to
Size of Transaction Net Amount Dealer as a Percentage
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>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. Distributors may at times reallow
the entire sales charge to the securities dealer. A securities dealer who
receives 90% or more of the sales commission may be deemed an underwriter under
the 1933 Act, as amended.
**A contingent deferred sales charge of 1% may be imposed on certain redemptions
of all or a part of an investment of $1 million or more. See "How Do I Sell
Shares? - Contingent Deferred Sales Charge."
***Please see "General - Other Payments to Securities Dealers" below for a
discussion of payments Distributors may make to securities dealers out of its
own resources.
Rights of Accumulation. To determine if you may pay a reduced sales charge, you
may add 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, to
the amount of your current purchase. To receive the reduction, you or your
investment representative must notify Distributors that your investment
qualifies for a discount.
Letter of Intent. You may purchase 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. You or your investment representative must inform us that the Letter is in
effect each time you purchase shares.
By completing the Letter of Intent section of the Shareholder Application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve five percent (5%) of the amount of the
total intended purchase in Fund shares registered in your name.
o You grant Distributors a security interest in these shares and appoint
Distributors as attorney-in-fact with full power of substitution to redeem any
or all of these reserved shares to pay any unpaid sales charge if you do not
fulfill the terms of the Letter.
o We will include the reserved shares in the total shares you own as reflected
on your periodic statements.
o You will receive dividend and capital gain distributions on the reserved
shares; we will pay or reinvest these distributions as you direct.
o Although you may exchange your shares, you may not liquidate reserved shares
until you complete the Letter or pay the higher sales charge.
o Our policy of reserving shares does not apply to certain benefit plans
described under "Purchases at Net Asset Value."
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 our
Shareholder Services Department.
Group Purchases. If you are a member of a qualified group, you may purchase Fund
shares at the reduced sales charge applicable 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. For example, if group
members previously invested and still hold $80,000 of Fund shares and invest
$25,000, the sales charge will be 3.75%.
We define a qualified group as one which (i) has been in existence for more than
six months, (ii) has a purpose other than acquiring Fund shares at a discount
and (iii) satisfies uniform criteria which enable Distributors to realize
economies of scale in its costs of distributing shares.
In addition, a qualified group must have more than 10 members, and be available
to arrange for meetings between our representatives and group members. It must
also agree to include sales and other materials related to the Franklin
Templeton Funds in publications and mailings to its members at reduced or no
cost to Distributors, and arrange for payroll deduction or other bulk
transmission of investments to the Fund.
If you select a payroll deduction plan, your investments will continue
automatically until you notify the Fund and your employer to discontinue further
investments. Due to the varying procedures used by employers to handle payroll
deductions, there may be a delay between the time of the payroll deduction and
the time the money reaches the Fund. We invest your purchase at the applicable
offering price per share determined on the day that the Fund receives both the
check and the payroll deduction data in required form.
PURCHASES AT NET ASSET VALUE
You may invest money from the following sources in shares of the Fund without
paying front-end or contingent deferred sales charges:
(i) a distribution that you have received from a Franklin Templeton Fund or a
real estate investment trust ("REIT") sponsored or advised by Franklin
Properties, Inc., if the distribution is returned within 365 days of its payment
date. You may reinvest Class II distributions in either Class I or Class II
shares, but Class I distributions may only be invested in Class I shares under
this privilege. For more information, see "Distribution Options" under "What
Distributions Might I Receive from the Fund?" or call Shareholder Services at
1-800/632-2301;
(ii) a redemption from a mutual fund with investment objectives similar to those
of the Fund, if (a) your investment in that fund was subject to either a
front-end or contingent deferred sales charge at the time of purchase, (b) the
fund is not part of the Franklin Templeton Funds, and (c) your redemption
occurred within the past 60 days;
(iii) a distribution from an existing retirement plan already invested in the
Franklin Templeton Funds (including the Franklin Templeton Profit Sharing 401(k)
plan), up to the total amount of the distribution. The distribution must be
returned to the Fund within 365 days of the distribution date; or
(iv) a redemption from Templeton Institutional Funds, Inc., if you then reinvest
the redemption proceeds under an employee benefit plan qualified under Section
401 of the Code, in shares of the Fund.
You may also reinvest the proceeds from a redemption of any of the Franklin
Templeton Funds at net asset value. To do so, you must (a) have paid a sales
charge on the purchase or sale of the original shares, (b) reinvest the
redemption money in the same class of shares, and (c) request the reinvestment
of the money within 365 days of the redemption date. You may reinvest up to the
total amount of the redemption proceeds under this privilege. If a different
class of shares is purchased, the full front-end sales charge must be paid at
the time of purchase of the new shares. While you will receive credit for any
contingent deferred sales charge paid on the shares redeemed, a new contingency
period will begin. Shares that were no longer subject to a contingent deferred
sales charge will be reinvested at net asset value and will not be subject to a
new contingent deferred sales charge. Shares exchanged into other Franklin
Templeton Funds are not considered "redeemed" for this privilege (see "What If
My Investment Outlook Changes? - Exchange Privilege").
If you immediately reinvested your redemption proceeds in a Franklin Bank
Certificate of Deposit ("CD") but you would like to reinvest them back into the
Franklin Templeton Funds as described above, you will have 365 days from the
date the CD (including any rollover) matures to do so.
If your securities dealer or another financial institution reinvests your money
in the Fund at net asset value for you, that person or institution may charge
you a fee for this service.
A redemption is a taxable transaction, but reinvestment without a sales charge
may affect the amount of gain or loss you recognize and the tax basis of the
shares reinvested. If you have a loss on the redemption, the loss may be
disallowed if you reinvest in the same fund within a 30-day period. If you would
like more information regarding the possible tax consequences of such a
reinvestment, please see the tax section of this Prospectus and the SAI.
Certain categories of investors also qualify to purchase shares of the Fund at
net asset value regardless of the source of the investment proceeds. If you or
your account is included in one of the categories below, none of the shares of
the Fund you purchase will be subject to front-end or contingent deferred sales
charges:
(i) companies exchanging shares or selling assets pursuant to a merger,
acquisition or exchange offer;
(ii) accounts managed by the Franklin Templeton Group;
(iii) certain unit investment trusts and unit holders of these trusts
reinvesting distributions from the trusts in the Fund;
(iv) registered securities dealers and their affiliates, for their investment
accounts only;
(v) current employees of securities dealers and their affiliates and their
family members, in accordance with the internal policies and procedures of the
employing securities dealer and affiliate;
(vi) broker-dealers who have entered into a supplemental agreement with
Distributors, or registered investment advisors affiliated with such
broker-dealers, on behalf of their clients who are participating in a
comprehensive fee program (sometimes known as a wrap fee program);
(vii) any state, county, or city, or any instrumentality, department, authority
or agency thereof which has determined that the Fund is a legally permissible
investment and which is prohibited by applicable investment laws from paying a
sales charge or commission in connection with the purchase of shares of any
registered management investment company ("an eligible governmental authority").
IF YOU ARE SUCH AN INVESTOR, PLEASE CONSULT YOUR OWN LEGAL ADVISORS TO DETERMINE
WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or the Manager on arbitrage rebate
calculations. If you are a securities dealer who has executed a dealer agreement
with Distributors and, through your services, an eligible governmental authority
invests in the Fund at net asset value, Distributors or one of its affiliates
may make a payment, out of its own resources, to you in an amount not to exceed
0.25% of the amount invested. Please contact the Franklin Templeton
Institutional Services Department for additional information;
(viii) officers, trustees, directors and full-time employees of the Franklin
Templeton Funds, or of the Franklin Templeton Group, and their family members.
Although you may pay sales charges on investments in accounts opened after your
association with us has ended, you may continue to invest in accounts opened
while you were with us without paying sales charges;
(ix) trust companies and bank trust departments that exercise exclusive
discretionary investment authority over funds held in a fiduciary, agency,
advisory, custodial or similar capacity and agree to invest at least $1 million
in Franklin Templeton Funds over a 13 month period. We will accept orders for
such 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 such order;
(x) group annuity separate accounts offered to retirement plans;
(xi) trustees or other fiduciaries purchasing securities for certain retirement
plans of organizations with collective retirement plan assets of $1 million or
more, without regard to where such assets are currently invested; or
(xii) Designated Retirement Plans. Non-Designated Retirement Plans may also
qualify to purchase shares of the Fund under this privilege if they meet the
requirements for Designated Retirement Plans and those described under "Group
Purchases" above.
If you qualify to buy shares at net asset value as discussed in this section,
please specify in writing the privilege that applies to your purchase and
include that written statement with your purchase order. We will not be
responsible for purchases that are not made at net asset value if this written
statement is not included with your order.
If you would like more information, please see "How Do I Buy and Sell Shares?"
in the SAI.
HOW DO I BUY SHARES IN CONNECTION WITH
TAX-DEFERRED RETIREMENT PLANS?
Your individual or employer-sponsored tax-deferred retirement plans may invest
in the Fund. You may use the Fund for an existing retirement plan, or, because
Trust Company can serve as custodian or trustee for retirement plans, you may
ask Trust Company to provide the plan documents and serve as custodian or
trustee. A plan document must be adopted in order for a retirement plan to be in
existence.
Brochures for Trust Company plans contain important information regarding
eligibility, contribution and deferral limits and distribution requirements.
Please note that you must use an application other than the one contained in
this Prospectus to establish a retirement plan account with Trust Company. To
obtain a retirement plan brochure or application, please call 1-800/DIAL BEN
(1-800/342-5236).
Please see "How Do I Sell Shares?" for information regarding redemptions from
retirement plan accounts. You must complete specific forms in order to receive
distributions from Trust Company retirement plans.
Individuals and plan sponsors should consult with legal, tax or benefits and
pension plan consultants before choosing a retirement plan. In addition, if you
are a retirement plan investor, you should consider consulting your investment
representatives or advisors about investment decisions within your plans.
GENERAL
The Fund continuously offers its shares through securities dealers who have an
agreement with Distributors. The Fund and Distributors may refuse any order for
the purchase of shares. Currently, the Fund does not allow investments by Market
Timers.
Securities laws of states in which the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required to register as securities dealers pursuant to state law.
Other Payments to Securities Dealers. Distributors will pay the following
commissions, out of its own resources, to securities dealers who initiate and
are responsible for purchases of $1 million or more: 1% on sales of $1 million
but less than $2 million, plus 0.80% on sales of $2 million but less than $3
million, plus 0.50% on sales of $3 million but less than $50 million, plus 0.25%
on sales of $50 million but less than $100 million, plus 0.15% on sales of $100
million or more. These breakpoints are reset every 12 months for purposes of
additional purchases.
Distributors or one of its affiliates may also pay up to 1% of the purchase
price to securities dealers who initiate and are responsible for purchases made
at net asset value by any of the entities described in paragraphs (ix), (xi) or
(xii) under "Purchases at Net Asset Value" above. These payments may not be made
to securities dealers or others in connection with the sale of Fund shares if
the payments might be used to offset administration or recordkeeping costs for
retirement plans or circumstances suggest that plan sponsors or administrators
might use or otherwise allow the use of Rule 12b-1 fees to offset such costs.
Please see "How Do I Buy and Sell Shares?" in the SAI for the breakpoints
applicable to these purchases.
Either Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with the
sale of shares of the Franklin Templeton Funds. In some cases, this compensation
may be available only to securities dealers whose representatives have sold or
are expected to sell significant amounts of shares of the Franklin Templeton
Funds. Compensation may include financial assistance and payments made in
connection with conferences, sales or training programs for employees of the
securities dealer, seminars for the public, advertising, sales campaigns and/or
shareholder services, programs regarding one or more of the Franklin Templeton
Funds and other programs or events sponsored by securities dealers, and payment
for travel expenses of invited registered representatives and their families,
including lodging, in connection with business meetings or seminars located
within or outside the U.S. 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 National Association of Securities
Dealers, Inc. None of this compensation is paid for by the Fund or its
shareholders.
For additional information about shares of the Fund, please see "How Do I Buy
and Sell Shares?" in the SAI. The SAI also includes a listing of the officers
and trustees of the Fund who are affiliated with Distributors. See "Officers and
Trustees."
WHAT PROGRAMS AND PRIVILEGES
ARE AVAILABLE TO ME AS A SHAREHOLDER?
Certain of the programs and privileges described in this section may not be
available directly from the Fund if your shares are held, of record, by a
financial institution or in a "street name" account or networked account through
the National Securities Clearing Corporation ("NSCC") (see "Registering Your
Account" in this Prospectus).
SHARE CERTIFICATES
Shares from an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by you, can be 2% or more of the value of the lost,
stolen or destroyed certificate. A certificate will be issued if requested by
you or your securities dealer.
CONFIRMATIONS
A confirmation statement will be sent to you quarterly to reflect the dividends
reinvested during the period and after each other transaction which affects your
account. This statement will also show the total number of shares you own,
including the number of shares in "plan balance" for your account.
AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan offers a convenient way to invest in the Fund.
Under the plan, you can arrange to have money transferred automatically from
your checking account to the Fund each month to buy additional shares. If you
are interested in this program, please refer to the Automatic Investment Plan
Application at the back of this Prospectus for the requirements of the program
or contact your investment representative. Of course, the market value of the
Fund's shares may fluctuate and a systematic investment plan such as this will
not assure a profit or protect against a loss. You may terminate the program at
any time by notifying Investor Services by mail or by phone.
SYSTEMATIC WITHDRAWAL PLAN
The Systematic Withdrawal Plan allows you to receive regular payments from your
account on a monthly, quarterly, semiannual or annual basis. To establish a
Systematic Withdrawal Plan, the value of your account must be at least $5,000
and the minimum payment amount for each withdrawal must be at least $50. Please
keep in mind that $50 is merely the minimum amount and is not a recommended
amount. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply.
If you would like to establish a Systematic Withdrawal Plan, please complete the
Systematic Withdrawal Plan section of the Shareholder Application included with
this Prospectus and indicate how you would like to receive your payments. You
may choose to receive your payments in any of the following ways:
1. Purchase shares of other Franklin Templeton Funds - You may direct your
payments to purchase the same class of shares of another Franklin Templeton
Fund.
2. Receive payments in cash - You may choose to receive your payments in cash.
You may have the money sent directly to you, to another person, or to a checking
account. If you choose to have the money sent to a checking account, please see
"Electronic Fund Transfers" below.
There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once your plan is established, any distributions paid by the
Fund will be automatically reinvested in your account. Payments under the plan
will be made from the redemption of an equivalent amount of shares in your
account, generally on the first business day of the month in which a payment is
scheduled. You will generally receive your payments within three to five days
after the shares are redeemed.
Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you.
Redemptions under a Systematic Withdrawal Plan are considered a sale for federal
income tax purposes. Because the amount withdrawn under the plan may be more
than your actual yield or income, part of the payment may be a return of your
investment.
While a Systematic Withdrawal Plan is in effect, shares must be held either in
plan balance or, where share certificates are outstanding, deposited with the
Fund. You should ordinarily not make additional investments in the Fund of less
than $5,000 or three times the amount of annual withdrawals under the plan
because of the sales charge on additional purchases. Shares redeemed under the
plan may also be subject to a contingent deferred sales charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may terminate a Systematic Withdrawal Plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying Investor Services in
writing at least seven business days prior to the end of the month preceding a
scheduled payment. The Fund may also terminate a Systematic Withdrawal Plan by
notifying you in writing and will automatically terminate a Systematic
Withdrawal Plan if all shares in your account are withdrawn or if the Fund
receives notification of the shareholder's death or incapacity.
ELECTRONIC FUND TRANSFERS
You may choose to have distributions from the Fund or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the checking
account is maintained at a bank that is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
you choose this option, please allow at least fifteen days for initial
processing. Any payments made during that time will be sent to the address of
record on your account.
INSTITUTIONAL ACCOUNTS
There may be additional methods of buying, selling or exchanging shares of the
Fund available to institutional accounts. For further information, contact the
Franklin Templeton Institutional Services Department at 1-800/321-8563.
WHAT IF MY INVESTMENT OUTLOOK CHANGES? - EXCHANGE PRIVILEGE
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these funds are
offered to the public with a sales charge. If your investment objective or
outlook for the securities markets changes, Fund shares may be exchanged for the
same class of shares of another Franklin Templeton Fund eligible for sale in
your state of residence and in conformity with that fund's stated eligibility
requirements and investment minimums.
No exchanges between different classes of shares will be allowed. You may choose
to sell your shares of the Fund and buy Class II shares of another Franklin
Templeton Fund but such purchase will be subject to that fund's Class II
front-end and contingent deferred sales charges. Although there are no exchanges
between different classes of shares, Class II shareholders of a Franklin
Templeton Fund may elect to direct their dividends and capital gain
distributions to the Fund at net asset value.
A contingent deferred sales charge will not be imposed on exchanges. If,
however, the exchanged shares were subject to a contingent deferred sales charge
in the original fund purchased and shares are subsequently redeemed within the
contingency period, a contingent deferred sales charge will be imposed.
Before making an exchange, you should review the prospectus of the fund you wish
to exchange from and the fund you wish to exchange into for all specific
requirements or limitations on exercising the exchange privilege, for example,
limitations on a fund's sale of its shares, minimum holding periods for
exchanges at net asset value, or applicable sales charges.
You may exchange shares in any of the following ways:
BY MAIL
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
BY TELEPHONE
You or your investment representative of record, if any, may exchange shares of
the Fund by calling Investor Services at 1-800/632-2301 or the automated
TeleFACTS(R) system (day or night) at 1-800/247-1753. If you do not wish this
privilege extended to a particular account, you should notify the Fund or
Investor Services.
The telephone exchange privilege allows you to effect exchanges from the Fund
into an identically registered account of the same class of shares in one of the
other available Franklin Templeton Funds. The telephone exchange privilege is
available only for uncertificated shares or those which have previously been
deposited in your account. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Please see "Telephone Transactions - Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, you should follow the other exchange
procedures discussed in this section, including the procedures for processing
exchanges through securities dealers.
THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "By Telephone" above.
Such a dealer-ordered exchange will be effective only for uncertificated shares
on deposit in your account or for which certificates have previously been
deposited. A securities dealer may charge a fee for handling an exchange.
ADDITIONAL INFORMATION REGARDING EXCHANGES
Exchanges are made on the basis of the net asset value of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the original
investment in the Franklin Templeton Funds was made pursuant to the privilege
permitting purchases at net asset value, as discussed under "How Do I Buy
Shares?" Exchanges of shares of the Fund which were purchased with a lower sales
charge into a fund which has a higher sales charge will be charged the
difference, unless the shares were held in the Fund for at least six months
prior to executing the exchange.
The contingency period during which a contingent deferred sales charge may be
assessed will be tolled (or stopped) for the period shares are exchanged into
and held in a Franklin or Templeton money market fund. If your account has
shares subject to a contingent deferred sales charge, shares will be exchanged
into the new account on a "first-in, first-out" basis. See "How Do I Sell
Shares? Contingent Deferred Sales Charge" for a discussion of investments
subject to a contingent deferred sales charge.
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be transferred to
the fund being exchanged into and will be invested at net asset value. Because
the exchange is considered a redemption and purchase of shares, you may realize
a gain or loss for federal income tax purposes. Backup withholding and
information reporting may also apply. Information regarding the possible tax
consequences of such an exchange is included in the tax section in this
Prospectus and under "Additional Information Regarding Taxation" in the SAI.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing money market
instruments, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objective exist immediately. Subsequently,
this money will be withdrawn from such short-term money market instruments and
invested in portfolio securities in as orderly a manner as is possible when
attractive investment opportunities arise.
The exchange privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
RETIREMENT PLAN ACCOUNTS
Franklin Templeton IRA and 403(b) retirement plan accounts may exchange shares
directly. Certain restrictions may apply, however, to other types of retirement
plans. See "Restricted Accounts" under "Telephone Transactions."
MARKET TIMERS
The Fund currently will not accept investments from Market Timers.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time and receive from the Fund the
value of the shares. You may sell shares in any of the following ways:
BY MAIL
Send a written request signed by all registered owners to Investor Services, at
the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. You will then receive from the Fund the
value of the shares redeemed based upon the net asset value per share (less a
contingent deferred sales charge, if applicable) next computed after the written
request in proper form is received by Investor Services. Redemption requests
received after the time at which the net asset value is calculated will receive
the price calculated on the following business day. The net asset value per
share is determined as of the scheduled close of the Exchange (generally 1:00
p.m. Pacific time) each day that the Exchange is open for trading. You are
requested to provide a telephone number where you may be reached during business
hours, or in the evening if preferred. Investor Services' ability to contact you
promptly when necessary will speed the processing of the redemption.
To be considered in proper form, signatures must be guaranteed if the redemption
request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owners of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
address of record, preauthorized bank account or brokerage firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions, including,
for example, when (a) the current address of one or more joint owners of an
account cannot be confirmed, (b) multiple owners have a dispute or give
inconsistent instructions to the Fund, (c) the Fund has been notified of an
adverse claim, (d) the instructions received by the Fund are given by an agent,
not the actual registered owner, (e) the Fund determines that joint owners who
are married to each other are separated or may be the subject of divorce
proceedings, or (f) the authority of a representative of a corporation,
partnership, association, or other entity has not been established to the
satisfaction of the Fund.
Signatures must be guaranteed by an "eligible guarantor institution" as defined
under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
that are members of a national securities exchange or a clearing agency or that
have minimum net capital of $100,000; or (4) institutions that participate in
the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
When shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered owners exactly as the account is
registered, with the signatures guaranteed as referenced above. You are advised,
for your protection, to send the share certificate and assignment form in
separate envelopes if they are being mailed in for redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officers of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustees and (2)
a copy of the pertinent pages of the trust document listing the trustees or a
Certification for Trust if the trustees are not listed on the account
registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and applicable state
law since these accounts have varying requirements, depending upon the state of
residence.
Payment for redeemed shares will be sent to you within seven days after receipt
of the request in proper form.
BY TELEPHONE
If you complete the Franklin Templeton Telephone Redemption Authorization
Agreement (the "Agreement"), included with this Prospectus, you may redeem
shares of the Fund by telephone, subject to the Restricted Account exception
noted under "Telephone Transactions - Restricted Accounts". You may obtain
additional information about telephone redemptions by writing to the Fund or
Investor Services at the address shown on the cover or by calling
1-800/632-2301. The Fund and Investor Services will employ reasonable procedures
to confirm that instructions given by telephone are genuine. You, however, bear
the risk of loss in certain cases as described under "Telephone Transactions -
Verification Procedures."
If your account has a completed Agreement on file, redemptions of uncertificated
shares or shares which have previously been deposited with the Fund or Investor
Services may be made for up to $50,000 per day per Fund account. Telephone
redemption requests received before the scheduled close of the Exchange
(generally 1:00 p.m. Pacific time) on any business day will be processed that
same day. The redemption check will be sent within seven days, made payable to
all the registered owners on the account, and will be sent only to the address
of record.
Redemption requests by telephone will not be accepted within 30 days following
an address change by telephone. In that case, you should follow the other
redemption procedures set forth in this Prospectus. Institutional accounts
(certain corporations, bank trust departments, qualified retirement plans and
government entities that qualify to purchase shares at net asset value pursuant
to the terms of this Prospectus) that wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which is
available from the Franklin Templeton Institutional Services Department by
calling 1-800/321-8563.
THROUGH SECURITIES DEALERS
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if you redeem
shares through a dealer, the redemption price will be the net asset value next
calculated after your dealer receives the order which is promptly transmitted to
the Fund, rather than on the day the Fund receives your written request in
proper form. The documents described under "By Mail" above, as well as a signed
letter of instruction, are required regardless of whether you redeem shares
directly or submit such shares to a securities dealer for repurchase. Your
letter should reference the Fund, the account number, the fact that the
repurchase was ordered by a dealer and the dealer's name. Details of the
dealer-ordered trade, such as trade date, confirmation number, and the amount of
shares or dollars, will help speed processing of the redemption. The seven-day
period within which the proceeds of your redemption will be sent will begin when
the Fund receives all documents required to complete ("settle") the repurchase
in proper form. The redemption proceeds will not earn dividends or interest
during the time between receipt of the dealer's repurchase order and the date
the redemption is processed upon receipt of all documents necessary to settle
the repurchase. Thus, it is in your best interest to have the required
documentation completed and forwarded to the Fund as soon as possible. Your
dealer may charge a fee for handling the order. See "How Do I Buy and Sell
Shares?" in the SAI for more information on the redemption of shares.
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers, all or a portion of
investments of $1 million or more redeemed within the contingency period of 12
months of the calendar month of such investment will be assessed a contingent
deferred sales charge, unless one of the exceptions described below applies. The
charge is 1% of the lesser of the value of the shares redeemed (exclusive of
reinvested dividends and capital gain distributions) or the net asset value at
the time of purchase of such shares, and is retained by Distributors. The
contingent deferred sales charge is waived in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation on shares held less than the contingency
period; (ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than the contingency period.
Shares subject to a contingent deferred sales charge will then be redeemed on a
"first-in, first-out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
The contingent deferred sales charge is waived, as applicable, for: specified
net asset value purchases discussed under "How Do I Buy Shares? - Purchases at
Net Asset Value"; exchanges; any account fees; distributions from an individual
retirement plan account due to death or disability or upon periodic
distributions based on life expectancy; tax-free returns of excess contributions
from employee benefit plans; distributions from employee benefit plans,
including those due to termination or plan transfer; redemptions initiated by
the Fund due to an account falling below the minimum specified account size;
redemptions following the death of the shareholder or beneficial owner; and
redemptions through a Systematic Withdrawal Plan set up for shares prior to
February 1, 1995, and for Systematic Withdrawal Plans set up thereafter,
redemptions of up to 1% monthly of an account's net asset value (3% quarterly,
6% semiannually or 12% annually). For example, if an account maintained an
annual balance of $1,000,000, only $120,000 could be withdrawn through a
once-yearly Systematic Withdrawal Plan free of charge. Any amount over that
$120,000 would be assessed a 1% contingent deferred sales charge.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Unless otherwise specified, requests for redemptions of a specified dollar
amount will result in additional shares being redeemed to cover any applicable
contingent deferred sales charge, while requests for redemption of a specific
number of shares will result in the applicable contingent deferred sales charge
being deducted from the total dollar amount redeemed.
ADDITIONAL INFORMATION REGARDING REDEMPTIONS
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption.
The right of redemption may be suspended or the date of payment postponed if the
Exchange is closed (other than customary closing) or upon the determination of
the SEC that trading on the Exchange is restricted or an emergency exists, or if
the SEC permits it, by order, for the protection of shareholders. Of course, the
amount received may be more or less than the amount you invested, depending on
fluctuations in the market value of securities owned by the Fund.
RETIREMENT PLAN ACCOUNTS
Retirement plan account liquidations require the completion of certain
additional forms to ensure compliance with IRS regulations. To liquidate a
retirement plan account, you or your securities dealer may call Franklin's
Retirement Plans Department to obtain the necessary forms.
Tax penalties will generally apply to any distribution from such plans to a
participant under age 591/2, unless the distribution meets one of the exceptions
set forth in the Code.
OTHER INFORMATION
Distribution or redemption checks sent to you do not earn interest or any other
income during the time such checks remain uncashed and neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
For any information required about a proposed liquidation, you may call
Franklin's Shareholder Services Department. Securities dealers may call
Franklin's Dealer Services Department.
TELEPHONE TRANSACTIONS
By calling Investor Services at 1-800/632-2301, you or your investment
representative of record, if any, may be able to execute various telephone
transactions, including to: (i) effect a change in address, (ii) change a
dividend option (see "Restricted Accounts" below), (iii) transfer Fund shares in
one account to another identically registered account in the Fund, (iv) request
the issuance of certificates (to be sent to the address of record only) and (v)
exchange Fund shares as described in this Prospectus by telephone. In addition,
if you complete and file an Agreement as described under "How Do I Sell Shares?
- - By Telephone" you will be able to redeem shares of the Fund.
VERIFICATION PROCEDURES
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to you caused by an unauthorized transaction. The Fund and
Investor Services may be liable for any losses due to unauthorized or fraudulent
instructions in the event such reasonable procedures are not followed. You are,
of course, under no obligation to apply for or accept telephone transaction
privileges. In any instance where the Fund or Investor Services is not
reasonably satisfied that instructions received by telephone are genuine, the
requested transaction will not be executed, and neither the Fund nor Investor
Services will be liable for any losses which may occur because of a delay in
implementing a transaction.
RESTRICTED ACCOUNTS
Telephone redemptions and dividend option changes may not be accepted on
Franklin Templeton retirement accounts. To assure compliance with all applicable
regulations, special forms are required for any redemption, distribution or
dividend payment changes. While the telephone exchange privilege is extended to
Franklin Templeton IRA and 403(b) retirement accounts, certain restrictions may
apply to other types of retirement plans.
To obtain further information regarding distribution or transfer procedures,
including any required forms, retirement account shareholders may call to speak
to a Retirement Plan Specialist at 1-800/527-2020.
GENERAL
During periods of drastic economic or market changes, it is possible that the
telephone transaction privilege will be difficult to execute because of heavy
telephone volume. In these situations, you may wish to contact your investment
representative for assistance or send written instructions to the Fund as
detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from your inability to execute a telephone transaction.
HOW ARE FUND SHARES VALUED?
The net asset value per share of the Fund is determined as of the scheduled
close of the Exchange (generally 1:00 p.m. Pacific time) each day that the
Exchange is open for trading. Many newspapers carry daily quotations of the
prior trading day's closing "bid" (net asset value) and "ask" (offering price).
The net asset value per share of the Fund is determined by deducting the
aggregate gross value of all liabilities from the aggregate gross value of all
assets, and then dividing the difference by the number of shares outstanding.
Assets in the Fund's portfolio are valued as described under "How Are Fund
Shares Valued?" in the SAI.
HOW DO I GET MORE INFORMATION ABOUT MY INVESTMENT?
Any questions or communications regarding your account should be directed to
Investor Services at the address shown on the back cover of this Prospectus.
From a touch-tone phone, you may access TeleFACTS(R). By calling the TeleFACTS
system (day or night) at 1-800/247-1753, you may obtain account information,
current price and, if available, yield or other performance information specific
to the Fund or any Franklin Templeton Fund. In addition, you may process an
exchange, within the same class, into an identically registered Franklin account
and request duplicate confirmation or year-end statements and deposit slips.
The Fund code, which will be needed to access system information, is 282. The
system's automated operator will prompt you with easy to follow step-by-step
instructions from the main menu. Other features may be added in the future.
To assist you and securities dealers wishing to speak directly with a
representative, the following list of Franklin departments, telephone numbers
and hours of operation is provided.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
HOW DOES THE FUND MEASURE PERFORMANCE?
Advertisements, sales literature and communications to you may contain several
measures of the Fund's performance, including current yield, various expressions
of total return and current distribution rate. They may also occasionally cite
statistics to reflect the Fund's volatility or risk.
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price for one-, five- and ten-year periods, or portion thereof,
to the extent applicable, through the end of the most recent calendar quarter,
assuming reinvestment of all distributions. The Fund may also furnish total
return quotations for other periods or based on investments at various sales
charge levels or at net asset value. For such purposes total return equals the
total of all income and capital gain paid to shareholders, assuming reinvestment
of all distributions, plus (or minus) the change in the value of the original
investment, expressed as a percentage of the purchase price.
Current yield reflects the income per share earned by the Fund's portfolio
investments. It is calculated by dividing the Fund's net investment income per
share during a recent 30-day period by the maximum public offering price on the
last day of that period and annualizing the result.
Current yield for the Fund, which is calculated according to a formula
prescribed by the SEC (see "General Information" in the SAI), is not indicative
of the dividends or distributions which were or will be paid to the Fund's
shareholders. Dividends or distributions paid to shareholders of the Fund are
reflected in the current distribution rate, which may be quoted to you. The
current distribution rate is computed by dividing the total amount of dividends
per share paid by the Fund during the past 12 months by a current maximum
offering price. Under certain circumstances, such as when there has been a
change in the amount of dividend payout or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid during the
period such policies were in effect, rather than using the dividends during the
past 12 months. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing
and short-term capital gain, and is calculated over a different period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against Fund income and will assume the payment of the maximum
sales charge on the purchase of shares. When there has been a change in the
sales charge structure, the historical performance figures will be restated to
reflect the new rate. The investment results of the Fund, like all other
investment companies, will fluctuate over time; thus, performance figures should
not be considered to represent what an investment may earn in the future or what
the Fund's performance may be in any future period.
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS
The Fund's fiscal year ends October 31. Annual Reports containing audited
financial statements of the Fund, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to each household, as
well as to reduce Fund expenses, Investor Services will attempt to identify
related shareholders within a household and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to the Fund at
the telephone number or address set forth on the cover page of this Prospectus.
Additional information on Fund performance is included in the Trust's Annual
Report to Shareholders and under "General Information" in the SAI.
ORGANIZATION AND VOTING RIGHTS
The Agreement and Declaration of Trust permits the trustees to issue an
unlimited number of full and fractional shares of beneficial interest of $.01
par value, which may be issued in any number of series and classes. Shares
issued will be fully paid and non-assessable and will have no preemptive,
conversion, or sinking rights. Shares of each series have equal and exclusive
rights as to dividends and distributions as declared by such series and the net
assets of such series upon liquidation or dissolution. Additional series or
classes may be added in the future by the Board.
Voting rights are noncumulative, so that in any election of trustees, the
holders of more than 50% of the shares voting can elect all of the trustees, if
they choose to do so, and in such event the holders of the remaining shares
voting will not be able to elect any person or persons to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust may,
however, hold a special shareholders' meeting of a series for such purposes as
changing fundamental investment restrictions, approving a new management
agreement or any other matters which are required to be acted on by shareholders
under the 1940 Act. A meeting may also be called by the trustees in their
discretion or by shareholders holding at least ten percent of the outstanding
shares of the Trust. Shareholders will receive assistance in communicating with
other shareholders in connection with the election or removal of trustees such
as that provided in Section 16(c) of the 1940 Act.
CONVERSION TO MASTER/FEEDER STRUCTURE
The Board reserves the right to convert the Fund to a master/feeder structure at
a future date. Currently, the Fund invests directly in a portfolio of
securities. Certain funds administered by the Manager participate as feeder
funds in master/feeder fund structures. Under a master/feeder structure, one or
more feeder funds, such as the Fund, invests its assets in a master fund which,
in turn, invests its assets directly in the securities. Various state
governments have adopted the North American Securities Administrators
Association Guidelines for registration of master/feeder funds. If required by
those guidelines, as then in effect, the Fund will seek shareholder approval
prior to converting the Fund to a master/feeder structure, subject to there not
being adopted a superseding contrary provision or ruling under federal law. If
it is determined by the requisite regulatory authorities that such approval is
not required, you will be deemed to have consented to such conversion by your
purchase of Fund shares and no further shareholder approval will be sought or
needed. You will, however, be informed in writing in advance of the conversion.
The determination to convert the Fund to a master/feeder fund structure will not
result in an increase in the fees or expenses paid by you or the Fund. The
investment objective and other fundamental policies of the Fund, which can be
changed only with shareholder approval, are structured so as to permit the Fund
to invest directly in securities or indirectly in securities through a
master/feeder fund structure.
REDEMPTIONS BY THE FUND
The Fund reserves the right to redeem your shares, at net asset value, if your
account has a value of less than $1,250, but only where the value of your
account has been reduced by the prior voluntary redemption of shares and has
been inactive (except for the reinvestment of distributions) for a period of at
least six months, provided you are given advance notice. For more information,
see "How Do I Buy and Sell Shares?" in the SAI.
REGISTERING YOUR ACCOUNT
An account registration should reflect your intentions as to ownership. Where
there are two co-owners on the account, the account will be registered as "Owner
1" and "Owner 2"; the "or" designation is not used except for money market fund
accounts. If co-owners wish to have the ability to redeem or convert on the
signature of only one owner, a limited power of attorney may be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, you may transfer an account in the Fund carried in "street"
or "nominee" name by your securities dealer to a comparably registered Fund
account maintained by another securities dealer. Both the delivering and
receiving securities dealers must have executed dealer agreements on file with
Distributors. Unless a dealer agreement has been executed and is on file with
Distributors, the Fund will not process the transfer and will so inform your
delivering securities dealer. To effect the transfer, you should instruct the
securities dealer to transfer the account to a receiving securities dealer and
sign any documents required by the securities dealers to evidence consent to the
transfer. Under current procedures, the account transfer may be processed by the
delivering securities dealer and the Fund after the Fund receives authorization
in proper form from your delivering securities dealer. Account transfers may be
effected electronically through the services of the NSCC.
The Fund may conclusively accept instructions from you or your nominee listed in
publicly available nominee lists, regardless of whether the account was
initially registered in the name of or by you, your nominee, or both. If a
securities dealer or other representative is of record on your account, you will
be deemed to have authorized the use of electronic instructions on the account,
including, without limitation, those initiated through the services of the NSCC,
to have adopted as instruction and signature any such electronic instructions
received by the Fund and Investor Services, and to have authorized them to
execute the instructions without further inquiry. At the present time, such
services which are available include the NSCC's "Networking," "Fund/SERV," and
"ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment or by calling Franklin's Fund
Information Department.
IMPORTANT NOTICE REGARDING
TAXPAYER IRS CERTIFICATIONS
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the IRS any taxable dividend, capital gain distribution, or other
reportable payment (including share redemption proceeds) and withhold 31% of any
such payments made to individuals and other non-exempt shareholders who have not
provided a correct taxpayer identification number ("TIN") and made certain
required certifications that appear in the Shareholder Application. You may also
be subject to backup withholding if the IRS or a securities dealer notifies the
Fund that the number furnished by you is incorrect or that you are subject to
backup withholding for previous under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by you is in
fact incorrect or upon the failure of a shareholder who has completed an
"awaiting TIN" certification to provide the Fund with a certified TIN within 60
days after opening the account.
USEFUL TERMS AND DEFINITIONS
1933 Act - Securities Act of 1933, as amended.
1940 Act - Investment Company Act of 1940, as amended.
Advisers - Franklin Advisers, Inc., the Fund's investment manager.
Board - The Board of Trustees of the Trust.
Class I and Class II - "Classes" of shares represent proportionate interests in
the same portfolio of investment securities but with different rights,
privileges and attributes, as determined by the trustees. Certain funds in the
Franklin Templeton Funds currently offer their shares in two classes, designated
"Class I" and "Class II." Because the Fund's sales charge structure and plan of
distribution are similar to those of Class I shares, shares of the Fund may be
considered Class I shares for redemption, exchange and other purposes.
Code - Internal Revenue Code of 1986, as amended.
Designated Retirement Plans - certain retirement plans, including
profit-sharing, pension, 401(k) and simplified employee pension plans, that: (i)
are sponsored by an employer with at least 200 employees; (ii) have aggregate
plan assets of at least $1 million; or (iii) agree to invest at least $1 million
in any of the Franklin Templeton Funds over a 13 month period. Distributors
determines the qualifications for Designated Retirement Plans.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter.
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.
Letter - Letter of Intent.
Manager - Franklin Advisers, Inc., the Fund's investment manager.
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.
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. When you buy, sell or exchange shares, we will use
the NAV per share next calculated after we receive your request in proper form.
Non-Designated Retirement Plans - employee benefit plans not included as
"Designated Retirement Plans" and not qualified under Section 401 of the Code.
Offering price - The public offering price is equal to the net asset value per
share plus the 4.5% sales charge.
Proper Form (Purchases) - generally, the Fund must receive a completed
Shareholder Application accompanied by a negotiable check.
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information.
SEC - Securities and Exchange Commission.
Securities Dealer - financial institutions which, either directly or through
affiliates, have an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TeleFACTS(R) - Franklin Templeton's automated customer servicing system.
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.
APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS
Moody's
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds 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.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is 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 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 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 rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
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,
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.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Moody's
Moody's commercial paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Fund, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
282 STKST 9/96o SUPPLEMENT DATED SEPTEMBER 1, 1996
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN VALUE FUND
Dated March 11, 1996
I. The section "OFFICERS AND TRUSTEES" is revised to add the following:
As of July 19, 1996, the officers and trustees, as a group, owned of record and
beneficially 5,731.576 shares, or approximately 2% 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. "HOW DO I BUY AND SELL SHARES?"
The sales charge table at the top of page 15, referring to Taiwan investors,
applies only to Class I shares. The table is replaced with the following:
Size of Purchase - U.S. dollars Sales Charge
---------------------------------------------------------------------
Under $30,000 .................................. 3.0%
$30,000 but less than $50,000............................ 2.5%
$50,000 but less than $100,000........................... 2.0%
$100,000 but less than $200,000.......................... 1.5%
$200,000 but less than $400,000.......................... 1.0%
$400,000 or more .................................. 0%
The subsection "OTHER PAYMENTS TO SECURITIES DEALERS" is replaced with the
following:
Distributors will pay the following commissions, out of its own resources, to
Securities Dealers who initiate and are responsible for purchases of Class I
shares of $1 million or more: 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 to $100 million,
plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible
for purchases of Class I shares by certain retirement plans pursuant to a sales
charge waiver, as discussed in the Prospectus: 1% on sales of $500,000 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 to $100
million, plus 0.15% on sales over $100 million. 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 dealer
if shares are sold 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 one of its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
The reduced sales charge in the subsection LETTER OF INTENT applies only to
Class I shares.
III. The section "HOW ARE FUND SHARES VALUED?" is revised to add the following:
The Net Asset Value per share is calculated for each class of the Fund.
IV. Under "THE FUND'S UNDERWRITER," the section Distribution Plan is amended as
follows:
The first paragraph in this section applies only to Class I's Rule 12b-1 plan.
The following paragraphs are inserted after the first paragraph in this section.
The Class II Plan. Under the Class II plan, the Fund pays Distributors up to
0.75% per year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the
Fund.
Under the Class II Plan, the Fund also pays an additional 0.25% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
During the first year after a purchase of Class II shares, Distributors may
keep this portion of the Rule 12b-1 fees associated with the Class II purchase.
The remaining paragraphs in this section apply to both the Class I and Class II
Rule 12b-1 plans.
V. Under "GENERAL INFORMATION" the following subsections are revised to add the
following:
PERFORMANCE
The cumulative total return for Class I from the date of inception through
June, 30, 1996, was 2.23%.
The yield for Class I for the 30-day period ended June 30, 1996, was 1.19%.
MISCELLANEOUS INFORMATION
As of July 19, 1996, the principal shareholders of the Fund, beneficial or of
record, were as follows:
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
CLASS I
Franklin Resources, Inc.
Corporate Treasury 6th Flr
1850 Gateway Drive
San Mateo, CA 94404......66,790.583 23.37%
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
CLASS I
Prudential Bache Securities
FBO Cecil H. Hale
PO Box 2538
Austin, TX 78768-2538....15,846.479 5.54%
VI. The following section is added after the last paragraph on page 27:
FINANCIAL STATEMENTS
FRANKLIN VALUEINVESTORS TRUST
Statement of Investments in Securities and Net Assets, June 30, 1996 (unaudited)
<TABLE>
<CAPTION>
Shares Franklin Value Fund
Common Stocks 87.5%
Banks & Thrifts 10.7%
<C> <C>
1,100 aAssociates First Capital Corp....................................................... $ 41,388
2,100 BankAtlantic Bancorp, Inc. - Class B ................................................ 29,400
12,100 aBank Plus Corp. .................................................................... 105,875
35,000 cChristiania Bank Og Kreditkasse (Norway) ........................................... 82,511
2,000 Fidelity Financial of Ohio, Inc...................................................... 20,000
3,200 Financial Security Assurance Holdings Ltd. .......................................... 87,600
5,000 aGA Financial, Inc................................................................... 55,000
--------
421,774
--------
Food 5.2%
5,000 Nash-Finch Co. ...................................................................... 80,000
1,000 Schultz Sav-o Stores, Inc............................................................ 12,875
12,000 Super Food Services, Inc............................................................. 114,000
--------
206,875
--------
Furniture & Homebuilders 5.1%
7,400 aAmerican Woodmark Corp. ............................................................ 41,625
5,400 aBeazer Homes USA, Inc............................................................... 86,400
5,000 Ryland Group, Inc.................................................................... 75,000
--------
203,025
--------
Industrial 7.7%
9,000 Haskel International, Inc............................................................ 67,500
5,600 Oil-Dri Corporation of America ...................................................... 83,300
2,500 Rochester & Pittsburgh Coal Co. ..................................................... 78,750
12,500 United Industrial Corp. ............................................................. 76,563
--------
306,113
--------
Insurance-Life & Specialty 6.6%
1,100 American National Insurance Co. ..................................................... 71,500
8,800 Presidential Life Corp. ............................................................. 91,300
3,000 USLIFE Corp. ........................................................................ 98,625
--------
261,425
--------
Insurance-Property & Casualty 3.5%
2,000 aPICOM Insurance Co. ................................................................ 50,000
3,700 RLI Corp. ........................................................................... 90,188
--------
140,188
--------
Manufacturing 11.5%
8,000 aAmerican Pacific Corp. ............................................................. 50,000
1,500 aCasTech Aluminum Group, Inc. ....................................................... 22,125
1,750 Douglas & Lomason Co. ............................................................... 24,938
10,000 Ennis Business Forms ................................................................ 113,750
3,100 Flexsteel Industries, Inc. .......................................................... 36,425
6,000 Medex, Inc. ......................................................................... 77,250
9,100 Oshkosh Truck Corp. ................................................................. 128,538
--------
453,026
--------
Miscellaneous 1.8%
6,000 aAztar Corp. ........................................................................ 69,000
--------
Real Estate 5.4%
4,500 Rouse Co. ........................................................................... 116,438
4,000 aU.S. Home Corp. .................................................................... 98,500
--------
214,938
--------
Retail 7.1%
10,000 aAllou Health and Beauty, Inc. ...................................................... $ 68,750
8,000 aLittle Switzerland, Inc. ........................................................... 42,000
10,700 aS & K Famous Brands, Inc. .......................................................... 102,988
4,000 Strawbridge & Clothier, Class A...................................................... 65,000
--------
278,738
--------
Technology 21.4%
4,000 Adobe Systems, Inc. ................................................................. 143,500
10,900 aAdvanced Logic Research, Inc. ...................................................... 91,288
4,600 Analysis & Technology, Inc. ......................................................... 63,250
3,800 aCray Research, Inc. ................................................................ 91,675
6,900 aESCO Electronics Corp. ............................................................. 78,488
8,200 Health Images, Inc. ................................................................. 95,325
7,700 aQuantum Corp. ...................................................................... 112,613
7,300 aSymantec Corp. ..................................................................... 91,250
16,900 aVideo Lottery Technologies, Inc. ................................................... 76,050
--------
843,439
--------
Utilities 1.5%
7,500 aNiagara Mohawk Power Corp. ......................................................... 58,120
--------
Total Long Term Investments (Cost $3,382,253)..................................3,456,661
--------
Face
Amount
bReceivables from Repurchase Agreement 13.3%
$ 522,768 Joint Repurchase Agreement, 5.439%, 07/01/96 (Maturity Value $ 525,418) (Cost $525,179)
Chase Securities, Inc., (Maturity Value $75,510 )
Collateral: U.S. Treasury Notes, 5.375%, 11/30/97
Daiwa Securities America, Inc., (Maturity Value $75,510)
Collateral: U.S. Treasury Notes, 5.25% - 8.875%, 12/31/97 - 08/31/00
Donaldson, Lufkin & Jenrette Securities Corp.,(Maturity Value $72,358)
Collateral: U.S. Treasury Bills, 05/29/97
U.S. Treasury Notes, 5.125% - 6.75%, 07/31/97 - 07/31/00
Fuji Securities, Inc., (Maturity Value $75,510)
Collateral: U.S. Treasury Notes, 5.50% - 8.875%, 07/31/97 - 02/15/99
Lehman Government Securities, Inc., (Maturity Value $75,510)
Collateral: U.S. Treasury Notes, 5.625% - 11.75%, 09/30/99 - 02/15/01
SBC Capital Markets, Inc., (Maturity Value $75,510)
Collateral: U.S. Treasury Notes, 5.75%, 09/30/97
UBS Securities, Inc., (Maturity Value $75,510)
Collateral: U.S. Treasury Notes, 6.50% - 8.875%, 11/15/98 - 11/30/99.................... 525,179
-------------
Total Investments (Cost $3,907,432) 100.8%.................................... 3,981,840
Liabilities in Excess of Other Assets, (.8)%.................................. (32,157)
-------------
Net Assets 100.0%.............................................................$3,949,683
=============
At June 30, 1996, the net unrealized appreciation based on the cost
of investments for income tax purposes of $3,907,432 was as
follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost......................................................... $ 179,384
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value......................................................... (104,976)
-------------
Net unrealized appreciation.......................................................... $ 74,408
=============
</TABLE>
aNon-income producing.
bFace amount for repurchase agreements is for the underlying collateral. See
Note 1( h ) regarding joint repurchase agreement.
cSecurities traded in foreign currency and valued in U.S. dollars.
The accompanying notes are an integral part of these financial statements.
FRANKLIN VALUEINVESTORS TRUST
Financial Statements
Statement of Assets and Liabilities
June 30, 1996 (unaudited)
Franklin
Value Fund
Assets:
Investments in securities:
At identified cost $3,382,253
==============
At value 3,456,661
Receivables from repurchase agreements,
at value and cost 525,179
Cash 122,930
Receivables:
Dividends and interest 3,333
Capital shares sold 81,690
Unamortized organization costs (Note 2) 2,798
--------------
Total assets 4,192,591
--------------
Liabilities:
Payables:
Investment securities purchased 237,219
Distributions payable to shareholders 8
Management fees 1,882
Distribution fees 1,741
Shareholder servicing costs 65
Accrued expenses and other liabilities 1,993
--------------
Total liabilities 242,908
--------------
Net assets, at value $3,949,683
==============
Net assets consist of:
Undistributed net investment income $ 3,656
Net unrealized appreciation on investments
and translation of assets and liabilities
denominated in foreign currencies 74,408
Undistributed net realized gains from investment
and foreign currency transactions 5,894
Capital shares 3,865,725
--------------
Net assets, at value $3,949,683
==============
Shares outstanding 246,165
==============
Net asset value per share* $16.04
==============
Maximum offering price per share 100/95.5,
of net asset value per share) $16.80
==============
Statement of Operations
for the period March 11, 1996 (effective date)
to June 30, 1996 (unaudited
Value Fund
Investment income:
Dividends $11,799
Interest (Note 1) 6,918
--------------
Total income 18,717
--------------
Expenses:
Management fees (Note 6) 5,001
Distribution fees (Note 6) 1,811
Shareholder servicing costs (Note 6) 182
Reports to shareholders 270
Custodian fees 6
Professional fees 1,271
Trustees' fees and expenses 9
Amortization of organization costs (Note 2) 202
Other 1,425
Management fees waived by manager (Note 6) (1,288)
--------------
Total expenses 8,889
--------------
Net investment income 9,828
--------------
Realized and unrealized gain (loss) from investments and foreign currency:
Net realized gain from investments 5,939
Net unrealized appreciation on:
Investments 74,408
Translation of assets and liabilities
denominated in foreign currencies (45)
--------------
Net realized and unrealized gain from
investments and foreign currencies 80,302
--------------
Net increase in net assets resulting from operations $90,130
==============
*Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
FRANKLIN VALUE INVESTORS TRUST
Financial Statements
Statements of Changes in Net Assets for the period March 11, 1996 (effective
date) to June 30, 1996 (unaudited)
<TABLE>
<CAPTION>
Value Fund
For the period
ended 6/30/96
Increase in net assets:
Operations:
<S> <C>
Net investment income.......................................................................................... $ 9,828
Net realized gain from investments and foreign currency transactions........................................... 5,894
Net unrealized appreciation on investments and translation of assets and liabilities denominated in foreign currencies 74,408
-------------
Net increase in net assets resulting from operations....................................................... 90,130
Distributions to shareholders from:
Undistributed net investment income............................................................................. (6,172)
Increase in net assets from capital share transactions (Note 3).................................................. 3,865,725
-------------
Net increase in net assets................................................................................. 3,949,683
Net assets:
Beginning of period............................................................................................. --
-------------
End of period................................................................................................... $3,949,683
=============
Undistributed net investment income included in net assets:
Beginning of period............................................................................................. --
=============
End of period................................................................................................... $ 3,656
=============
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements (unaudited)
</TABLE>
1. SIGNIFICANT ACCOUNTING POLICIES
Franklin Value Trust (the Trust) is an open-end, non-diversified management
investment company (mutual fund), registered under the Investment Company Act of
1940 as amended. The Trust currently consists of three separate and distinct
portfolios. This report pertains only to the Franklin Value Fund (the Fund). The
Fund issues a separate series of the Trust's shares and maintains a totally
separate and distinct investment portfolio. The investment objective of the Fund
is capital growth and income.
The Value Fund became effective March 11, 1996.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
a. Security Valuation:
Portfolio securities listed on a securities exchange or on the NASDAQ for which
market quotations are readily available are valued at the last sale price or, if
there is no sale price, within the range of the most recent quoted bid and asked
prices. Other securities are valued based on a variety of factors, including
yield, risk, maturity, trade activity and recent developments related to the
securities. The Trust may utilize a pricing service, bank or broker/dealer
experienced in such matters to perform any of the pricing functions, under
procedures approved by the Board of Trustees (the Board). Securities for which
market quotations are not available are valued in accordance with procedures
established by the Board.
The value of a foreign security is determined as of the earlier of the close of
trading on the foreign exchange on which it is traded or the close of trading on
the New York Stock Exchange. 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 asked 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, unless material. If events which materially
affect the value of these foreign securities occur during such period, then
these securities will be valued in accordance with procedures established by the
Board.
The fair values of securities restricted as to resale are determined following
procedures established by the Board.
b. Income Taxes:
The Fund intends to qualify for the tax treatment applicable to regulated
investment companies under the Internal Revenue Code and to make the requisite
distributions to shareholders which will be sufficient to relieve the Fund from
income and excise taxes. The Fund is treated as a separate entity in the
determination of compliance with the Internal Revenue Code.
c. Security Transactions:
Security transactions are accounted for on the date the securities are purchased
or sold (trade date). Realized gains and losses on security transactions are
determined on the basis of specific identification.
d. Investment Income, Expenses and Distributions:
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income and estimated expenses are accrued daily.
e. Accounting Estimates:
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the amounts of income and expense during
the reporting period. Actual results could differ from those estimates.
f. Expense Allocation:
Common expenses incurred by the Trust are allocated to the Fund based on the
ratio of net assets of the Fund to the combined net assets. In all other
respects, expenses are charged to the Fund as incurred on a specific
identification basis.
g. Foreign Currency Translation:
The accounting records of the Fund are maintained in U.S. dollars. All assets
and liabilities denominated in foreign currencies are translated into U.S.
dollars at the rate of exchange of the currencies against U.S. dollars on the
valuation date. Purchases and sales of securities, income and expenses are
translated at the rate of exchange quoted on the day that the transactions are
recorded. Differences between income and expense amounts recorded and collected
or paid are recognized when reported by the custodian.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from fluctuations arising
from changes in market prices of securities held. Such fluctuations are included
with the net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales and maturities of
short-term securities, sales of foreign currencies, gains or losses realized
between the trade date and settlement dates on security transactions, the
difference between the amounts of dividends and interest, and foreign
withholding taxes recorded on the Trust's books and the U.S. dollar equivalent
of the amounts actually received or paid. Net unrealized appreciation or
depreciation on translation of assets and liabilities denominated in foreign
currencies arise from changes in the value of assets and liabilities other than
investments in securities at the end of the reporting period, resulting from
changes in exchange rates.
h. Repurchase Agreements:
The Fund may enter into a joint repurchase agreement whereby their uninvested
cash balances are deposited into a joint cash account to be used to invest in
one or more repurchase agreements with government securities dealers recognized
by the Federal Reserve Board and/or member banks of the Federal Reserve System.
The value and face amount of the joint repurchase agreement are allocated to the
Fund based on their pro-rata interest.
A repurchase agreement is accounted for as a loan by the Fund to the seller,
collateralized by underlying U.S. government securities, which are delivered to
the Fund's custodian. The market value, including accrued interest, of the
initial collateralization is required to be at least 102% of the dollar amount
invested by the Fund, with the value of the underlying securities marked to
market daily to maintain coverage of at least 100%. At June 30, 1996, all
outstanding repurchase agreements held by the Fund had been entered into on June
28, 1996.
2. UNAMORTIZED ORGANIZATION COSTS
The organization costs of the Fund are amortized on a straight-line basis over a
period of five years from the effective date of registration under the
Securities Act of 1933. In the event Franklin Resources, Inc. (Resources), which
was the sole shareholder prior to the effective date of registration, redeems
its shares within the five-year period, the pro-rata share of the
then-unamortized deferred organization cost will be deducted from the redemption
price paid to Resources. New investors purchasing shares of the Fund subsequent
to that date bear such costs during the amortization period only as such charges
are accrued daily against investment income.
3. TRUST SHARES
At June 30, 1996, there were an unlimited number of .01 par value shares of
beneficial interest authorized. Transactions in each of the Fund's shares were
as follows:
<TABLE>
<CAPTION>
Value Fund
-----------------
Shares Amount
------ --------
For the period March 11, 1996 (effective date) to June 30, 1996
<S> <C> <C>
Shares sold........................................................................................... 246,552 $3,871,760
Shares issued in reinvestment of distributions........................................................ 330 5,332
Shares redeemed....................................................................................... (717) (11,367)
Net increase........................................................................................... 246,165 3,865,725
</TABLE>
4. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
For tax purposes, the aggregate cost of securities and unrealized appreciation
of the Fund are the same as for financial reporting purposes at June 30, 1996.
5. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding purchases and sales of short-term
securities) for the period March 11, 1996 (effective date) to June 30, 1996,
were as follows:
<TABLE>
<CAPTION>
Value Fund
--------
<S> <C>
Purchases............................................................................................... $3,414,839
Sales............................................................................................................. $ 38,525
</TABLE>
6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
a. Management Agreement:
Under the terms of a management agreement, Franklin Advisory Services, Inc.
(Advisory) provides investment advice, administrative services, office space and
facilities to the Fund and receives fees computed daily on the net assets of the
Fund as follows:
Value Fund
Annualized Fee Rate Daily Net Assets
------------- --------------------------------
0.75% First $500 million
0.625% Over $500 million, up to and including $1 billion
0.50% Over $1 billion
The terms of the management agreement provide that annual aggregate expenses of
the Fund be limited to the extent necessary to comply with the limitations set
forth in the laws, regulations, and administrative interpretations of the states
in which the Fund's shares are registered. For the four months ended June 30,
1996, the Fund's expenses did not exceed these limitations. However, Advisory
agreed in advance to waive management fees for the Value Fund, as noted in the
statement of operations, in an effort to minimize the Value Fund's expenses.
b. Shareholder Services Agreement:
Under the terms of a shareholder services agreement with Franklin/Templeton
Investor Services, Inc. (Investor Services), the Fund pays costs on a per
shareholder account basis. Shareholder servicing costs incurred by the Fund for
the four months ended June 30, 1996, aggregated $182, all of which was paid to
Investor Services.
c. Distribution Plans and Underwriting Agreement:
Under the terms of distribution plans pursuant to Rule 12b-1 of the Investment
Company Act of 1940 (the Plans), the Value Fund reimburses Franklin/Templeton
Distributors, Inc.(Distributors), in an amount up to 0.35% per annum, of average
daily net assets for costs incurred in the promotion,offering and marketing of
the Fund's shares.
The Plans do not permit nor require payments of excess costs after termination.
In its capacity as underwriter for the shares of the Fund, Distributors receives
commissions on sales of the Fund's shares of beneficial interest. Commissions
are deducted from the gross proceeds received from the sale of the shares of the
Fund, and as such are not expenses of the Fund. Distributors may also make
payments, out of its own resources, to the dealers for certain sales of the
Fund's shares. Commissions received by Distributors, the amounts paid to other
dealers, and any applicable contingent deferred sales charges for the four
<TABLE>
<CAPTION>
months ended June 30, 1996, were as follows:
Value Fund
--------
<S> <C>
Total commissions received........................................................................................ $58,215
</TABLE>
d. Other Affiliates and Related Party Transactions:
Certain officers and trustees of the Trust are also officers and/or directors of
Distributors, Advisory, and Investor Services, all wholly-owned subsidiaries of
Resources.
At June 30, 1996, Resources owned 27% of the Value Fund.
7. FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout the
period, are as follows:
<TABLE>
<CAPTION>
Per Share Operating Performance Ratios/Supplemental Data
--------------------------------- ---------------------------
Ratio of
Expenses
to Aver-
age Net Ratio of
Total Distri- Distri- Assets Net In-
Net Net From butions butions Net Net Ratio of (before feevestment Port-
Asset Net Realized & Invest-From Net From Asset Assets Expenses waiver and Income folio Average
Value at Invest-Unrealized ment Invest- Realized Total Value at at End to Aver- expense to Aver- Turn- Com-
Period Beginning ment Gain on Oper- ment Capital Distri- End of Total of Period age Net reduction) age Net over mission
Ended of Period Income Securities ations Income Gains butions Period Return*(in 000's)Assets (Note 6) Assets Rate Rate**
Value Fund
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19961 $15.00 $.045 $1.025 1.070 $(.03) $-- $(.03) $16.04 7.13% $3,950 1.340%++ 1.530%4 1.480%4 1.94%4 .0396
</TABLE>
1For the period March 11, 1996 (effective date) to June 30, 1996.
4Annualized
++During the periods indicated, Advisory agreed in advance to waive all or a
portion of its management fees and pay all or a portion of the other expenses of
the Fund.
*Total return measures the change in value of an investment over the
periods 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.
**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.
FRANKLIN
VALUE FUND
Franklin Value Investors Trust
STATEMENT OF
ADDITIONAL INFORMATION
777 Mariners Island Blvd., P.O. Box 7777 MARCH 11, 1996
San Mateo, CA 94403-7777 1-800/DIAL BEN
Contents Page
How Does the Fund Invest Its Assets? 2
What Are the Fund's Potential Risks? 7
Investment Restrictions........... 9
Officers and Trustees............. 10
Investment Advisory and Other Services 13
How Does the Fund Purchase
Securities For Its Portfolio?.... 13
How Do I Buy and Sell Shares?..... 14
How Are Fund Shares Valued?....... 17
Additional Information Regarding Taxation 18
The Fund's Underwriter............ 20
General Information............... 22
Financial Statements.............. 26
The Franklin 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 long-term total return. It seeks to
achieve that objective by investing in the securities of companies that the
Fund's investment manager believes are undervalued.
A Prospectus for the Fund, dated March 11, 1996 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 ("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?
The Fund seeks long-term total return. The Fund seeks to achieve its objective
by investing at least 65% of its assets in the securities of companies that the
Fund's investment manager believes are undervalued. As with any other
investment, there can be no assurance that this technique will be successful for
the Fund or that the Fund will achieve its investment objective. Income is a
secondary consideration of the Fund, although it is not part of the Fund's
investment objective.
The following information supplements "How Does the Fund Invest Its Assets?" in
the Prospectus.
Options and Futures
Options. The Fund may write covered call options that are listed on a national
securities exchange and buy listed options on securities and securities indices
for portfolio hedging purposes. The Fund may also write covered call options and
buy put options that are traded over-the-counter ("OTC"). In addition, the Fund
may enter into closing transactions with respect to its open option positions.
Call Options. The Fund may buy call options on securities which it intends to
buy. By buying these options, the Fund limits the risk of a substantial increase
in the market price of these securities. The Fund may also buy call options on
securities held in its portfolio and on which it has written call options as
described below.
A writer of a call option retains the amount of the premium paid by the buyer of
the option regardless of whether it is exercised. The premium amount reflects,
among other things, the relationship of the exercise price to the market price,
the volatility of the underlying security, the remaining term of the option,
supply and demand, and interest rates. A premium received by the writer of a
covered call option may be offset by a decline in the market value of the
underlying security during the option period. Because the writer of a call
option may be assigned an exercise notice at any time before the termination of
the call, the writer may have no control over when the underlying securities
must be sold. If a call option is exercised, the writer experiences a profit or
loss from the sale of the underlying security. Also, by writing a covered call
option, 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.
Unless a writer of an option has already been notified of the exercise of an
option, the writer may terminate its obligation by buying an option of the same
series as the option previously written. This is known as a "closing purchase
transaction," and it allows the writer's position to be canceled by the clearing
corporation. A holder of an option liquidates its position by selling an option
of the same series as the option previously purchased, which is known as a
"closing sale transaction." There is no guarantee that either a closing purchase
or a closing sale transaction can be completed.
The Fund may conduct a closing transaction on a written call option to permit
the Fund to (i) write another call option on the underlying security with either
a different exercise price, expiration date or both or (ii) use the cash or
proceeds from the sale of the underlying security for other Fund investments. If
the Fund wants to sell a security from its portfolio on which it has written a
call option, it may conduct a closing transaction before or at the same time as
it sells the security. 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.
If the price of a closing transaction is less than the premium received from
writing the option or the premium paid to buy the option, the Fund makes a
profit on the transaction; if the price is more, the Fund realizes a loss.
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 purchase of a call option is likely to be offset by appreciation of the
underlying security owned by the Fund.
Put Options. The Fund may also buy put options. The Fund may enter into closing
sale transactions with respect to such options, exercise them, or permit them to
expire. The Fund may buy 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. This allows the Fund to sell
the underlying security at the put exercise price, regardless of any decline in
the underlying security's market price, until the put expires. If the investment
manger decides to hold the underlying security for tax considerations, for
example, a put option may be purchased in order to protect any unrealized
appreciation. Of course any capital gain realized when the security is sold
would be reduced by the premium paid for the put option and any transaction
costs.
Options on Indices. Options on indices, which are described in the Prospectus,
give the holder the right to receive cash 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. Options on indices differ from
options on individual securities in that 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.
Forward Conversions. In a forward conversion, the Fund buys securities and
writes call options and buys put options on such securities. By purchasing puts,
the Fund protects the underlying security from depreciation in value. By selling
or writing calls on the same security, the Fund receives premiums which may
offset part or all of the cost of purchasing the puts while forgoing the
opportunity for appreciation in the value of the underlying security. The Fund
will not exercise a put it has purchased while a call option on the same
security is outstanding.
Forward conversions are intended to hedge against fluctuations in the market
value of the underlying security. Although it is generally intended that the
exercise price of put and call options would be identical, situations might
occur in which some option positions are acquired with different exercise
prices. Therefore, the Fund's return may depend in part on movements in the
price of the underlying security. The Fund's return on forward conversions may
be greater or less than it would otherwise have been if it had hedged the
security only by purchasing put options.
Spread and Straddle Options Transactions. In "spread" transactions, the Fund
buys and writes a put or buys and writes a call on the same underlying security
with the options having different exercise prices and/or expiration dates. In
"straddles," the Fund purchases or writes combinations of put and call options
on the same security. When the Fund engages in spread and straddle transactions,
it seeks to profit from differentials in the option premiums paid and received
and in the market prices of the related options positions when they are closed
out or sold. Because these transactions require the Fund to buy and/or write
more than one option simultaneously, the Fund's ability to enter into such
transactions and to liquidate its positions when necessary or deemed advisable
may be more limited than if the Fund was to buy or sell a single option.
Similarly, costs incurred by the Fund in connection with these transactions will
in many cases be greater than if the Fund was to buy or sell a single option.
Futures. The Fund may enter into contracts for the purchase or sale for future
delivery of securities, contracts based upon financial indices, and the Fund may
buy options on such contracts ("financial futures"). Financial futures contracts
are contracts that obligate the long or short holder to take or make delivery of
a specified quantity of a financial instrument, such as a security, or the cash
value of a securities index during a specified future period at a specified
price. A "sale" of a futures contract means the seller has a contractual
obligation to deliver the securities described in the contract at a specified
price on a specified date. A "purchase" of a futures contract means the buyer
has a contractual obligation to acquire the securities described in the contract
at a specified price on a specified date. Futures contracts have been designed
by exchanges which have been designated "contracts markets" by the Commodity
Futures Trading Commission ("CFTC") and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by buying
(or selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation to take
delivery of the securities. Since all transactions in the futures market are
made, offset or fulfilled through a clearinghouse associated with the exchange
on which the contracts are traded, the Fund will incur brokerage fees when it
purchases or sells futures contracts.
The Fund will not engage in transactions in futures contracts or related options
for speculation but only as a hedge against changes resulting from market
conditions in the values of its securities or securities which it intends to
purchase. The Fund will not enter into any stock index future or related option
if, immediately thereafter, more than one-third of the Fund's net assets would
be represented by futures contracts or related options. In addition, the Fund
may not buy or sell futures contracts or buy or sell related options if,
immediately thereafter, the sum of the amount of margin deposits on its existing
futures and related options positions, and premiums paid for related options,
would exceed 5% of the market value of the Fund's total assets.
The purpose of the acquisition or sale of a futures contract is to attempt to
protect the Fund from fluctuations in price of portfolio securities without
actually buying or selling the underlying security. To the extent the Fund
enters into futures contracts or related options, it will deposit in a
segregated account with its custodian cash or other United States ("U.S.")
Treasury obligations equal to a specified percentage of the value of the futures
contract (the "initial margin"), as required by the relevant contract market and
futures commission merchant. The futures contract will be marked-to-market
daily. If the value of the futures contract declines relative to the Fund's
position, the Fund will be required to pay the futures commission merchant an
amount equal to the change in value.
Stock Index Futures Contracts. The Fund may purchase and sell stock index
futures contracts traded on domestic exchanges and, to the extent such contracts
have been approved by the CFTC for sale to customers in the U.S., on foreign
exchanges. A stock index futures contract obligates the seller to deliver (and
the purchaser to take) an amount of cash equal to a specific dollar amount times
the difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement is made.
Open futures contracts are valued on a daily basis and the Fund may be obligated
to provide or receive cash reflecting any decline or increase in the contract's
value. No physical delivery of the underlying stocks in the index is made in the
future.
The Fund may sell stock index futures contracts in anticipation of or during a
market decline in an attempt to offset the decrease in market value of its
securities that might otherwise result. When the Fund is not fully invested in
stocks and anticipates a significant market advance, it may purchase stock index
futures in order to gain rapid market exposure that may offset increases in the
cost of common stocks that it intends to purchase.
Future Developments. The Fund may take advantage of opportunities in the area of
options and futures contracts and any other derivative investments that are not
presently contemplated for use by the Fund or which are not currently available
but which may be developed, to the extent such opportunities are both consistent
with the Fund's investment objective and legally permissible for the Fund. Prior
to investing in any such investment vehicle, the Fund will supplement its
Prospectus, if appropriate.
Other Types of Securities and Policies
Depositary Receipts. Many securities of foreign issuers are represented by
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
and Global Depositary Receipts ("GDRs") (collectively "Depositary Receipts").
ADRs evidence ownership of, and represent the right to receive, securities of
foreign issuers deposited in a domestic bank or trust company or a foreign
correspondent bank. EDRs and GDRs are typically issued by foreign banks or trust
companies, although they also may be issued by U.S. banks or trust companies,
and evidence ownership of underlying securities issued by either a foreign or a
U.S. corporation. Generally, Depositary Receipts in registered form are designed
for use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the U.S.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on
exchanges or over-the-counter. While ADRs do not eliminate all the risk
associated with foreign investments, by investing in ADRs rather than directly
in the stock of foreign issuers, the Fund will avoid currency risks during the
settlement period for either purchases or sales. In general, there is a large,
liquid market in the U.S. for ADRs quoted on a national securities exchange or
on NASDAQ. The information available for ADRs is subject to the accounting,
auditing and financial reporting standards of the U.S. market or exchange on
which they are traded, which standards are more uniform and more exacting than
those to which many foreign issuers may be subject. EDRs and GDRs may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted.
Depositary Receipts may be issued under sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of Depositary Receipts. In unsponsored programs, the issuer
may not be directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs and there may not be a correlation
between such information and the market value of the Depositary Receipts.
Convertible Securities. The Fund may invest in convertible securities. A
convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When an operating company-issued
convertible stock is "converted," the operating company often issues new stock
to the holder of the convertible security, but, if the parity price of the
convertible security is less than the call price, the operating company may pay
out cash instead. If the convertible security is issued by an investment bank,
the securities are obligations of and are convertible through the issuing
investment banks.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the Fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the Fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is 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. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stocks are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
Enhanced Convertibles. The Fund may invest in enhanced convertibles such as
PERCS, which provide the Fund with the opportunity to earn higher dividend
income than is available from a company's common stock. A PERCS is a preferred
stock that generally features a mandatory conversion date, as well as a capital
appreciation limit which 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 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, and hence do not provide call protection. However,
if a PERCS is called early, 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 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). ACES, PEPS,
PRIDES, SAILS, TECONS, QICS, and DECS all have the following features: they are
issued by the company, the common stock of which will be received in the event
the convertible preferred stock is converted; 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 to 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 automatically convert to either
cash or a specified number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company whose common stock is to be acquired in the event the security
is converted 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 salient characteristics of enhanced convertible
preferred stocks but will be ranked as senior or subordinated debt in the
issuer's corporate structure, according to the terms of the debt indenture.
There may be additional types of convertible securities not specifically
referred to herein that may be similar to those described above in which the
Fund may invest, consistent with its objective and policies. The Fund will not
invest in enhanced convertible securities that are issued by investment
companies. For more information, see "What Are the Fund's Potential Risks? -
Enhanced Convertibles" below.
Synthetic Convertibles. A synthetic convertible is created by combining
different securities, which together have the two principle characteristics of a
true convertible security: fixed income and the right to acquire the underlying
equity security. This combination is achieved by investing in nonconvertible
fixed-income securities and in warrants or stock or stock index call options
that grant the holder the right to purchase a specified quantity of securities
within a specified period of time at a specified price or, in the case of stock
index options, the right to receive cash.
Synthetic convertible securities differ from true convertible securities in
several respects. The value of a synthetic convertible is the sum of the values
of its fixed-income component and its convertibility component. Thus, the values
of a synthetic convertible and a true convertible security will respond
differently to market fluctuations. Further, although the investment manager
normally expects to create synthetic convertibles whose two components represent
one issuer, the character of a synthetic convertible allows the Fund to combine
components representing distinct issuers, or to combine a fixed-income security
with a call option on a stock index, when the investment manager determines that
such a combination would better promote the Fund's investment objective. In
addition, the component parts of a synthetic convertible security may be
purchased simultaneously or separately, and the holder of a synthetic
convertible faces the risk that the price of the stock, or the level of the
market index underlying the convertibility component will decline.
Trade Claims. Trade claims are bought from creditors of companies in financial
difficulty who seek to reduce the number of debt obligations they are owed. Such
trade creditors generally sell their claims in an attempt to improve their
balance sheets and reduce uncertainty regarding payments. For buyers, trade
claims offer the potential for profits since they are often purchased at a
significantly discounted value and, consequently, have the potential for higher
income and capital appreciation should the debt issuer's financial position
improve. Trade claims are generally liquid, as there is a secondary market, but
the Board of Trustees (the "Board") will monitor their liquidity. An investment
in trade claims is speculative and there can be no guarantee that the debt
issuer will ever be able to satisfy the obligation. Further, trading in trade
claims is not regulated by federal securities laws but primarily by bankruptcy
and commercial laws. Because trade claims are unsecured obligations, holders may
have a lower priority than secured or preferred creditors.
Warrants. A warrant is typically a long-term option issued by a corporation
which gives the holder the privilege of buying a specified number of shares of
the underlying common stock at a specified exercise price at any time on or
before an expiration date. Stock index warrants entitle the holder to receive,
upon exercise, an amount in cash determined by reference to fluctuations in the
level of a specified stock index. If the Fund does not exercise or dispose of a
warrant prior to its expiration, it will expire worthless. Further, the Fund
does not intend to 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
Exchange.
Loans of Portfolio Securities. The lending of securities is a common practice in
the securities industry. The Fund may engage in security loan arrangements with
the primary objective of increasing the Fund's income either through investing
the cash collateral in short-term interest-bearing obligations or by receiving a
loan premium from the borrower. Under the securities loan agreement, the Fund
continues to be entitled to all dividends or interest on any loaned securities.
As with any extension of credit, there are risks of delay in recovery and loss
of rights in the collateral should the borrower of the security fail
financially.
Short-Selling. In a short sale, the Fund sells a security it does not own in
anticipation of a decline in the market value of that security. The security
sold must be listed on a national exchange. To complete the transaction, the
Fund must borrow the security to make delivery to the buyer. The Fund is then
obligated to replace the security borrowed by purchasing it at the market price
at the time of replacement. Until the security is replaced, the Fund must pay
the lender any dividends or interest that 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 the Fund 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.
In addition to the short sales discussed above, the Fund may also make short
sales "against the box." A short sale is "against the box" to the extent that
the Fund contemporaneously owns or has the right to obtain at no added cost
securities identical to those 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.
No securities will be sold short if, after the sale, the total market value of
all the Fund's open short positions, including short sales against the box,
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.
Non-diversification. As a non-diversified investment company under the 1940 Act,
the Fund may invest more than 5% and up to 25% of its assets in the securities
of any one issuer at the time of purchase. For purposes of the Internal Revenue
Code of 1986, as amended (the "Code"), however, as of the last day of any fiscal
quarter, the Fund may not have more than 25% of its total assets invested in any
one issuer, and, with respect to 50% of its total assets, the Fund may not have
more than 5% of its total assets invested in any one issuer, nor may it own more
than 10% of 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 or its agencies or instrumentalities or to securities of
investment companies that qualify as regulated investment companies under the
Code.
What Are the Fund's Potential Risks?
Options, Futures and Options on Futures. The Fund's ability to hedge effectively
all or a portion of its securities through transactions in options on stock
indices, financial futures and related options depends on the degree to which
price movements in the underlying index or underlying securities correlate with
price movements in the relevant portion of the Fund's portfolio. Inasmuch as
these securities will not duplicate the components of the index or such
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 such securities and the hedging instrument. Accordingly, successful use by
the Fund of options on stock indices, financial futures and other options will
be subject to the investment manager's ability to predict correctly movements in
the direction of the securities markets generally or a particular segment. This
requires different skills and techniques than predicting changes in the price of
individual stocks.
Positions in stock index options and financial futures and related options 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
stock index option or futures contract or related option at any specific time.
Thus, it may not be possible to close such an option or futures position. The
inability to close options or futures positions also could have an adverse
impact on the Fund's ability to effectively hedge its securities. Of course, the
Fund will enter into an option or futures position only if there appears to be a
liquid secondary market for such options or futures.
OTC options may be subject to more risks than exchange-traded options because
OTC options are arranged with dealers, not with a clearing corporation, and
because pricing of OTC options is typically done by reference to information
from market makers. There can be no assurance that a continuous liquid secondary
market will exist for any particular OTC option at any specific time.
Consequently, the Fund may be able to realize the value of an OTC option it has
purchased only by exercising it or entering into a closing sale transaction with
the dealer that issued it. Similarly, when the Fund writes an OTC option, it
generally can close out that option prior to its expiration only by entering
into a closing purchase transaction with the dealer to which the Fund originally
wrote it. If a covered call option writer cannot effect a closing transaction,
it cannot sell the underlying security until the option expires or the option is
exercised. Therefore, a covered call option writer of an OTC option may not be
able to sell an underlying security even though it might otherwise be
advantageous to do so. Likewise, a secured put writer of an OTC option may be
unable to sell the securities pledged to secure the put for other investment
purposes while it is obligated as a put writer. Similarly, a purchaser of such
put or call option might also find it difficult to terminate its position on a
timely basis in the absence of a secondary market.
The CFTC and the various exchanges have established limits, referred to as
"speculative position limits," on the maximum net long or net short position
which any person may hold or control in a particular futures contract. Trading
limits are imposed on the maximum number of contracts which any person may trade
on a particular trading day. An exchange may order the liquidation of positions
found to be in violation of these limits and it may impose other sanctions or
restrictions. The Fund does not believe that these trading and positions limits
will have an adverse impact on the Fund's strategies for hedging its securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the investment manager may
still not result in a successful transaction.
In addition, futures contracts entail risks. Although the Fund believes that use
of such contracts will benefit the Fund, if the investment manager's judgment
about the general direction of interest rates is incorrect, the Fund's overall
performance would be poorer than if it had not entered into any such contract.
For example, if the Fund has hedged against the possibility of an increase in
interest rates that would adversely affect the price of bonds held in its
portfolio and interest rates decrease instead, the Fund will lose part or all of
the benefit of the increased value of its bonds which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities
from its portfolio to meet daily variation margin requirements. Such sales may
be, but will not necessarily be, at increased prices which reflect the rising
market. The Fund may have to sell securities at a time when it may be
disadvantageous to do so.
The Fund's sale of futures contracts and purchase of put options on futures
contracts will be solely to protect its investments against declines in value.
The Fund expects that in the normal course it will purchase securities upon
termination of long futures contracts and long call options on future contracts,
but under unusual market conditions it may terminate any of such positions
without a corresponding purchase of securities.
Depositary Receipts. Depositary Receipts, such as American Depositary Receipts
and Global Depositary Receipts, reduce but do not eliminate all the risk
inherent in investing in the securities of foreign issuers. To the extent that
the Fund acquires Depositary Receipts through banks which do not have a
contractual relationship with the foreign issuer of the security underlying the
Depositary Receipt to issue and service such Depositary Receipts, there may be
an increased possibility that the Fund would not become aware of and be able to
respond to corporate actions such as stock splits or rights offerings involving
the foreign issuer in a timely manner.
Enhanced Convertibles. An investment in enhanced convertible securities or any
other securities may involve additional risks to the Fund. The Fund may have
difficulty disposing of such securities because there may be a thin trading
market for a particular security at any given time. Reduced liquidity may have
an adverse impact on market price and the Fund's ability to dispose of
particular securities, when necessary, to meet the Fund's liquidity needs or in
response to a specific economic event, such as the deterioration in the
creditworthiness of an 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.
The Fund, however, intends to acquire liquid securities, though there can be no
assurances that this will be achieved.
High Yielding, Fixed Income Securities. 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 make it more difficult for the Fund
to manage the timing of its receipt of income, which may have tax implications.
The Fund may be required under the Code and U.S. Treasury regulations to accrue
income for income tax purposes on defaulted obligations and to distribute such
income to the Fund's shareholders even though the Fund is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy any or all of these distribution requirements, 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.
Generally, purchasers of high yielding securities are 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.
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, as amended ("1933 Act"), which entails special
responsibilities and liabilities. The Fund may incur special costs in disposing
of such securities; however, the Fund will generally incur no costs when the
issuer is responsible for registering the securities.
The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recession that began in 1990
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. Although the economy has improved considerably and high
yielding securities have performed more consistently since that time, there is
no assurance that the adverse effects previously experienced will not recur. For
example, the highly publicized defaults of some high yield issuers during 1989
and 1990 and concerns regarding a sluggish economy which continued into 1993,
depressed the prices for many of these securities. While market prices may still
be temporarily somewhat depressed due to these factors, the ultimate price of
any security will generally reflect the true operating results of the issuer.
Factors adversely impacting the market value of high yielding securities owned
by the Fund will adversely impact the Fund's net asset value. In addition, the
Fund may 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 Manager's judgment, analysis and experience
in evaluating the creditworthiness of an issuer. In this evaluation, the 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.
Restricted Securities. The Board has authorized the Fund to invest in restricted
securities and to consider them liquid (and thus not subject to the 10%
limitation on illiquid securities) to the extent the Manager determines that
there is a liquid institutional or other market for these securities. For
example, restricted securities may be freely transferred among qualified
institutional buyers under Rule 144A of the 1933 Act, and in some cases a liquid
institutional market has developed.
On an ongoing basis, the Board will review the Manager's decisions to treat
restricted securities as liquid - including the Manager's assessment of current
trading activity and the availability of reliable price information. In
determining whether a restricted security can be considered liquid, the Manager
and the Board will take into account the following factors: (i) the frequency of
trades and quotes for the security, (ii) the number of dealers willing to buy or
sell the security and the number of potential buyers, (iii) dealer undertakings
to make a market in the security, and (iv) the nature of the security and nature
of the marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer). To the extent the
Fund invests in restricted securities that are deemed to be liquid, the general
level of illiquidity in the Fund may be increased if qualified institutional
buyers become uninterested in buying these securities or the market for these
securities contracts.
Investment Restrictions
The Fund has adopted the following 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 voting
securities" of the Fund means the affirmative vote of the lesser of (i) more
than 50% of the outstanding shares of the Fund or (ii) 67% or more of the shares
of the Fund present at a shareholder meeting if more than 50% of the outstanding
shares of the Fund are represented at the meeting in person or by proxy. The
Fund may not:
1. Borrow money, except that the Fund may borrow money in a manner consistent
with the Fund's investment objective and policies in an amount not exceeding
331/3% of the value of the Fund's total assets (including the amount borrowed).
The Fund may borrow in connection with short-sales and short-sales "against the
box," and the Fund may borrow from banks, other Franklin Templeton Funds or
other persons to the extent permitted by applicable law.
2. 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.)
3. 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.
4. Loan money, except as consistent with the Fund's investment objectives, and
except that the Fund may (a) purchase a portion of an issue of publicly
distributed bonds, debentures, notes and other evidences of indebtedness, (b)
enter into repurchase agreements, (c) lend its portfolio securities, and (d)
participate in an interfund lending program with other Franklin Templeton Funds
to the extent permitted by the 1940 Act and any rules or orders thereunder.
5. Purchase or sell commodities or commodity contracts; except that the Fund may
enter into interest rate and financial futures contracts, options thereon, and
forward contracts.
6. Issue securities senior to the Fund's presently authorized shares of
beneficial interest.
7. Invest more than 25% of the Fund's assets (at the time of the most recent
investment) in any single industry.
Additional Restrictions. The Fund has adopted the following additional
restrictions which are not fundamental and which may be changed without
shareholder approval, to the extent permitted by applicable law, regulation or
regulatory policy. Under these restrictions, the Fund may not:
1. Invest in any company for the purpose of exercising control or management,
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. Purchase securities on margin, except that the Fund may make margin payments
in connection with futures, options and currency transactions.
3. Purchase or retain securities of any company in which officers or directors
of the Fund, or of its investment manager, individually owning more than 1/2 of
1% of the securities of such company, in the aggregate own more than 5% of the
securities of such company.
4. Purchase securities of open-end or closed-end investment companies, except in
compliance with the 1940 Act, and except that the Fund may invest in another
registered investment company as described in Restriction 1, above.
5. 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.
6. Hold or purchase the securities of any issuer if, as a result, in the
aggregate, more than 10% of the value of the Fund's net assets would be invested
in (i) securities that are not readily marketable or (ii) repurchase agreements
maturing in more than seven days. The Fund may, however, invest in registered
investment companies as described in Restriction 1, above.
If a percentage restriction contained herein is adhered to at the time of
investment, a later increase or decrease in the percentage resulting from a
change in value of portfolio securities or the amount of net assets will not be
considered a violation of any of the foregoing restrictions.
Officers and Trustees
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
trustees, in turn, elect the officers of the Fund who are responsible for
administering day-to-day operations of the Fund. The affiliations of the
officers and trustees and their principal occupations for the past five years
are listed below. Trustees who are deemed to be "interested persons" of the
Fund, as defined in the 1940 Act, are indicated by an asterisk (*).
Positions and Offices
Name, Age and Address with the Trust Principal Occupations During Past Five
Years
Frank T. Crohn (71) Trustee
7251 West Palmetto Park Road
Boca Raton, FL 33433
Chairman and Chief Executive Officer, Financial Benefit Life Insurance Company
and Financial Benefit Group, Inc.; Director, Unity Mutual Life Insurance
Company; and trustee of three of the investment companies in the Franklin Group
of Funds.
*William J. Lippman (71) President, Chief
One Parker Plaza Executive Officer
Fort Lee, NJ 07024 and Trustee
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc.,
Franklin Templeton Distributors, Inc. and Franklin Management, Inc.; officer
and/or director or trustee of six of the investment companies in the Franklin
Group of Funds.
Charles Rubens II (65) Trustee
18 Park Road
Scarsdale, NY 10583
Private Investor; and trustee of three of the investment companies in the
Franklin Group of Funds.
Leonard Rubin (70) Trustee
501 Broad Avenue
Ridgefield, NJ 07657
Chairman of the Board, Carolace Embroidery Co., Inc.; President, F.N.C Textiles,
Inc.; Vice President, Trimtex Co. Inc.; and trustee of three of the investment
companies in the Franklin Group of Funds.
Harmon E. Burns (51) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 43 of the investment companies in the Franklin Templeton Group of Funds.
Kenneth V. Domingues (63) Vice President -
777 Mariners Island Blvd. Financial Reporting
San Mateo, CA 94404 and Accounting Standards
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and
Franklin Templeton Distributors, Inc.; officer and/or director, as the case may
be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of 37 of the investment companies
in the Franklin Group of Funds.
Martin L. Flanagan (35) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and
officer of 61 of the investment companies in the Franklin Templeton Group of
Funds.
Deborah R. Gatzek (47) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President and General Counsel, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; Vice President, Franklin Advisers, Inc. and
officer of 37 of the investment companies in the Franklin Group of Funds.
Rupert H. Johnson, Jr. (55) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director, trustee or managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 43 of the investment companies
in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (57) Treasurer
777 Mariners Island Blvd. and Principal
San Mateo, CA 94404 Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey (58) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 32 of the investment companies in the Franklin Group of
Funds.
R. Martin Wiskemann (69) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President, Portfolio Manager and Director, Franklin Advisers, Inc.;
Senior Vice President, Franklin Management, Inc.; Vice President, Treasurer and
Director, ILA Financial Services, Inc. and Arizona Life Insurance Company of
America; and officer and/or director, as the case may be, of 20 of the
investment companies in the Franklin Group of Funds.
The preceding table indicates those officers and trustees who are also
affiliated persons of Distributors and the investment manager. Trustees not
affiliated with the investment manager ("nonaffiliated trustees") are currently
paid fees of $600 per quarter plus $300 per meeting attended. As indicated
above, certain of the Trust's nonaffiliated trustees also serve as directors,
trustees or managing general partners of other investment companies in the
Franklin Group of Funds(R) from which they may receive fees for their services.
The following table indicates the total fees paid to nonaffiliated trustees by
the Trust and by other funds in the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
Number of
Total Fees Boards in the
Total Fees Received from Franklin Group of
Received the Franklin Funds on Which
Name from the Trust* Group of Funds**Each Serves***
<S> <C> <C> <C>
Frank T. Crohn........................... $3,900 $15,600 3
Charles Rubens, II....................... $3,900 $15,600 3
Leonard Rubin............................ $3,900 $15,600 3
</TABLE>
*For the fiscal year ended October 31, 1995.
**For the calendar year ended December 31, 1995.
***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 Group of
Funds and the Templeton Group of Funds (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.
("Resources") 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, Resources 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 Resources, a publicly owned
holding company whose shares are listed on the New York Stock Exchange (the
"Exchange"). Resources owns several other subsidiaries that are involved in
investment management and shareholder services.
Pursuant to the management agreement, 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 Trust's Code of Ethics.
The management agreement is in effect until March 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"), 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 New York, Mutual Funds Division, 90 Washington Street, New York, New
York, 10286, acts as custodian of the securities and other assets of the Fund.
Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian for cash received in connection with the
purchase of Fund shares. 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. During the fiscal year ended October 31,
1995, their auditing services consisted of rendering an opinion on the financial
statements of the Trust included in the Trust's Annual Report to Shareholders
dated October 31, 1995.
How Does the Fund Purchase
Securities For Its Portfolio?
Under the current management agreement, 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 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 that 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 pay a
higher commission than 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 services 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 the Manager from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits the Manager to supplement its own research
and analysis activities and to receive the views and information of individuals
and research 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 Trust's officers 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, it should be noted that since the proceeds from
the sale of shares of an investment company are generally 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. Please see "What If My Investment Outlook Changes? - Exchange
Privilege" in the Prospectus.
If, in connection with the purchase of Fund shares, you submit a check or a
draft that is returned unpaid to the Fund, the Fund may impose a $10 charge
against your account for each returned item.
Dividend checks returned to the Fund marked "unable to forward" by the postal
service will be deemed to be a request to change your dividend option to
reinvest all distributions 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 costs 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 one of its affiliates to help defray expenses of
maintaining a service office in Taiwan, including expenses related to local
literature fulfillment and communication facilities.
Shares of the 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 - 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 you resulting from the failure to do so must be settled between you
and the securities dealer.
Other Payments to Securities Dealers
As discussed in the Prospectus under "How Do I Buy Shares? - General," either
Distributors or one of its affiliates may make payments, out of its own
resources, to securities dealers who initiate and are responsible for purchases
made at net asset value by certain trust companies and trust departments of
banks, certain designated retirement plans (excluding IRA and IRA Rollovers),
certain non-designated plans, and certain retirement plans of organizations with
collective retirement plan assets of $1 million or more, as described 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 shares are redeemed 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 one
of its affiliates, and the securities dealer.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to securities dealers who initiate and are responsible for
purchases made at net asset value by certain designated retirement plans
(excluding IRA and IRA rollovers): 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 $1 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 a reduced sales charge, you may file
with the Fund a signed Shareholder Application, with the Letter of Intent (the
"Letter") section completed. After the Letter is filed, each additional
investment will be entitled to the sales charge applicable to the level of
investment indicated on the Letter. Sales charge reductions based 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 you make, unless by a designated retirement
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 retirement 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.
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. This policy of reserving shares does not apply to a designated retirement
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 as you direct. 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 that 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 as you direct. If
within 20 days after written request the difference in sales charge is not paid,
the redemption of an appropriate number of reserved shares to realize the
difference will be made. In the event of a total redemption of the account 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 is executed on behalf of a designated retirement plan, the level and
any reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These 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 these 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 the 90-day period. This commitment is irrevocable
without the prior approval of the Securities and Exchange Commission ("SEC"). In
the case of redemption requests in excess of these amounts, the trustees reserve
the right to make payments in whole or in part in securities or other assets of
the Fund, in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of the Fund. In such
circumstances, the securities distributed would be valued at the price used to
compute the Fund's net assets and you may incur brokerage fees in converting the
securities to cash. The Fund does not intend to redeem illiquid securities in
kind. Should it happen, however, you may not be able to recover your investment
in a timely manner.
Redemptions by the Fund
Due to the relatively high cost of handling small investments, the Fund reserves
the right to involuntarily redeem your shares at net asset value if your account
has a value of less than one-half of your initial required minimum investment,
but only where the value of your 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 your 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 your 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 the "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 regarding its performance and
portfolio holdings to shareholders. 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 that maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such 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. These
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. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. 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.
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 prices 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 which materially affect the values of
these foreign securities occur during such period, then these securities will be
valued in accordance with procedures established by the Board.
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 these securities used in
computing the net asset value of the Fund's shares is determined as of such
times. Occasionally, events affecting the values 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 values of these securities occur
during such period, then the securities will be valued at their fair value as
determined in good faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of trustees, the
Fund may utilize a pricing service, bank or securities dealer to perform any of
the above described functions.
Additional Information Regarding Taxation
Generally. The Fund intends to qualify and elect to be treated as a regulated
investment company under Subchapter M of 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 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 your 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. 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 your basis in the shares
and the amount received, subject to the rules described below. If such shares
are a capital asset in your hands, 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 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 Templeton Group of 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. You should consult
with your tax advisor 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 Investments - Generally. The Fund's investment in options, futures
and forward conversions, options on futures, stock indices, foreign currencies
and securities, synthetic and enhanced convertible securities, structured notes,
zero coupon/deferred interest securities and pay-in-kind bonds, and its
participation in spread and straddle transactions, or actual or deemed short
sales may be limited by the Code and may require the application of many complex
and special tax rules.
Absent a tax election to the contrary, each 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 timing of
income distributed to you by the Fund.
Options and Related Tax Rules. 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 to prevent disqualification of the Fund as a regulated investment
company under Subchapter M of the Code.
Foreign Securities. The Fund may invest in foreign securities. These
investments, if made, will have the following tax consequences.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currencies, foreign currency payables or
receivables, foreign currency-denominated debt securities, foreign currency
forward contracts, and options or futures contracts on foreign currencies are
subject to special tax rules which may cause such gains and losses to be treated
as ordinary income and losses rather than capital gains and losses, and may
affect the amount and timing of the Fund's income or loss from such transactions
and in turn it distributions to you.
The Fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. Because the Fund intends to invest 50% or less of its
total assets in securities of foreign corporations, it will not be entitled
under the Code to pass-through to its shareholders their pro rata share of the
foreign taxes paid by the Fund. These taxes will be taken as a deduction by the
Fund.
Conversion Transactions. 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.
Zero Coupon and Pay-in-Kind Bonds. The Fund's investment in zero coupon or
pay-in-kind bonds that provide for the payment of delayed interest may cause the
Fund to recognize income and make distributions to shareholders prior to the
receipt of cash payments on these obligations. These debt instruments are
subject to special tax rules concerning the amount, character and timing of
income required to be accrued by the Fund. The Fund may be required to accrue
income for income tax purposes on these obligations and to distribute such
income to shareholders even though the Fund is not currently receiving interest
or principal payments on the obligations. In order to generate cash to satisfy
distribution requirements, 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.
U.S. Government Securities. The Fund may also invest for temporary or defensive
purposes in securities of the U.S. Government and certain of its agencies or
instrumentalities. Many states grant tax-free status to dividends paid to
shareholders of regulated investment companies from interest earned by the fund
from direct obligations of the U.S. Government, subject in some states to
minimum investment requirements that must be met by the Fund. Investments in
mortgage-backed securities and repurchase agreements collateralized by U.S.
Government securities do not generally qualify for tax-free treatment. At the
end of each calendar year, the Fund will provide you with the percentage of any
dividends paid which may qualify for such tax-free treatment. You should then
consult with your tax advisers with respect to the application of your state and
local income tax laws to these distributions.
The Fund's Underwriter
Pursuant to an underwriting agreement in effect until March 31, 1997,
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 Trust's trustees who are not parties to the underwriting
agreement or interested persons of any such party (other than as trustees of the
Trust), cast in person at a meeting called for that purpose. The underwriting
agreement terminates automatically in the event of its assignment and may be
terminated by either party on 90 days' written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. 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, for expenses incurred in the
promotion and distribution of its shares. In addition, the Fund is permitted to
pay Distributors up to an additional 0.10% per annum of its average daily net
assets for reimbursement of such distribution expenses.
Pursuant to the Plan, Distributors or others will be entitled to be reimbursed
each quarter (up to the maximum stated above) for actual expenses incurred in
the distribution and promotion of the Fund's shares, including, but not limited
to, the printing of prospectuses and reports used for sales purposes, expenses
of preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a prorated
portion of Distributors' overhead expenses attributable to the distribution of
Fund shares, as well as any distribution or service fees paid to securities
dealers or their firms or others who have executed a servicing agreement with
the Fund, Distributors or its affiliates.
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.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the Plan as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. Such banking institutions, however, are permitted to receive fees under
the Plan for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing such services, you would be
permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In such an event, changes in the
services provided might occur and you might no longer be able to avail yourself
of any automatic investment or other services then being provided by the bank.
It is not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
The Plan has been approved in accordance with the provisions of Rule 12b-1. The
Plan is effective through March 11, 1997 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 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 and 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 currently in effect.
The average annual compounded rates of return for the Fund will be calculated
according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five- or ten-year periods at the end of the one-, five-
or ten-year periods (or fractional portion thereof).
As discussed in the Prospectus, the Fund may quote total rates of return in
addition to its average annual total return. These quotations are computed in
the same manner as the Fund's average annual compounded rate, except they 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.
Current Yield
Current yield reflects the income per share earned by the Fund's portfolio
investments and is determined by dividing the net investment income per share
earned during a 30-day base period by the maximum offering price per share on
the last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders during the base period.
Current yield figures will be obtained using the following SEC formula:
6
Yield = 2 [( a-b + 1) -1]
---
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on the last day of the period
Current Distribution Rate
Current 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 shareholders
of the Fund. 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 an
index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market,
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of net asset value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
Other Performance Quotations
For 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 you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials regarding the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. 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 - an unmanaged
index 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, 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 highlights or summarizes 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 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, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition,
there can be no assurance that the Fund will continue its 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 costs 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 U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 48 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 $135
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.
Employees of Resources or its subsidiaries who are access persons under the 1940
Act are permitted to engage in personal securities transactions subject to the
following general restrictions and procedures: (i) the trade must receive
advance clearance from a compliance officer and must be completed within 24
hours after clearance; (ii) copies of all brokerage confirmations must be sent
to a 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; and (iii) access persons involved in preparing and making
investment decisions must, in addition to (i) and (ii) above, file annual
reports of their securities holdings each January and inform the compliance
officer (or other designated personnel) if they own a security that is being
considered for a fund or other client transaction or if they are recommending a
security in which they have an ownership interest for purchase or sale by a fund
or other client.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner 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 if you are held personally liable for
obligations of the Fund. The Declaration of Trust provides that the Fund shall,
upon request, assume the defense of any claim made against you for any act or
obligation of the Fund and satisfy any judgment thereon. All such rights are
limited to the assets of the Fund. The Declaration of Trust further provides
that the Fund may maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the Fund, its
shareholders, trustees, officers, employees and agents to cover possible tort
and other liabilities. Furthermore, the activities of the Fund as an investment
company, as distinguished from an operating company, would not likely give rise
to liabilities in excess of the Fund's total assets. Thus, the risk of you
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.
FRANKLIN 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
Value Fund (one of the funds constituting the Franklin Value Investors Trust) as
of March 4, 1996. 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 test basis, evidence supporting
the amounts and disclosures in the financial statement. Our procedures included
confirmation of cash held as of March 4, 1996 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 Value Fund as of March
4, 1996 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
March 5, 1996
San Francisco, California
FRANKLIN VALUE FUND
Statement of Assets and Liabilities
March 4, 1996
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 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."
