FRANKLIN
BALANCE SHEET
INVESTMENT FUND
Franklin Value Investors Trust
PROSPECTUS
March 1, 1996
777 Mariners Island Blvd.,
P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin Balance Sheet Investment Fund (the "Fund") is a non-diversified series
of Franklin Value Investors Trust (the "Trust"), an open-end management
investment company. The Fund's investment objective is to seek high total
return, of which capital appreciation and income are components. The Fund will
seek capital appreciation primarily through investment in securities that the
Manager believes are undervalued in the marketplace. The Fund will also seek
income when deemed consistent with its objective. The Fund currently seeks to
achieve its objective by investing in the types of securities which the Manager
believes represent intrinsic values not reflected in the current market price of
such securities and/or present opportunities for high income. The Fund will also
invest a portion of its total assets in the securities of closed-end management
investment companies. The Fund may invest in domestic and foreign securities as
described under "How Does the Fund Invest Its Assets?"
The Fund is designed for long-term investors and not as a trading vehicle, and
is not intended to present a complete investment program. An investment in the
Fund involves certain speculative considerations; see "What Are the Fund's
Potential Risks?"
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that you should know before investing. After reading
the Prospectus, you should retain it for future reference; it contains
information about the purchase and sale of shares and other items which you will
find useful to have.
An SAI concerning the Fund, dated March 1, 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
Financial Highlights -
How Has the Fund Performed?..................... 4
What Is the Franklin Balance Sheet
Investment Fund?................................ 5
How Does the Fund Invest Its Assets?.............. 5
What Are the Fund's Potential Risks?.............. 9
How You Participate in the Results
of the Fund's Activities........................ 13
Who Manages the Fund?............................. 14
What Distributions Might I Receive
from the Fund?.................................. 15
How Taxation Affects You and the Fund............. 17
How Do I Buy Shares?.............................. 18
What Programs and Privileges
Are Available to Me as a Shareholder?........... 23
What If My Investment Outlook Changes? -
Exchange Privilege.............................. 25
How Do I Sell Shares?............................. 27
Telephone Transactions............................ 31
How Are Fund Shares Valued?....................... 32
How Do I Get More Information
About My Investment?............................ 32
How Does the Fund Measure Performance?............ 33
General Information............................... 34
Registering Your Account.......................... 35
Important Notice Regarding
Taxpayer IRS Certifications..................... 36
Useful Terms and Definitions...................... 36
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 the aggregate operating
expenses of the Fund for the fiscal year ended October 31, 1995.
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)............................... 1.50%
Deferred Sales Charge............................................... NONE+
Exchange Fee (per transaction)...................................... $5.00*
+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."
*$5.00 fee imposed only on Market Timers. All other exchanges are processed
without a fee.
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees..................................................... 0.54%
Rule 12b-1 Fees..................................................... 0.44%**
Other Expenses:
Shareholder servicing costs.................................. 0.06%
Reports to shareholders...................................... 0.04%
Other expenses............................................... 0.09%
Total other expenses................................................ 0.19%
Total Fund Operating Expenses....................................... 1.17%
** The maximum amount of Rule 12b-1 fees allowed pursuant to the Fund's
distribution plan is 0.50%. 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. Given the
Fund's maximum front-end sales charge and the rate of the Fund's Rule 12b-1 fee,
however, it is estimated that this would take a substantial number of years.
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 Five Years Ten Years
$27* $52 $78 $155
*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. 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%.
Financial Highlights - How Has the Fund Performed?
Set forth below is a table containing the financial highlights for a share of
the Fund from the effective date of its registration statement, as indicated
below, through the fiscal year ended October 31, 1995. The information for each
of the five fiscal years in the period ended October 31, 1995 has been audited
by Coopers & Lybrand L.L.P., independent auditors, whose audit report appears in
the financial statements in the Trust's Annual Report to Shareholders dated
October 31. The remaining figures, which are also audited, are not covered by
the auditors' current report. See "Reports to Shareholders" under "General
Information" in this Prospectus.
<TABLE>
<CAPTION>
Year Ended October 31, April 2, 1990** to
1995 1994 1993 1992 1991 October 31, 1990
- -------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period....... $22.68 $22.97 $17.37 $15.54 $11.48 $15.00
- -------------------------------------------------------------------------------------------------------------------
Net investment income........................ .30 .23 .39 .53 .52 .29
Net realized and unrealized
gain (loss) on securities................... 3.98 .51 6.26 1.83 4.10 (3.63)
- -------------------------------------------------------------------------------------------------------------------
Total from investment operations............. 4.28 .74 6.65 2.36 4.62 (3.34)
Less distributions:
From net investment income................... (.27) (.26) (.43 ) (.53) (.56) (.18)
From capital gains........................... (.35) (.77) (.62) -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total distributions.......................... (.62) (1.03) (1.05) (.53) (.56) (.18)
- -------------------------------------------------------------------------------------------------------------------
Net asset value at end of period............. $26.34 $22.68 $22.97 $17.37 $15.54 $11.48
Total Return*................................ 19.32% 3.42% 37.78% 15.51% 40.96% (22.36)%
Ratios/Supplemental Data
Net assets at end of period (in 000s)........ $387,540 $134,255 $22,317 $5,149 $3,572 $1,405
Ratio of expenses to average net assets...... 1.17% 1.19%++ --++ --++ --++ --++
Ratio of expenses to average net assets
(excluding waiver and payment of
expenses by investment manager).............. 1.17% 1.34% 1.85% 2.60% 3.16% 3.54%+
Ratio of net investment income to
average net assets......................... 1.30% .99% 1.89% 3.16% 3.79% 2.31%+
Portfolio turnover rate...................... 28.63% 24.96% 31.36% 30.86% 31.94% 5.34%
</TABLE>
*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 and assumes reinvestment of dividends and capital gains distributions, if
any, at net asset value.
**Effective date of registration.
+Annualized.
++During the periods indicated Advisers agreed in advance to waive all or a
portion of its management fees and/or pay other expenses of the Fund.
What is the Franklin Balance Sheet Investment Fund?
The Fund is a non-diversified series of the Trust, an open-end management
investment company commonly called a "mutual fund." The Trust, formerly known as
the Franklin Balance Sheet Investment Fund, was organized as a Massachusetts
business trust on September 11, 1989, and registered with the SEC under the 1940
Act. The Trust currently consists of two series, each of which issues a separate
series of the Trust's shares and maintains a totally separate investment
portfolio. Shares of the Fund may be considered Class I shares, as described
under "Useful Terms and Definitions," for redemption, exchange and other
purposes.
As of February 5, 1996, the Fund is closed to new investors except retirement
plan accounts. If you were a shareholder of record as of February 5, 1996,
you may continue to add to your existing open account by new purchases,
exchanges, and reinvestment of income dividends and capital gain
distributions.
How Does the Fund Invest Its Assets?
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The investment objective of the Fund is to seek high total return, of which
capital appreciation and income are components. This investment objective is a
fundamental policy of the Fund and may not be changed without shareholder
approval. Capital appreciation will be sought primarily through investment in
securities that the Fund's Manager believes are undervalued in the marketplace.
Accordingly, the focus on balance sheet items will be an important element in
the Manager's investment analysis. Income will also be sought when consistent
with the Fund's objective. The Fund currently invests in equity and debt
securities which, in the opinion of the Manager, represent intrinsic values not
reflected in the current market price of such securities and/or present
opportunities for high income.
Of course, there is no assurance that the Fund's objective will be achieved.
Types of Securities the Fund May Purchase
The Fund may invest an unlimited amount of its total assets in the securities of
any companies which, in the opinion of the Manager, represent an opportunity for
(i) significant capital appreciation due to intrinsic values not reflected in
the current market price of such securities and/or (ii) high income. The
securities of such companies, which include common and preferred stocks and
secured or unsecured bonds, commercial paper or notes, will typically be
purchased at prices below the book value of the company. The Manager, however,
will also take into account a variety of other factors in order to determine
whether to purchase, and once purchased, whether to hold or sell these
securities. In addition to book value, the Manager may consider the following
factors among others: valuable franchises or other intangibles; ownership of
valuable trademarks or trade names; control of distribution networks or of
market share for particular products; ownership of real estate the value of
which is understated; underutilized liquidity and other factors that would
identify the issuer as a potential takeover target or turnaround candidate.
The Fund generally favors common stocks, although it has no limit on the
percentage of its assets which may be invested in preferred stock and debt
obligations. The percentage of the Fund's assets invested for capital
appreciation or high income or both will vary at any time in accordance with the
Manager's appraisal of what securities will best meet the Fund's objective of
high total return.
The Fund will also invest a portion (but may invest without limitation) of its
total assets in the securities of registered closed-end management investment
companies ("closed-end funds"), which are traded on a national securities
exchange or in the over-the-counter markets and which the Manager believes are
undervalued in the marketplace. Consistent with its objective of capital
appreciation, the Fund may also purchase securities issued by unit investment
trusts ("UITs") when, in the Manager's view, these securities are trading at a
discount from net asset value. The Fund's investment in the securities of
closed-end funds and UITs will be subject to certain restrictions and conditions
imposed by the 1940 Act. (See "How Does the Fund Invest Its Assets? - 1940 Act
Provisions" in the SAI.) The Fund may, consistent with its investment objective,
invest in securities of any closed-end fund without regard to whether the
investment objectives and policies of such closed-end fund are similar to or
consistent with those of the Fund.
The Manager will consider the following, among other factors, in evaluating
closed-end funds: (i) historical market discounts, (ii) portfolio
characteristics, (iii) repurchase, tender offer, and dividend reinvestment
programs, (iv) provisions for converting into an open-end fund, and (v) quality
of management.
The securities of closed-end funds in which the Fund invests are traded on a
national securities exchange or in the over-the-counter markets. The Fund
invests in the securities of closed-end funds which, at the time of investment
by the Fund, are either trading at a discount to net asset value or which, in
the opinion of the Manager, present an opportunity for capital appreciation or
high income irrespective of whether such securities are trading at a discount or
at a premium to net asset value. There can be no assurance that the market value
of the securities of the closed-end funds in which the Fund invests will
increase, particularly with respect to securities trading at a premium to net
asset value. For further information regarding the conditions under which the
securities of a closed-end fund may trade at a discount to net asset value, see
"How Does the Fund Invest Its Assets? - Closed-End Funds" in the SAI.
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 and
instrumentalities, which 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.; (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 or 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 such obligations, issued by banks and savings institutions which are subject
to regulation by the U.S. government, its agencies or instrumentalities and
which have assets of over one billion dollars, unless such obligations are
guaranteed by a parent bank which has total assets in excess of five billion
dollars; (4) commercial paper considered by the Manager to be of high quality,
which must be rated within the two highest grades by Standard & Poor's
Corporation ("S&P") or Moody's Investors Service ("Moody's") or, if not rated,
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 which are rated within the two highest rating categories by S&P and Moody's.
(See the "Appendix" in the SAI for a discussion of ratings.)
Options. When seeking high current income to achieve its investment objective of
high total return, the Fund may write covered call options on any of the
securities it owns which are listed for trading on a national securities
exchange, and it may also purchase listed call and put options for portfolio
hedging purposes.
Call options are short-term contracts (generally having a duration of nine
months or less) which give the purchaser of the option the right to buy, and
obligate the writer to sell, the underlying security at the exercise price at
any time during the option period, regardless of the market price of the
underlying security. The purchaser of an option pays a cash premium, which
typically reflects, among other things, the relationship of the exercise price
to the market price and the volatility of the underlying security, the remaining
term of the option, supply and demand factors, and interest rates.
Call options written by the Fund give the holder the right to buy the underlying
security from the Fund at a stated exercise price upon exercising the option at
any time prior to its expiration. A call option written by the Fund is "covered"
if the Fund owns or has an absolute right (such as by conversion) to the
underlying security covered by the call. A call option is also covered if the
Fund holds a call on the same security and in the same principal amount as the
call written and the exercise price of the call held (a) is equal to or less
than the exercise price of the call written or (b) is greater than the exercise
price of the call written if the difference is maintained by the Fund in cash,
government securities or other high grade debt obligations in a segregated
account with its custodian.
The Fund may also purchase put options on common stock that it owns or may
acquire through the conversion or exchange of other securities to protect
against a decline in the market value of the underlying security or to protect
the unrealized gain in an appreciated security in its portfolio without actually
selling the security. A put option gives the holder the right to sell the
underlying security at the option exercise price at any time during the option
period. The Fund may pay for a put either separately or by paying a higher price
for securities which are purchased subject to a put, thus increasing the cost of
the securities and reducing the yield otherwise available from the same
securities.
In the case of put options, any gain realized by the Fund will be reduced by the
amount of the premium and transaction costs it paid and may be offset by a
decline in the value of its portfolio securities. If the value of the underlying
stock exceeds the exercise price (or never declines below the exercise price),
the Fund may suffer a loss equal to the amount of the premium it paid plus
transaction costs. The Fund may also close out its option positions before they
expire by entering into a closing purchase transaction as discussed above and
subject to the same risks.
The Fund's investment in options and certain securities transactions involving
actual or deemed short sales may be limited by the requirements of the Code for
qualification as a regulated investment company and are subject to special tax
rules that may affect the amount, timing, and character of distributions to
shareholders. These securities require the application of complex and special
tax rules and elections. For more information, please see "Additional
Information Regarding Taxation" in the SAI.
Foreign Securities. 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. The Fund intends to limit its investment in foreign
securities to no more than 25% of total assets. See "What Are the Fund's
Potential Risks? - Foreign Securities" in this Prospectus and "How Does the Fund
Invest Its Assets? - Depositary Receipts" in the SAI.
Convertible Securities. The Fund may invest up to 25% of its total assets in
convertible securities although its current investment strategy is to limit
these investments to less than 5% of its net assets (at the time of investment).
A convertible security is generally a debt obligation or a preferred stock 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 may also
be subject to redemption by the issuer but only after a specified date and under
circumstances established at the time the security is issued. Convertible
securities provide a fixed-income stream and the opportunity, through their
conversion feature, to participate in the capital appreciation resulting from a
market price advance in the convertible security's underlying common stock.
Though the Fund intends to invest in liquid convertible securities there can be
no assurance that this will always be achieved. For more information on
convertible securities, including liquidity issues, please see the SAI.
Other Investment Policies of the Fund
For the purpose of earning additional income, the Fund may also engage to a
limited extent in the following investment practices each of which may involve
certain special risks. The SAI contains more detailed information about these
practices, including limitations designed to reduce these risks.
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 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 102%. This collateral shall consist of
cash, securities issued by the U.S. Government, its agencies or
instrumentalities, or irrevocable letters of credit. The lending of securities
is a common practice in the securities industry. The Fund may engage in security
loan arrangements with the primary objective of increasing the Fund's income
either through investing the cash collateral in short-term interest bearing
obligations or by receiving a loan premium from the borrower. Under the
securities loan agreement, the Fund continues to be entitled to all dividends or
interest on any loaned securities. As with any extension of credit, there are
risks of delay in recovery and loss of rights in the collateral should the
borrower of the security fail financially.
Repurchase Agreements. The Fund may engage in repurchase transactions in which
the Fund purchases a U.S. government security subject to resale to a bank or
dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Fund in each agreement, with the value of the
underlying security marked-to-market daily to maintain coverage of at least
100%. A default by the seller might cause the Fund to experience a loss or delay
in the liquidation of the collateral securing the repurchase agreement. The Fund
might also incur disposition costs in liquidating the collateral. The Fund,
however, intends to enter into repurchase agreements only with financial
institutions such as broker-dealers and banks which are deemed creditworthy by
the 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 Fund's Board and
will be held pursuant to a written agreement.
Borrowing. As a matter of fundamental policy, the Fund does not borrow money or
mortgage or pledge any of its assets, except that it may borrow up to 15% of its
total assets (including the amount borrowed) from banks 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 purchase any securities
while any such borrowings exceed 5% of its total assets.
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.
Illiquid Investments. It is the policy of the Fund that illiquid securities
(securities that cannot be disposed of within seven days in the normal course of
business at approximately the amount at which the Fund has valued the securities
and securities with legal or contractual restrictions on resale) may not
constitute, at the time of purchase, more than 10% of the value of the total net
assets of the Fund.
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?
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An investment in the Fund involves certain speculative considerations and may
involve a higher degree of risk than an investment in shares of more traditional
open-end, diversified investment companies because the Fund may invest up to
100% of its assets in the securities of issuers (including closed-end funds)
with less than three years continuous operation. The securities of certain
closed-end funds in which the Fund will invest may lack a liquid secondary
market. For further information see "How Does the Fund Invest Its Assets? -
Closed-End Funds" in the SAI.
The Fund's Approach to Value Investing. The Fund will invest principally in the
securities of companies believed by the investment 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 or 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 investment
manager may be incorrect in its assessment of a particular industry or company
or that the investment 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
deleveraged capital structure (lower level of debt), it may still retain a
relatively weak balance sheet. During economic downturns such 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
the securities of companies engaged in attempts to turn around their
performance, cyclical downturns or bankruptcy, as well as those of companies
reporting poor earnings, whose prices have declined sharply, or which are not
widely followed, differs from the approach followed by many other mutual funds.
The investment 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, for purposes of
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. 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 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.
Closed-end Funds. The Fund, by investing in securities of closed-end funds,
indirectly pays a portion of the operating expenses, management expenses and
brokerage costs of these companies. Thus, you will indirectly pay higher total
management and operating expenses and other costs than you would otherwise incur
if you directly owned the securities of such closed-end funds. You will also
incur some duplicative costs such as advisory, administrative and brokerage
fees. The Fund's investment strategy may result (i) in duplicative holdings, if
two or more of the closed-end funds in whose securities the Fund invests own the
same portfolio security and/or (ii) in situations whereby one closed-end fund in
whose securities the Fund invests buys a portfolio security that another
closed-end fund in whose securities the Fund invests is selling. However, the
Fund offers the opportunity for a professionally managed portfolio of the
securities of different closed-end funds and/or other companies that the Manager
believes are undervalued in the marketplace.
Fixed-Income Securities. The Fund may invest up to 25% of its total assets (as
measured at the time of investment) in other securities, including fixed-income
and convertible securities of an issuer in default with respect to such
securities, that the Manager believes represent intrinsic values not reflected
in the current market prices of the securities. These securities may be
non-rated debt and/or debt rated D, the lowest rating category by S&P and
Moody's. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears. Although the Fund reserves the right to invest up to
25% of its assets in these securities, its current investment strategy is to
limit such investments to less than 5% of the Fund's net assets. These debt
obligations are rated below investment grade and are regarded as extremely
speculative investments with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. They are also
generally considered to be subject to greater risk than securities with higher
ratings with regard to a general deterioration of prevailing economic
conditions. See the SAI for further information concerning the risks of lower
rated securities, including the rating categories of S&P and Moody's.
Options. When the Fund writes or sells covered call options, it will receive a
cash premium which can be used in whatever way is believed by the Manager to be
most beneficial to the Fund. The risks associated with covered option writing
are that in the event of a price rise on the underlying security which would
likely trigger the exercise of the call option, the Fund will not participate in
the increase in price beyond the exercise price. It will generally be the Fund's
policy, in order to avoid the exercise of a call option written by it, to cancel
its obligation under the call option by entering into a "closing purchase
transaction," if available, unless it is determined to be in the Fund's interest
to deliver the underlying securities from its portfolio. A closing purchase
transaction consists of the Fund purchasing an option having the same terms as
the option written by the Fund, and has the effect of canceling the Fund's
position as a writer of such an option. The premium which the Fund will pay in
executing a closing purchase transaction may be higher or lower than the premium
it received when writing the option, depending in large part upon the relative
price of the underlying security at the time of each transaction.
One risk involved in both the purchase and sale of options is that the Fund may
not be able to effect a closing purchase transaction at a time when it wishes to
do so or at an advantageous price. There is no assurance that a liquid market
will exist for a given contract or option at any particular time. To mitigate
this risk, the Fund will ordinarily purchase and write options only if a
secondary market for the option exists on a national securities exchange or in
the over-the-counter market. Another risk is that during the option period, if
the Fund has written a covered call option, it will have given up the
opportunity to profit from a price increase in the underlying securities above
the exercise price in return for the premium on the option (although, of course,
the premium can be used to offset any losses or add to the Fund's income) but,
as long as its obligation as a writer of such an option continues, the Fund will
have retained the risk of loss should the price of the underlying security
decline. In addition, the Fund has no control over the time when it may be
required to fulfill its obligation as a writer of the option; once the Fund has
received an exercise notice, it cannot effect a closing transaction in order to
terminate its obligation under the option and must deliver the underlying
securities at the exercise price. The aggregate premiums paid on all such
options which are held at any time will not exceed 20% of the Fund's total net
assets. Transactions in options are generally considered "derivative
securities."
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 such securities trade may also have less volume
and liquidity. Securities acquired by the Fund outside the U.S. and which are
publicly traded in the U.S. or on a foreign securities exchange or in a foreign
securities market will not be considered illiquid so long as the Fund acquires
and holds the security with the intention of reselling the security in the
foreign trading market, the Fund reasonably believes it can readily dispose of
the security for cash in the U.S. or foreign market, and current market
quotations are readily available.
You should carefully consider the substantial risks involved in investing in
securities of foreign issuers - risks that are often heightened for investments
in developing markets. For example, the small size, inexperience and limited
volume of trading on securities markets in certain developing countries may make
the Fund's investments in developing countries illiquid and more volatile than
investments in more developed countries, and the Fund may be required to
establish special custody or other arrangements before making certain
investments in such countries. The laws of some foreign countries may also limit
the ability of the Fund to invest in securities of certain issuers located in
those countries.
How You Participate in the Results of the Fund's Activities
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The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
you own will increase. If the securities owned by the Fund decrease in value,
the value of your shares will also decline. In this way, you participate in any
change in the value of the securities owned by the Fund.
In addition to the factors which affect the value of individual securities, as
described in the preceding sections, you may anticipate that the value of Fund
shares will fluctuate with movements in the broader equity and bond markets.
To the extent the Fund's investments consist of debt securities, changes in the
prevailing interest rates in any of the countries in which the Fund is invested
will likely affect the value of the Fund's portfolio and thus its share price.
Increased rates of interest which frequently accompany higher inflation and/or a
growing economy are likely to have a negative effect on the value of Fund
shares. To the extent the Fund's investments consist of common stocks, a decline
in the stock market of any country in which the Fund is invested may also be
reflected in declines in the Fund's share price. Changes in currency valuations
will also affect the price of Fund shares. History reflects both increases and
decreases in interest rates and in the valuation of the market, and these may
reoccur unpredictably in the future.
Who Manages the Fund?
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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.
Bruce C. Baughman Portfolio Manager of Advisers
Mr. Baughman holds a bachelor of arts degree from Stanford University and a
master of science degree in accounting from New York University. He has been
with Advisers since 1988.
Margaret McGee Portfolio Manager of Advisers
Ms. McGee holds a bachelor of arts degree from William Paterson College. She
has been with Advisers since 1988.
Pursuant to 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 Trust'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 Trust's
Code of Ethics.
During the fiscal year ended October 31, 1995, management fees totaling 0.54% of
the average daily net assets of the Fund were paid to Advisers.
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.
During the fiscal year ended October 31, 1995, expenses borne by the Fund,
including fees paid to Advisers and to Investor Services, totaled 1.17% of the
average daily net assets of the Fund.
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 in an amount equal to 0.25% per annum of the
average daily net assets of the Fund 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.
In addition, pursuant to the Plan, the Fund may pay Distributors or others a
service fee to reimburse such parties for personal services provided to
shareholders of the Fund and/or the maintenance of shareholder accounts. The
total amount of service fees paid by the Fund shall not exceed 0.25% per year of
the average daily net assets of the Fund. These payments are made pursuant to
distribution and/or service agreements entered into between service providers
and Distributors or the Fund directly. The maximum amount which the Fund may pay
for the promotion and distribution of shares, including service fees, is 0.50%
per year of the average daily net assets of the Fund payable monthly. Payments
in excess of reimbursable expenses under the Plan in any year must be refunded.
Further, expenses of Distributors other than for service fees in excess of 0.25%
per year of the Fund's average net assets that otherwise qualify for payment may
not be carried forward into successive annual periods.
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?
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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, its fiscal year ending
date, and any undistributed net capital gains from the prior fiscal year. The
Fund may make more than one distribution derived from net short-term and net
long-term capital gains in any year or adjust the timing of these distributions
for operational or other reasons.
Distribution Date
Although subject to change by the Board without prior notice to or approval by
shareholders, the Fund's current policy is to declare income dividends
quarterly, payable in March, June, September and December, for shareholders of
record on the 14th day of the month or prior business day, 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. 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
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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 continue to qualify 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 sale or exchange of the Fund's
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.
99.62% of the income dividends paid by the Fund for the fiscal year ended
October 31, 1995 qualified for the corporate dividends-received deduction,
subject to certain holding period and debt financing restrictions imposed under
the Code on the corporation claiming the deduction.
Corporate shareholders should note that dividends paid by the Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividends-received deduction. For example, any interest income and net
short-term capital gain (in excess of any net long-term capital loss or capital
loss carryover) included in investment company taxable income and distributed by
the Fund as a dividend will not qualify for the dividends-received deduction.
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 the Fund shares have been held (or deemed
held) for at least 46 days in a substantially unhedged manner. The
dividends-received deduction may also be reduced to the extent interest paid or
accrued by a corporate shareholder is directly attributable to its investment in
Fund shares. The entire dividend, including the portion which is treated as a
deduction, is includable in the tax base on which the federal alternative
minimum tax is computed and may also result in a reduction in the shareholder's
tax basis in its Fund shares, under certain circumstances, if the shares have
been held for less than two years. Corporate shareholders whose investment in
the Fund is "debt financed" for these tax purposes should consult with their tax
advisors concerning the availability of the dividends-received deduction.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid, and will promptly after the close of each calendar year
advise you of the tax status for federal income tax purposes of such dividends
and distributions.
If you are not a U.S. person for purposes of federal income taxation, you should
consult with your financial or tax advisors regarding the applicability of U.S.
withholding or other taxes on distributions received by you from the Fund and
the application of foreign tax laws to these distributions.
You should consult your tax advisors with respect to the applicability of state
and local intangible property or income taxes to your shares in the Fund and to
distributions and redemption proceeds received from the Fund.
How Do I Buy Shares?
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You may add to your existing Fund account with as little as $100 at any time. As
of February 5, 1996, the Fund is closed to new investors except retirement plan
accounts. Investment minimums may be waived when shares are purchased by
retirement plans.
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.
Total Sales Charge
As a Percentage of Amount Allowed to
Dealer as a Percentage Net Amount Size of Transaction at
of Offering Price* Offering Price Invested of Offering Price
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Less than $500,000.................... 1.50% 1.52% 1.50%
$500,000 but less than $1,000,000..... 1.00% 1.01% 1.00%
$1,000,000 or more.................... None** None None***
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*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 Securities Act of 1933, 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 $480,000 of Fund shares and invest
$25,000, the sales charge will be 1.0%.
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.
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."
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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.
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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 call- ing 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 twelve months
prior to executing the exchange (six months with respect to shares purchased
prior to September 30, 1994, by persons who were shareholders of the Fund as of
July 30, 1994).
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
Market Timers will be charged a $5.00 administrative service fee for each
exchange. All other exchanges are without charge.
Restrictions on Exchanges
In accordance with the terms of their respective prospectuses, certain funds do
not accept or may place differing limitations than those below on exchanges by
Market Timers.
The Fund reserves the right to temporarily or permanently terminate the exchange
privilege or reject any specific purchase order for any Market Timer, group or
person whose transactions seem to follow a timing pattern who: (i) makes an
exchange request out of the Fund within two weeks of an earlier exchange request
out of the Fund, (ii) makes more than two exchanges out of the Fund per calendar
quarter, or (iii) exchanges shares equal in value to at least $5 million, or
more than 1% of the Fund's net assets. Accounts under common ownership or
control, including accounts administered by Market Timers, will be aggregated
for purposes of the exchange limits.
The Fund also reserves the right to refuse the purchase side of an exchange
request by any Market Timer, person, or group if, in the Manager's judgment, the
Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected.
The purchase side of an exchange may be restricted or refused if the Fund
receives or anticipates simultaneous orders affecting significant portions of
the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to the Fund and therefore may be
refused.
The Fund and Distributors, as indicated in "How Do I Buy Shares?", reserve the
right to refuse any order for the purchase of shares.
- ------------------------------------------------------------------------------
How Do I Sell Shares?
You may sell (redeem) your shares at any time and receive from the Fund the
value of the shares. If you sell all your shares after February 5, 1996, your
account will be closed and you will not be allowed to buy additional shares of
the Fund or reopen your account. This policy does not apply to retirement plans.
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.
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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.
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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.
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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 150. 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 5:00p.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 5:00p.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.
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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
per share par value, which may be issued in any number of series and classes.
All shares have one vote and, when issued, are fully paid, non-assessable and
redeemable. Shares have no preemptive, conversion or subscription rights, and
are fully transferable. 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 shares
entitled to vote at the meeting. 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.
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 ($500 for an IRA account), 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.
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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.
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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
- ------------------------------------------------------------------------------
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 1.50% 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
FRANKLIN
BALANCE SHEET
INVESTMENT FUND
Franklin Value Investors Trust
STATEMENT OF
ADDITIONAL INFORMATION
777 Mariners Island Blvd., P.O. Box 7777 MARCH 1, 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?...................... 5
Investment Restrictions................................... 7
Officers and Trustees..................................... 8
Investment Advisory and Other Services.................... 11
How Does the Fund Purchase Securities
For Its Portfolio?....................................... 12
How Do I Buy and Sell Shares?............................. 13
How Are Fund Shares Valued?............................... 16
Additional Information Regarding Taxation................. 16
The Fund's Underwriter.................................... 18
General Information....................................... 19
Financial Statements...................................... 23
Appendix.................................................. 23
Franklin Balance Sheet Investment Fund (the "Fund") is a non-diversified series
of Franklin Value Investors Trust (the "Trust"), an open-end management
investment company. The Fund's investment objective is to seek high total
return, of which capital appreciation and income are components.
A Prospectus for the Fund dated March 1, 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?
As noted in the Prospectus, the Fund's investment objective is to seek high
total return, of which capital appreciation and income are components. This
objective is a fundamental policy and may not be changed without approval of
shareholders. The Fund will seek capital appreciation primarily through
investment in securities that the Fund's investment manager believes are
undervalued in the marketplace. The Fund will also seek income when deemed
consistent with its objective.
The Fund's emphasis on securities believed to be undervalued by the market uses
a technique followed by certain very wealthy investors highlighted by the media
and a number of private partnerships with very high minimum investments. It
requires not only the resources to undertake exhaustive research of little
followed, out-of-favor securities, but also the patience and discipline to hold
these investments until their intrinsic values are ultimately recognized by
others in the marketplace. There can be no assurance that this technique will be
successful for the Fund or that the Fund will achieve its investment objective.
The following information supplements and should be read in conjunction with the
section in the Fund's Prospectus entitled "How Does the Fund Invest Its Assets?"
Closed-End Funds. As stated in the Prospectus, the Fund invests a portion of its
total assets (but may invest without limitation) in the common shares of
closed-end funds that are traded on a national securities exchange or in the
over-the-counter markets. Typically, the common shares of closed-end funds are
offered to the public in a one-time initial public offering by a group of
underwriters who retain a spread or underwriting commission of between 4% and 6%
of the initial public offering price. These securities may then be listed for
trading on the New York Stock Exchange, the American Stock Exchange, the
National Association of Securities Dealers Automated Quotation ("NASDAQ") System
and, in some cases, may be traded in other over-the-counter markets. Because the
common shares of closed-end funds cannot be redeemed upon demand to the issuer
like the shares of an open-end investment company (such as the Fund), investors
seek to buy and sell common shares of closed-end funds in the secondary market.
The Fund also may invest in senior securities, such as preferred stock and debt
obligations, of closed-end funds. Closed-end funds may issue senior securities
for the purpose of leveraging the closed-end fund's common shares in an attempt
to enhance the current return to closed-end fund's common shareholders. The
Fund's investment in the common shares of closed-end funds that are financially
leveraged may create an opportunity for greater total return on its investment,
but at the same time may be expected to exhibit more volatility in market price
and net asset value than an investment in shares of investment companies without
a leveraged capital structure. The Fund will not invest in senior securities of
closed-end funds rated lower than A by Standard & Poor's Corporation ("S&P") and
Moody's Investors Service ("Moody's") and the Fund will not own more than 3% of
the total outstanding stock (including common and preferred stock and certain
senior securities that have been afforded voting rights as a consequence of the
existence of dividend arrears) of any single closed-end fund.
The Fund generally will only purchase securities of closed-end funds in the
secondary market. The Fund will incur normal brokerage costs on these purchases
similar to the expenses the Fund would incur for the purchase of securities of
any other type of issuer in the secondary market. The Fund may, however, also
purchase securities of a closed-end fund in an initial public offering when, in
the opinion of the investment manager, based on a consideration of the nature of
the closed-end fund's proposed investments, the prevailing market conditions and
the level of demand for such securities, they represent an attractive
opportunity for capital appreciation. The initial offering price will include a
dealer spread, which may be higher than the applicable brokerage cost if the
Fund purchased the securities in the secondary market.
Closed-end funds invest the net proceeds of their public offering in the
securities of other companies consistent with their investment objectives and
policies. Certain closed-end funds seek to provide current income to investors,
others seek to provide appreciation in value, while others may seek a
combination of both income and appreciation. Closed-end funds may have a policy
of investing in certain types of securities such as equity or debt securities;
some may concentrate in particular industry sectors or geographic areas, while
others may invest in a variety of securities to achieve a particular type of
return or a particular tax result. The indicated characteristics and risks apply
to the securities of closed-end funds regardless of whether such securities
trade at a market discount or premium. According to a report from Lipper
Analytical Services, Inc., as of December 31, 1994, there were approximately 531
closed-end funds with assets in excess of $118 billion. In order to comply with
federal tax regulations, the Fund will generally invest in closed-end funds that
qualify as "regulated investment companies" under federal income tax law.
The common shares of many closed-end funds, after their initial public offering,
frequently trade at a price per share which is less than the net asset value per
share, the difference representing the "market discount" of such common shares.
This market discount may be due in part to the investment objective of long-term
appreciation, which is sought by many closed-end funds, as well as the fact that
the common shares of closed-end funds are not redeemable by the holder upon
demand to the issuer at the next-determined net asset value but rather are
subject to the principles of supply and demand in the secondary market. A
relative lack of secondary market purchasers of closed-end fund common shares
also may contribute to such common shares trading at a discount to their net
asset value.
Although the Fund intends primarily to purchase common shares of closed-end
funds that trade at a market discount and that the investment manager believes
present the opportunity for capital appreciation or increased income due in part
to such market discount, there can be no assurance that the market discount on
common shares of any closed-end fund will ever decrease. In fact, it is possible
that this market discount may increase and the Fund may suffer realized or
unrealized capital losses due to a further decline in the market price of the
securities of such closed-end funds, thereby adversely affecting the net asset
value of the Fund's shares. Similarly, there can be no assurance that the common
shares of closed-end funds which trade at a premium will continue to trade at a
premium or that the premium will not decrease subsequent to a purchase of shares
by the Fund. Although no assurances can be given, the investment manager
believes that its market research and analysis and the diversification policies
of the Fund will enable the Fund to avoid significant declines in the net asset
value of the Fund's shares due to losses related to an individual issuer.
The Fund may also invest in the securities of closed-end funds which (i)
concentrate their portfolios in the issuers of specific industries or in
specific geographic areas and (ii) are non-diversified for purposes of the
Investment Company Act of 1940, as amended (the "1940 Act"). However, because
the Fund does not intend to concentrate its investments in any single industry
and because the closed-end funds in which the Fund will invest will generally
satisfy the diversification requirements applicable to a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code"), the
Fund does not believe that its investment in closed-end funds that concentrate
in specific industries or geographic areas or which are non-diversified for
purposes of the 1940 Act present any special risks to you. The Fund will treat
its entire investment in the securities of a closed-end fund that concentrates
in a specific industry as an investment in securities of an issuer in the
industry in which such fund concentrates its portfolio.
The Fund will not invest in the securities of closed-end funds that invest more
than 10% of their assets in the securities of other investment companies. The
Fund will also not invest directly in the securities of open-end investment
companies; however, the Fund may retain the securities of a closed-end
investment company that has converted to open-end fund status subsequent to the
Fund's investment in the securities of such closed-end fund.
1940 Act Provisions. The Fund will structure its investments in the securities
of closed-end funds and unit investment trusts ("UITs") to comply with
applicable provisions of the 1940 Act. The presently applicable provisions
require that (i) the Fund and affiliated persons of the Fund not own together
more than 3% of the total outstanding stock of any one investment company, (ii)
the Fund not offer its shares at a public offering price that includes a sales
charge of more than 1.5% and (iii) the Fund will either seek instructions from
its shareholders with regard to the voting of all proxies with respect to its
investment in the securities of closed-end funds and UITs and vote such proxies
only in accordance with such instructions, or vote the shares held by it in the
same proportion as the vote of all other holders of such securities. For
purposes of applying the 3% of total outstanding stock limitation, the Fund will
aggregate its purchases of a closed-end fund or a UIT with the purchases, if
any, by other investment companies managed or sponsored by the investment
manager. The Fund intends to vote the shares of any closed-end fund held by it
in the same proportion as the vote of all other holders of such fund's
securities. The effect of such "mirror" voting is to neutralize the Fund's
influence on corporate governance matters regarding the closed-end funds in
which the Fund invests.
Closed-end funds may, under certain circumstances, convert into open-end
investment companies. Pursuant to applicable provisions of the 1940 Act, the
Fund may not redeem more than 1% of the outstanding redeemable securities of an
open-end investment company during any period of 30 days or less. Consequently,
should the Fund own more than 1% of the outstanding redeemable securities of an
open-end investment company after such fund's conversion from closed-end fund
status, the amount in excess of 1% may be treated as an investment in illiquid
securities. Because the Fund may not hold at any time more than 10% of the value
of its total assets in 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), the Fund may seek to divest
itself, prior to any such conversion, of securities in excess of 1% of the
outstanding redeemable securities of a converting fund. The Fund may, however,
retain such securities and any amount in excess of 1% of the open-end fund,
thereby subject to the limits on redemption, would be treated as an investment
in illiquid securities subject to the aggregate limit of 10% of the Fund's total
assets.
The Fund will not invest in the securities of closed-end funds which are managed
by the investment manager or UITs that are sponsored by the investment manager.
The foregoing policy is not a fundamental policy of the Fund and can therefore
be changed by a majority vote of the Board of Trustees of the Fund without any
requirement for a vote of the Fund's shareholders.
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
United States ("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.
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 that 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.
Convertible Securities. 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 also 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.
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 a convertible security
issued by an operating company 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 of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank. 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.
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 stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
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. To complete such
a transaction, the Fund must borrow the security to make delivery to the buyer.
The Fund then is obligated to replace the security borrowed by purchasing it at
the market price at the time of replacement. The price at this time may be more
or less than the price at which the security was sold by the Fund. Until the
security is replaced, the Fund is required to pay to the lender any dividends or
interest which accrue during the period of the loan. To borrow the security, the
Fund also may 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. The Fund will realize a gain if the
security declines in price between those 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 may be required to pay in connection with a short
sale.
No securities will be sold short if, after effect is given to any such short
sale, the total market value of all securities sold short would exceed 25% of
the value of the Fund's net assets. In addition, short sales of the securities
of any single issuer, which must be listed on a national exchange, may not
exceed 5% of the Fund's net assets or 5% of any class of such issuer's
securities.
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). This segregated account will be marked-to-market
daily, provided that at no time will the amount deposited in it plus the amount
deposited with the broker as collateral be less than the market value of the
securities at the time they were sold short.
In addition to the short sales discussed above, the Fund also may make short
sales "against the box," i.e., when a security identical to one owned by the
Fund is borrowed and sold short. The Fund at no time will have more than 15% of
the value of its net assets in deposits on short sales against the box.
WHAT ARE THE FUND'S POTENTIAL RISKS?
Fixed-Income Securities. The Fund may invest up to 25% of its total assets in
fixed-income securities offering high current income, although its current
investment strategy is to limit these investments to less than 5% of its net
assets (at the time of investment). 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, 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 bonds 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, such issuers may not have sufficient cash flow to meet
their interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific developments affecting
the issuer, the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss due
to default by the issuer may be significantly greater for the holders of high
yielding securities because such securities are generally unsecured and are
often subordinated to other creditors of the issuer. As of October 31, 1995 no
issues (excluding short-term securities and cash equivalents) in the Fund's
portfolio were in default. Current prices for defaulted bonds are generally
significantly lower than their purchase price, and the Fund may have unrealized
losses on such defaulted securities which are reflected in the price of the
Fund's shares. In general, securities which 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 which 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 premature disposition of a high
yielding security due to a call or buy-back feature, the deterioration of the
issuer's creditworthiness, or a default may also make it more difficult for the
Fund to manage the timing of its receipt of income, which may have tax
implications. The Fund may 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.
The Fund may have difficulty disposing of certain high yielding securities
because there may be a thin trading market for a particular security at any
given time. The market for lower rated, fixed-income securities generally tends
to be concentrated among a smaller number of dealers than is the case for
securities which trade in a broader secondary retail market. Generally,
purchasers of these securities are predominantly dealers and other institutional
buyers, rather than individuals. To the extent the secondary trading market for
a particular high yielding, fixed-income security does exist, it is generally
not as liquid as the secondary market for higher rated securities. Reduced
liquidity in the secondary market may have an adverse impact on market price and
the Fund's ability to dispose of particular issues, when necessary, to meet the
Fund's liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of the issuer. Reduced liquidity in the
secondary market for certain securities may also make it more difficult for the
Fund to obtain market quotations based on actual trades for purposes of valuing
the Fund's portfolio. Current values for these high yield issues are obtained
from pricing services and/or a limited number of dealers and may be based upon
factors other than actual sales. (See "How Are Fund Shares Valued?" in this
Prospectus and 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. While many high yielding securities have been sold
with registration rights, covenants and penalty provisions for delayed
registration, if the Fund is required to sell such restricted securities before
the securities have been registered, it may be deemed an underwriter of such
securities under the Securities Act of 1933, which entails special
responsibilities and liabilities. The Fund may incur special costs in disposing
of such securities; however, the Fund will generally incur no costs when the
issuer is responsible for registering the securities.
The Fund may acquire high yielding, fixed-income securities during an initial
underwriting. Such securities involve special risks because they are new issues.
The Fund has no arrangement with its 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.
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 reoccur.
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
be temporarily 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 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.
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 1940 Act a "vote of a
majority of the outstanding voting securities" of the Fund means the affirmative
vote of the lesser of (i) more than 50% of the outstanding 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. Have invested as of the last day of any fiscal quarter (i) more than 25% of
its total assets in the securities of any one issuer, or (ii) with respect to
50% of the Fund's total assets, more than 5% of its total assets in the
obligations of any one issuer, except for securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities.
2. Purchase more than 10% of the voting securities, or more than 10% of any
class of securities, of any issuer. For purposes of this restriction, all
outstanding fixed-income securities of an issuer are considered as one class.
3. Invest in the stock of any investment company if a purchase of such stock
would result in the Fund and affiliates of the Fund owning together more than 3%
of the total outstanding stock of such investment company.
4. Borrow money, except from banks, in order to meet redemption requests that
might otherwise require the untimely disposition of portfolio securities or for
other temporary or emergency (not leveraging) purposes in an amount up to 15% of
the value of the Fund's total assets (including the amount borrowed) based on
the lesser of cost or market, less liabilities (not including the amount
borrowed) at the time the borrowing is made. While borrowings exceed 5% of the
Fund's total assets, the Fund will not make any additional investments.
5. Pledge, hypothecate, mortgage or otherwise encumber its assets, except to
secure borrowings for temporary or emergency purposes and permissible options,
short selling or other hedging transactions.
6. Purchase securities on margin or underwrite securities. (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.)
7. Buy or sell interests in oil, gas or mineral exploration or development
programs or leases, or real estate. (Does not preclude investments in marketable
securities of issuers engaged in such activities.)
8. Make loans to others except through the purchase of debt obligations
referred to in the Prospectus and the entry into repurchase agreements and
portfolio lending agreements, provided that the value of securities subject to
such lending agreements may not exceed 25% of the value of the Fund's total
assets. Any loans of portfolio securities will be made according to guidelines
established by the Securities and Exchange Commission ("SEC") and the Fund's
Board of Trustees, including maintenance of collateral of the borrower equal at
all times to at least 102% of the current market value of the securities loaned.
9. Purchase or sell commodities or commodity futures contracts or financial
futures contracts; or invest in put, call, straddle or spread options on
financial or other futures contracts or stock index futures contracts.
10. Invest in warrants (valued at the lower of cost or market) in excess of 5%
of the value of the Fund's net assets. No more than 2% of the value of the
Fund's net assets may be invested in warrants (valued at the lower of cost or
market) which are not listed on the New York or American Stock Exchanges.
11. Purchase from or sell to its officers and trustees, or any firm of which any
officer or trustee is a member, as principal, any securities, but the Fund may
deal with such persons or firms as brokers and pay a customary brokerage
commission; nor invest in securities of any company if, to the knowledge of the
Fund, any officer, director or trustee of the Fund or the investment advisor
owns more than 0.5% of the outstanding securities of such company and such
officers, directors and trustees (who own more than 0.5%) in the aggregate own
more than 5% of the outstanding securities of such company.
12. Underwrite the 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.
13. Purchase or hold the securities of any issuer if, as a result, in the
aggregate, more than 10% of the value of the Fund's total assets would be
invested in securities that are subject to legal or contractual restrictions on
resale ("restricted securities"), in securities that are not readily marketable
(including over-the-counter options) or in repurchase agreements maturing in
more than seven days.
14. Invest in any issuer for purposes of exercising control or management.
15. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making any
permitted borrowings, mortgages or pledges or (ii) entering into repurchase
transactions.
16. Engage in the short sales of securities, except short sales "against the
box," if the cash or securities deposited in the segregated account with the
Fund's custodian to collateralize its short positions in the aggregate exceed
25% of the Fund's net assets.
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except as
otherwise noted.
Pursuant to an undertaking given to the Texas State Securities Board, the Fund
may not invest in real estate limited partnerships or in interests (other than
publicly traded equity securities) in oil, gas, or other mineral leases,
exploration or development.
OFFICERS AND TRUSTEES
The Board of Trustees (the "Board") has the responsibility for the overall
management of the Fund, including general supervision and review of its
investment activities. The trustees, in turn, elect the officers of the Fund who
are responsible for administering day-to-day operations of the Fund. The
affiliations of the officers and trustees and their principal occupations for
the past five years are listed below. Trustees who are deemed to be "interested
persons" of the Fund, as defined in the 1940 Act, are indicated by an
asterisk(*).
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 - Legal, Franklin Resources, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and officer of 37 of
the investment companies in the Franklin Group of Funds.
Rupert H. Johnson, Jr. (55) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director, trustee or managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 43 of the investment companies
in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (57) Treasurer and
777 Mariners Island Blvd. Principal Accounting
San Mateo, CA 94404 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) and the Templeton Group of Funds (the "Franklin
Templeton Group of Funds") 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.
Number of
Total Fees Boards in the
Total Fees Received from the Franklin Templeton
Received Franklin Templeton Group of Funds on
Name from the Trust* Group of Funds** Which Each Serves***
Frank T. Crohn...... $3,900 $15,600 3
Charles Rubens, II.. $3,900 $15,600 3
Leonard Rubin....... $3,900 $15,600 3
*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 Templeton Group of Funds and does not include the
total number of series or funds within each investment company for which the
trustees are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, consisting of approximately 162
U.S. based funds or series.
Nonaffiliated trustees are reimbursed for expenses incurred in connection with
attending board meetings, paid pro rata by each fund in the Franklin Templeton
Group of Funds for which they serve as director, trustee or managing general
partner. No officer or trustee received any other compensation directly from the
Fund. 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.
As of December 7, 1995, the officers and trustees, as a group, owned of record
and beneficially approximately 64,792 shares or less than 1% of the total
outstanding shares of the Fund. Many of the Fund's trustees also own shares in
various of the other funds in the Franklin Templeton Group of Funds.
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. To the
best knowledge of the Fund, no other person holds beneficially or of record more
than 5% of the Fund's outstanding shares.
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. Please see the Statement of Operations
in the financial statements included in the Trust's Annual Report to
Shareholders dated October 31, 1995.
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.
Pursuant to the management agreement, the Fund is obligated to pay the Manager a
fee computed and accrued daily and paid monthly at an annual rate of 0.625 of 1%
for the first $100 million of average daily net assets of the Fund; 0.50 of 1%
on net assets in excess of $100 million up to $250 million; 0.45 of 1% on net
assets in excess of $250 million up to $10 billion; 0.44 of 1% on net assets in
excess of $10 billion up to and including $12.5 billion; 0.42 of 1% on net
assets in excess of $12.5 billion up to and including $15 billion; and 0.40 of
1% on net assets in excess over $15 billion.
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. The most stringent current limit requires the
Manager to reduce or eliminate its fee to the extent that aggregate operating
expenses of the Fund (excluding interest, taxes, brokerage commissions and
extraordinary expenses such as litigation costs) would otherwise exceed in any
fiscal year 2.5% of the first $30 million of average net assets of the Fund,
2.0% of the next $70 million of average net assets of the Fund and 1.5% of
average net assets of the Fund in excess of $100 million. Expense reductions
have not been necessary based on state requirements.
In previous years the Manager agreed in advance to waive its management fees and
make certain payments to reduce expenses. For the fiscal years ended October 31,
1993, and 1994, the Manager waived the management fees the Fund was otherwise
contractually obligated to pay of $65,810 and $111,747, respectively. Management
fees for the fiscal year ended October 31, 1995, when there was no advance
waiver, were $1,325,910.
The management agreement is in effect until March 31, 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 Fund's 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 30 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 Fund 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 Fund'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.
During the past three fiscal years ended October 31, the Fund paid brokerage
commissions totaling $143,849, $922,550, and $851,495, respectively. As of
October 31, 1995, the Fund did not own securities of its regular broker-dealers.
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.
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 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.
Should the Fund do so, you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. Should
it happen, however, you may not be able to recover your investment in a timely
manner and you may incur brokerage costs in selling the securities.
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 $1250 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 $2500.
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.
In the case of securities of closed-end funds, the last quoted sale price, or
the mean between the quoted bid and ask prices, may be lower or higher than the
net asset value of such securities. 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.
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.
ADDITIONAL INFORMATION REGARDING TAXATION
As stated in the Prospectus, the Fund has elected 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 a 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.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve-month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. Under these rules, certain distributions
which are declared in October, November or December but which, for operational
reasons, may not be paid to 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. The Fund intends as a matter of policy
to declare such dividends, if any, in December and to pay these dividends in
December or January to avoid the imposition of this tax, but does not guarantee
that its distributions will be sufficient to avoid any or all federal excise
taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between the shareholder's basis
in the shares and the amount received, subject to the rules described below. If
such shares are a capital asset in the hands of the shareholder, gain or loss
will be capital gain or loss and will be long-term for federal income tax
purposes if the shares have been held for more than one year.
All or a portion of the sales charge incurred in purchasing shares of the Fund
will not be included in the federal tax basis of such shares sold or exchanged
within ninety (90) days of their purchase (for purposes of determining gain or
loss with respect to such shares) if the sales proceeds are reinvested in the
Fund or in another fund in the Franklin Group of Funds and the Templeton Funds
and a sales charge which would otherwise apply to the reinvestment is reduced or
eliminated. Any portion of such sales charge excluded from the tax basis of the
shares sold will be added to the tax basis of the shares acquired in the
reinvestment. You should consult with your tax advisors concerning the tax rules
applicable to the redemption or exchange of Fund shares.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares purchased.
The Fund's investment in options and certain transactions involving actual or
deemed short sales are subject to many complex and special tax rules. For
example, over-the-counter options on debt securities and equity options,
including options on stock and on narrow-based stock indices, will be subject to
tax under Section 1234 of the Code, generally producing a long-term or
short-term capital gain or loss upon exercise, lapse or closing out of the
option or sale of the underlying stock or security.
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.
Gain realized by a Fund from transactions entered into after April 30, 1993 that
are deemed to constitute "conversion transactions" under the Code and which
would otherwise produce capital gain may be recharacterized as ordinary income
to the extent that such gain does not exceed an amount defined by the Code as
the "applicable imputed income amount." A conversion transaction is any
transaction in which substantially all of the Fund's expected return is
attributable to the time value of the Fund's net investment in such transaction
and any one of the following criteria are met: 1) there is an acquisition of
property with a substantially contemporaneous agreement to sell the same or
substantially identical property in the future; 2) the transaction is an
applicable straddle; 3) the transaction was marketed or sold to the Fund on the
basis that it would have the economic characteristics of a loan but would be
taxed as capital gain; or 4) the transaction is specified in Treasury
regulations to be promulgated in the future. The applicable imputed income
amount, which represents the deemed return on the conversion transaction based
upon the time value of money, is computed using a yield equal to 120 percent of
the applicable federal rate, reduced by any prior recharacterizations under this
provision or Section 263(g) of the Code concerning capitalized carrying costs.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement in effect until March 31, 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 Fund's trustees who are not parties to the underwriting
agreement or interested persons of any such party (other than as trustees of the
Fund), cast in person at a meeting called for that purpose. The underwriting
agreement terminates automatically in the event of its assignment and may be
terminated by either party on 90 days' written notice.
Distributors pays the expenses of 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.
Until April 30, 1994, income dividends were reinvested at the offering price
(which includes the sales charge) and Distributors allowed 50% of the entire
commission to the securities dealer of record, if any, on an account. Starting
with any income dividends paid after April 30, 1994, such reinvestment is at net
asset value.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal years ended October 31, 1993, 1994 and 1995 were
$143,922, $953,869 and $1,801,511, respectively. After allowances to dealers,
Distributors retained $73, and $31,319 in net underwriting discounts and
commissions in 1993 and 1994, respectively, and nothing in 1995. Distributors
may be entitled to reimbursement under the Fund's distribution plan, as
discussed below. Except as noted, Distributors received no other compensation
from the Fund for acting as underwriter.
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 net assets for expenses incurred in the distribution of its shares.
In addition, the Plan provides that up to an additional 0.25% may be paid to
Distributors or others as a service fee to reimburse these service providers for
personal services to shareholders of the Fund and/or the maintenance of
shareholder accounts.
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 31, 1997, and renewable annually by a vote of
the Board, including a majority vote of the trustees who are non-interested
persons of the Fund 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 the
underwriting agreement with Distributors, or by a 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.
For the fiscal year ended October 31, 1995, the total amount paid by the Fund
pursuant to the Plan was $1,068,865, which was used for the following purposes:
Dollar
Amount
Advertising...................................... $ 65,454
Printing and mailing of prospectuses
other than to current shareholders.............. $ 33,991
Payments to underwriters......................... $ 29,281
Payments to broker-dealers....................... $940,139
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 Fund's average annual compounded rates of return for the indicated periods
ended October 31, 1995 were as follows:
One Year........................................... 17.51%
From inception (April 2, 1990)..................... 14.67%
These figures were 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. The Fund's total rates of return for the indicated periods ended
October 31, 1995 were as follows:
One Year........................................... 17.51%
From inception (April 2, 1990)..................... 114.85%
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. The
Fund's yield for the 30-day period ended October 31, 1995 was 1.23%.
This figure was 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
The above formula will be used in calculating quotations of current yield, based
on specified 30-day periods identified in an advertisement or communication.
Yield calculations assume the maximum applicable sales load.
The Fund's current yield and total return may be compared to relevant indices,
including U.S. domestic and international taxable bond indices and data from
Lipper Analytical Services, Inc. or S&P's Indices.
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 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.
You should note that the investment results of the Fund will fluctuate over
time, and any presentation of the Fund's current yield or total return for any
period should not be considered as a representation of what an investment may
earn or what your total return or yield may be in any future period. You should
also note that although the Fund believes that there are substantial benefits to
be realized by investing in the shares of closed-end funds, these investments
also involve certain risks. Please see "What Are the Fund's Potential Risks?" in
the Prospectus.
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) Valueline Index - an unmanaged index which follows the stocks of
approximately 1,700 companies.
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) 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.
k) Financial publications: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune and Money magazines provide performance
statistics over specified time periods.
l) Morgan Stanley Capital International World Indices, including, among others,
the Morgan Stanley Capital International Europe, Australia, Far East Index
("EAFE Index"). The EAFE index is an unmanaged index of more than 1,000
companies of Europe, Australia and the Far East.
m) Financial Times Actuaries Indices - including the FTA-World Index (and
components thereof), which are based on stocks in major world equity markets.
n) The Russell 1000 Value Index is a total return index that comprises stocks
from the Russell 1000 Index with a less than average growth orientation. The
average market capitalization (as of November 31, 1995) is $18.99 billion.
From time to time, advertisements or information for the Fund may include a
discussion of the benefits of investing in the shares of closed-end investment
companies by purchasing the shares of a mutual fund, such as the Fund, which
invest a substantial portion of its assets in closed-end fund shares. Such
advertisements or information may include symbols, headlines or other material
which highlights or summarizes the information discussed in more detail in the
communication.
These 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. Further, it may be
noted that the Fund is the first to offer the research and potential benefits of
buying discounted securities in the mutual fund format.
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 offers 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.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, dated October 31, 1995, including the auditors' report, are
incorporated herein by reference.
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.
Nonrated: Where no rating has been assigned or where a rating has been suspended
or withdrawn, it may be for reasons unrelated to the quality of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
3. There is a lack of essential data pertaining to the issuer.
4. The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonably up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
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.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
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.
Prime-1 repayment ability will often be evidenced by many of the following
characteristics:
- - Leading market positions in well-established industries.
- - High rates of return on funds employed.
- - Conservative capitalization structure with moderate reliance on debt and ample
asset protection.
- - Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- - Well-established access to a range of financial markets and assured sources of
alternate liquidity.
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.
S&P Notes
A S&P note rating reflects the liquidity concerns and market access risks unique
to notes. Notes due in three years or less will likely receive a note rating.
Notes maturing beyond three years will most likely receive a long-term debt
rating. The following criteria will be used in making that assessment:
- - Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- - Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a plus
(+) designation.
SP-2: Satisfactory capacity to pay principal and interest.
SP-3: Speculative capacity to pay principal and interest.
