As filed with the Securities and Exchange Commission on February 28, 1997.
File Nos.
33-31326
811-5878
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre- Effective Amendment No. _____
Post-Effective Amendment No. 16 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 17 (X)
FRANKLIN VALUE INVESTORS TRUST
(Formerly Franklin Balance Sheet Investment Fund)
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CALIFORNIA 94404 (Address of
Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (415) 312-2000
Harmon E. Burns, 777 Mariners Island Bvld., San Mateo, CA 94403
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate
box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on March 1, 1997 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on(date) pursuant to paragraph (a)(ii) of
rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Declaration Pursuant to Rule 24f-2. The issuer has registered an indefinite
number or amount of securities under the Securities Act of 1933 pursuant to Rule
24(f)(2) under the Investment Company Act of 1940. The Rule 24f-2 Notice for the
issuers most recent fiscal year was filed on December 20, 1996.
CROSS REFERENCE SHEET
FORM N- 1A
Part A: Information Required in Prospectus
(Franklin Balance Sheet Investment Fund)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial "Financial Highlights"; "How
Information does the Fund Measure
Performance?"
4. General Description of "How is the Trust
Registrant Organized?"; "How does the
Fund Invest its Assets?";
"What are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Contained in Registrant's
Discussion of Fund Annual Report to Shareholders
Performance
6. Capital Stock and "How is the Trust
Other Securities Organized?"; "Services to
Help You Manage Your
Account"; "What
Distributions Might I
Receive from the Fund?";
"How Taxation Affects the
Fund and its Shareholders"
7. Purchase of Securities "How Do I Buy Shares?"; "May
Being Offered I Exchange Shares for Shares
of Another Fund?";
"Transaction Procedures and
Special Requirements";
"Services to Help You Manage
Your Account"; "Who Manages
the Fund?"; "Useful Terms
and Definitions"
Redemption or "May I Exchange Shares for
Repurchase Shares of Another Fund?";
"How Do I Sell Shares?";
"Transaction Procedures and
Special Requirements";
"Services to Help You Manage
Your Account"; What if I Have
Questions About My Account?"
9. Pending Legal Not Applicable
Proceedings
CROSS REFERENCE SHEET
FORM N- 1A
Part A: Information Required in Prospectus
(Franklin MicroCap Value Fund)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial "Financial Highlights"; "How
Information does the Fund Measure
Performance?"
4. General Description of "How is the Trust
Registrant Organized?"; "How does the
Fund Invest its Assets?";
"What are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Contained in Registrant's
Discussion of Fund Annual Report to Shareholders
Performance
6. Capital Stock and "How is the Trust
Other Securities Organized?"; "Services to
Help You Manage Your
Account"; "What
Distributions Might I
Receive from the Fund?";
"How Taxation Affects the
Fund and its Shareholders"
7. Purchase of Securities "How Do I Buy Shares?"; "May
Being Offered I Exchange Shares for Shares
of Another Fund?";
"Transaction Procedures and
Special Requirements";
"Services to Help You Manage
Your Account"; "Who Manages
the Fund?"; "Useful Terms
and Definitions"
8. Redemption or "May I Exchange Shares for
Repurchase Shares of Another Fund?";
"How Do I Sell Shares?";
"Transaction Procedures and
Special Requirements";
"Services to Help You Manage
Your Account"; What if I Have
Questions About My Account?"
9. Pending Legal Not Applicable
Proceedings
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(Franklin Value Fund - Class I and II)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial "Financial Highlights"; "How
Information does the Fund Measure
Performance?"
4. General Description of "How is the Trust
Registrant Organized?"; "How does the
Fund Invest its Assets?";
"What are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Contained in Registrant's
Discussion of Fund Annual Report to Shareholders
Performance
6. Capital Stock and "How is the Trust
Other Securities Organized?"; "Services to
Help You Manage Your
Account"; "What
Distributions Might I
Receive from the Fund?";
"How Taxation Affects the
Fund and its Shareholders"
7. Purchase of Securities "How Do I Buy Shares?"; "May
Being Offered I Exchange Shares for Shares
of Another Fund?";
"Transaction Procedures and
Special Requirements";
"Services to Help You Manage
Your Account"; "Who Manages
the Fund?"; "Useful Terms
and Definitions"
8. Redemption or "May I Exchange Shares for
Repurchase Shares of Another Fund?";
"How Do I Sell Shares?";
"Transaction Procedures and
Special Requirements";
"Services to Help You Manage
Your Account" What if I Have
Questions About My Account?"
9. Pending Legal Not Applicable
Proceedings
FRANKLIN VALUE INVESTORS TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(Franklin Value Fund - Advisor Class)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial "How does the Fund Measure
Information Performance?"
4. General Description of "How is the Trust
Registrant Organized?"; "How does the
Fund Invest its Assets?";
"What are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Contained in Registrant's
Discussion of Fund Annual Report to Shareholders
Performance
6. Capital Stock and "How is the Trust
Other Securities Organized?"; "Services to
Help You Manage Your
Account"; "What
Distributions Might I
Receive from the Fund?";
"How Taxation Affects the
Fund and its Shareholders"
7. Purchase of Securities "How Do I Buy Shares?"; "May
Being Offered I Exchange Shares for Shares
of Another Fund?";
"Transaction Procedures and
Special Requirements";
"Services to Help You Manage
Your Account"; "Who Manages
the Fund?"; "Useful Terms
and Definitions"
8. Redemption or "May I Exchange Shares for
Repurchase Shares of Another Fund?";
"How Do I Sell Shares?";
"Transaction Procedures and
Special Requirements";
"Services to Help You Manage
Your Account"; What if I Have
Questions About My Account?"
9. Pending Legal Not Applicable
Proceedings
FRANKLIN VALUE INVESTORS TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in Statement of Additional Information
(Franklin Balance Sheet Investment Fund)
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information Not Applicable
and History
13. Investment Objectives "How does the Fund Invest
and Policies its Assets?"; "Investment
Restrictions"
14. Management of the "Officers and Trustees";
Registrant "Investment Management and
Other Services"
15. Control Persons and "Officers and Trustees";
Principal Holders of "Miscellaneous Information"
Securities
16. Investment Advisory "Investment Management and
and Other Services Other Services"; "The Fund's
Underwriter"
17. Brokerage Allocation "How does the Fund Purchase
and Other Practices Securities for its
Portfolio?"
18. Capital Stock and See Prospectus "How is the
Other Securities Trust Organized?"
19. Purchase, Redemption "How Do I Buy, Sell and
and Pricing of Exchange Shares?"; "How are
Securities Being Fund Shares Valued?";
Offered "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of "How does the Fund Measure
Performance Data Performance?"
23. Financial Statements "Financial Statements"
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in Statement of Additional Information
(Franklin MicroCap Value Fund)
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information Not Applicable
and History
13. Investment Objectives "How does the Fund Invest
and Policies its Assets?"; "Investment
Restrictions"
14. Management of the "Officers and Trustees";
Registrant "Investment Management and
Other Services"
15. Control Persons and "Officers and Trustees";
Principal Holders of "Miscellaneous Information"
Securities
16. Investment Advisory "Investment Management and
and Other Services Other Services"; "The Fund's
Underwriter"
17. Brokerage Allocation "How does the Fund Purchase
and Other Practices Securities for its
Portfolio?"
18. Capital Stock and See Prospectus "How is the
Other Securities Trust Organized?"
19. Purchase, Redemption "How Do I Buy, Sell and
and Pricing of Exchange Shares?"; "How are
Securities Being Fund Shares Valued?";
Offered "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of "How does the Fund Measure
Performance Data Performance?"
23. Financial Statements "Financial Statements"
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in Statement of Additional Information
(Franklin Value Fund - Class I and II)
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information Not Applicable
and History
13. Investment Objectives "How does the Fund Invest
and Policies its Assets?"; "Investment
Restrictions"
14. Management of the "Officers and Trustees";
Registrant "Investment Management and
Other Services"
15. Control Persons and "Officers and Trustees";
Principal Holders of "Miscellaneous Information"
Securities
16. Investment Advisory "Investment Management and
and Other Services Other Services"; "The Fund's
Underwriter"
17. Brokerage Allocation "How does the Fund Purchase
and Other Practices Securities for its
Portfolio?"
18. Capital Stock and See Prospectus "How is the
Other Securities Trust Organized?"
19. Purchase, Redemption "How Do I Buy, Sell and
and Pricing of Exchange Shares?"; "How are
Securities Being Fund Shares Valued?";
Offered "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of "How does the Fund Measure
Performance Data Performance?"
23. Financial Statements "Financial Statements"
FORM N-1A
Part B: Information Required in Statement of Additional Information
(Franklin Value Fund - Advisor Class)
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information Not Applicable
and History
13. Investment Objectives "How does the Fund Invest
and Policies its Assets?"; "Investment
Restrictions"
14. Management of the "Officers and Trustees";
Registrant "Investment Management and
Other Services"
15. Control Persons and "Officers and Trustees";
Principal Holders of "Miscellaneous Information"
Securities
16. Investment Advisory "Investment Management and
and Other Services Other Services"; "The Fund's
Underwriter"
17. Brokerage Allocation "How does the Fund Purchase
and Other Practices Securities for its
Portfolio?"
18. Capital Stock and See Prospectus "How is the
Other Securities Trust Organized?"
19. Purchase, Redemption "How Do I Buy, Sell and
and Pricing of Exchange Shares?"; "How are
Securities Being Fund Shares Valued?";
Offered "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of "How does the Fund Measure
Performance Data Performance?"
23. Financial Statements "Financial Statements"
PROSPECTUS & APPLICATION
FRANKLIN
BALANCE SHEET
INVESTMENT FUND
INVESTMENT STRATEGY
GROWTH & INCOME
MARCH 1, 1997
Franklin Value Investors Trust
This prospectus describes the Franklin Balance Sheet Investment Fund (the
"Fund"). It contains information you should know before investing in the Fund.
Please keep it for future reference.
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.
The Fund has a Statement of Additional Information ("SAI"), dated March 1, 1997,
which may be amended from time to time. It includes more information about the
Fund's procedures and policies. It has been filed with the SEC and is
incorporated by reference into this prospectus. For a free copy or a larger
print version of this prospectus, call 1-800/DIAL BEN or write the Fund at the
address shown.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
FRANKLIN
BALANCE SHEET
INVESTMENT
FUND
MARCH 1, 1997
WHEN READING THIS PROSPECTUS, YOU WILL SEE CERTAIN TERMS BEGINNING WITH CAPITAL
LETTERS. THIS MEANS THE TERM IS EXPLAINED IN OUR GLOSSARY SECTION.
TABLE OF CONTENTS
About the Fund
Expense Summary ........................................ 2
Financial Highlights ................................... 3
How does the Fund Invest its Assets? ................... 4
What are the Fund's Potential Risks? ................... 14
Who Manages the Fund? .................................. 20
How does the Fund Measure Performance? ................. 22
How Taxation Affects the Fund and its Shareholders ..... 23
How is the Trust Organized? ............................ 24
About Your Account
How Do I Buy Shares? ................................... 25
May I Exchange Shares for Shares of Another Fund?....... 30
How Do I Sell Shares? .................................. 32
What Distributions Might I Receive from the Fund? ...... 34
Transaction Procedures and Special Requirements ........ 35
Services to Help You Manage Your Account ............... 39
What If I Have Questions About My Account? ............. 42
Glossary
Useful Terms and Definitions ........................... 42
Appendix
Description of Ratings ................................. 45
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
Expense Summary
This table is designed to help you understand the costs of investing in the
Fund. It is based on the Fund's historical expenses for the fiscal year ended
October 31, 1996. The Fund's actual expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge Imposed on Purchases
(as a percentage of Offering Price) ..................... 1.50%++
Deferred Sales Charge ................................... None+++
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.50%
Rule 12b-1 Fees 0.44%*
Other Expenses 0.14%
-----
Total Fund Operating Expenses 1.08%
=====
C. EXAMPLE
Assume the Fund's annual return is 5%, operating expenses are as described
above, and you sell your shares after the number of years shown. These are
the projected expenses for each $1,000 that you invest in the Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------
$26** $49 $74 $145
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The Fund pays its operating expenses. The effects of these expenses are
reflected in its Net Asset Value or dividends and are not directly charged to
your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more.
+++A Contingent Deferred Sales Charge of 1% may apply to purchases of $1 million
or more if you sell the shares within one year. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*These fees may not exceed 0.50%. The combination of front-end sales charges and
Rule 12b-1 fees could cause long-term shareholders to pay more than the economic
equivalent of the maximum front-end sales charge permitted under the NASD's
rules. It is estimated, however, that this would take a substantial number of
years.
**Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent five years appears in the
financial statements in the Trust's Annual Report to Shareholders for the fiscal
year ended October 31, 1996. The Annual Report to Shareholders also includes
more information about the Fund's performance. For a free copy, please call Fund
Information.
<TABLE>
<CAPTION>
Year Ended October 31,
---------------------------------------------------------------------------------------------------- April 2, 1990** to
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992 1991 October 31,1990
- ----------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at beginning of period$ 26.34 $22.68 $22.97 $17.37 $15.54 $11.48 $15.00
------------------------------------------------------------------------------------------
Net investment income 0.47 0.30 0.23 0.39 0.53 0.52 0.29
Net realized and unrealized gain (loss)
on securities 3.846 3.98 0.51 6.26 1.83 4.10 (3.63)
Total from investment operations 4.316 4.28 0.74 6.65 2.36 4.62 (3.34)
Less distributions:
From net investment income (0.442) (0.27) (0.26) (0.43) (0.53) (0.56) (0.18)
From capital gains (1.064) (0.35) (0.77) (0.62) - - -
Total distributions (1.506) (0.62) (1.03) (1.05) (0.53) (0.56) (0.18)
Net Asset Value at end of period $29.15 $26.34 $22.68 $22.97 $17.37 $15.54 $11.48
Total Return* 16.93% 19.32% 3.42% 37.78% 15.51% 40.96% (22.36)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period(in 000s) $657,002 $387,540 $134,255 $22,317 $5,149 $3,572 $1,405
Ratio of expenses to average net assets 1.08% 1.17% 1.19%++ -++ -++ -++ -++
Ratio of expenses to average net assets
(excluding waiver and payment of expenses
by investment manager) 1.08% 1.17% 1.34% 1.85% 2.60% 3.16% 3.54%+
Ratio of net investment income to
average net assets 1.69% 1.30% 0.99% 1.89% 3.16% 3.79% 2.31%+
Portfolio turnover rate 35.46% 28.63% 24.96% 31.36% 30.86% 31.94% 5.34%
Average commission rate+++ 0.0453 - - - - - -
*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 PAY ALL OR A PORTION OF THE OTHER EXPENSES OF
THE FUND.
+++REPRESENTS THE AVERAGE BROKER COMMISSION RATE PER SHARE PAID BY THE FUND IN
CONNECTION WITH THE EXECUTION OF THE FUND'S PORTFOLIO TRANSACTIONS IN EQUITY
SECURITIES
</TABLE>
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is to seek high total return, of which capital
appreciation and income are components. The objective is a fundamental policy of
the Fund and may not be changed without shareholder approval. Of course, there
is no assurance that the Fund's objective will be achieved.
The Fund is designed for long-term investors and not as a trading vehicle. It is
not intended to present a complete investment program. Capital appreciation will
be sought primarily through investment in securities that Advisory Services
believes are undervalued in the marketplace. Accordingly, the focus on balance
sheet items will be an important element in Advisory Services' 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 Advisory Services, represent intrinsic values not reflected in the current
market price of the 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 policies used to seek to achieve
the Fund's objective are not fundamental, unless otherwise noted, and are
subject to change without shareholder approval.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
The Fund may invest an unlimited amount of its total assets in the securities of
any companies, including investments in small capitalization companies, which,
in the opinion of Advisory Services, represent an opportunity for (i)
significant capital appreciation due to intrinsic values not reflected in the
current market price of the securities and/or (ii) high income. The securities
of these 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. Advisory Services, however, will
also take into account a variety of other factors in order to determine whether
to buy, and once purchased, whether to hold or sell these securities. In
addition to book value, Advisory Services may consider the following factors
among others: valuable franchises or other intangibles; ownership of valuable
trademarks or trade names; control of distribution networks or of market share
for particular products; ownership of real estate the value of which is
understated; 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 that 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
Advisory Services' appraisal of what securities will best meet the Fund's
objective of high total return.
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
Advisory Services 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 that mature in one year or less from the date of
purchase, including U.S. Treasury bills, notes and bonds, and securities of the
Government National Mortgage Association, the Federal Housing Administration and
other agency or instrumentality issues or guarantees that 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 CDs (subject to the 10%
aggregate limit on the Fund's investment in illiquid securities), letters of
credit and bankers' acceptances, or instruments secured by those obligations,
issued by banks and savings institutions that are subject to regulation by the
U.S. government, its agencies or instrumentalities and that have assets of over
$1 billion, unless these obligations are guaranteed by a parent bank that has
total assets in excess of $5 billion; (4) commercial paper considered by
Advisory Services to be of high quality, and rated within the two highest rating
categories by S&P or 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 Advisory Services to be high grade or that are rated
within the two highest rating categories by S&P and Moody's. Please see
"Appendix" for a discussion of ratings.
CLOSED-END FUNDS. 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 that
Advisory Services believes are undervalued in the marketplace. Consistent with
seeking capital appreciation, the Fund may also buy securities issued by unit
investment trusts ("UITs") when, in Advisory Services' 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. Please 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 the closed-end fund are
similar to or consistent with those of the Fund.
Advisory Services 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 Fund invests in the securities of closed-end funds that, at the time of
investment, are either trading at a discount to net asset value or which, in the
opinion of Advisory Services, present an opportunity for capital appreciation or
high income irrespective of whether the 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 more information about 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.
HIGH YIELDING, FIXED-INCOME SECURITIES. The Fund may invest up to 25% of its
total assets in lower rated, fixed-income and convertible securities (those
rated BB or lower by S&P or Ba or lower by Moody's) and unrated securities of
comparable quality that Advisory Services believes possess intrinsic values in
excess of the current market prices of those securities. Lower rated bonds are
commonly called "junk bonds." Lower rated securities are considered by S&P, on
balance, to be predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligation, and they generally involve more credit risk than securities in the
higher rating categories. Lower rated securities in which the Fund may invest
include securities rated D, the lowest rating category of S&P, or unrated
securities of comparable quality. Debt obligations rated D are in default and
the payment of interest and/or repayment of principal is in arrears. Please see
"What are the Fund's Potential Risks?" below for more information.
CONVERTIBLE SECURITIES. The Fund may invest up to 25% of its total assets in
convertible securities. A convertible security is generally a debt obligation or
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 provides a fixed-income stream and the opportunity, through its
conversion feature, to participate in the capital appreciation resulting from a
market price advance in its underlying common stock. As with a straight
fixed-income security, a convertible security tends to increase in market value
when interest rates decline and decrease in value when interest rates rise. Like
a common stock, the value of a convertible security 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. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the Fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the Fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
The Fund may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stocks ("PERCS"), which
provide an investor, such as the Fund, with the opportunity to earn higher
dividend income than is available on a company's common stock. PERCS are
preferred stocks that generally feature a mandatory conversion date, as well as
a capital appreciation limit which is usually expressed in terms of a stated
price. Most PERCS expire three years from the date of issue, at which time they
are convertible into common stock of the issuer. PERCS are generally not
convertible into cash at maturity. Under a typical arrangement, after three
years PERCS convert into one share of the issuer's common stock if the issuer's
common stock is trading at a price below that set by the capital appreciation
limit, and into less than one full share if the issuer's common stock is trading
at a price above that set by the capital appreciation limit. The amount of that
fractional share of common stock is determined by dividing the price set by the
capital appreciation limit by the market price of the issuer's common stock.
PERCS can be called at any time prior to maturity, and hence do not provide call
protection. If called early, however, the issuer must pay a call premium over
the market price to the investor. This call premium declines at a preset rate
daily, up to the maturity date.
The Fund may also invest in other enhanced convertible securities. These include
but are not limited to ACES (Automatically Convertible Equity Securities), PEPS
(Participating Equity Preferred Stock), PRIDES (Preferred Redeemable Increased
Dividend Equity Securities), SAILS (Stock Appreciation Income Linked
Securities), TECONS (Term Convertible Notes), QICS (Quarterly Income Cumulative
Securities), and DECS (Dividend Enhanced Convertible Securities). ACES, PEPS,
PRIDES, SAILS, TECONS, QICS, and DECS all have the following features: they are
issued by the company, the common stock of which will be received in the event
the convertible preferred stock is converted, unlike PERCS they do not have a
capital appreciation limit, they seek to provide the investor with high current
income with some prospect of future capital appreciation, they are typically
issued with three to four-year maturities, they typically have some built-in
call protection for the first two to three years, investors have the right to
convert them into shares of common stock at a preset conversion ratio or hold
them until maturity, and upon maturity they will automatically convert to either
cash or a specified number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked as
senior or subordinated debt in the issuer's corporate structure according to the
terms of the debt indenture. There may be additional types of convertible
securities not specifically referred to herein that may be similar to those
described above in which the Fund may invest, consistent with its objectives and
policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the Fund. The Fund may have difficulty disposing of
such securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the Fund's ability to dispose of particular securities, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the creditworthiness of an issuer.
Reduced liquidity in the secondary market for certain securities may also make
it more difficult for the Fund to obtain market quotations based on actual
trades for purposes of valuing the Fund's portfolio. The Fund, however, intends
to acquire liquid securities, though there can be no assurances that this will
be achieved.
SYNTHETIC CONVERTIBLES. The Fund may invest a portion of its assets in
"synthetic convertible" securities. A synthetic convertible is created by
combining distinct securities which together possess the two principal
characteristics of a true convertible security, i.e., fixed income and the right
to acquire the underlying equity security. This combination is achieved by
investing in nonconvertible fixed-income securities and in warrants or stock or
stock index call options which grant the holder the right to purchase a
specified quantity of securities within a specified period of time at a
specified price or to receive cash in the case of stock index options. Synthetic
convertible securities are generally not considered to be "Equity Securities"
for purposes of the Fund's investment policy regarding those securities.
Synthetic convertible securities differ from the true convertible security in
several respects. The value of a synthetic convertible is the sum of the values
of its fixed-income component and its convertibility component. Thus, the values
of a synthetic convertible and a true convertible security will respond
differently to market fluctuations. Further, although Advisory Services expects
normally to create synthetic convertibles whose two components represent one
issuer, the character of a synthetic convertible allows the Fund to combine
components representing distinct issuers, or to combine a fixed income security
with a call option on a stock index, when Advisory Services determines that such
a combination would better promote the Fund's investment objectives. In
addition, the component parts of a synthetic convertible security may be
purchased simultaneously or separately; and the holder of a synthetic
convertible faces the risk that the price of the stock, or the level of the
market index underlying the convertibility component will decline.
FOREIGN SECURITIES. The Fund may invest in foreign securities if 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.
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 buy the securities of foreign issuers directly in
foreign markets, and may buy the securities of issuers in developing nations.
The Fund intends to limit its investment in foreign securities to no more than
25% of its total assets. Please 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.
OPTIONS. When seeking high current income to achieve its investment objective of
high total return, the Fund may write (sell) covered call options on any of the
securities it owns that are listed for trading on a national securities
exchange, and it may also buy listed call and put options for portfolio hedging
purposes.
Call options are short-term contracts (generally having a duration of nine
months or less) that give the buyer 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 buyer of an option pays a cash premium that 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.
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 bank.
The Fund may also buy put options on common stock that it owns or may acquire
them 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 that 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. Subject to the same risks, the Fund may also close out its
option positions before they expire by entering into a closing purchase
transaction.
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 on Distributions and Taxes" in the SAI.
Options are generally considered "derivative securities." The Fund's investment
in options will be for portfolio hedging purposes in an effort to stabilize
principal fluctuation to achieve the Fund's investment objective and not for
speculation. For more information about the Fund's investments in options,
please see "What are the Fund's Potential Risks? - Options" below and "How does
the Fund Invest its Assets?" in the SAI.
OTHER INVESTMENT POLICIES OF THE FUND
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors,
provided that such loans do not exceed 25% of the value of the Fund's total
assets at the time of the most recent loan. The borrower must deposit with the
Fund's custodian bank collateral with an initial market value of at least 102%
of the initial market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 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 buys a U.S. government security subject to resale to a bank or dealer
at an agreed-upon price and date. The transaction requires the collateralization
of the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller might cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund might
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks that are deemed creditworthy by Advisory
Services. A repurchase agreement is deemed to be a loan by the Fund under the
1940 Act. The U.S. government security subject to resale (the collateral) will
be held on behalf of the Fund by a custodian bank approved by the Board and will
be held pursuant to a written agreement.
BORROWING. As a 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 buy any securities while
borrowings exceed 5% of its total assets.
SHORT-SELLING. The Fund may make short sales. Short sales 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. The Fund's policy is not to invest more than 10% of its
net assets in illiquid securities and securities with legal or contractual
restrictions on resale. Illiquid securities are generally securities that cannot
be sold within seven days in the normal course of business at approximately the
amount at which the Fund has valued them.
PERCENTAGE RESTRICTIONS. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in the value or liquidity of portfolio securities or the
amount of net assets will not be considered a violation of any of the foregoing
policies.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How does the Fund Invest its Assets?" and "Investment Restrictions" in the
SAI.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
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 more information please 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 Advisory Services 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 Advisory Services
may be incorrect in its assessment of a particular industry or company or that
Advisory Services may not buy these securities at their lowest possible prices
or sell them at their highest.
When the Fund buys securities of companies emerging from bankruptcy, it may
encounter risks that do not exist with other investments. Companies emerging
from bankruptcy may have some difficulty retaining customers and suppliers who
prefer transacting with solvent organizations. If new management is installed in
a company emerging from bankruptcy, the management may be considered untested;
if the existing management is retained, the management may be considered
incompetent. Further, even when a company has emerged from bankruptcy with a
lower level of debt, it may still retain a relatively weak balance sheet. During
economic downturns these companies may not have sufficient cash flow to pay
their debt obligations and may also have difficulty finding additional
financing. In addition, reduced liquidity in the secondary market may make it
difficult for the Fund to sell the securities or to value them based on actual
trades.
The Fund's policy of investing in securities that may be out of favor, including
turnarounds, cyclicals and companies emerging from bankruptcy, companies
reporting poor earnings, and companies whose share prices have declined sharply
or that are not widely followed, differs from the approach followed by many
other mutual funds. Advisory Services believes, however, that these securities
may provide a greater total investment return than securities whose prices
appear to reflect anticipated favorable developments.
NON-DIVERSIFICATION. As a non-diversified investment company under the 1940 Act,
the Fund may concentrate its investments in the securities of a smaller number
of issuers than if it were a diversified company. 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.
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 these 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 Advisory
Services believes are undervalued in the marketplace.
FOREIGN SECURITIES. Investments in the securities of companies organized outside
the U.S. or whose securities are principally traded outside the U.S. ("foreign
issuers") may offer potential benefits not available from investments solely in
securities of U.S. issuers. These benefits may include the opportunity to invest
in foreign issuers that appear, in the opinion of Advisory Services, to offer
more potential for long-term capital appreciation or current earnings than
investments in U.S. issuers, the opportunity to invest in foreign countries with
economic policies or business cycles different from those of the U.S., and the
opportunity to reduce fluctuations in portfolio value by taking advantage of
foreign securities markets that do not necessarily move in a manner parallel to
U.S. markets.
Investments in securities of foreign issuers involve significant risks,
including possible losses that are not typically associated with investments in
securities of U.S. issuers. These risks include political, social or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of the imposition of exchange
controls, expropriation, limits on removal of currency or other assets,
nationalization of assets, foreign withholding and income taxation and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Changes in government administrations and economic or
monetary policies in the U.S. or abroad, changes in circumstances surrounding
dealings between nations, and changes in currency convertibility or exchange
rates could 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 buy securities in any foreign country, developed or developing, but
investments will not be made in any securities issued without stock certificates
or comparable stock documents.
Foreign securities may be subject to greater fluctuations in price than U.S.
securities. The markets on which foreign securities trade may also have less
volume and liquidity. Securities acquired by the Fund outside the U.S. and that
are publicly traded in the U.S. or on a foreign securities exchange or in a
foreign securities market will not be considered illiquid so long as the Fund
acquires and holds the security with the intention of reselling the security in
the foreign trading market, the Fund reasonably believes it can readily dispose
of the security for cash in the U.S. or foreign market, and current market
quotations are readily available.
You should carefully consider the substantial risks involved in investing in
securities of foreign issuers - risks that are often heightened for investments
in developing markets. For example, the small size, inexperience and limited
volume of trading on securities markets in certain developing countries may make
the Fund's investments in developing countries illiquid and more volatile than
investments in more developed countries, and the Fund may be required to
establish special custody or other arrangements before making certain
investments in these countries. The laws of some foreign countries may also
limit the ability of the Fund to invest in securities of certain issuers located
in those countries.
OPTIONS. When the Fund writes (sells) covered call options, it will receive a
cash premium that can be used in whatever way Advisory Services believes is most
beneficial to the Fund. The risks associated with covered option writing are
that in the event of a price increase on the underlying security that 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 buying an option having the same terms as the
option written by the Fund, and has the effect of canceling the Fund's position
as the writer of the option. The premium that 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 buying and selling 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 buy 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 that are
held at any time will not exceed 20% of the Fund's total assets.
SMALL COMPANIES. The Fund may invest in companies that have relatively small
revenues, limited product lines, and a small share of the market for their
products or services. Small companies may lack depth of management, the ability
to internally generate funds necessary for growth or potential development, or
the ability to generate funds through external financing on favorable terms.
They may also attempt to develop or market new products or services for which
markets are not yet established and may never become established. Due to these
and other factors, small companies may suffer significant losses, as well as
realize substantial growth.
Historically, small capitalization stocks have been more volatile in price than
larger capitalization stocks. Among the reasons for the greater price volatility
of these securities are the less certain growth prospects of smaller firms, the
lower degree of liquidity in the markets for these stocks, and the greater
sensitivity of small companies to changing economic conditions. Besides
exhibiting greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks. Small company stocks may decline in
price as large company stocks rise, or rise in price as large company stocks
decline. You should therefore expect that the shares of a fund that invests a
substantial portion of its net assets in small company stocks to be more
volatile than the shares of a fund that invests solely in larger capitalization
stocks.
HIGH YIELDING, Fixed-Income Securities. Because of the Fund's policy of
investing in higher yielding, higher risk securities, an investment in the Fund
is accompanied by a higher degree of risk than is present with an investment in
higher rated, lower yielding securities. Accordingly, an investment in the Fund
should not be considered a complete investment program and should be carefully
evaluated for its appropriateness in light of your overall investment needs and
goals. If you are on a fixed income or retired, you should also consider the
increased risk of loss to principal that 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 securities rated BBB by S&P or Baa by Moody's, ratings which
are considered investment grade, possess some speculative characteristics.
Issuers of high yielding, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with acquiring the securities of these issuers is generally
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of high yielding securities may experience financial stress.
During these periods, these issuers may not have sufficient cash flow to meet
their interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific developments affecting
the issuer, the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss due
to default by the issuer may be significantly greater for the holders of high
yielding securities because the securities are generally unsecured and are often
subordinated to other creditors of the issuer. Current prices for defaulted
bonds are generally significantly lower than their purchase price, and the Fund
may have unrealized losses on defaulted securities that are reflected in the
price of the Fund's shares. In general, securities that default lose much of
their value in the time period before the actual default so that the Fund's net
assets are impacted before the default. The Fund may retain an issue that has
defaulted because the issue may present an opportunity for subsequent price
recovery.
High yielding, fixed-income securities frequently have call or buy-back features
that permit an issuer to call or repurchase the securities from the Fund.
Although these 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, Advisory Services may find it necessary to
replace the securities with lower yielding securities, which could result in
less net investment income to the Fund.
The Fund may have difficulty disposing of certain high yielding securities
because there may be a thin trading market for a particular security at any
given time. The market for lower rated, fixed-income securities generally tends
to be concentrated among a smaller number of dealers than is the case for
securities that trade in a broader secondary retail market. Reduced liquidity in
the secondary market may have an adverse impact on market price and the Fund's
ability to dispose of particular issues, when necessary, to meet the Fund's
liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of the issuer. Reduced liquidity in the
secondary market for certain securities may also make it more difficult for the
Fund to obtain market quotations based on actual trades for purposes of valuing
the Fund's portfolio. Current values for these high yield issues are obtained
from pricing services and/or a limited number of dealers and may be based upon
factors other than actual sales. For more information, please see "How are Fund
Shares Valued?" in the SAI.
The Fund is authorized to acquire high yielding, fixed-income securities that
are sold without registration under the federal securities laws and therefore
carry restrictions on resale. The Fund may acquire high yielding, fixed-income
securities during an initial underwriting. These securities involve special
risks because they are new issues. The Fund has no arrangement with its
underwriter or any other person concerning the acquisition of these securities.
INTEREST RATE, CURRENCY AND MARKET RISK. To the extent the Fund invests in debt
securities, changes in interest rates in any country where the Fund is invested
will affect the value of the Fund's portfolio and its share price. Rising
interest rates, which often occur during times of inflation or a growing
economy, are likely to have a negative effect on the value of the Fund's shares.
To the extent the Fund invests in common stocks, a general market decline, in
any country where the Fund is invested, may cause the value of what the Fund
owns, and thus the Fund's share price, to decline. Changes in currency
valuations may also affect the price of Fund shares. The value of stock markets,
currency valuations and interest rates throughout the world has increased and
decreased in the past. These changes are unpredictable and may happen again in
the future.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations.
INVESTMENT MANAGER. As of July 1, 1996, Advisory Services manages the Fund's
assets and makes its investment decisions. Advisory Services also performs
similar services for other funds. It is wholly owned by Resources, a publicly
owned company engaged in the financial services industry through its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources. Together, Advisory Services and its affiliates manage
over $179 billion in assets. Advisory Services employs the same individuals to
manage the Fund's portfolio as the previous manager. The terms and conditions of
the management services provided to the Fund remain the same. Please see
"Investment Management and Other Services" and "Miscellaneous Information" in
the SAI for information on securities transactions and a summary of the Fund's
Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio since its inception is:
William Lippman
President and Director of Advisory Services
Mr. Lippman holds a master of business administration degree from New York
University and a bachelor of business administration degree from City College
New York. Mr. Lippman has been in the securities industry for over 30 years and
with the Franklin Templeton Group since 1988.
Bruce C. Baughman
Vice President of Advisory Services
Mr. Baughman holds a master of science degree in accounting from New York
University and a bachelor of arts degree from Stanford University. He has been
with the Franklin Templeton Group since 1988.
Margaret McGee
Vice President of Advisory Services
Ms. McGee holds a bachelor of arts degree in business administration from
William Paterson College. She has been in the securities industry since 1985 and
with the Franklin Templeton Group since 1988.
MANAGEMENT FEES. During the fiscal year ended October 31, 1996, management fees
totaling 0.50% of the average daily net assets of the Fund were paid to the
investment manager. Total expenses of the Fund, including fees paid to the
investment manager, were 1.08%.
PORTFOLIO TRANSACTIONS. Advisory Services tries to obtain the best execution on
all transactions. If Advisory Services believes more than one broker or dealer
can provide the best execution, consistent with internal policies, it may
consider research and related services and the sale of Fund shares, as well as
shares of other funds in the Franklin Templeton Group of Funds, when selecting a
broker or dealer. Please see "How does the Fund Buy Securities for its
Portfolio?" in the SAI for more information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisory Services, FT Services
provides certain administrative services and facilities for the Fund. Please see
"Investment Management and Other Services" in the SAI for more information.
THE RULE 12B-1 PLAN
The Fund has a distribution plan or "Rule 12b-1 Plan" under which it may
reimburse Distributors or others for activities primarily intended to sell
shares of the Fund. Under the plan, the Fund may reimburse Distributors or
others up to 0.25% per year of the Fund's average daily net assets for all
expenses incurred by Distributors or others in the promotion and distribution of
the Fund's shares. These expenses may include, among others, distribution or
service fees paid to Securities Dealers or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates, printing prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and advertisements, and a prorated portion of Distributors' overhead expenses.
In addition, the Fund may pay Distributors or others a service fee to reimburse
those 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. 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.
During the first year after certain purchases made without a sales charge,
Distributors may keep the Rule 12b-1 fees associated with the purchase. For more
information, please see "The Fund's Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, the Fund advertises its performance. The more commonly used
measures of performance are total return, current yield and current distribution
rate. Performance figures are usually calculated using the maximum sales charge,
but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield shows the
income per share earned by the Fund. The current distribution rate shows the
dividends or distributions paid to shareholders by the Fund. This rate is
usually computed by annualizing the dividends paid per share during a certain
period and dividing that amount by the current Offering Price. Unlike current
yield, the current distribution rate may include income distributions from
sources other than dividends and interest received by the Fund.
The Fund's investment results will vary. Performance figures are always based on
past performance and do not guarantee future results. For a more detailed
description of how the Fund calculates its performance figures, please see "How
does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund has elected and 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 that 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 that are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated for tax purposes as if paid by the
Fund and received by you on December 31 of the calendar year in which they are
declared.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or a loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to such shares.
For the fiscal year ended October 31, 1996, 27.84% of the income dividends paid
by the Fund 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's 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 that 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 its 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 considered a U.S. person for federal income tax purposes, you
should consult with your financial or tax advisor regarding the applicability of
U.S. withholding or other taxes on distributions received by you from the Fund
and the application of foreign tax laws to these distributions.
You should consult your tax advisor with respect to the applicability of state
and local intangible property or income taxes to your shares in the Fund and to
distributions and redemption proceeds received from the Fund.
HOW IS THE TRUST ORGANIZED?
The Fund is a non-diversified series of Franklin Value Investors Trust (the
"Trust"), an open-end management investment company, commonly called a mutual
fund. The Trust, formerly known as the Franklin Balance Sheet Investment Fund,
was organized as a Massachusetts business trust on September 11, 1989, and is
registered with the SEC under the 1940 Act. Shares of each series of the Trust
have equal and exclusive rights to dividends and distributions declared by that
series and the net assets of the series in the event of liquidation or
dissolution. Shares of the Fund are considered Class I shares for redemption,
exchange and other purposes. Additional series and classes of shares may be
offered in the future.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
removing members of the Board.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
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 account with as little as $100 or buy additional
shares through the reinvestment of dividend or capital gain distributions. We
may waive the investment minimum for retirement plans. We may also refuse any
order to buy shares. Currently, the Fund does not allow investments by Market
Timers.
SALES CHARGE REDUCTIONS AND WAIVERSF
If you qualify to buy shares under one of the sales charge reduction or
waiver categories described below, please include a written statement with each
purchase order explaining which privilege applies. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
QUANTITY DISCOUNTS. The sales charge you pay depends on the dollar amount you
invest, as shown in the table below.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
------------------ PERCENTAGE O
AMOUNT OF PURCHASE OFFERING NET AMOUNT OFFERING PRICE
AT OFFERING PRICE PRICE INVESTED
- -------------------------------------------------------------------------------
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
*If you invest $1 million or more, a Contingent Deferred Sales Charge may be
imposed on an early redemption. Please see "How Do I Sell Shares? - Contingent
Deferred Sales Charge." Please also see "Other Payments to Securities Dealers"
below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases.
CUMULATIVE QUANTITY DISCOUNTS. To determine if you may pay a reduced sales
charge, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your existing shares in the Franklin Templeton
Funds, as well as those of your spouse, children under the age of 21 and
grandchildren under the age of 21. If you are the sole owner of a company, you
may also add any company accounts, including retirement plan accounts. Companies
with one or more retirement plans may add together the total plan assets
invested in the Franklin Templeton Funds to determine the sales charge that
applies.
LETTER OF INTENT. You may buy shares at a reduced sales charge by completing the
Letter of Intent section of the shareholder application. A Letter of Intent is a
commitment by you to invest a specified dollar amount during a 13 month period.
The amount you agree to invest determines the sales charge you pay.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Fund shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Fund
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
SALES CHARGE WAIVERS. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying shares with money from
the following sources:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, the Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares were subject to a
Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
5. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within
the past 60 days, you may invest the proceeds without any sales charge
if(a)the investment objectives were similar to the Fund's, and (b) your
shares in that fund were subject to any front-end or contingent deferred
sales charges at the time of purchase. You must provide a copy of the
statement showing your redemption.
The Fund's sales charges will also not apply to purchases by:
6. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
7. Group annuity separate accounts offered to retirement plans
8. Retirement plans that (i) are sponsored by an employer with at least
100 employees, (ii) have plan assets of $1 million or more, or (iii) agree
to invest at least $500,000 in the Franklin Templeton Funds over a 13 month
period. Retirement plans that are not Qualified Retirement Plans or SEPS,
such as 403(b)or 457 plans, must also meet the requirements described under
"Group Purchases" above.
9. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is permissible
and suitablefor you and the effect, if any, of payments by the Fund on
arbitrage rebate calculations.
10. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
11. Registered Securities Dealers and their affiliates, for their investment
accounts only
12. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
13. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
14. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
15. Accounts managed by the Franklin Templeton Group
16. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for certain purchases made without a sales charge. The payments
are subject to the sole discretion of Distributors, and are paid by Distributors
or one of its affiliates and not by the Fund or its shareholders.
1. Purchases of $1 million or more - up to 1% of the purchase price.
2. Purchases by certain retirement plans - up to 1% of the purchase price.
3. Purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the purchase
price.
A Securities Dealer may only receive one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1 or 2 above will be eligible to receive the Rule 12b-1
fee associated with the purchase starting in the thirteenth calendar month after
the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums.
EXCHANGES INTO THE FUND FROM OTHER FRANKLIN TEMPLETON FUNDS WILL ONLY BE
ACCEPTED TO ADD TO AN EXISTING FUND ACCOUNT AND NOT TO ESTABLISH A NEW FUND
ACCOUNT, OTHER THAN A RETIREMENT PLAN ACCOUNT.
METHOD STEPS TO FOLLOW
- -------------------------------------------------------------------------------
BY MAIL 1. Send us written instructions signed by all account
owners
2. Include any outstanding share certificates for the
shares you're exchanging
BY PHONE Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to exchange by phone to
apply to your account, please let us know.
THROUGH YOUR DEALER Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than twelve months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred Sales
Charge when you exchange shares. Any shares subject to a Contingent Deferred
Sales Charge at the time of exchange, however, will remain so in the new fund.
For accounts with shares subject to a Contingent Deferred Sales Charge, shares
are exchanged into the new fund in the order they were purchased. If you
exchange shares into one of our money funds, the time your shares are held in
that fund will not count towards the completion of any Contingency Period. For
more information about the Contingent Deferred Sales Charge, please see that
section under "How Do I Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class, except as noted below.
o The accounts must be identically registered. You may, however, exchange shares
from a Fund account requiring two or more signatures into an identically
registered money fund account requiring only one signature for all transactions.
Please notify us in writing if you do not want this option to be available on
your account. Additional procedures may apply. Please see "Transaction
Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Advisor Class" or "Class Z" shares. Because the
Fund does not currently offer an Advisor Class, you may exchange Advisor Class
shares of any Franklin Templeton Fund for shares of the Fund at Net Asset Value.
If you do so and you later decide you would like to exchange into a fund that
offers an Advisor Class, you may exchange your Fund shares for Advisor Class
shares of that fund. Beginning on or about May 1, 1997, you may also exchange
Class Z shares of Franklin Mutual Series Fund Inc. for shares of the Fund at Net
Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time. If you sell all the shares in
your account, your account will be closed and you will not be allowed to buy
additional shares of the Fund or to reopen your account. This policy does not
apply to retirement plans.
METHOD STEPS TO FOLLOW
- -------------------------------------------------------------------------------
BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to
send additional documents. Accounts under court
jurisdiction may have other requirements.
- -------------------------------------------------------------------------------
BY PHONE
(Only available if you have completed and sent to us
the telephone redemption agreement included with this
prospectus) Call Shareholder Services
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts may exceed
$50,000 by completing a separate agreement. Call Institutional
Services to receive a copy.
o If there are no share certificates issued for the shares you want to
sell or you have already returned them to the Fund
o Unless you are selling shares in a Trust Company retirement plan
account
o Unless the address on your account was changed by phone within the
last 30 days
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
Beginning on or about May 1, 1997, you will automatically be able to redeem
shares by telephone without completing a telephone redemption agreement. PLEASE
NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON YOUR
ACCOUNT. If you later decide you would like this option, send us written
instructions signed by all account owners, with a signature guarantee.
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
CONTINGENT DEFERRED SALES CHARGE
If you did not pay a front-end sales charge because you invested $1 million or
more or agreed to invest $1 million or more under a Letter of Intent, a
Contingent Deferred Sales Charge may apply if you sell all or a part of your
investment within the Contingency Period. Once you have invested $1 million or
more, any additional investments you make without a sales charge may also be
subject to a Contingent Deferred Sales Charge if they are sold within the
Contingency Period. The charge is 1% of the value of the shares sold or the Net
Asset Value at the time of purchase, whichever is less.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual balance
of $1 million, you can withdraw up to $120,000 annually through a systematic
withdrawal plan free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to termination
or plan transfer
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income quarterly, payable in
March, June, September and December, to shareholders of record on the first
business day before the 15th of the month and pays them on or about the last day
of that month. Capital gains, if any, may be distributed annually, usually in
December.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge) by
reinvesting capital gain distributions, or both dividend and capital gain
distributions. This is a convenient way to accumulate additional shares and
maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge).
Many shareholders find this a convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE FUND. For
Trust Company retirement plans, special forms are required to receive
distributions in cash. You may change your distribution option at any time by
notifying us by mail or phone. Please allow at least seven days before the
record date for us to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the scheduled close of the NYSE, generally 1:00 p.m.
Pacific time. You can find the prior day's closing Net Asset Value and Offering
Price of the Fund in many newspapers.
To calculate Net Asset Value per share, the Fund's assets are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares outstanding. The Fund's assets are valued as
described under "How are Fund Shares Valued?" in the SAI.
THE PRICE WE USE WHEN YOU BUY OR SELL SHARES
You buy shares at the Offering Price, unless you qualify to buy shares at a
reduced sales charge or with no sales charge. The Offering Price is based on the
Net Asset Value per share and includes the maximum sales charge. We calculate it
to two decimal places using standard rounding criteria. You sell shares at Net
Asset Value.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. YOU SHOULD
VERIFY THAT THE INSTITUTION IS AN ELIGIBLE GUARANTOR BEFORE SIGNING. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We will also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by telephone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- -------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- -------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
- -------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- -------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
ELECTRONIC INSTRUCTIONS. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We will accept electronic instructions directly from your dealer
or representative without further inquiry. Electronic instructions may be
processed through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $1,250 ($500 for an IRA
account). We will only do this if the value of your account fell below this
amount because you voluntarily sold your shares and your account has been
inactive (except for the reinvestment of distributions) for at least six months.
Before we close your account, we will notify you and give you 30 days to
increase the value of your account to $2,500.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the Fund's code number to use TeleFACTS. The Fund's code number is
150.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund and Distributors are also located at this address. Advisory Services is
located at One Parker Plaza, Sixteenth Floor, Fort Lee, New Jersey 07024. You
may also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- -------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.(Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's former investment manager
ADVISORY SERVICES - Franklin Advisory Services, Inc., the Fund's investment
manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - Certain funds in the Franklin Templeton Funds offer two
classes of shares, designated "Class I" and "Class II." The two classes have
proportionate interests in the same portfolio of investment securities. They
differ, however, primarily in their sales charge structures and Rule 12b-1
plans. Because the Fund's sales charge structure and Rule 12b-1 plan are similar
to those of Class I shares, shares of the Fund are considered Class I shares for
redemption, exchange and other purposes.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - The 12 month period during which a Contingent Deferred
Sales Charge may apply. Regardless of when during the month you purchased
shares, they will age one month on the last day of that month and each following
month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - 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.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the 1.50% sales charge.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALEr - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
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.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original 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): 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
AS&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.
PROSPECTUS & APPLICATION
FRANKLIN MICROCAP VALUE FUND
INVESTMENT STRATEGY
GROWTH & INCOME
March 1, 1997
Franklin Value Investors Trust
This prospectus describes the Franklin MicroCap Value Fund (the "Fund"). It
contains information you should know before investing in the Fund. Please keep
it for future reference.
As of July 5, 1996, the Fund is closed to new investors, except
retirement plan accounts. If you were a shareholder of record as of
July 5, 1996, you may continue to add to your existing open account
through new purchases and reinvestment of income dividends and capital
gain distributions.
The Fund has a Statement of Additional Information ("SAI"), dated March
1, 1997, which may be amended from time to time. It includes more
information about the Fund's procedures and policies. It has been filed
with the SEC and is incorporated by reference into this prospectus. For
a free copy or a larger print version of this prospectus, call
1-800/DIAL BEN or write the Fund at the address shown.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY OF THE U.S. GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SEC OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED
IN ANY STATE, JURISDICTION OR COUNTRY 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 INFORMA-TION MAY BE
OBTAINED FROM DISTRIBUTORS.
Franklin MicroCap Value Fund
FRANKLIN
MICROCAP
VALUE FUND
March 1, 1997
When reading this prospectus, you will see certain terms beginning with
capital letters. This means the term is explained in our glossary
section.
TABLE OF CONTENTS
About the Fund
Expense Summary..................................... 2
Financial Highlights................................ 3
How does the Fund Invest its Assets?................ 4
What are the Fund's Potential Risks?................ 11
Who Manages the Fund?............................... 16
How does the Fund Measure Performance?.............. 18
How Taxation Affects the Fund and its Shareholders.. 19
How is the Trust Organized?......................... 20
About Your Account
How Do I Buy Shares?................................ 20
May I Exchange Shares for Shares of Another Fund?... 25
How Do I Sell Shares?............................... 26
What Distributions Might I Receive from the Fund?... 29
Transaction Procedures and Special Requirements..... 30
Services to Help You Manage Your Account............ 34
What If I Have Questions About My Account?.......... 36
Glossary
Useful Terms and Definitions........................ 37
Appendix
Description of Ratings.............................. 39
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
Franklin MicroCap Value Fund
ABOUT THE FUND
Expense Summary
This table is designed to help you understand the costs of investing in
the Fund. It is based on the Fund's historical expenses for the fiscal
year ended October 31, 1996. The Fund's actual expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of Offering Price)............... 4.50%++
Deferred Sales Charge ............................. None+++
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees ................................... 0.75%**
Rule 12b-1 Fees ................................... 0.24%*
Other Expenses .................................... 0.25%**
-------
Total Fund Operating Expenses ..................... 1.24%**
=======
C. EXAMPLE
Assume the Fund's annual return is 5%, operating expenses are as
described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you
invest in the Fund.
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------
$57** $83 $110 $188
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE
EXPENSES OR RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS
THAN THOSE SHOWN. The Fund pays its operating expenses. The effects
of these expenses are reflected in its Net Asset Value or dividends
and are not directly charged to your account.
+If your transaction is processed through your Securities Dealer, you
may be charged a fee by your Securities Dealer for this service.
++there is no front-end sales charge if you invest $1 million or more.
+++A Contingent Deferred Sales Charge of 1% may apply to purchases of
$1 million or more if you sell the shares within one year. See "How Do
I Sell Shares? - Contingent Deferred Sales Charge" for details.
*Annualized. The Fund's actual Rule 12b-1 fees for the 10-month period
ended October 31, 1996, were 0.20%. These fees may not exceed 0.25%.
The combination of front-end sales charges and Rule 12b-1 fees could
cause long-term shareholders to pay more than the economic equivalent
of the maximum front-end sales charge permitted under the NASD's rules.
It is estimated, however, that this would take a substantial number of
years.
**Annualized
***Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has
been audited by Coopers & Lybrand L.L.P., the Fund's independent
auditors. Their audit report covering the period beginning December 12,
1995, the Fund's commencement date, through the fiscal year ended
October 31, 1996 appears in the financial statements in the Trust's
Annual Report to Shareholders for the fiscal year ended October 31,
1996. The Annual Report to Shareholders also includes more information
about the Fund's performance. For a free copy, please call Fund
Information.
December 12, 1995
to October 31,1996
- -----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at beginning of period....................... $15.00
--------
Net investment income........................................ .140
Net realized & unrealized gain on securities ................ 3.410
-------
Total from investment operations ............................ 3.550
=======
Distributions from net investment income..................... (.110)
Distributions from realized capital gains.................... -
Total distributions.......................................... (.110)
-------
Net Asset Value at end of period ............................ $18.44
=========
Total Return* ............................................... 23.72%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in 000's)....................... $119,664
Ratio of expenses to average net assets** ................... 1.24
Ratio of net investment income to average net assets**....... 1.28
Portfolio turnover rate ..................................... 14.15
Average commission rate***................................... .0476
*Total return measures the change in value of an investment over the
period indicated. It is not annualized. It does not include the maximum
front-end sales charge or Contingent Deferred Sales Charge, and assumes
reinvestment of dividends and capital gains at Net Asset Value.
**Annualized.
***Represents the average broker commission rate per share paid by the
Fund in connection with the execution of the Fund's portfolio
transactions in equity securities.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is to seek high total return, of which
capital appreciation and income are components. The objective is a
fundamental policy of the Fund and may not be changed without
shareholder approval. Of course, there is no assurance that the Fund's
objective will be achieved.
The Fund will seek capital appreciation primarily by investing in the
securities of companies with market capitalization under $100 million
at the time of purchase and that Advisory Services believes are
undervalued in the marketplace. Accordingly, a focus on balance sheet
items will be an important element in Advisory Services' analysis. The
Fund will also seek income when consistent with its objective. The
policies used to seek to achieve the Fund's objective are not
fundamental, unless otherwise noted, and are subject to change without
shareholder approval.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
Under normal market conditions, the Fund will invest at least 65% of
its total assets in securities of companies with market capitalization
under $100 million at the time of purchase and which, in the opinion of
Advisory Services, possess an opportunity for significant capital
appreciation due to intrinsic values in excess of the current market
price of such securities. The securities of these companies will
typically be purchased at prices below the book value of the company.
Advisory Services, however, will take into account a variety of other
factors in order to determine whether to purchase, and once purchased,
whether to hold or sell the securities. In addition to book value,
Advisory Services may consider the following factors among others:
valuable franchises or other intangibles; ownership of valuable
trademarks or trade names; control of distribution networks or of
market share for particular products; ownership of real estate the
value of which is understated; and underutilized liquidity and other
factors that would identify the issuer as a potential takeover target
or turnaround candidate. Investments in the securities of companies
with market capitalization under $100 million may involve special
risks. See "What are the Fund's Potential Risks? - Small Companies."
The Fund may invest the remainder of its assets, up to 35%, in
securities of companies with similar characteristics but that have
market capitalization over $100 million.
The Fund will generally invest in common stocks, although it has no
limit on the percentage of its assets that may be invested in preferred
stock or debt obligations, including securities convertible into common
stocks, secured or unsecured bonds, commercial paper and notes. The
mixture of common stocks, preferred stocks and debt obligations will
vary from time to time based upon Advisory Services' assessment as to
whether investments in each category will contribute to meeting the
Fund's investment objective.
In anticipation of and during temporary defensive periods or when
investments of the type in which the Fund intends to invest are not
available at prices which Advisory Services believes are attractive,
the Fund may invest up to 100% of its total assets in: (1) securities
of the U.S. government or its agencies or instrumentalities that mature
in one year or less from the date of purchase, including U.S. Treasury
bills, notes and bonds, as well as certain agency securities issued by
the Government National Mortgage Association, the Federal Housing
Administration and other agencies which may carry guarantees backed by
the full faith and credit of the U.S. government; (2) securities of
other U.S. government agencies or instrumentalities, such as certain
securities issued by the Federal Home Loan Banks and the Student Loan
Marketing Association, which may not be backed by the full faith and
credit of the U.S. government but which are supported by the right of
the issuer to borrow from the U.S. government or by the credit of the
issuer; (3) bank obligations, including negotiable or non-negotiable
CDs (subject to the Fund's 10% limitation on illiquid securities
discussed under "Illiquid Investments" below), letters of credit and
bankers' acceptances, or instruments secured by such obligations,
issued by banks and savings institutions that are subject to regulation
by the U.S. government, its agencies or instrumentalities and that have
assets of over $1 billion, unless such obligations are guaranteed by a
parent bank that has total assets in excess of $5 billion; (4)
commercial paper considered by Advisory Services to be of high quality
and rated within the two highest rating categories of S&P or Moody's
or, if unrated, issued by a company having an outstanding debt issue
rated at least AA by S&P or Aa by Moody's; and (5) corporate
obligations including, but not limited to, corporate notes, bonds and
debentures considered by Advisory Services to be of high quality and
rated within the two highest rating categories by S&P or Moody's.
Please see "Appendix" for a discussion of ratings.
HIGH YIELDING, FIXED-INCOME SECURITIES. The Fund may invest up to 25%
of its net assets at the time of purchase in lower rated, fixed-income
and convertible securities (those rated BB or lower by S&P or Ba or
lower by Moody's) and unrated securities of comparable quality that
Advisory Services believes possess intrinsic values in excess of the
current market prices of those securities. Lower rated bonds are
commonly called "junk bonds." Lower rated securities are considered by
S&P, on balance, to be predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance
with the terms of the obligation and generally involve more credit risk
than securities in the higher rating categories. Lower rated securities
in which the Fund may invest include securities rated D, the lowest
rating category of S&P, or unrated securities of comparable quality.
Debt obligations rated D are in default and the payment of interest
and/or repayment of principal is in arrears. Please see "What are the
Fund's Potential Risks?" below for more information.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities.
A convertible security is generally a debt obligation or 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 provides a fixed-income stream and the
opportunity, through its conversion feature, to participate in the
capital appreciation resulting from a market price advance in its
underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest
rates decline and decrease in value when interest rates rise. Like a
common stock, the value of a convertible security 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. In addition, a
convertible security may be subject to redemption by the issuer, but
only after a specified date and under circumstances established at the
time the security is issued.
While the Fund uses the same criteria to rate a convertible debt
security that it uses to rate a more conventional debt security, a
convertible preferred stock is treated like a preferred stock for the
Fund's financial reporting, credit rating, and investment limitation
purposes. A preferred stock is subordinated to all debt obligations in
the event of insolvency, and an issuer's failure to make a dividend
payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity
date, so that its market value is dependent on the issuer's business
prospects for an indefinite period of time. In addition, distributions
from preferred stock are dividends, rather than interest payments, and
are usually treated as such for corporate tax purposes.
The Fund may invest in convertible preferred stocks that offer enhanced
yield features, such as Preferred Equity Redemption Cumulative Stocks
("PERCS"), which provide an investor, such as the Fund, with the
opportunity to earn higher dividend income than is available on a
company's common stock. PERCS are preferred stocks that generally
feature a mandatory conversion date, as well as a capital appreciation
limit which is usually expressed in terms of a stated price. Most PERCS
expire three years from the date of issue, at which time they are
convertible into common stock of the issuer. PERCS are generally not
convertible into cash at maturity. Under a typical arrangement, after
three years PERCS convert into one share of the issuer's common stock
if the issuer's common stock is trading at a price below that set by
the capital appreciation limit, and into less than one full share if
the issuer's common stock is trading at a price above that set by the
capital appreciation limit. The amount of that fractional share of
common stock is determined by dividing the price set by the capital
appreciation limit by the market price of the issuer's common stock.
PERCS can be called at any time prior to maturity, and hence do not
provide call protection. If called early, however, the issuer must pay
a call premium over the market price to the investor. This call premium
declines at a preset rate daily, up to the maturity date.
The Fund may also invest in other enhanced convertible securities.
These include but are not limited to ACES (Automatically Convertible
Equity Securities), PEPS (Participating Equity Preferred Stock), PRIDES
(Preferred Redeemable Increased Dividend Equity Securities), SAILS
(Stock Appreciation Income Linked Securities), TECONS (Term Convertible
Notes), QICS (Quarterly Income Cumulative Securities), and DECS
(Dividend Enhanced Convertible Securities). ACES, PEPS, PRIDES, SAILS,
TECONS, QICS, and DECS all have the following features: they are issued
by the company, the common stock of which will be received in the event
the convertible preferred stock is converted, unlike PERCS they do not
have a capital appreciation limit, they seek to provide the investor
with high current income with some prospect of future capital
appreciation, they are typically issued with three to four-year
maturities, they typically have some built-in call protection for the
first two to three years, investors have the right to convert them into
shares of common stock at a preset conversion ratio or hold them until
maturity, and upon maturity they will automatically convert to either
cash or a specified number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by
the operating company, whose common stock is to be acquired in the
event the security is converted, or by a different issuer, such as an
investment bank. These securities may be identified by names such as
ELKS (Equity Linked Securities) or similar names. Typically they share
most of the salient characteristics of an enhanced convertible
preferred stock but will be ranked as senior or subordinated debt in
the issuer's corporate structure according to the terms of the debt
indenture. There may be additional types of convertible securities not
specifically referred to herein which may be similar to those described
above in which a Fund may invest, consistent with its objectives and
policies.
An investment in an enhanced convertible security or any other security
may involve additional risks to the Fund. The Fund may have difficulty
disposing of such securities because there may be a thin trading market
for a particular security at any given time. Reduced liquidity may have
an adverse impact on market price and the Fund's ability to dispose of
particular securities, when necessary, to meet the Fund's liquidity
needs or in response to a specific economic event, such as the
deterioration in the creditworthiness of an issuer. Reduced liquidity
in the secondary market for certain securities may also make it more
difficult for the Fund to obtain market quotations based on actual
trades for purposes of valuing the Fund's portfolio. The Fund, however,
intends to acquire liquid securities, though there can be no assurances
that this will be achieved.
SYNTHETIC CONVERTIBLES. The Fund may invest a portion of its assets in
"synthetic convertible" securities. A synthetic convertible is created
by combining distinct securities which together possess the two
principal characteristics of a true convertible security, i.e., fixed
income and the right to acquire the underlying equity security. This
combination is achieved by investing in nonconvertible fixed-income
securities and in warrants or stock or stock index call options which
grant the holder the right to purchase a specified quantity of
securities within a specified period of time at a specified price or to
receive cash in the case of stock index options. Synthetic convertible
securities are generally not considered to be "Equity Securities" for
purposes of each Fund's investment policy regarding those securities.
Synthetic convertible securities differ from the true convertible
security in several respects. The value of a synthetic convertible is
the sum of the values of its fixed-income component and its
convertibility component. Thus, the values of a synthetic convertible
and a true convertible security will respond differently to market
fluctuations. Further, although Advisory Services expects normally to
create synthetic convertibles whose two components represent one
issuer, the character of a synthetic convertible allows the Fund to
combine components representing distinct issuers, or to combine a fixed
income security with a call option on a stock index, when Advisory
Services determines that such a combination would better promote the
Fund's investment objectives. In addition, the component parts of a
synthetic convertible security may be purchased simultaneously or
separately; and the holder of a synthetic convertible faces the risk
that the price of the stock, or the level of the market index
underlying the convertibility component will decline.
FOREIGN SECURITIES. The Fund may invest in foreign securities, without
restriction, if these investments are consistent with the Fund's
investment objective and policies. The Fund will ordinarily buy foreign
securities that are traded in the U.S. or buy sponsored or unsponsored
American Depositary Receipts, which are certificates issued by U.S.
banks representing the right to receive securities of a foreign issuer
deposited with that bank or a correspondent bank. The Fund may buy the
securities of foreign issuers directly in foreign markets, and may buy
the securities of issuers in developing nations. See "What are the
Fund's Potential Risks? - Foreign Securities."
OPTIONS. When seeking high current income to achieve its investment
objective of high total return, the Fund may write (sell) call options
on securities, which are listed on a national securities exchange, and
buy listed call and put options on securities and securities indices.
The Fund may write a call option only if the option is "covered," which
means so long as the Fund is obligated as the writer of a call option,
it will own the underlying security subject to the call or a call on
the same security where the exercise price of the call held is equal to
or less than the exercise price of the call written. The Fund will not
invest in any stock options or stock index options, other than hedging
or covered positions, if the option premiums paid on its open positions
exceed 5% of the value of the Fund's total assets.
An option on a security is a contract that allows the buyer of the
option, in return for the premium paid, the right to buy a specified
security (in the case of a call option) or to sell a specified security
(in the case of a put option) from or to the writer of the option at a
designated price during the term of the option. Options on securities
indices are similar to options on securities except, rather than the
right to buy or sell particular securities at a specified price,
options on a securities index give the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of
the underlying stock index is greater than (or less than, in the case
of a put) the exercise price of the option. The cash received is equal
to the difference between the closing price of the index and the
exercise price of the option, expressed in dollars, multiplied by a
specified number. Thus, unlike options on individual securities, all
settlements are in cash, and gain or loss depends on price movements in
the stock market generally (or in a particular industry or segment of
the market) rather than on price movements in individual securities.
Options are generally considered "derivative securities." The Fund's
investment in options will be for portfolio hedging purposes in an
effort to stabilize principal fluctuations to achieve the Fund's
investment objective and not for speculation. For more information
about the Fund's investments in options, please see "What are the
Fund's Potential Risks? - Options" below and "How does the Fund Invest
Its Assets?" in the SAI.
The Fund's investment in options and certain securities transactions
involving actual or deemed short sales (discussed below) may be limited
by the requirements of the Code for qualification as a regulated
investment company and are subject to special tax rules that may affect
the amount, timing, and character of distributions to shareholders.
These securities require the application of complex and special tax
rules and elections. For more information, please see "Additional
Information Regarding Taxation" in the SAI.
OTHER INVESTMENT POLICIES OF THE FUND
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by
the Board and subject to the following conditions, the Fund may lend
its portfolio securities to qualified securities dealers or other
institutional investors, provided that such loans do not exceed 25% of
the value of the Fund's total assets at the time of the most recent
loan. The borrower must deposit with the Fund's custodian bank
collateral with an initial market value of at least 102% of the initial
market value of the securities loaned, including any accrued interest,
with the value of the collateral and loaned securities marked-to-market
daily to maintain collateral coverage of at least 100%. 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 cash
collateral in short-term interest bearing obligations or by receiving a
loan premium from the borrower. Under the securities loan agreement,
the Fund continues to be entitled to all dividends or interest on any
loaned securities. As with any extension of credit, there are risks of
delay in recovery and loss of rights in the collateral should the
borrower of the security fail financially.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions
in which the Fund buys a U.S. government security subject to resale to
a bank or dealer at an agreed-upon price and date. The transaction
requires the collateralization of the seller's obligation by the
transfer of securities with an initial market value, including accrued
interest, equal to at least 102% of the dollar amount invested by the
Fund in each agreement, with the value of the underlying security
marked-to-market daily to maintain coverage of at least 100%. A default
by the seller might cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The
Fund might also incur disposition costs in liquidating the collateral.
The Fund, however, intends to enter into repurchase agreements only
with financial institutions such as broker-dealers and banks that are
deemed creditworthy by Advisory Services. A repurchase agreement is
deemed to be a loan by the Fund under the 1940 Act. The U.S. government
security subject to resale (the collateral) will be held on behalf of
the Fund by a custodian bank approved by the Board and will be held
pursuant to a written agreement.
BORROWING. As a fundamental policy, the Fund may not borrow money,
except in the form of reverse repurchase agreements or from banks in
order to meet redemption requests or for other temporary or emergency
purposes in an amount up to 15% of its total assets (including the
amount borrowed). The Fund will not make any additional investments
while any borrowings exceed 5% of its total assets. The Fund also may
not mortgage or pledge any of its assets, except to secure borrowings
for temporary or emergency purposes and permissible options, short
selling or other hedging transactions.
SHORT-SELLING. The Fund may make short sales, which are transactions in
which the Fund sells a security it does not own in anticipation of a
decline in the market value of that security.
ILLIQUID INVESTMENTS. The Fund's policy is not to invest more than 10%
of its net assets in illiquid securities. Illiquid securities are
generally securities that cannot be sold within seven days in the
normal course of business at approximately the amount at which the Fund
has valued them.
PERCENTAGE RESTRICTIONS. If a percentage restriction noted above is
adhered to at the time of investment, a later increase or decrease in
the percentage resulting from a change in the value or liquidity of
portfolio securities or the amount of net assets will not be considered
a violation of any of the foregoing policies.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional
investment restrictions that limit its activities to some extent. Some
of these restrictions may only be changed with shareholder approval.
For a list of these restrictions and more information about the Fund's
investment policies, please see "How does the Fund Invest its Assets?"
and "Investment Restrictions" in the SAI.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities
owned by the Fund increases and will decrease as the value of the
Fund's investments decrease. In this way, you participate in any change
in the value of the securities owned by the Fund. In addition to the
factors that affect the value of any particular security that the Fund
owns, the value of Fund shares may also change with movements in the
stock and bond markets.
An investment in the Fund involves certain speculative considerations
and may involve a higher degree of risk than an investment in shares of
more traditional open-end, diversified investment companies. The Fund
is designed for long-term investors, not as a trading vehicle, and is
not intended to present a complete investment program. You should
consider your individual investment objectives, as well as your other
investments, when deciding whether to buy shares of the Fund.
THE FUND'S APPROACH TO VALUE INVESTING. The Fund will invest
principally in the securities of companies believed by Advisory
Services 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 Advisory Services may be incorrect in its assessment of
a particular industry or company or that Advisory Services may not buy
these securities at their lowest possible prices or sell them at their
highest.
When the Fund buys securities of companies emerging from bankruptcy it
may encounter risks that do not exist with other investments. Companies
emerging from bankruptcy may have some difficulty retaining customers
and suppliers who prefer transacting with solvent organizations. If new
management is installed in a company emerging from bankruptcy, the
management may be considered untested; if the existing management is
retained, the management may be considered incompetent. Further, even
when a company has emerged from bankruptcy with a lower level of debt,
it may still retain a relatively weak balance sheet. During economic
downturns these companies may not have sufficient cash flow to pay
their debt obligations and may also have difficulty finding additional
financing. In addition, reduced liquidity in the secondary market may
make it difficult for the Fund to sell the securities or to value them
based on actual trades.
The Fund's policy of investing in securities that may be out of favor,
including turnarounds, cyclicals and companies emerging from
bankruptcy, companies reporting poor earnings, and companies whose
share prices have declined sharply or that are not widely followed,
differs from the approach followed by many other mutual funds. Advisory
Services believes, however, that these securities may provide a greater
total investment return than securities whose prices appear to reflect
anticipated favorable developments.
NON-DIVERSIFICATION. As a non-diversified investment company under the
1940 Act, the Fund may concentrate its investments in the securities of
a smaller number of issuers than if it were a diversified company under
the 1940 Act. An investment in the Fund therefore will entail greater
risk than an investment in a diversified investment company because a
higher percentage of investments among fewer issuers may result in
greater fluctuation in the total market value of the Fund's portfolio,
and economic, political or regulatory developments may have a greater
impact on the value of the Fund's portfolio than would be the case if
the portfolio were diversified among more issuers. All securities in
which the Fund may invest are inherently subject to market risk, and
the market value of the Fund's investments will fluctuate.
SMALL COMPANIES. The Fund may invest in companies that have relatively
small revenues, limited product lines, and a small share of the market
for their products or services. Small companies may lack depth of
management, they may be unable to internally generate funds necessary
for growth or potential development or to generate such funds through
external financing on favorable terms, and they may be developing or
marketing new products or services for which markets are not yet
established and may never become established. Due to these and other
factors, small companies may suffer significant losses, as well as
realize substantial growth.
Historically, small capitalization stocks have been more volatile than
larger capitalization stocks and are therefore more speculative than
investments in larger companies. Among the reasons for the greater
price volatility are the less certain growth prospects of smaller
firms, the lower degree of liquidity in the markets for such stocks,
and the greater sensitivity of small companies to changing economic
conditions. Besides exhibiting greater volatility, small company stocks
may, to a degree, fluctuate independently of larger company stocks.
Small company stocks may decline in price as large company stocks rise,
or rise in price as large company stocks decline. You should therefore
expect that the value of the Fund's shares may be more volatile than
the shares of a fund that invests in larger capitalization stocks. The
Fund should not be considered suitable if you are unable or unwilling
to assume the risks of loss inherent in investments in small companies.
FOREIGN SECURITIES. Investments in the securities of companies
organized outside the U.S. or whose securities are principally traded
outside the U.S. ("foreign issuers") may offer potential benefits not
available from investments solely in securities of U.S. issuers. These
benefits may include the opportunity to invest in foreign issuers that
appear, in the opinion of Advisory Services, to offer more potential
for long-term capital appreciation or current earnings than investments
in U.S. issuers, the opportunity to invest in foreign countries with
economic policies or business cycles different from those of the U.S.
and the opportunity to reduce fluctuations in portfolio value by taking
advantage of foreign securities markets that do not necessarily move in
a manner parallel to U.S. markets.
Investments in securities of foreign issuers involve significant risks,
including possible losses, that are not typically associated with
investments in securities of U.S. issuers. These risks include
political, social or economic instability in the country of the issuer,
the difficulty of predicting international trade patterns, the
possibility of the imposition of exchange controls, expropriation,
limits on removal of currency or other assets, nationalization of
assets, foreign withholding and income taxation and foreign trading
practices (including higher trading commissions, custodial charges and
delayed settlements). Changes in government administrations and
economic or monetary policies in the U.S. or abroad, changes in
circumstances surrounding dealings between nations, and changes in
currency convertibility or exchange rates could result in investment
losses for the Fund. In addition, public information may not be as
readily available for a foreign company as it is for a U.S. domiciled
company, foreign companies are generally not subject to uniform
accounting, auditing and financial reporting standards comparable to
those applicable to U.S. companies, and there is usually less
government regulation of securities exchanges, brokers and listed
companies. Confiscatory taxation or diplomatic developments could also
affect these investments.
Investments in foreign securities where delivery takes place outside
the U.S. will be made in compliance with applicable U.S. and foreign
currency restrictions and other laws limiting the amount and type of
foreign investments. The Fund may buy securities in any foreign
country, developed or developing, but investments will not be made in
any securities issued without stock certificates or comparable stock
documents.
Foreign securities may be subject to greater fluctuations in price than
U.S. securities. The markets on which foreign securities trade may also
have less volume and liquidity. Securities acquired by the Fund outside
the U.S. and that are publicly traded in the U.S. or on a foreign
securities exchange or in a foreign securities market will not be
considered illiquid so long as the Fund acquires and holds the security
with the intention of reselling the security in the foreign trading
market, the Fund reasonably believes it can readily dispose of the
security for cash in the U.S. or foreign market, and current market
quotations are readily available.
You should carefully consider the substantial risks involved in
investing in securities of foreign issuers, risks that are often
heightened for investments in developing markets. For example, the
small size, inexperience and limited volume of trading on securities
markets in certain developing countries may make the Fund's investments
in developing countries illiquid and more volatile than investments in
more developed countries, and the Fund may be required to establish
special custody or other arrangements before making certain investments
in such countries. The laws of some foreign countries may also limit
the ability of the Fund to invest in securities of certain issuers
located in those countries.
OPTIONS. The purchase and sale of stock options and stock index
options, including the writing of covered call options, involve risks
different from those involved with direct investments in securities. A
liquid secondary market for any particular option may not be available
when a position is sought to be closed and the inability to close a
position may have an adverse impact on the Fund's ability to
effectively hedge securities. In addition, there may be an imperfect
correlation between movements in the securities on which an option
contract is based and movements in the securities in the Fund's
portfolio. Successful use of option contracts is further dependent on
Advisory Services' ability to correctly predict movements in the
securities markets and no assurance can be given that Advisory
Services' judgment will be correct. In addition, by writing covered
call options, the Fund gives up the opportunity to profit from any
price increase in the underlying security above the option exercise
price while the option is in effect.
HIGH YIELDING, FIXED-INCOME SECURITIES. Because of the Fund's policy of
investing in higher yielding, higher risk securities, an investment in
the Fund is accompanied by a higher degree of risk than is present with
an investment in higher rated, lower yielding securities. Accordingly,
an investment in the Fund should not be considered a complete
investment program and should be carefully evaluated for its
appropriateness in light of your overall investment needs and goals. If
you are on a fixed income or retired, you should also consider the
increased risk of loss to principal that 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 securities rated BBB by S&P or Baa 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 these issuers is generally greater than is the case with
higher rated securities. For example, during an economic downturn or a
sustained period of rising interest rates, highly leveraged issuers of
high yielding securities may experience financial stress. During these
periods, these issuers may not have sufficient cash flow to meet their
interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific developments
affecting the issuer, the issuer's inability to meet specific projected
business forecasts, or the unavailability of additional financing. The
risk of loss due to default by the issuer may be significantly greater
for the holders of high yielding securities because the securities are
generally unsecured and are often subordinated to other creditors of
the issuer. Current prices for defaulted bonds are generally
significantly lower than their purchase price, and the Fund may have
unrealized losses on defaulted securities that are reflected in the
price of the Fund's shares. In general, securities that default lose
much of their value in the time period before the actual default so
that the Fund's net assets are impacted prior to the default. The Fund
may retain an issue that has defaulted because the issue may present an
opportunity for subsequent price recovery.
High yielding, fixed-income securities frequently have call or buy-back
features that permit an issuer to call or repurchase the securities
from the Fund. Although these 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,
Advisory Services may find it necessary to replace the securities with
lower yielding securities, which could result in less net investment
income to the Fund.
The Fund may have difficulty disposing of certain high yielding
securities because there may be a thin trading market for a particular
security at any given time. The market for lower rated, fixed-income
securities generally tends to be concentrated among a smaller number of
dealers than is the case for securities that trade in a broader
secondary retail market. Generally, buyers of these securities are
predominantly dealers and other institutional buyers, rather than
individuals. To the extent the secondary trading market for a
particular high yielding, fixed-income security does exist, it is
generally not as liquid as the secondary market for higher rated
securities. Reduced liquidity in the secondary market may have an
adverse impact on market price and the Fund's ability to dispose of
particular issues, when necessary, to meet the Fund's liquidity needs
or in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer. Reduced liquidity in the secondary
market for certain securities may also make it more difficult for the
Fund to obtain market quotations based on actual trades for purposes of
valuing the Fund's portfolio. Current values for these high yield
issues are obtained from pricing services and/or a limited number of
dealers and may be based upon factors other than actual sales. See "How
are Fund Shares Valued?" in the SAI.
The Fund is authorized to acquire high yielding, fixed-income
securities that are sold without registration under the federal
securities laws and therefore carry restrictions on resale. The Fund
may acquire high yielding, fixed-income securities during an initial
underwriting. These securities involve special risks because they are
new issues. The Fund has no arrangement with its underwriter or any
other person concerning the acquisition of these securities.
INTEREST RATE, CURRENCY AND MARKET RISK. To the extent the Fund invests
in debt securities, changes in interest rates in any country where the
Fund is invested will affect the value of the Fund's portfolio and its
share price. Rising interest rates, which often occur during times of
inflation or a growing economy, are likely to have a negative effect on
the value of the Fund's shares. To the extent the Fund invests in
common stocks, a general market decline, in any country where the Fund
is invested, may also cause the value of what the Fund owns, and thus,
the Fund's share price to decline. Changes in currency valuations will
also affect the price of Fund shares. The value of stock markets,
currency valuations, and interest rates throughout the world has
increased and decreased in the past. These changes are unpredictable
and may happen again in the future.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day
operations.
INVESTMENT MANAGER. As of July 1, 1996, Advisory Services manages the
Fund's assets and makes its investment decisions. Advisory Services
also performs similar services for other funds. It is wholly owned by
Resources, a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H.
Johnson, Jr. are the principal shareholders of Resources. Together,
Advisory Services and its affiliates manage over $179 billion in
assets. Advisory Services employs the same individuals to manage the
Fund's portfolio as the previous manager. The terms and conditions of
the management services provided to the Fund remain the same. Please
see "Investment Management and Other Services" and "Miscellaneous
Information" in the SAI for information on securities transactions and
a summary of the Fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of
the Fund's portfolio is:
William Lippman
President and Director of Advisory Services
Mr. Lippman holds a master of business administration degree from New
York University and a bachelor of business administration degree from
City College New York. Mr. Lippman has been in the securities industry
for over 30 years and with the Franklin Templeton Group since 1988.
Bruce C. Baughman
Vice President of Advisory Services
Mr. Baughman holds a master of science degree in accounting from New
York University and a bachelor of arts degree from Stanford University.
He has been with the Franklin Templeton Group since 1988.
Margaret McGee
Vice President of Advisory Services
Ms. McGee holds a bachelor of arts degree in business administration
from William Paterson College. She has been in the securities industry
since 1985 and with the Franklin Templeton Group since 1988.
MANAGEMENT FEES. During the fiscal year ended October 31, 1996,
management fees totaling 0.75% of the average daily net assets of the
Fund were paid to the investment manager. Total expenses of the Fund,
including fees paid to investment manager, were 1.24%. These figures
are annualized.
The Fund pays its own operating expenses. These expenses include
Advisory Services' management fees; taxes, if any; custodian, legal and
auditing fees; the fees and expenses of Board members who are not
members of, affiliated with, or interested persons of Advisory
Services; fees of any personnel not affiliated with Advisory Services;
insurance premiums; trade association dues; expenses of obtaining
quotations for calculating the Fund's Net Asset Value; and printing and
other expenses that are not expressly assumed by Advisory Services.
Under its management agreement, the Fund pays Advisory Services a
management fee equal to an annual rate of 0.75%. The fee is computed
daily and paid monthly.
PORTFOLIO TRANSACTIONS. Advisory Services tries to obtain the best
execution on all transactions. If Advisory Services believes more than
one broker or dealer can provide the best execution, consistent with
internal policies it may consider research and related services and the
sale of Fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, when selecting a broker or dealer. Please see
"How does the Fund Buy Securities for its Portfolio?" in the SAI for
more information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisory Services, FT
Services provides certain administrative services and facilities for
the Fund. Please see "Investment Management and Other Services" in the
SAI for more information.
THE RULE 12B-1 PLAN
The Fund has a distribution plan or "Rule 12b-1 Plan." Payments by the
Fund may not exceed 0.25% per year of the Fund's average daily net
assets. The fees payable under the plan will be used primarily to pay
Distributors or others who have executed a servicing agreement with the
Fund, Distributors or its affiliates a service fee to reimburse them
for personal services provided to shareholders of the Fund and/or the
maintenance of shareholder accounts. To the extent authorized by the
Board, these fees may be used to reimburse Distributors or others in
the promotion and distribution of Fund shares. For more information,
please see "The Fund's Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, the Fund advertises its performance. The more
commonly used measures of performance are total return, current yield
and current distribution rate. Performance figures are usually
calculated using the maximum sales charge, but certain figures may not
include the sales charge.
Total return is the change in value of an investment over a given
period. It assumes any dividends and capital gains are reinvested.
Current yield shows the income per share earned by the Fund. The
current distribution rate shows the dividends or distributions paid to
shareholders by the Fund. This rate is usually computed by annualizing
the dividends paid per share during a certain period and dividing that
amount by the current Offering Price. Unlike current yield, the current
distribution rate may include income distributions from sources other
than dividends and interest received by the Fund.
The Fund's investment results will vary. Performance figures are always
based on past performance and do not guarantee future results. For a
more detailed description of how the Fund calculates its performance
figures, please see "How does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that
affect mutual funds and their shareholders. For more information on tax
matters relating to the Fund and its shareholders, see "Additional
Information on Distributions and Taxes" in the SAI.
The Fund has elected and 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 that 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.
Pursuant to the Code, certain distributions which are declared in
October, November or December but which, for operation 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 31st of
the calender year in which they are declared. Distributions derived
from the excess of net long-term capital gain over net short-term
capital loss are treated as long-term capital gain regardless of the
length of time you have owned Fund shares and regardless of whether
such distributions are received in cash or in additional shares.
Redemptions and exchanges of Fund shares are taxable events on which
you may realize a gain or a loss. Any loss incurred on the sale or
exchange of Fund shares, held for six months or less, will be treated
as a long-term capital loss to the extent of capital gain dividends
received with respect to such shares.
For the fiscal year ended October 31, 1996, 46% of the income dividends
paid (including short term capital gain distributions) qualified for
the corporate dividends-received deduction, subject to certain holding
periods 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.
The Fund will inform you of the source of its 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 considered a U.S. person for federal income tax
purposes, you should consult with your financial or tax advisor
regarding the applicability of U.S. withholding or other taxes on
distributions received by you from the Fund and the application of
foreign tax laws to these distributions.
You should consult your tax advisor with respect to the applicability
of state and local intangible property or income taxes to your shares
in the Fund and to distributions and redemption proceeds received from
the Fund.
HOW IS THE TRUST ORGANIZED?
The Fund is a non-diversified series of Franklin Value Investors Trust
(the "Trust"), an open-end management investment company, commonly
called a mutual fund. The Trust, formerly known as Franklin Balance
Sheet Investment Fund, was organized as a Massachusetts business trust
on September 11, 1989, and is registered with the SEC under the 1940
Act. Shares of each series of the Trust have equal and exclusive rights
to dividends and distributions declared by that series and the net
assets of the series in the event of liquidation or dissolution. Shares
of the Fund are considered Class I shares for redemption, exchange and
other purposes. Additional series and classes of shares may be offered
in the future.
The Trust has noncumulative voting rights. This gives holders of more
than 50% of the shares voting the ability to elect all of the members
of the Board. If this happens, holders of the remaining shares voting
will not be able to elect anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may
hold a special meeting of a series, however, for matters requiring
shareholder approval under the 1940 Act. A meeting may also be called
by the Board in its discretion or by shareholders holding at least 10%
of the outstanding shares. The 1940 Act requires that we help you
communicate with other shareholders in connection with removing members
of the Board.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
As of July 5, 1996, the Fund is closed to new investors, except
retirement plan accounts. If you were a shareholder of record as of
July 5, 1996, you may continue to add to your account with as little as
$100 or buy additional shares through the reinvestment of dividend or
capital gain distributions. We may waive the initial investment minimum
for retirement plans. We may also refuse any order to buy shares.
Currently, the Fund does not allow investments by Market Timers.
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify to buy shares under one of the sales charge reduction
or waiver categories described below, please include a written
statement with each purchase order explaining which privilege applies.
If you don't include this statement, we cannot guarantee that you will
receive the sales charge reduction or waiver.
QUANTITY DISCOUNTS. The sales charge you pay depends on the dollar
amount you invest, as shown in the table below.
Total Sales Charge Amount Paid
as a Percentage of to Dealer as a
Amount of Purchase Offering Net Amount Percentage of
at Offering Price Price Invested Offering Price
- --------------------------------------------------------------------------
Under $100,000 .................... 4.50% 4.71% 4.00%
$100,000 but less than $250,000.... 3.75% 3.90% 3.25%
$250,000 but less than $500,000.... 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000.. 2.25% 2.30% 2.00%
$1,000,000 or more*................ None None None
*If you invest $1 million or more, a Contingent Deferred Sales Charge
may be imposed on an early redemption. Please see "How Do I Sell
Shares? - Contingent Deferred Sales Charge." Please also see "Other
Payments to Securities Dealers" below for a discussion of payments
Distributors may make out of its own resources to Securities Dealers
for certain purchases.
CUMULATIVE QUANTITY DISCOUNTS. To determine if you may pay a reduced
sales charge, the amount of your current purchase is added to the cost
or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds, as well as those of your spouse, children
under the age of 21 and grandchildren under the age of 21. If you are
the sole owner of a company, you may also add any company accounts,
including retirement plan accounts. Companies with one or more
retirement plans may add together the total plan assets invested in the
Franklin Templeton Funds to determine the sales charge that applies.
LETTER OF INTENT. You may buy shares at a reduced sales charge by
completing the Letter of Intent section of the shareholder application.
A Letter of Intent is a commitment by you to invest a specified dollar
amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER
APPLICATION, YOU ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended
purchase in Fund shares registered in your name until you fulfill your
Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved
shares until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total
shares you own. We will pay or reinvest dividend and capital gain
distributions on the reserved shares as you direct. Our policy of
reserving shares does not apply to certain retirement plans.
If you would like more information about the Letter of Intent
privilege, please see "How Do I Buy, Sell and Exchange Shares? - Letter
of Intent" in the SAI or call Shareholder Services.
GROUP PURCHASES. If you are a member of a qualified group, you may buy
Fund shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the
group members' existing investments, plus the amount of the current
purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group
members,
o Agrees to include Franklin Templeton Fund sales and other materials
in publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
SALES CHARGE WAIVERS. The Fund's sales charges (front-end and
contingent deferred) will not apply to certain purchases. For waiver
categories 1 or 2 below: (i) the distributions or payments must be
reinvested within 365 days of their payment date, and (ii) Class II
distributions may be reinvested in either Class I or Class II shares.
Class I distributions may only be reinvested in Class I shares.
The Fund's sales charges will not apply if you are buying shares with
money from the following sources:
1. Dividend and capital gain distributions from any Franklin
Templeton Fund or a REIT sponsored or advised by Franklin Properties,
Inc.
2. Annuity payments received under either an annuity option or from
death benefit proceeds, only if the annuity contract offers as an
investment option the Franklin Valuemark Funds, the Templeton Variable
Annuity Fund, the Templeton Variable Products Series Fund, or the
Franklin Government Securities Trust. You should contact your tax
advisor for information on any tax consequences that may apply.
3. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund
within the past 60 days, you may invest the proceeds without any sales
charge if (a) the investment objectives were similar to the Fund's, and
(b) your shares in that fund were subject to any front-end or
contingent deferred sales charges at the time of purchase. You must
provide a copy of the statement showing your redemption.
The Fund's sales charges will also not apply to purchases by:
4. Trust companies and bank trust departments agreeing to invest in
Franklin Templeton Funds over a 13 month period at least $1 million of
assets held in a fiduciary, agency, advisory, custodial or similar
capacity and over which the trust companies and bank trust departments
or other plan fiduciaries or participants, in the case of certain
retirement plans, have full or shared investment discretion. We will
accept orders for these accounts by mail accompanied by a check or by
telephone or other means of electronic data transfer directly from the
bank or trust company, with payment by federal funds received by the
close of business on the next business day following the order.
5. Group annuity separate accounts offered to retirement plans
6. Retirement plans that (i) are sponsored by an employer with at
least 100 employees, (ii) have plan assets of $1 million or more, or
(iii) agree to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period. Retirement plans that are not Qualified
Retirement Plans or SEPS, such as 403(b) or 457 plans, must also meet
the requirements described under "Group Purchases" above.
7. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments by
the Fund on arbitrage rebate calculations.
8. Broker-dealers, registered investment advisors or certified
financial planners who have entered into an agreement with Distributors
for clients participating in comprehensive fee programs
9. Registered Securities Dealers and their affiliates, for their
investment accounts only
10. Current employees of Securities Dealers and their affiliates and
their family members, as allowed by the internal policies of their
employer
11. Officers, trustees, directors and full-time employees of the
Franklin Templeton Funds or the Franklin Templeton Group, and their
family members, consistent with our then-current policies
12. Investment companies exchanging shares or selling assets pursuant
to a merger, acquisition or exchange offer
13. Accounts managed by the Franklin Templeton Group
14. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the
Fund. Plan documents are required for all retirement plans. Trust
Company can provide the plan documents for you and serve as custodian
or trustee.
Trust Company can provide you with brochures containing important
information about its plans. To establish a Trust Company retirement
plan, you will need an application other than the one included in this
prospectus. For a retirement plan brochure or application, please call
our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before
choosing a retirement plan. Your investment representative or advisor
can help you make investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who
initiate and are responsible for certain purchases made without a sales
charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and
not by the Fund or its shareholders.
1. Purchases of $1 million or more - up to 1% of the purchase price.
2. Purchases by certain retirement plans - up to 1% of the purchase
price.
3. Purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of
clients participating in comprehensive fee programs - up to 0.25% of
the purchase price.
A Securities Dealer may only receive one of these payments for each
qualifying purchase. Securities Dealers who receive payments in
connection with investments described in paragraphs 1 or 2 above will
be eligible to receive the Rule 12b-1 fee associated with the purchase
starting in the thirteenth calendar month after the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL
COMPENSATION PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE
OF FUND SHARES, PLEASE SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? -
OTHER PAYMENTS TO SECURITIES DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in
another Franklin Templeton Fund (an "exchange"). Because it is
technically a sale and a purchase of shares, an exchange is a taxable
transaction.
Before making an exchange, please read the prospectus of the fund you
are interested in. This will help you learn about the fund, its
investment objective and policies, and its rules and requirements for
exchanges. For example, some Franklin Templeton Funds do not accept
exchanges and others may have different investment minimums.
NO EXCHANGES INTO THE FUND FROM OTHER FRANKLIN TEMPLETON FUNDS WILL BE
ACCEPTED.
Method Steps to Follow
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BY MAIL 1. Send us written instructions signed by all account
owners
2. Include any outstanding share certificates for the
shares you're exchanging
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BY PHONE Call Shareholder Services or TeleFACTS
If you do not want the ability to exchange by phone,
please let us know.
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Through Your Dealer Call your investment representative
- -------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for
other important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If
you have held your shares less than six months, however, you will pay
the percentage difference between the sales charge you previously paid
and the applicable sales charge of the new fund. If you have never paid
a sales charge on your shares because, for example, they have always
been held in a money fund, you will pay the Fund's applicable sales
charge no matter how long you have held your shares. These charges may
not apply if you qualify to buy shares without a sales charge.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent
Deferred Sales Charge when you exchange shares. Any shares subject to a
Contingent Deferred Sales Charge at the time of exchange, however, will
remain so in the new fund. For accounts with shares subject to a
Contingent Deferred Sales Charge, shares are exchanged into the new
fund in the order they were purchased. If you exchange shares into one
of our money funds, the time your shares are held in that fund will not
count towards the completion of any Contingency Period. For more
information about the Contingent Deferred Sales Charge, please see that
section under "How Do I Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class.
o The accounts must be identically registered. You may, however,
exchange shares from a Fund account requiring two or more signatures
into an identically registered money fund account requiring only one
signature for all transactions. Please notify us in writing if you do
not want this option to be available on your account. Additional
procedures may apply. Please see "Transaction Procedures and Special
Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange
shares as described above. Restrictions may apply to other types of
retirement plans. Please contact our Retirement Plans Department for
information on exchanges within these plans.
o The fund you are exchanging into must be eligible for sale in your
state.
o We may modify or discontinue our exchange policy if we give you 60
days' written notice.
o Currently, the Fund does not allow investments by Market Timers.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time. If you sell all the
shares in your account, your account will be closed and you will not be
allowed to buy additional shares of the Fund or to reopen your account.
This policy does not apply to retirement plans.
Method Steps to Follow
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BY MAIL 1. Send us written instructions signed by all account
owners
2. Include any outstanding share certificates for the
shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to
send additional documents. Accounts under court
jurisdiction may have additional requirements.
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BY PHONE
(Only available if you have completed and sent to us the telephone
redemption agreement included with this prospectus)
Call Shareholder Services
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional
accounts may exceed $50,000 by completing a
separate agreement. Call Institutional Services to receive
a copy.
o If there are no share certificates issued for the
shares you want to sell or you have already
returned them to the Fund
o Unless you are selling shares in a Trust Company
retirement plan account
o Unless the address on your account was changed by
phone within the last 30 days
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THROUGH YOUR DEALER Call your investment representative
- -------------------------------------------------------------------------
Beginning on or about May 1, 1997, you will automatically be able to
redeem shares by telephone without completing a telephone redemption
agreement. PLEASE NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION
TO BE AVAILABLE ON YOUR ACCOUNT. If you later decide you would like
this option, send us written instructions signed by all account owners,
with a signature guarantee.
We will send your redemption check within seven days after we receive
your request in proper form. If you sell your shares by phone, the
check may only be made payable to all registered owners on the account
and sent to the address of record. We are not able to receive or pay
out cash in the form of currency.
If you sell shares you recently purchased with a check or draft, we may
delay sending you the proceeds for up to 15 days or more to allow the
check or draft to clear. A certified or cashier's check may clear in
less time.
Under unusual circumstances, we may suspend redemptions or postpone
payment for more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for
other important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms
before selling shares in a Trust Company retirement plan account. Tax
penalties generally apply to any distribution from these plans to a
participant under age 59 1/2, unless the distribution meets an
exception stated in the Code. To obtain the necessary forms, please
call our Retirement Plans Department.
CONTINGENT DEFERRED SALES CHARGE
If you did not pay a front-end sales charge because you invested $1
million or more or agreed to invest $1 million or more under a Letter
of Intent, a Contingent Deferred Sales Charge may apply if you sell all
or a part of your investment within the Contingency Period. Once you
have invested $1 million or more, any additional investments you make
without a sales charge may also be subject to a Contingent Deferred
Sales Charge if they are sold within the Contingency Period. The charge
is 1% of the value of the shares sold or the Net Asset Value at the
time of purchase, whichever is less.
We will first redeem any shares in your account that are not subject to
the charge. If there are not enough of these to meet your request, we
will redeem shares subject to the charge in the order they were
purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR
AMOUNT, we will redeem additional shares to cover any Contingent
Deferred Sales Charge. For requests to sell a stated NUMBER OF SHARES,
we will deduct the amount of the Contingent Deferred Sales Charge, if
any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum
required account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before
February 1, 1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, up to 1% a month of an account's Net Asset Value (3%
quarterly, 6% semiannually or 12% annually). For example, if you
maintain an annual balance of $1 million, you can withdraw up to
$120,000 annually through a systematic withdrawal plan free of charge.
o Distributions from individual retirement plan accounts due to death
or disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to
termination or plan transfer
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income quarterly,
payable in March, June, September and December to shareholders of
record on the first business day before the 15th of the month and pays
them on or about the last day of that month. Capital gains, if any, may
be distributed annually, usually in December.
Dividend payments are not guaranteed, are subject to the Board's
discretion and may vary with each payment. The Fund does not pay
"interest" or guarantee any fixed rate of return on an investment in
its shares.
If you buy shares shortly before the record date, please keep in mind
that any distribution will lower the value of the Fund's shares by the
amount of the distribution and you will then receive a portion of the
price you paid back in the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of
the Fund (without a sales charge or imposition of a Contingent Deferred
Sales Charge) by reinvesting capital gain distributions, or both
dividend and capital gain distributions. This is a convenient way to
accumulate additional shares and maintain or increase your earnings
base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin
Templeton Fund (without a sales charge or imposition of a Contingent
Deferred Sales Charge). Many shareholders find this a convenient way to
diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both
dividend and capital gain distributions in cash. If you have the money
sent to another person or to a checking account, you may need a
signature guarantee. If you send the money to a checking account,
please see "Electronic Fund Transfers" under "Services to Help You
Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR
INVESTMENT REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT
AN OPTION, WE WILL AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN
DISTRIBUTIONS IN THE FUND. For Trust Company retirement plans, special
forms are required to receive distributions in cash. You may change
your distribution option at any time by notifying us by mail or phone.
Please allow at least seven days before the record date for us to
process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine
the Net Asset Value per share as of the scheduled close of the NYSE,
generally 1:00 p.m. Pacific time. You can find the prior day's closing
Net Asset Value and Offering Price of the Fund in many newspapers.
To calculate Net Asset Value per share, the Fund's assets are valued
and totaled, liabilities are subtracted, and the balance, called net
assets, is divided by the number of shares outstanding. The Fund's
assets are valued as described under "How are Fund Shares Valued?" in
the SAI.
THE PRICE WE USE WHEN YOU BUY OR SELL SHARES
You buy shares at the Offering Price, unless you qualify to buy shares
at a reduced sales charge or with no sales charge. The Offering Price
is based on the Net Asset Value per share and includes the maximum
sales charge. We calculate it to two decimal places using standard
rounding criteria. You sell shares at Net Asset Value.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If
you buy or sell shares through your Securities Dealer, however, we will
use the Net Asset Value next calculated after your Securities Dealer
receives your request, which is promptly transmitted to the Fund. Your
redemption proceeds will not earn interest between the time we receive
the order from your dealer and the time we receive any required
documents.
PROPER FORM
An order to buy shares is in proper form when we receive your signed
shareholder application and check. Written requests to sell or exchange
shares are in proper form when we receive written instructions signed
by all registered owners, with a signature guarantee if necessary. We
must also receive any outstanding share certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid
any delay in processing your transaction, they should include:
o Your name,
o The Fund's name,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o The dollar amount or number of shares, and
A telephone number where we may reach you during the day, or in the
evening if preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the
following situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the
registered owners,
3) The proceeds are not being sent to the address of record,
preauthorized bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against
potential claims based on the instructions received.
A signature guarantee verifies the authenticity of your signature and
may be obtained from certain banks, brokers or other eligible
guarantors. YOU SHOULD VERIFY THAT THE INSTITUTION IS AN ELIGIBLE
GUARANTOR BEFORE SIGNING. A NOTARIZED SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the
costly problem of replacing lost, stolen or destroyed certificates. If
a certificate is lost, stolen or destroyed, you may have to pay an
insurance premium of up to 2% of the value of the certificate to
replace it.
Any outstanding share certificates must be returned to the Fund if you
want to sell or exchange those shares or if you would like to start a
systematic withdrawal plan. The certificates should be properly
endorsed. You can do this either by signing the back of the certificate
or by completing a share assignment form. For your protection, you may
prefer to complete a share assignment form. In this case, you should
send the certificate and assignment form in separate envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the
sections of this prospectus that discuss the transaction you would like
to make or call Shareholder Services.
When you call, we will request personal or other identifying
information to confirm that instructions are genuine. We will also
record calls. We will not be liable for following instructions
communicated by telephone if we reasonably believe they are genuine.
For your protection, we may delay a transaction or not implement one if
we are not reasonably satisfied that the instructions are genuine. If
this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone,
you may wish to ask your investment representative for assistance or
send us written instructions, as described elsewhere in this
prospectus. If you are unable to execute a transaction by telephone, we
will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions
to sell shares or change distribution options on Trust Company
retirement plans by phone. While you may exchange shares of Trust
Company IRA and 403(b) retirement accounts by phone, certain
restrictions may be imposed on other retirement plans.
To obtain any required forms or more information about distribution or
transfer procedures, please call our Retirement Plans Department.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your
shares registered. How you register your account will affect your
ownership rights and ability to make certain transactions. If you have
questions about how to register your account, you should consult your
investment representative or legal advisor. Please keep the following
information in mind when registering your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we
register the account as "joint tenants with rights of survivorship"
unless you tell us otherwise. An account registered as "joint tenants
with rights of survivorship" is shown as "Jt Ten" on your account
statement. For any account with two or more owners, all owners must
sign instructions to process transactions and changes to the account.
Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in
writing. If you would like another person or owner to sign for you,
please send us a current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a
minor under your state's Uniform Gifts/Transfers to Minors Act. Other
than this form of registration, a minor may not be named as an account
owner.
TRUSTS. You should register your account as a trust only if you have a
valid written trust document. This avoids future disputes or possible
court action over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts,
please send us the following documents when you open your account. This
will help avoid delays in processing your transactions while we verify
who may sign on the account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
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CORPORATION Corporate Resolution
- ------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
- ------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that
identify the trustees, or
2. A certification for trust
- ------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street"
or "nominee" name account with your Securities Dealer, you may transfer
the shares to the street or nominee name account of another Securities
Dealer. Both dealers must have an agreement with Distributors or we
cannot process the transfer. Contact your Securities Dealer to initiate
the transfer. We will process the transfer after we receive
authorization in proper form from your delivering Securities Dealer.
Accounts may be transferred electronically through the NSCC. For
accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
ELECTRONIC INSTRUCTIONS. If there is a Securities Dealer or other
representative of record on your account, we are authorized to use and
execute electronic instructions. We will accept electronic instructions
directly from your dealer or representative without further inquiry.
Electronic instructions may be processed through the services of the
NSCC, which currently include the NSCC's "Networking," "Fund/SERV," and
"ACATS" systems, or through Franklin/Templeton's PCTrades II System.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax
identification number on a signed shareholder application or applicable
tax form. Federal law requires us to withhold 31% of your taxable
distributions and sale proceeds if (i) you have not furnished a
certified correct taxpayer identification number, (ii) you have not
certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is
incorrect, or (iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required
tax identification number and certifications. We may also close your
account if the IRS notifies us that your tax identification number is
incorrect. If you complete an "awaiting TIN" certification, we must
receive a correct tax identification number within 60 days of your
initial purchase to keep your account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may
close your account if the value of your shares is less than $1,250. We
will only do this if the value of your account fell below this amount
because you voluntarily sold your shares and your account has been
inactive (except for the reinvestment of distributions) for at least
six months. Before we close your account, we will notify you and give
you 30 days to increase the value of your account to $2,500.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the
Fund. Under the plan, you can have money transferred automatically from
your checking account to the Fund each month to buy additional shares.
If you are interested in this program, please refer to the automatic
investment plan application included with this prospectus or contact
your investment representative. The market value of the Fund's shares
may fluctuate and a systematic investment plan such as this will not
assure a profit or protect against a loss. You may discontinue the
program at any time by notifying Investor Services by mail or phone.
AUTOMATIC PAYROLL DEDUCTION
You may have money transferred from your paycheck to the Fund to buy
additional shares. Your investments will continue automatically until
you instruct the Fund and your employer to discontinue the plan. To
process your investment, we must receive both the check and payroll
deduction information in required form. Due to different procedures
used by employers to handle payroll deductions, there may be a delay
between the time of the payroll deduction and the time we receive the
money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and
receive regular payments from your account on a monthly, quarterly,
semiannual or annual basis. The value of your account must be at least
$5,000 and the minimum payment amount for each withdrawal must be at
least $50. For retirement plans subject to mandatory distribution
requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please
complete the systematic withdrawal plan section of the shareholder
application included with this prospectus and indicate how you would
like to receive your payments. You may choose to direct your payments
to buy the same class of shares of another Franklin Templeton Fund or
have the money sent directly to you, to another person, or to a
checking account. If you choose to have the money sent to a checking
account, please see "Electronic Fund Transfers" below.
You will generally receive your payment by the end of the month in
which a payment is scheduled. When you sell your shares under a
systematic withdrawal plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a
short period of time, you may not want to set up a systematic
withdrawal plan if you plan to buy shares on a regular basis. Shares
sold under the plan may also be subject to a Contingent Deferred Sales
Charge. Please see "Contingent Deferred Sales Charge" under "How Do I
Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us
in writing at least seven business days before the end of the month
preceding a scheduled payment. Please see "How Do I Buy, Sell and
Exchange Shares? - Systematic Withdrawal Plan" in the SAI for more
information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions from the
Fund or payments under a systematic withdrawal plan sent directly to a
checking account. If the checking account is with a bank that is a
member of the Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If you choose this option,
please allow at least fifteen days for initial processing. We will send
any payments made during that time to the address of record on your
account.
TELEFACTS R
From a touch-tone phone, you may call our TeleFACTS system (day or
night) at 1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton
Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the Fund's code number to use TeleFACTS. The Fund's code
number is 189.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular
basis:
Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments.
PLEASE VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
Financial reports of the Fund will be sent every six months. To
reduce Fund expenses, we attempt to identify related shareholders
within a household and send only one copy of a report. Call Fund
Information if you would like an additional free copy of the Fund's
financial reports or an interim quarterly report.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund
may be available to institutional accounts. Institutional investors may
also be required to complete an institutional account application. For
more information, call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however,
your shares are held by a financial institution, in a street name
account, or networked through the NSCC, the Fund may not be able to
offer these services directly to you. Please contact your investment
representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor
Services at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo,
California 94403-7777. The Fund and Distributors and are also located
at this address. Advisory Services is located at One Parker Plaza,
Sixteenth Floor, Fort Lee, New Jersey 07024. You may also contact us by
phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
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Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you
with high quality service. You will hear a regular beeping tone if your
call is being recorded.
GLOSSARY
Useful Terms and Definitions
1940 ACT - Investment Company Act of 1940, as amended
ADVISORY SERVICES - Franklin Advisory Services, Inc., the Fund's
investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - Certain funds in the Franklin Templeton Funds
offer two classes of shares, designated "Class I" and "Class II." The
two classes have proportionate interests in the same portfolio of
investment securities. They differ, however, primarily in their sales
charge structures and Rule 12b-1 plans. Because the Fund's sales charge
structure and Rule 12b-1 plan are similar to those of Class I shares,
shares of the Fund are considered Class I shares for redemption,
exchange and other purposes.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - The 12 month period during which a Contingent
Deferred Sales Charge may apply. Regardless of when during the month
you purchased shares, they will age one month on the last day of that
month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may
apply if you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's
principal underwriter. The SAI lists the officers and Board members who
are affiliated with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has
determined the Fund is a legally permissible investment and that can
only buy shares of the Fund without paying sales charges.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the
Franklin Group of Funds and the Templeton Group of Funds except
Franklin Valuemark Funds, Franklin Government Securities Trust,
Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned
holding company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDs - All U.S. registered investment
companies in the Franklin Group of Funds and the Templeton Group of
Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's
administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the
Fund's shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - 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.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by
deducting the fund's liabilities from the total assets of the
portfolio. The net asset value per share is determined by dividing the
net asset value of the fund by the number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset
Value per share and includes the 4.50% sales charge.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or
profit-sharing plan that qualifies under section 401 of the Code.
Examples include 401(k), money purchase pension, profit sharing and
defined benefit plans.
REIT - Real Estate Investment Trust
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle
customer orders and accounts with the Fund. This reference is for
convenience only and does not indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan
established under section 408(k) of the Code
TELEFACTS R - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an
affiliate of Distributors and both are wholly owned subsidiaries of
Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these
terms refer to the Fund and/or Investor Services, Distributors, or
other wholly owned subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large, fluctuation of protective
elements may be of greater amplitude, or there may be other elements
present which make the long-term risks appear somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the
future.
BAA - Bonds rated Baa are considered medium grade obligations. They are
neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
BA - Bonds rated Ba are judged to have predominantly speculative
elements and their future cannot be considered well assured. Often the
protection of interest and principal payments is very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond ratings.
The modifier 1 indicates that the security ranks in the higher end of
its generic rating category; modifier 2 indicates a mid-range ranking;
and modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation
and indicates an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong and, in the
majority of instances, differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit protection
parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay principal and
interest for bonds in this category than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the
terms of the obligations. BB indicates the lowest degree of speculation
and CC the highest degree of speculation. While such bonds will likely
have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that
is assigned an actual or implied CCC- rating. The C rating may also
reflect the filing of a bankruptcy petition under circumstances where
debt service payments are continuing. The C1 rating is reserved for
income bonds on which no interest is being paid.
D - Debt rated D is in default and payment of interest and/or repayment
of principal is in arrears.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following
designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely
payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Issues within the
"A" category are delineated with the numbers 1, 2 and 3 to indicate the
relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely
payment is very strong. A "plus" (+) designation indicates an even
stronger likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming
as for issues designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying
the higher designations.
PROSPECTUS & APPLICATION
FRANKLIN VALUE FUND
INVESTMENT STRATEGY
GROWTH & INCOME
MARCH 1, 1997
Franklin Value Investors Trust
This prospectus describes Class I and Class II shares of the Franklin Value Fund
(the "Fund"). It contains information you should know before investing in the
Fund. Please keep it for future reference.
The Fund currently offers another class of shares with a different sales charge
and expense structure, which affects performance. This class is described in a
separate prospectus. For more information, contact your investment
representative or call 1-800/DIAL BEN.
The Fund has a Statement of Additional Information ("SAI") for its Class I and
Class II shares, dated March 1, 1997, which may be amended from time to time. It
includes more information about the Fund's procedures and policies. It has been
filed with the SEC and is incorporated by reference into this prospectus. For a
free copy or a larger print version of this prospectus, call 1-800/DIAL BEN or
write the Fund at the address shown.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
Franklin Value Fund
FRANKLIN
VALUE FUND
March 1, 1997
WHEN READING THIS PROSPECTUS, YOU WILL SEE CERTAIN TERMS BEGINNING WITH CAPITAL
LETTERS. THIS MEANS THE TERM IS EXPLAINED IN OUR GLOSSARY SECTION.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary .............................................. 2
Financial Highlights ......................................... 3
How does the Fund Invest its Assets? ......................... 4
What are the Fund's Potential Risks?.......................... 13
Who Manages the Fund? ........................................ 19
How does the Fund Measure Performance?........................ 22
How Taxation Affects the Fund and its Shareholders ........... 22
How is the Trust Organized? .................................. 23
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ......................................... 24
May I Exchange Shares for Shares of Another Fund? ............ 30
How Do I Sell Shares? ........................................ 33
What Distributions Might I Receive from the Fund?............. 35
Transaction Procedures and Special Requirements .............. 36
Services to Help You Manage Your Account ..................... 41
What If I Have Questions About My Account? ................... 43
GLOSSARY
Useful Terms and Definitions ................................. 44
APPENDIX
Description of Ratings ....................................... 46
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
Franklin Value Fund
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the contractual management and Rule 12b-1 fees of each
class and historical annualized operating expenses of each class for the fiscal
year ended October 31, 1996. The Fund's actual expenses may vary.
CLASS I CLASS II
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge
(as a percentage of Offering Price) ................. 4.50 % 1.99%
Paid at time of purchase ............................ 4.50%++ 1.00%+++
Paid at redemption++++ ............................. None 0.99 %
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees .................................... 0.00%* 0.00%*
Rule 12b-1 Fees .................................... 0.35%** 1.00%**
Other Expenses ..................................... 1.00% 1.00%
-------------------
Total Fund Operating Expenses ...................... 1.35%* 2.00%*
===================
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the Fund.
1 YEAR 3 YEARS
- ------------------------------------
Class I $58*** $86
Class II $40 $72
For the same Class II investment, you would pay projected expenses of $30 if
you did not sell your shares at the end of the first year. Your projected
expenses for the remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of each class and are not directly charged to
your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more in Class I
shares.
+++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? - Deciding Which Class to Buy."
++++A Contingent Deferred Sales Charge may apply to any Class II purchase if you
sell the shares within 18 months and to Class I purchases of $1 million or more
if you sell the shares within one year. The charge is 1% of the value of the
shares sold or the Net Asset Value at the time of purchase, whichever is less.
The number in the table shows the charge as a percentage of Offering Price.
While the percentage is different depending on whether the charge is shown based
on the Net Asset Value or the Offering Price, the dollar amount paid by you
would be the same. See "How Do I Sell Shares? - Contingent Deferred Sales
Charge" for details.
* For the period shown, the investment manager had agreed in advance to waive
its management fees and make certain payments to reduce the Fund's expenses.
Without this reduction, management fees were 0.75% and total operating expenses
were 2.87% for Class I and 3.52% for Class II. Advisory Services has agreed in
advance to limit its management fees and make certain payments to reduce
expenses so the Fund's total operating expenses do not exceed 1.35% for Class I
and 2.00% for Class II for the current fiscal year. After October 31, 1997,
Advisory Services may end this agreement at any time.
** The combination of front-end sales charges and Rule 12b-1 fees could cause
long-term shareholders to pay more than the economic equivalent of the maximum
front-end sales charge permitted under the NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report appears in the financial statements in the Trust's Annual Report to
Shareholders for the fiscal year ended October 31, 1996. The Annual Report to
Shareholders also includes more information about the Fund's performance. For a
free copy, please call Fund Information.
CLASS I CLASS II
PERIOD ENDED OCTOBER 31 1996 1 1996 2
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period ........ $15.00 $16.38
----------------------------
Net Investment Income ......................... 0.053 0.006
Net Realized & Unrealized Gain (Loss)on Securities 2.147 0.761
Total From Investment Operations .............. 2.200 0.767
===========================
Distributions From Net Investment Income ...... (0.050) (0.007)
Total Distributions ........................... (0.050) (0.007)
---------------------------
Net Asset Value at End of Period .............. 17.15 17.14
===========================
Total Return++ ................................ 14.69% 4.68%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) ........ $7,828 $434
Ratios of Expenses to Average Net Assets ...... 1.35%*+ 2.00%*+
Ratio of Expenses to Average Net Assets
(before fee waiver and expense reduction)..... 2.87%* 3.52%*
Ratio of Net Investment Income to Average
Net Assets .................................. 0.57%* (0.08)%*
Portfolio Turnover Rate ....................... 32.52% 32.52%
Average Commission Rate** ..................... 0.0464 0.0464
1 For the period March 11, 1996 (effective date) to October 31, 1996
2 For the period September 3, 1996 (effective date) to October 31, 1996
+During the period indicated, the investment manager agreed in advance to waive
all or a portion of its management fees and pay all or a portion of the other
expenses of the Fund.
++Total return measures the change in value of an investment over the period
indicated. It is not annualized. It does not include the maximum front-end sales
charge or Contingent Deferred Sales Charge, and assumes reinvestment of
dividends and capital gains at Net Asset Value.
*Annualized.
**Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is to seek long-term total return. The objective
is a fundamental policy of the Fund and may not be changed without shareholder
approval. Of course, there is no assurance that the Fund's objective will be
achieved.
The Fund seeks to achieve its objective by investing at least 65% of its assets
in the securities of companies that Advisory Services believes are undervalued.
The securities the Fund may invest in include common and preferred stocks,
warrants, secured and unsecured bonds, and notes. Income is a secondary
consideration of the Fund, although it is not part of the Fund's investment
objective. The policies used to seek to achieve the Fund's objective are not
fundamental, unless otherwise noted, and are subject to change without
shareholder approval.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
The Fund invests at least 65% of its assets in companies of various sizes,
including investments in small capitalization companies, that Advisory Services
believes are selling substantially below the underlying value of their assets or
their private market value. Private market value is what a sophisticated
investor would pay for the entire company. Advisory Services may take into
account a variety of factors in order to determine whether to buy or hold
securities, including: low price to earnings ratio relative to the market,
industry group or earnings growth; low price relative to book value or cash
flow; valuable franchises, patents, trademarks, trade names, distribution
channels or market share for particular products or services, tax loss
carryforwards, or other intangibles that may not be reflected in stock prices;
ownership of understated or underutilized tangible assets such as land, timber
or minerals; underutilized cash or investment assets; and unusually high current
income. These criteria and others, alone and in combination, may identify
companies that are attractive to financial or strategic acquirers (i.e. takeover
candidates). Purchases may include companies in cyclical businesses, turnarounds
and companies emerging from bankruptcy. Purchase decisions may also be
influenced by company and its insiders' stock buy-backs.
In anticipation of and during temporary defensive periods or when the type of
investments in which the Fund intends to invest are not available at prices that
Advisory Services believes are attractive, the Fund may invest up to 100% of its
total assets in: (1) securities of the U.S. government and certain of its
agencies or instrumentalities that mature in one year or less from the date of
purchase, including U.S. Treasury bills, notes and bonds, and securities of the
Government National Mortgage Association, the Federal Housing Administration and
other agency or instrumentality issues or guarantees that are supported by the
full faith and credit of the U.S. government; (2) obligations issued or
guaranteed by other U.S. government agencies or instrumentalities, some of which
are supported by the right of the issuer to borrow from the U.S. government
(e.g., obligations of the Federal Home Loan Banks) and some of which are backed
by the credit of the issuer itself (e.g., obligations of the Student Loan
Marketing Association); (3) bank obligations, including negotiable and
non-negotiable CDs (subject to the 10% aggregate limit on the Fund's investment
in illiquid securities), letters of credit and bankers' acceptances, or
instruments secured by these types of obligations, issued by banks and savings
institutions that are subject to regulation by the U.S. government, its agencies
or instrumentalities and that have assets of over $1 billion, unless these types
of obligations are guaranteed by a parent bank that has total assets in excess
of $5 billion; (4) commercial paper considered by Advisory Services to be of
high quality, which must be rated within the two highest rating categories by
S&P or Moody's or, if unrated, issued by a company having an outstanding debt
issue rated at least AA by S&P or Aa by Moody's; and (5) corporate obligations
including, but not limited to, corporate notes, bonds and debentures considered
by Advisory Services to be high grade or that are rated within the two highest
rating categories by S&P or Moody's. Please see "Appendix" for a discussion of
ratings.
Whether investing for value or for other reasons, Advisory Services may buy any
of the types of securities described below and in the SAI. The Fund currently
intends to invest primarily in domestic securities, but it may also invest its
assets in foreign securities.
HIGH YIELDING, FIXED-INCOME SECURITIES. The Fund may invest up to 25% of its net
assets in lower rated, fixed-income and convertible securities (those rated BB
or lower by S&P or Ba or lower by Moody's) and unrated securities of comparable
quality, that Advisory Services believes possess intrinsic values in excess of
the current market prices of those securities. Lower rated bonds are commonly
called "junk bonds." Lower rated securities are considered by S&P, on balance,
to be predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation, and
they generally involve more credit risk than securities in the higher rating
categories. Lower rated securities in which the Fund may invest include
securities rated D, the lowest rating category of S&P, or unrated securities of
comparable quality. Debt obligations rated D are in default and the payment of
interest and/or repayment of principal is in arrears. Please see "What are the
Fund's Potential Risks?" below for more information.
ZERO COUPON SECURITIES AND PAY-IN-KIND BONDS. Zero coupon or deferred interest
securities are debt obligations that do not entitle the holder to any periodic
payments of interest before maturity or a specified date when the securities
begin paying current interest (the "cash payment date") and therefore are
generally issued and traded at a discount from their face amounts or par value.
The discount varies depending on the time remaining until maturity or cash
payment date, prevailing interest rates, liquidity of the security and the
perceived credit quality of the issuer. The discount, in the absence of
financial difficulties of the issuer, typically decreases as the final maturity
or cash payment date of the security approaches. The market prices of zero
coupon securities are generally more volatile than the market prices of
securities that pay interest periodically and are likely to respond to changes
in interest rates to a greater degree than do non-zero coupon or deferred
interest securities having similar maturities and credit quality. Current
federal income tax law requires that a holder of a zero coupon security report
as income each year the portion of the original issue discount on the security
that accrues that year, even though the holder receives no cash payments of
interest during the year.
Pay-in-kind bonds are securities that pay interest through the issuance of
additional bonds. The Fund will be deemed to receive interest over the life of
the bonds and be treated as if interest were paid on a current basis for federal
income tax purposes, although no cash interest payments are received by the Fund
until the cash payment date or until the bonds mature. More information is
included under "What are the Fund's Potential Risks?" and in the tax section of
the SAI.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities. A
convertible security is generally a debt obligation or 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 provides a
fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance in
its underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Like a common stock, the
value of a convertible security 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. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the Fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the Fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
The Fund may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stocks ("PERCS"), which
provide an investor, such as the Fund, with the opportunity to earn higher
dividend income than is available on a company's common stock. PERCS are
preferred stocks that generally feature a mandatory conversion date, as well as
a capital appreciation limit which is usually expressed in terms of a stated
price. Most PERCS expire three years from the date of issue, at which time they
are convertible into common stock of the issuer. PERCS are generally not
convertible into cash at maturity. Under a typical arrangement, after three
years PERCS convert into one share of the issuer's common stock if the issuer's
common stock is trading at a price below that set by the capital appreciation
limit, and into less than one full share if the issuer's common stock is trading
at a price above that set by the capital appreciation limit. The amount of that
fractional share of common stock is determined by dividing the price set by the
capital appreciation limit by the market price of the issuer's common stock.
PERCS can be called at any time prior to maturity, and hence do not provide call
protection. If called early, however, the issuer must pay a call premium over
the market price to the investor. This call premium declines at a preset rate
daily, up to the maturity date.
The Fund may also invest in other enhanced convertible securities. These include
but are not limited to ACES (Automatically Convertible Equity Securities), PEPS
(Participating Equity Preferred Stock), PRIDES (Preferred Redeemable Increased
Dividend Equity Securities), SAILS (Stock Appreciation Income Linked
Securities), TECONS (Term Convertible Notes), QICS (Quarterly Income Cumulative
Securities), and DECS (Dividend Enhanced Convertible Securities). ACES, PEPS,
PRIDES, SAILS, TECONS, QICS, and DECS all have the following features: they are
issued by the company, the common stock of which will be received in the event
the convertible preferred stock is converted, unlike PERCS they do not have a
capital appreciation limit, they seek to provide the investor with high current
income with some prospect of future capital appreciation, they are typically
issued with three to four-year maturities, they typically have some built-in
call protection for the first two to three years, investors have the right to
convert them into shares of common stock at a preset conversion ratio or hold
them until maturity, and upon maturity they will automatically convert to either
cash or a specified number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked as
senior or subordinated debt in the issuer's corporate structure according to the
terms of the debt indenture. There may be additional types of convertible
securities not specifically referred to herein which may be similar to those
described above in which the Fund may invest, consistent with its objectives and
policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the Fund. The Fund may have difficulty disposing of
such securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the Fund's ability to dispose of particular securities, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the creditworthiness of an issuer.
Reduced liquidity in the secondary market for certain securities may also make
it more difficult for the Fund to obtain market quotations based on actual
trades for purposes of valuing the Fund's portfolio. The Fund, however, intends
to acquire liquid securities, though there can be no assurances that this will
be achieved.
SYNTHETIC CONVERTIBLES. The Fund may invest a portion of its assets in
"synthetic convertible" securities. A synthetic convertible is created by
combining distinct securities which together possess the two principal
characteristics of a true convertible security, i.e., fixed income and the right
to acquire the underlying equity security. This combination is achieved by
investing in nonconvertible fixed-income securities and in warrants or stock or
stock index call options which grant the holder the right to purchase a
specified quantity of securities within a specified period of time at a
specified price or to receive cash in the case of stock index options. Synthetic
convertible securities are generally not considered to be "Equity Securities"
for purposes of the Fund's investment policy regarding those securities.
Synthetic convertible securities differ from the true convertible security in
several respects. The value of a synthetic convertible is the sum of the values
of its fixed-income component and its convertibility component. Thus, the values
of a synthetic convertible and a true convertible security will respond
differently to market fluctuations. Further, although Advisory Services expects
normally to create synthetic convertibles whose two components represent one
issuer, the character of a synthetic convertible allows the Fund to combine
components representing distinct issuers, or to combine a fixed income security
with a call option on a stock index, when Advisory Services determines that such
a combination would better promote the Fund's investment objectives. In
addition, the component parts of a synthetic convertible security may be
purchased simultaneously or separately; and the holder of a synthetic
convertible faces the risk that the price of the stock, or the level of the
market index underlying the convertibility component will decline.
FOREIGN SECURITIES. The Fund may invest in foreign securities if 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.
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 buy the securities of foreign issuers directly in
foreign markets, and may buy the securities of issuers in developing nations.
Please see "What are the Fund's Potential Risks? - Foreign Securities" in this
Prospectus.
OPTIONS. The Fund may write (sell) call options on securities that are listed on
a national securities exchange or traded over-the-counter ("OTC") and buy listed
and OTC call and put options on securities and securities indices. The Fund may
write a call option only if the option is "covered," which means so long as the
Fund is obligated as the writer of a call option, it will either own (i) the
underlying security subject to the call or (ii) a call on the same security
where the exercise price of the call held is equal to or less than the exercise
price of the call written. The Fund will not invest in any stock options or
stock index options, other than for hedging or in covered positions, if the
option premiums paid on its open positions exceed 5% of the value of the Fund's
total assets. The Fund may enter into closing purchase transactions with respect
to its open option positions.
An option on a security is a contract that allows the buyer of the option, in
return for the premium paid, the right to buy a specified security (call option)
or to sell a specified security (put option) from or to the writer of the option
at a designated price during the term of the option. Options on securities
indices are similar to options on securities except that, rather than the right
to buy or sell particular securities at a specified price, options on a
securities index give the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the underlying stock index is
greater than (for calls, or less than, for puts) the exercise price of the
option. The Fund may also engage in spread and straddle transactions, although
it intends to limit these transactions to no more than 5% of the Fund's net
assets. Please see "What are the Fund's Potential Risks?" below for more
information about options.
FUTURES. The Fund may enter into (i) contracts for the purchase or sale for
future delivery of securities, (ii) contracts based on securities indices and
(iii) options on these contracts. At the present time, the Fund intends to limit
these investments to no more than 5% of its net assets.
Options, futures and options on futures are generally considered "derivative
securities." The Fund's investment in options, futures and options on futures
will be for portfolio hedging or other appropriate risk management purposes in
an effort to stabilize principal fluctuations to achieve the Fund's investment
objective and not for speculation.
STRUCTURED NOTES. The Fund may invest in structured notes. Structured notes
entitle their holders to receive some portion of the principal or interest
payments that would be due on traditional debt obligations. A zero coupon bond,
which is the right to receive only the principal portion of a debt security, is
a simple form of structured note. A structured note's performance or value may
be linked to a change in return, interest rate, or value at maturity of the
change in an identified or "linked" equity security, currency, interest rate,
index or other financial indicator. The holder's right to receive principal or
interest payments on a structured note may also vary in timing or amount,
depending on changes in certain rates of interest or other external events.
LOAN PARTICIPATIONS. Through a loan participation, the Fund can buy from a
lender a portion of a larger loan that it has made to a borrower. By buying loan
participations, the Fund may be able to acquire interests in loans from
financially strong borrowers that the Fund could not otherwise acquire. These
instruments are typically interests in floating or variable rate senior loans to
U.S. corporations, partnerships, and other entities. Generally, loan
participations are sold without guarantee or recourse to the lending institution
and are subject to the credit risks of both the borrower and the lending
institution. While loan participations generally trade at par value, if the
borrowers have credit problems, some may sell at discounts. To the extent the
borrower's credit problems are resolved, the loan participations may then
appreciate in value. These loan participations, however, carry substantially the
same risk as that for defaulted debt obligations and may cause loss of the
entire investment. Most loan participations are illiquid and therefore will be
included in the Fund's limitation on illiquid investments.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The Fund may invest in
mortgage-backed securities, including collateralized mortgage obligations, which
represent direct or indirect participation in, or are collateralized by and
payable from, mortgage loans secured by real property. In addition, the Fund may
buy asset-backed securities, which represent participation in, or are secured by
and payable from, assets such as motor vehicle installment sale contracts,
installment loan contracts, leases of various types of real and personal
property, receivables from revolving credit (credit card) agreements and other
categories of receivables. These securities are generally issued by trusts and
special purpose corporations. Please see "What are the Fund's Potential Risks? -
Mortgage-Backed and Asset-Backed Securities" below for more information.
TRADE CLAIMS. The Fund may invest in trade claims, which are purchased from
creditors of companies in financial difficulty who seek to reduce the number of
debt obligations they are owed. At the present time, however, the Fund intends
to limit these investments to no more than 5% of its net assets.
RESTRICTED SECURITIES. Some of the securities the Fund buys are considered
"restricted securities." The Fund's investment in restricted securities may not
exceed 15% of its net assets. Restricted securities are securities with legal or
contractual restrictions on resale, including securities that are not registered
under the 1933 Act. Securities not registered under the 1933 Act may not be sold
without first being registered, unless there is an available exemption under the
1933 Act. Normally the costs of registering these securities is borne by the
issuer. Restricted securities involve certain risks, including the risk that a
secondary market may not exist when a holder wants to sell them. In addition,
the price and valuation of these securities may reflect a discount because they
are perceived as having less liquidity than similar securities that are not
restricted.
As with other securities in the Fund's portfolio, if no readily available market
quotations exist for restricted securities, they will be valued at fair value in
accordance with procedures adopted by the Board. If the Fund suddenly has to
sell restricted securities, time constraints or a lack of interested, qualified
buyers may prevent the Fund from receiving the carrying value of the securities
at the time of the sale. Alternatively, Advisory Services may sell unrestricted
securities it might have retained if the Fund had only held unrestricted
securities.
Other Investment Policies of the Fund
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors,
provided that such loans do not exceed 25% of the value of the Fund's total
assets at the time of the most recent loan. The borrower must deposit with the
Fund's custodian bank collateral with an initial market value of at least 102%
of the initial market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 100%. 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 buys a U.S. government security subject to resale to a bank or dealer
at an agreed-upon price and date. The transaction requires the collateralization
of the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller might cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund might
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks that are deemed creditworthy by Advisory
Services. A repurchase agreement is deemed to be a loan by the Fund under the
1940 Act. The U.S. government security subject to resale (the collateral) will
be held on behalf of the Fund by a custodian bank approved by the Board and will
be held pursuant to a written agreement.
BORROWING. The Fund does not borrow money or mortgage or pledge any of its
assets, except that it may borrow up to 331/3% of its total assets (including
the amount borrowed) in order to meet redemption requests that might otherwise
require the untimely disposition of portfolio securities or for other temporary
or emergency purposes and may pledge its assets in connection therewith. The
Fund will not make any additional investments while any borrowings exceed 5% of
its total assets.
ILLIQUID INVESTMENTS. The Fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them.
SHORT-SELLING. The Fund may make short sales, which are transactions in which
the Fund sells a security it does not own in anticipation of a decline in the
market value of that security.
PORTFOLIO TURNOVER. The Fund anticipates its annual portfolio turnover rate
generally will not exceed 100%, but this expected rate is not a limiting factor
in the operation of the Fund's portfolio.
PERCENTAGE RESTRICTIONS. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in the value or liquidity of portfolio securities or the
amount of net assets will not be considered a violation of any of the foregoing
policies.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How does the Fund Invest its Assets?" and "Investment Restrictions" in the
SAI.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
THE FUND'S APPROACH TO VALUE INVESTING. The Fund will invest principally in the
securities of companies believed by Advisory Services 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 Advisory Services
may be incorrect in its assessment of a particular industry or company or that
Advisory Services may not buy these securities at their lowest possible prices
or sell them at their highest.
When the Fund buys securities of companies emerging from bankruptcy it may
encounter risks that do not exist with other investments. Companies emerging
from bankruptcy may have some difficulty retaining customers and suppliers who
prefer transacting with solvent organizations. If new management is installed in
a company emerging from bankruptcy, the management may be considered untested;
if the existing management is retained, the management may be considered
incompetent. Further, even when a company has emerged from bankruptcy with a
lower level of debt, it may still retain a relatively weak balance sheet. During
economic downturns these companies may not have sufficient cash flow to pay
their debt obligations and may also have difficulty finding additional
financing. In addition, reduced liquidity in the secondary market may make it
difficult for the Fund to sell the securities or to value them based on actual
trades.
The Fund's policy of investing in securities that may be out of favor, including
turnarounds, cyclicals and companies emerging from bankruptcy, companies
reporting poor earnings, and companies whose share prices have declined sharply
or that are not widely followed, differs from the approach followed by many
other mutual funds. Advisory Services believes, however, that these securities
may provide a greater total investment return than securities whose prices
appear to reflect anticipated favorable developments.
NON-DIVERSIFICATION. As a non-diversified investment company under the 1940 Act,
the Fund may concentrate its investments in the securities of a smaller number
of issuers than if it were a diversified company. An investment in the Fund
therefore will entail greater risk than an investment in a diversified
investment company because a higher percentage of investments among fewer
issuers may result in greater fluctuation in the total market value of the
Fund's portfolio, and economic, political or regulatory developments may have a
greater impact on the value of the Fund's portfolio than would be the case if
the portfolio were diversified among more issuers. All securities in which the
Fund may invest are inherently subject to market risk, and the market value of
the Fund's investments will fluctuate. The Fund intends to comply with the
diversification and other requirements applicable to regulated investment
companies under the Code. For more information, please see "How does the Fund
Invest its Assets?- Non-diversification" in the SAI.
FOREIGN SECURITIES. Investments in the securities of companies organized outside
the U.S. or whose securities are principally traded outside the U.S. ("foreign
issuers") may offer potential benefits not available from investments solely in
securities of U.S. issuers. These benefits may include the opportunity to invest
in foreign issuers that appear, in the opinion of Advisory Services, to offer
more potential for long-term capital appreciation or current earnings than
investments in U.S. issuers, the opportunity to invest in foreign countries with
economic policies or business cycles different from those of the U.S., and the
opportunity to reduce fluctuations in portfolio value by taking advantage of
foreign securities markets that do not necessarily move in a manner parallel to
U.S. markets.
Investments in securities of foreign issuers involve significant risks,
including possible losses that are not typically associated with investments in
securities of U.S. issuers. These risks include political, social or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of the imposition of exchange
controls, expropriation, limits on removal of currency or other assets,
nationalization of assets, foreign withholding and income taxation and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Changes in government administrations and economic or
monetary policies in the U.S. or abroad, changes in circumstances surrounding
dealings between nations, and changes in currency convertibility or exchange
rates could 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 buy securities in any foreign country, developed or developing, but
investments will not be made in any securities issued without stock certificates
or comparable stock documents.
Foreign securities may be subject to greater fluctuations in price than U.S.
securities. The markets on which foreign securities trade may also have less
volume and liquidity. Securities acquired by the Fund outside the U.S. and that
are publicly traded in the U.S. or on a foreign securities exchange or in a
foreign securities market will not be considered illiquid so long as the Fund
acquires and holds the security with the intention of reselling the security in
the foreign trading market, the Fund reasonably believes it can readily dispose
of the security for cash in the U.S. or foreign market, and current market
quotations are readily available.
You should carefully consider the substantial risks involved in investing in
securities of foreign issuers - risks that are often heightened for investments
in developing markets. For example, the small size, inexperience and limited
volume of trading on securities markets in certain developing countries may make
the Fund's investments in developing countries illiquid and more volatile than
investments in more developed countries, and the Fund may be required to
establish special custody or other arrangements before making certain
investments in these countries. The laws of some foreign countries may also
limit the ability of the Fund to invest in securities of certain issuers located
in those countries.
OPTIONS. The purchase and sale of stock options and stock index options,
including the writing of covered call options, involve risks different from
those involved with direct investments in securities. A liquid secondary market
for any particular option may not be available when a position is sought to be
closed and the inability to close a position may have an adverse impact on the
Fund's ability to effectively hedge securities. In addition, there may be an
imperfect correlation between movements in the securities on which an option
contract is based and movements in the securities in the Fund's portfolio.
Successful use of option contracts is further dependent on Advisory Services'
ability to correctly predict movements in the securities markets, but no
assurance can be given that Advisory Services' judgment will be correct.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. Mortgage-backed and asset-backed
securities are often subject to more rapid repayment than their stated maturity
dates would indicate because of the pass-through of prepayments of principal on
the underlying loans. During periods of declining interest rates, prepayment of
loans underlying mortgage-backed and asset-backed securities can be expected to
accelerate, and thus impair the Fund's ability to reinvest the returns of
principal at comparable yields. Accordingly, the market value of these
securities will vary with changes in market interest rates generally and in
yield differentials among various kinds of U.S. government securities and other
mortgage-backed and asset-backed securities. Asset-backed securities present
certain additional risks that are not presented by mortgage-backed securities
because asset-backed securities generally do not have the benefit of a security
interest in collateral that is comparable to mortgage assets. There is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
SMALL COMPANIES. The Fund may invest in companies that have relatively small
revenues, limited product lines, and a small share of the market for their
products or services. Small companies may lack depth of management, the ability
to internally generate funds necessary for growth or potential development, or
the ability to generate funds through external financing on favorable terms.
They may also attempt to develop or market new products or services for which
markets are not yet established and may never become established. Due to these
and other factors, small companies may suffer significant losses, as well as
realize substantial growth.
Historically, small capitalization stocks have been more volatile in price than
larger capitalization stocks. Among the reasons for the greater price volatility
of these securities are the less certain growth prospects of smaller firms, the
lower degree of liquidity in the markets for these stocks, and the greater
sensitivity of small companies to changing economic conditions. Besides
exhibiting greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks. Small company stocks may decline in
price as large company stocks rise, or rise in price as large company stocks
decline. You should therefore expect that the shares of a fund that invests a
substantial portion of its net assets in small company stocks to be more
volatile than the shares of a fund that invests solely in larger capitalization
stocks.
HIGH YIELDING, FIXED-INCOME SECURITIES. Because of the Fund's policy of
investing in higher yielding, higher risk securities, an investment in the Fund
is accompanied by a higher degree of risk than is present with an investment in
higher rated, lower yielding securities. Accordingly, an investment in the Fund
should not be considered a complete investment program and should be carefully
evaluated for its appropriateness in light of your overall investment needs and
goals. If you are on a fixed income or retired, you should also consider the
increased risk of loss to principal that 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 securities rated BBB by S&P or Baa by Moody's, ratings which
are considered investment grade, possess some speculative characteristics.
Issuers of high yielding, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with acquiring the securities of these issuers is generally
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of high yielding securities may experience financial stress.
During these periods, these issuers may not have sufficient cash flow to meet
their interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific developments affecting
the issuer, the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss due
to default by the issuer may be significantly greater for the holders of high
yielding securities because the securities are generally unsecured and are often
subordinated to other creditors of the issuer. Current prices for defaulted
bonds are generally significantly lower than their purchase price, and the Fund
may have unrealized losses on defaulted securities that are reflected in the
price of the Fund's shares. In general, securities that default lose much of
their value in the time period before the actual default so that the Fund's net
assets are impacted before the default. The Fund may retain an issue that has
defaulted because the issue may present an opportunity for subsequent price
recovery.
High yielding, fixed-income securities frequently have call or buy-back features
that permit an issuer to call or repurchase the securities from the Fund.
Although these 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, Advisory Services may find it necessary to
replace the securities with lower yielding securities, which could result in
less net investment income to the Fund.
The Fund may have difficulty disposing of certain high yielding securities
because there may be a thin trading market for a particular security at any
given time. The market for lower rated, fixed-income securities generally tends
to be concentrated among a smaller number of dealers than is the case for
securities that trade in a broader secondary retail market. Reduced liquidity in
the secondary market may have an adverse impact on market price and the Fund's
ability to dispose of particular issues, when necessary, to meet the Fund's
liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of the issuer. Reduced liquidity in the
secondary market for certain securities may also make it more difficult for the
Fund to obtain market quotations based on actual trades for purposes of valuing
the Fund's portfolio. Current values for these high yield issues are obtained
from pricing services and/or a limited number of dealers and may be based upon
factors other than actual sales. For more information, please see "How are Fund
Shares Valued?" in the SAI.
The Fund is authorized to acquire high yielding, fixed-income securities that
are sold without registration under the federal securities laws and therefore
carry restrictions on resale. The Fund may acquire high yielding, fixed-income
securities during an initial underwriting. These securities involve special
risks because they are new issues. The Fund has no arrangement with its
underwriter or any other person concerning the acquisition of these securities.
ZERO COUPON SECURITIES AND PAY-IN-KIND BONDS. The credit risk factors pertaining
to lower rated securities also apply to lower rated zero coupon, deferred
interest and pay-in-kind bonds. These bonds carry an additional risk in that,
unlike bonds that pay interest throughout the period to maturity, the Fund will
realize no cash until the cash payment date and, if the issuer defaults, the
Fund may obtain no return at all on its investment. Zero coupon, deferred
interest and pay-in-kind bonds involve additional special considerations. During
periods when the Fund receives no cash interest payments on its zero coupon
securities or deferred interest or pay-in-kind bonds, it may be required to
dispose of portfolio securities to meet the distribution requirements and these
sales may be subject to the risk factors discussed above. The Fund is not
limited in the amount of its assets that may be invested in these types of
securities. For more information, please see "How Taxation Affects the Fund and
its Shareholders."
INTEREST RATE, CURRENCY AND MARKET RISK. To the extent the Fund invests in debt
securities, changes in interest rates in any country where the Fund is invested
will affect the value of the Fund's portfolio and its share price. Rising
interest rates, which often occur during times of inflation or a growing
economy, are likely to have a negative effect on the value of the Fund's shares.
To the extent the Fund invests in common stocks, a general market decline in any
country where the Fund is invested, may cause the value of what the Fund owns,
and thus the Fund's share price, to decline. Changes in currency valuations may
also affect the price of Fund shares. The value of stock markets, currency
valuations and interest rates throughout the world has increased and decreased
in the past. These changes are unpredictable and may happen again in the future.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. As of July 1, 1996, Advisory Services manages the Fund's
assets and makes its investment decisions. Advisory Services also performs
similar services for other funds. It is wholly owned by Resources, a publicly
owned company engaged in the financial services industry through its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources. Together, Advisory Services and its affiliates manage
over $179 billion in assets. Advisory Services employs the same individuals to
manage the Fund's portfolio as the previous manager. The terms and conditions of
the management services provided to the Fund remain the same. Please see
"Investment Management and Other Services" and "Miscellanous Information" in the
SAI for information on securities transactions and a summary of the Fund's Code
of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio since its inception is:
William Lippman
President of Advisory Services
Mr. Lippman holds a master of business administration degree from New York
University and a bachelor of business administration degree from City College
New York. Mr. Lippman has been in the securities industry for over 30 years and
with the Franklin Templeton Group since 1988.
Margaret McGee
Vice President of Advisory Services
Ms. McGee holds a bachelor of arts degree in business administration from
William Paterson College. She has been in the securities industry since 1985 and
with the Franklin Templeton Group since 1988.
Bruce C. Baughman
Vice President of Advisory Services
Mr. Baughman holds a master of science degree in accounting from New York
University and a bachelor of arts degree from Stanford University. He has been
the Franklin Templeton Group since 1988.
Management Fees. During the fiscal year ended October 31, 1996, management fees,
before any advance waiver, totaled 0.75% of the average daily net assets of the
Fund. Total operating expenses totaled 2.87% for Class I and 3.52% for Class II.
Under an agreement by the investment manager to limit its fees, the Fund paid no
management fees and operating expenses totaling 1.35% for Class I and 2.00% for
Class II.
The Fund pays its own operating expenses. These expenses include Advisory
Services' management fees; taxes, if any; custodian, legal and auditing fees;
the fees and expenses of Board members who are not members of, affiliated with,
or interested persons of Advisory Services; fees of any personnel not affiliated
with Advisory Services; insurance premiums; trade association dues; expenses of
obtaining quotations for calculating the Fund's Net Asset Value; and printing
and other expenses that are not expressly assumed by Advisory Services.
Under its management agreement, the Fund pays Advisory Services a management fee
equal to an annual rate of 0.75% on the first $500 million of the average daily
net assets of the Fund, 0.625% per year on the next $500 million of the average
daily net assets of the Fund, and 0.50% per year on the average daily net assets
of the Fund in excess of $1 billion. The fee is computed daily and paid monthly.
Each class pays its proportionate share of the management fee.
For the current fiscal year, Advisory Services has agreed in advance to limit
its management fees and make certain payments to reduce expenses so the Fund's
total operating expenses do not exceed 1.35% for Class I and 2.00% for Class II.
After October 31, 1997, Advisory Services may end this agreement at any time.
PORTFOLIO TRANSACTIONS. Advisory Services tries to obtain the best execution on
all transactions. If Advisory Services believes more than one broker or dealer
can provide the best execution, consistent with internal policies it may
consider research and related services and the sale of Fund shares, as well as
shares of other funds in the Franklin Templeton Group of Funds, when selecting a
broker or dealer. Please see "How does the Fund Buy Securities for its
Portfolio?" in the SAI for more information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisory Services, FT Services
provides certain administrative services and facilities for the Fund. Please see
"Investment Management and Other Services" in the SAI for more information.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for activities
primarily intended to sell shares of the class. These expenses may include,
among others, distribution or service fees paid to Securities Dealers or others
who have executed a servicing agreement with the Fund, Distributors or its
affiliates, printing prospectuses and reports used for sales purposes, preparing
and distributing sales literature and advertisements, and a prorated portion of
Distributors' overhead expenses.
Payments by the Fund under the Class I plan may not exceed 0.35% per year of
Class I's average daily net assets. Of this amount, the Fund may reimburse up to
0.25% to Distributors or others and may reimburse an additional 0.10% to
Distributors for distribution expenses. All distribution expenses over this
amount will be borne by those who have incurred them. During the first year
after certain Class I purchases made without a sales charge, Distributors may
keep the Rule 12b-1 fees associated with the purchase.
Under the Class II plan, the Fund may pay Distributors up to 0.75% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the purchase.
The Fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, each class of the Fund advertises its performance. The more
commonly used measures of performance are total return, current yield and
current distribution rate. Performance figures are usually calculated using the
maximum sales charges, but certain figures may not include sales charges.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How does the Fund Measure Performance" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund has elected and 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 that you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated for tax purposes as if paid by the
Fund and received by you on December 31 of the calendar year in which they are
declared.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or a loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to such shares.
For the fiscal year ended October 31, 1996, 65.93% of the income dividends paid
(including short-term capital gain distributions) 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 not long-term capital loss or capital
loss carryover) included in investment company taxable income and distributed by
the Fund as a dividend will not qualify for the dividends-received deduction.
The Fund will inform you of the source of its dividends and distributions at the
time they are paid, and will promptly after the close of each calendar year
advise you of the tax status for federal income tax purposes of these dividends
and distributions.
If you are not considered a U.S. person for federal income tax purposes, you
should consult with your financial or tax advisor regarding the applicability of
U.S. withholding or other taxes on distributions received by you from the Fund
and the application of foreign tax laws to these distributions.
You should consult your tax advisor with respect to the applicability of state
and local intangible property or income taxes to your shares in the Fund and to
distributions and redemption proceeds received from the Fund.
HOW IS THE TRUST ORGANIZED?
The Fund is a non-diversified series of Franklin Value Investors Trust (the
"Trust"), an open-end management investment company, commonly called a mutual
fund. The Trust, formerly known as the Franklin Balance Sheet Investment Fund,
was organized as a Massachusetts business trust on September 11, 1989, and is
registered with the SEC under the 1940 Act. As of January 1, 1997, the Fund
began offering a new class of shares designated Franklin Value Fund - Advisor
Class. All shares outstanding before the offering of Adviser Class shares have
been designated Franklin Value Fund - Class I and Franklin Value Fund - Class
II. Additional series and classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state law, or (3) required to be voted on
separately by the 1940 Act. Shares of each class of a series have the same
voting and other rights and preferences as the other classes and series of the
Trust for matters that affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
removing members of the Board.
As of February 3, 1997, Donald G. Taylor and Gigo H. Lee-Taylor owned of record
and beneficially more than 25% of the outstanding shares of Advisor Class of the
Fund.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check. PLEASE INDICATE WHICH CLASS OF SHARES YOU WANT TO BUY. IF YOU DO NOT
SPECIFY A CLASS, YOUR PURCHASE WILL BE AUTOMATICALLY INVESTED IN CLASS I SHARES.
MINIMUM
INVESTMENTS*
To Open Your Account .......... $2500
To Add to Your Account......... $ 100
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares. Currently, the Fund does not allow investments by Market Timers.
DECIDING WHICH CLASS TO BUY
You should consider a number of factors when deciding which class of shares to
buy. IF YOU PLAN TO BUY $1 MILLION OR MORE IN A SINGLE PAYMENT OR YOU QUALIFY TO
BUY CLASS I SHARES WITHOUT A SALES CHARGE, YOU MAY NOT BUY CLASS II SHARES.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds; and
o you plan to sell a substantial number of your shares within approximately six
years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
PURCHASE PRICE OF FUND SHARES
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- ------------------------------------------------------------------------------
CLASS I
Under $100,000 ................... 4.50% 4.71% 4.00%
$100,000 but less than $250,000 ... 3.75% 3.90% 3.25%
$250,000 but less than $500,000 ... 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 . 2.25% 2.30% 2.00%
$1,000,000 or more* ............... None None None
CLASS II
Under $1,000,000* ................. 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Deciding Which
Class to Buy."
SALES CHARGE REDUCTIONS AND WAIVERS
IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH EACH
PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
CUMULATIVE QUANTITY DISCOUNTS - CLASS I ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds, as well as those of your spouse, children under the
age of 21 and grandchildren under the age of 21. If you are the sole owner of a
company, you may also add any company accounts, including retirement plan
accounts. Companies with one or more retirement plans may add together the total
plan assets invested in the Franklin Templeton Funds to determine the sales
charge that applies.
LETTER OF INTENT - CLASS I ONLY. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES - CLASS I ONLY. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
SALES CHARGE WAIvers. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 4:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, the Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares were subject to a
Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
5. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front-end or contingent deferred sales charges at the
time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to Class I purchases by:
6. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following the order.
7. Group annuity separate accounts offered to retirement plans
8. Retirement plans that (i) are sponsored by an employer with at least 100
employees, (ii) have plan assets of $1 million or more, or (iii) agree to invest
at least $500,000 in the Franklin Templeton Funds over a 13 month period.
Retirement plans that are not Qualified Retirement Plans or SEPS, such as 403(b)
or 457 plans, must also meet the requirements described under "Group Purchases -
Class I Only" above.
9. An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is permissible and suitable
for you and the effect, if any, of payments by the Fund on arbitrage rebate
calculations.
10. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
11. Registered Securities Dealers and their affiliates, for their investment
accounts only
12. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
13. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
14. Investment companies exchanging shares or selling assets pursuant to a
merger,
acquisition or exchange offer
15. Accounts managed by the Franklin Templeton Group
16. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not by
the Fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 1% of the purchase price.
3. Class I purchases by certain retirement plans - up to 1% of the purchase
price.
4. Class I purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the purchase price.
A Securities Dealer may only receive one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1, 2 or 3 above will be eligible to receive the Rule
12b-1 fee associated with the purchase starting in the thirteenth calendar month
after the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums. Some Franklin Templeton Funds do not offer Class II shares.
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------------
BY MAIL 1. Send us written instructions signed by all account
owners
2. Include any outstanding share certificates for the
shares you're exchanging
- -------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to exchange by phone to
apply to your account, please let us know.
- -------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- -------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
CONTINGENT DEFERRED SALES CHARGE - CLASS I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
CONTINGENT DEFERRED SALES CHARGE - CLASS II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
Contingent Deferred Sales Charge, such as shares from the reinvestment of
dividends and capital gains ("free shares"), $2,000 in shares that are no longer
subject to a Contingent Deferred Sales Charge because you have held them for
longer than 18 months ("matured shares"), and $3,000 in shares that are still
subject to a Contingent Deferred Sales Charge ("CDSC liable shares"). If you
exchange $3,000 into a new fund, $500 will be exchanged from free shares, $1,000
from matured shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. We believe the proportional method of exchanging Class II shares
more closely reflects the expectations of Class II shareholders if shares are
sold during the Contingency Period. The tax consequences of a sale or exchange
are determined by the Code and not by the method used by the Fund to transfer
shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class, except as noted below.
o The accounts must be identically registered. You may, however exchange shares
from a Fund account requiring two or more signatures into an identically
registered money fund account requiring only one signature for all transactions.
Please notify us in writing if you do not want this option to be available on
your account. Additional procedures may apply. Please see "Transaction
Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
Limited Exchanges Between Different Classes of Shares
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Class Z" shares. Beginning on or about May 1,
1997, you may exchange Class Z shares of Franklin Mutual Series Fund Inc. for
Class I shares of the Fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
- -------------------------------------------------------------------------------
BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction
may have other requirements.
- -------------------------------------------------------------------------------
BY PHONE
(Only available if you have completed and sent to us the telephone redemption
agreement included with the prospectus)
Call Shareholder Services
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts
may exceed $50,000 by completing a separate agreement.
Call Institutional Services to receive a copy.
o If there are no share certificates issued for the shares
you want to sell or you have already returned them to the
Fund
o Unless you are selling shares in a Trust Company retirement
plan account
o Unless the address on your account was changed by phone
within the last 30 days
- -------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- -------------------------------------------------------------------------------
Beginning on or about May 1, 1997, you will automatically be able to redeem
shares by telephone without completing a telephone redemption agreement. PLEASE
NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON YOUR
ACCOUNT. If you later decide you would like this option, send us written
instructions signed by all account owners, with a signature guarantee.
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
CONTINGENT DEFERRED SALES CHARGE
For Class I purchases, if you did not pay a front-end sales charge because you
invested $1 million or more or agreed to invest $1 million or more under a
Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell all
or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class I investments you make without
a sales charge may also be subject to a Contingent Deferred Sales Charge if they
are sold within the Contingency Period. For any Class II purchase, a Contingent
Deferred Sales Charge may apply if you sell the shares within the Contingency
Period. The charge is 1% of the value of the shares sold or the Net Asset Value
at the time of purchase, whichever is less.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
Waivers. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual balance of
$1 million in Class I shares, you can withdraw up to $120,000 annually through a
systematic withdrawal plan free of charge. Likewise, if you maintain an annual
balance of $10,000 in Class II shares, $1,200 may be withdrawn annually free of
charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to termination
or plan transfer
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income quarterly, payable in
March, June, September and December, to shareholders of record on the first
business day before the 15th of the month and pays them on or about the last day
of that month. Capital gains, if any, may be distributed annually, usually in
December.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of Class I and Class II.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the same
class of the Fund (without a sales charge or imposition of a Contingent Deferred
Sales Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. If you own Class II shares, you may also reinvest
your distributions in Class I shares of the Fund. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDs - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge). If
you own Class II shares, you may also direct your distributions to buy Class I
shares of another Franklin Templeton Fund. Many shareholders find this a
convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. For Trust Company retirement plans, special forms are required to
receive distributions in cash. You may change your distribution option at any
time by notifying us by mail or phone. Please allow at least seven days before
the record date for us to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the scheduled close of the NYSE,
generally 1:00 p.m. Pacific time. You can find the prior day's closing Net Asset
Value and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
THE PRICE WE USE WHEN YOU BUY OR SELL SHARES
You buy shares at the Offering Price of the class you wish to purchase, unless
you qualify to buy shares at a reduced sales charge or with no sales charge. The
Offering Price of each class is based on the Net Asset Value per share of the
class and includes the maximum sales charge. We calculate it to two decimal
places using standard rounding criteria. You sell shares at Net Asset Value.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. YOU SHOULD
VERIFY THAT THE INSTITUTION IS AN ELIGIBLE GUARANTOR BEFORE SIGNING. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We will also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by telephone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust, only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
Required Documents. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- ----------------------------------------------------------------------------
CORPORATION Corporate Resolution
- ----------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify
the general partners, or
2. A certification for a partnership agreement
- -----------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- -----------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
ELECTRONIC INSTRUCTIONS. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We will accept electronic instructions directly from your dealer
or representative without further inquiry. Electronic instructions may be
processed through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $1250. We will only do
this if the value of your account fell below this amount because you voluntarily
sold your shares and your account has been inactive (except for the reinvestment
of distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $2,500.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION - CLASS I ONLY
You may have money transferred from your paycheck to the Fund to buy additional
Class I shares. Your investments will continue automatically until you instruct
the Fund and your employer to discontinue the plan. To process your investment,
we must receive both the check and payroll deduction information in required
form. Due to different procedures used by employers to handle payroll
deductions, there may be a delay between the time of the payroll deduction and
the time we receive the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS - CLASS I ONLY
You may choose to have dividend and capital gain distributions from Class I
shares of the Fund or payments under a systematic withdrawal plan sent directly
to a checking account. If the checking account is with a bank that is a member
of the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If you choose this option, please allow at least
fifteen days for initial processing. We will send any payments made during that
time to the address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the code number for each class to use TeleFACTS. The code number
is 282 for Class I and 582 for Class II.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund and Distributors are also located at this address. Advisory Services is
located at One Parker Plaza, Sixteenth Floor, Fort Lee, New Jersey 07024. You
may also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- ------------------------------------------------------------------------------
Shareholder Services 1-800/632-230 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1933 ACT - Securities Act of 1933, as amended
1940 ACT - Investment Company Act of 1940, as amended
ADVISORY SERVICES - Franklin Advisory Services, Inc., the Fund's investment
manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - 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.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
PROSPECTUS & APPLICATION
FRANKLIN
VALUE
FUND
ADVISOR CLASS
INVESTMENT STRATEGY
GROWTH &INCOME
MARCH 1, 1997
FRANKLIN VALUE INVESTORS TRUST
This prospectus describes the Advisor Class shares of the Franklin
Value Fund (the "Fund"). It contains information you should know before
investing in the Fund. Please keep it for future reference.
The Fund currently offers other classes of shares with different sales charge
and expense structures, which affect performance. These classes are described in
a separate prospectus. For more information, contact your investment
representative or call 1-800/DIAL BEN.
The Fund has a Statement of Additional Information ("SAI") for its Advisor
Class, dated March 1, 1997, which may be amended from time to time. It includes
more information about the Fund's procedures and policies. It has been filed
with the SEC and is incorporated by reference into this prospectus. For a free
copy or a larger print version of this prospectus, call 1-800/DIAL BEN or write
the Fund at the address shown.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
Franklin Value Fund
FRANKLIN
VALUE
FUND -
ADVISOR CLASS
MARCH 1, 1997
WHEN READING THIS PROSPECTUS, YOU WILL SEE CERTAIN TERMS BEGINNING WITH CAPITAL
LETTERS. THIS MEANS THE TERM IS EXPLAINED IN OUR GLOSSARY SECTION.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary........... 2
How does the Fund Invest its Assets? 3
What are the Fund's Potential Risks? 12
Who Manages the Fund?..... 18
How does the Fund Measure Performance? 19
How Taxation Affects the Fund and
its Shareholders......... 20
How is the Trust Organized? 21
ABOUT YOUR ACCOUNT
How Do I Buy Shares?...... 22
May I Exchange Shares for Shares
of Another Fund?......... 24
How Do I Sell Shares?..... 26
What Distributions Might I Receive
from the Fund?........... 27
Transaction Procedures and Special
Requirements............. 28
Services to Help You Manage Your
Account.................. 32
What If I Have Questions About My Account? 34
GLOSSARY
Useful Terms and Definitions 34
APPENDIX
Description of Ratings.... 36
777 MARINERS ISLAND BLVD.
P.O. BOX 7777
SAN MATEO
CA 94403-7777
1-800/DIAL BEN
FRANKLIN VALUE FUND
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. Since Advisor Class shares were not offered until January 1, 1997, the
table is based on the contractual management fees and the historical annualized
operating expenses of the Fund's Class I shares for the period March 11, 1996,
to October 31, 1996. The Fund's actual expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge Imposed on Purchases None
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Management Fees 0.00%++
Rule 12b-1 Fees None
Other Expenses 1.00%
Total Fund Operating Expenses 1.00%++
C. EXAMPLE
Assume the annual return for the class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the Fund.
1 YEAR3 YEARS
- -------------
$10 $32
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected
in the Net Asset Value or dividends of the class and are not directly charged
to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++For the period shown, the investment manager had agreed in advance to waive
its management fees and make certain payments to reduce the Fund's expenses.
Without this reduction, management fees were 0.75% and total operating expenses
were 2.52%. Additionally, Advisory Services has agreed in advance to limit its
management fees and make certain payments to reduce expenses so the Fund's total
operating expenses do not exceed 1.00% for Advisor Class for the current fiscal
year. After October 31, 1997, Advisory Services may end this agreement at any
time.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is to seek long-term total return. The objective
is a fundamental policy of the Fund and may not be changed without shareholder
approval. Of course, there is no assurance that the Fund's objective will be
achieved.
The Fund seeks to achieve its objective by investing at least 65% of its assets
in the securities of companies that Advisory Services believes are undervalued.
The securities the Fund may invest in include common and preferred stocks,
warrants, secured and unsecured bonds, and notes. Income is a secondary
consideration of the Fund, although it is not part of the Fund's investment
objective. The policies used to seek to achieve the Fund's objective are not
fundamental, unless otherwise noted, and are subject to change without
shareholder approval.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
The Fund invests at least 65% of its assets in companies of various sizes,
including investments in small capitalization companies, that Advisory Services
believes are selling substantially below the underlying value of their assets or
their private market value. Private market value is what a sophisticated
investor would pay for the entire company. Advisory Services may take into
account a variety of factors in order to determine whether to buy or hold
securities, including: low price to earnings ratio relative to the market,
industry group or earnings growth; low price relative to book value or cash
flow; valuable franchises, patents, trademarks, trade names, distribution
channels or market share for particular products or services, tax loss
carryforwards, or other intangibles that may not be reflected in stock prices;
ownership of understated or underutilized tangible assets such as land, timber
or minerals; underutilized cash or investment assets; and unusually high current
income. These criteria and others, alone and in combination, may identify
companies that are attractive to financial or strategic acquirers (i.e. takeover
candidates). Purchases may include companies in cyclical businesses, turnarounds
and companies emerging from bankruptcy. Purchase decisions may also be
influenced by company and its insiders' stock buy-backs.
In anticipation of and during temporary defensive periods or when the type of
investments in which the Fund intends to invest are not available at prices that
Advisory Services believes are attractive, the Fund may invest up to 100% of its
total assets in: (1) securities of the U.S. government and certain of its
agencies or instrumentalities that mature in one year or less from the date of
purchase, including U.S. Treasury bills, notes and bonds, and securities of the
Government National Mortgage Association, the Federal Housing Administration and
other agency or instrumentality issues or guarantees that are supported by the
full faith and credit of the U.S. government; (2) obligations issued or
guaranteed by other U.S. government agencies or instrumentalities, some of which
are supported by the right of the issuer to borrow from the U.S. government
(e.g., obligations of the Federal Home Loan Banks) and some of which are backed
by the credit of the issuer itself (e.g., obligations of the Student Loan
Marketing Association); (3) bank obligations, including negotiable and
non-negotiable CDs (subject to the 10% aggregate limit on the Fund's investment
in illiquid securities), letters of credit and bankers' acceptances, or
instruments secured by these types of obligations, issued by banks and savings
institutions that are subject to regulation by the U.S. government, its agencies
or instrumentalities and that have assets of over $1 billion, unless these types
of obligations are guaranteed by a parent bank that has total assets in excess
of $5 billion; (4) commercial paper considered by Advisory Services to be of
high quality, which must be rated within the two highest rating categories by
S&P or Moody's or, if unrated, issued by a company having an outstanding debt
issue rated at least AA by S&P or Aa by Moody's; and (5) corporate obligations
including, but not limited to, corporate notes, bonds and debentures considered
by Advisory Services to be high grade or that are rated within the two highest
rating categories by S&P or Moody's. Please see "Appendix" for a discussion of
ratings.
Whether investing for value or for other reasons, Advisory Services may buy any
of the types of securities described below and in the SAI. The Fund currently
intends to invest primarily in domestic securities, but it may also invest its
assets in foreign securities.
HIGH YIELDING, FIXED-INCOME SECURITIES. The Fund may invest up to 25% of its net
assets in lower rated, fixed-income and convertible securities (those rated BB
or lower by S&P or Ba or lower by Moody's) and unrated securities of comparable
quality, that Advisory Services believes possess intrinsic values in excess of
the current market prices of those securities. Lower rated bonds are commonly
called "junk bonds." Lower rated securities are considered by S&P, on balance,
to be predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation, and
they generally involve more credit risk than securities in the higher rating
categories. Lower rated securities in which the Fund may invest include
securities rated D, the lowest rating category of S&P, or unrated securities of
comparable quality. Debt obligations rated D are in default and the payment of
interest and/or repayment of principal is in arrears. Please see "What are the
Fund's Potential Risks?" below for more information.
ZERO COUPON SECURITIES AND PAY-IN-KIND BONDS. Zero coupon or deferred interest
securities are debt obligations that do not entitle the holder to any periodic
payments of interest before maturity or a specified date when the securities
begin paying current interest (the "cash payment date") and therefore are
generally issued and traded at a discount from their face amounts or par value.
The discount varies depending on the time remaining until maturity or cash
payment date, prevailing interest rates, liquidity of the security and the
perceived credit quality of the issuer. The discount, in the absence of
financial difficulties of the issuer, typically decreases as the final maturity
or cash payment date of the security approaches. The market prices of zero
coupon securities are generally more volatile than the market prices of
securities that pay interest periodically and are likely to respond to changes
in interest rates to a greater degree than do non-zero coupon or deferred
interest securities having similar maturities and credit quality. Current
federal income tax law requires that a holder of a zero coupon security report
as income each year the portion of the original issue discount on the security
that accrues that year, even though the holder receives no cash payments of
interest during the year.
Pay-in-kind bonds are securities that pay interest through the issuance of
additional bonds. The Fund will be deemed to receive interest over the life of
the bonds and be treated as if interest were paid on a current basis for federal
income tax purposes, although no cash interest payments are received by the Fund
until the cash payment date or until the bonds mature. More information is
included under "What are the Fund's Potential Risks?" and in the tax section of
the SAI.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities. A
convertible security is generally a debt obligation or 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 provides a
fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance in
its underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Like a common stock, the
value of a convertible security 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. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the Fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the Fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
The Fund may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stocks ("PERCS"), which
provide an investor, such as the Fund, with the opportunity to earn higher
dividend income than is available on a company's common stock. PERCS are
preferred stocks that generally feature a mandatory conversion date, as well as
a capital appreciation limit which is usually expressed in terms of a stated
price. Most PERCS expire three years from the date of issue, at which time they
are convertible into common stock of the issuer. PERCS are generally not
convertible into cash at maturity. Under a typical arrangement, after three
years PERCS convert into one share of the issuer's common stock if the issuer's
common stock is trading at a price below that set by the capital appreciation
limit, and into less than one full share if the issuer's common stock is trading
at a price above that set by the capital appreciation limit. The amount of that
fractional share of common stock is determined by dividing the price set by the
capital appreciation limit by the market price of the issuer's common stock.
PERCS can be called at any time prior to maturity, and hence do not provide call
protection. If called early, however, the issuer must pay a call premium over
the market price to the investor. This call premium declines at a preset rate
daily, up to the maturity date.
The Fund may also invest in other enhanced convertible securities. These include
but are not limited to ACES (Automatically Convertible Equity Securities), PEPS
(Participating Equity Preferred Stock), PRIDES (Preferred Redeemable Increased
Dividend Equity Securities), SAILS (Stock Appreciation Income Linked
Securities), TECONS (Term Convertible Notes), QICS (Quarterly Income Cumulative
Securities), and DECS (Dividend Enhanced Convertible Securities). ACES, PEPS,
PRIDES, SAILS, TECONS, QICS, and DECS all have the following features: they are
issued by the company, the common stock of which will be received in the event
the convertible preferred stock is converted, unlike PERCS they do not have a
capital appreciation limit, they seek to provide the investor with high current
income with some prospect of future capital appreciation, they are typically
issued with three to four-year maturities, they typically have some built-in
call protection for the first two to three years, investors have the right to
convert them into shares of common stock at a preset conversion ratio or hold
them until maturity, and upon maturity they will automatically convert to either
cash or a specified number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked as
senior or subordinated debt in the issuer's corporate structure according to the
terms of the debt indenture. There may be additional types of convertible
securities not specifically referred to herein which may be similar to those
described above in which a Fund may invest, consistent with its objectives and
policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the Fund. The Fund may have difficulty disposing of
such securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the Fund's ability to dispose of particular securities, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the creditworthiness of an issuer.
Reduced liquidity in the secondary market for certain securities may also make
it more difficult for the Fund to obtain market quotations based on actual
trades for purposes of valuing the Fund's portfolio. The Fund, however, intends
to acquire liquid securities, though there can be no assurances that this will
be achieved.
SYNTHETIC CONVERTIBLES. The Fund may invest a portion of its assets in
"synthetic convertible" securities. A synthetic convertible is created by
combining distinct securities which together possess the two principal
characteristics of a true convertible security, i.e., fixed income and the right
to acquire the underlying equity security. This combination is achieved by
investing in nonconvertible fixed-income securities and in warrants or stock or
stock index call options which grant the holder the right to purchase a
specified quantity of securities within a specified period of time at a
specified price or to receive cash in the case of stock index options. Synthetic
convertible securities are generally not considered to be "Equity Securities"
for purposes of the Fund's investment policy regarding those securities.
Synthetic convertible securities differ from the true convertible security in
several respects. The value of a synthetic convertible is the sum of the values
of its fixed-income component and its convertibility component. Thus, the values
of a synthetic convertible and a true convertible security will respond
differently to market fluctuations. Further, although Advisory Services expects
normally to create synthetic convertibles whose two components represent one
issuer, the character of a synthetic convertible allows the Fund to combine
components representing distinct issuers, or to combine a fixed income security
with a call option on a stock index, when Advisory Services determines that such
a combination would better promote the Fund's investment objectives. In
addition, the component parts of a synthetic convertible security may be
purchased simultaneously or separately; and the holder of a synthetic
convertible faces the risk that the price of the stock, or the level of the
market index underlying the convertibility component will decline.
FOREIGN SECURITIES. The Fund may invest in foreign securities if 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.
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 buy the securities of foreign issuers directly in
foreign markets, and may buy the securities of issuers in developing nations.
Please see "What are the Fund's Potential Risks? Foreign Securities" in this
Prospectus.
OPTIONS. The Fund may write (sell) call options on securities that are listed on
a national securities exchange or traded over-the-counter ("OTC") and buy listed
and OTC call and put options on securities and securities indices. The Fund may
write a call option only if the option is "covered," which means so long as the
Fund is obligated as the writer of a call option, it will either own (i) the
underlying security subject to the call or (ii) a call on the same security
where the exercise price of the call held is equal to or less than the exercise
price of the call written. The Fund will not invest in any stock options or
stock index options, other than for hedging or in covered positions, if the
option premiums paid on its open positions exceed 5% of the value of the Fund's
total assets. The Fund may enter into closing purchase transactions with respect
to its open option positions.
An option on a security is a contract that allows the buyer of the option, in
return for the premium paid, the right to buy a specified security (call option)
or to sell a specified security (put option) from or to the writer of the option
at a designated price during the term of the option. Options on securities
indices are similar to options on securities except that, rather than the right
to buy or sell particular securities at a specified price, options on a
securities index give the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the underlying stock index is
greater than (for calls, or less than, for puts) the exercise price of the
option. The Fund may also engage in spread and straddle transactions, although
it intends to limit these transactions to no more than 5% of the Fund's net
assets. Please see "What are the Fund's Potential Risks?" below for more
information about options.
FUTURES. The Fund may enter into (i) contracts for the purchase or sale for
future delivery of securities, (ii) contracts based on securities indices and
(iii) options on these contracts. At the present time, the Fund intends to limit
these investments to no more than 5% of its net assets.
Options, futures and options on futures are generally considered "derivative
securities." The Fund's investment in options, futures and options on futures
will be for portfolio hedging or other appropriate risk management purposes in
an effort to stabilize principal fluctuations to achieve the Fund's investment
objective and not for speculation.
STRUCTURED NOTES. The Fund may invest in structured notes. Structured notes
entitle their holders to receive some portion of the principal or interest
payments that would be due on traditional debt obligations. A zero coupon bond,
which is the right to receive only the principal portion of a debt security, is
a simple form of structured note. A structured note's performance or value may
be linked to a change in return, interest rate, or value at maturity of the
change in an identified or "linked" equity security, currency, interest rate,
index or other financial indicator. The holder's right to receive principal or
interest payments on a structured note may also vary in timing or amount,
depending on changes in certain rates of interest or other external events.
LOAN PARTICIPATIONS. Through a loan participation, the Fund can buy from a
lender a portion of a larger loan that it has made to a borrower. By buying loan
participations, the Fund may be able to acquire interests in loans from
financially strong borrowers that the Fund could not otherwise acquire. These
instruments are typically interests in floating or variable rate senior loans to
U.S. corporations, partnerships, and other entities. Generally, loan
participations are sold without guarantee or recourse to the lending institution
and are subject to the credit risks of both the borrower and the lending
institution. While loan participations generally trade at par value, if the
borrowers have credit problems, some may sell at discounts. To the extent the
borrower's credit problems are resolved, the loan participations may then
appreciate in value. These loan participations, however, carry substantially the
same risk as that for defaulted debt obligations and may cause loss of the
entire investment. Most loan participations are illiquid and therefore will be
included in the Fund's limitation on illiquid investments.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The Fund may invest in
mortgage-backed securities, including collateralized mortgage obligations, which
represent direct or indirect participation in, or are collateralized by and
payable from, mortgage loans secured by real property. In addition, the Fund may
buy asset-backed securities, which represent participation in, or are secured by
and payable from, assets such as motor vehicle installment sale contracts,
installment loan contracts, leases of various types of real and personal
property, receivables from revolving credit (credit card) agreements and other
categories of receivables. These securities are generally issued by trusts and
special purpose corporations. Please see "What are the Fund's Potential Risks? -
Mortgage-Backed and Asset-Backed Securities" below for more information.
TRADE CLAIMS. The Fund may invest in trade claims, which are purchased from
creditors of companies in financial difficulty who seek to reduce the number of
debt obligations they are owed. At the present time, however, the Fund intends
to limit these investments to no more than 5% of its net assets.
RESTRICTED SECURITIES. Some of the securities the Fund buys are considered
"restricted securities." The Fund's investment in restricted securities may not
exceed 15% of its net assets. Restricted securities are securities with legal or
contractual restrictions on resale, including securities that are not registered
under the 1933 Act. Securities not registered under the 1933 Act may not be sold
without first being registered, unless there is an available exemption under the
1933 Act. Normally the costs of registering these securities is borne by the
issuer. Restricted securities involve certain risks, including the risk that a
secondary market may not exist when a holder wants to sell them. In addition,
the price and valuation of these securities may reflect a discount because they
are perceived as having less liquidity than similar securities that are not
restricted.
As with other securities in the Fund's portfolio, if no readily available market
quotations exist for restricted securities, they will be valued at fair value in
accordance with procedures adopted by the Board. If the Fund suddenly has to
sell restricted securities, time constraints or a lack of interested, qualified
buyers may prevent the Fund from receiving the carrying value of the securities
at the time of the sale. Alternatively, Advisory Services may sell unrestricted
securities it might have retained if the Fund had only held unrestricted
securities.
OTHER INVESTMENT POLICIES OF THE FUND
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors,
provided that such loans do not exceed 25% of the value of the Fund's total
assets at the time of the most recent loan. The borrower must deposit with the
Fund's custodian bank collateral with an initial market value of at least 102%
of the initial market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 100%. 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 buys a U.S. government security subject to resale to a bank or dealer
at an agreed-upon price and date. The transaction requires the collateralization
of the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller might cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund might
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks that are deemed creditworthy by Advisory
Services. A repurchase agreement is deemed to be a loan by the Fund under the
1940 Act. The U.S. government security subject to resale (the collateral) will
be held on behalf of the Fund by a custodian bank approved by the Board and will
be held pursuant to a written agreement.
BORROWING. The Fund does not borrow money or mortgage or pledge any of its
assets, except that it may borrow up to 331/3% of its total assets (including
the amount borrowed) in order to meet redemption requests that might otherwise
require the untimely disposition of portfolio securities or for other temporary
or emergency purposes and may pledge its assets in connection therewith. The
Fund will not make any additional investments while any borrowings exceed 5% of
its total assets.
ILLIQUID INVESTMENTS. The Fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them.
SHORT-SELLING. The Fund may make short sales, which are transactions in
which the Fund sells a security it does not own in anticipation of a
decline in the market value of that security.
PORTFOLIO TURNOVER. The Fund anticipates its annual portfolio turnover rate
generally will not exceed 100%, but this expected rate is not a limiting factor
in the operation of the Fund's portfolio.
PERCENTAGE RESTRICTIONS. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in the value or liquidity of portfolio securities or the
amount of net assets will not be considered a violation of any of the foregoing
policies.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How does the Fund Invest its Assets?" and "Investment Restrictions" in the
SAI.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
THE FUND'S APPROACH TO VALUE INVESTING. The Fund will invest principally in the
securities of companies believed by Advisory Services 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 Advisory Services
may be incorrect in its assessment of a particular industry or company or that
Advisory Services may not buy these securities at their lowest possible prices
or sell them at their highest.
When the Fund buys securities of companies emerging from bankruptcy it may
encounter risks that do not exist with other investments. Companies emerging
from bankruptcy may have some difficulty retaining customers and suppliers who
prefer transacting with solvent organizations. If new management is installed in
a company emerging from bankruptcy, the management may be considered untested;
if the existing management is retained, the management may be considered
incompetent. Further, even when a company has emerged from bankruptcy with a
lower level of debt, it may still retain a relatively weak balance sheet. During
economic downturns these companies may not have sufficient cash flow to pay
their debt obligations and may also have difficulty finding additional
financing. In addition, reduced liquidity in the secondary market may make it
difficult for the Fund to sell the securities or to value them based on actual
trades.
The Fund's policy of investing in securities that may be out of favor, including
turnarounds, cyclicals and companies emerging from bankruptcy, companies
reporting poor earnings, and companies whose share prices have declined sharply
or that are not widely followed, differs from the approach followed by many
other mutual funds. Advisory Services believes, however, that these securities
may provide a greater total investment return than securities whose prices
appear to reflect anticipated favorable developments.
NON-DIVERSIFICATION. As a non-diversified investment company under the 1940 Act,
the Fund may concentrate its investments in the securities of a smaller number
of issuers than if it were a diversified company. An investment in the Fund
therefore will entail greater risk than an investment in a diversified
investment company because a higher percentage of investments among fewer
issuers may result in greater fluctuation in the total market value of the
Fund's portfolio, and economic, political or regulatory developments may have a
greater impact on the value of the Fund's portfolio than would be the case if
the portfolio were diversified among more issuers. All securities in which the
Fund may invest are inherently subject to market risk, and the market value of
the Fund's investments will fluctuate. The Fund intends to comply with the
diversification and other requirements applicable to regulated investment
companies under the Code. For more information, please see "How does the Fund
Invest its Assets?- Non-diversification" in the SAI.
FOREIGN SECURITIES. Investments in the securities of companies organized outside
the U.S. or whose securities are principally traded outside the U.S. ("foreign
issuers") may offer potential benefits not available from investments solely in
securities of U.S. issuers. These benefits may include the opportunity to invest
in foreign issuers that appear, in the opinion of Advisory Services, to offer
more potential for long-term capital appreciation or current earnings than
investments in U.S. issuers, the opportunity to invest in foreign countries with
economic policies or business cycles different from those of the U.S., and the
opportunity to reduce fluctuations in portfolio value by taking advantage of
foreign securities markets that do not necessarily move in a manner parallel to
U.S. markets.
Investments in securities of foreign issuers involve significant risks,
including possible losses that are not typically associated with investments in
securities of U.S. issuers. These risks include political, social or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of the imposition of exchange
controls, expropriation, limits on removal of currency or other assets,
nationalization of assets, foreign withholding and income taxation and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Changes in government administrations and economic or
monetary policies in the U.S. or abroad, changes in circumstances surrounding
dealings between nations, and changes in currency convertibility or exchange
rates could 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 buy securities in any foreign country, developed or developing, but
investments will not be made in any securities issued without stock certificates
or comparable stock documents.
Foreign securities may be subject to greater fluctuations in price than U.S.
securities. The markets on which foreign securities trade may also have less
volume and liquidity. Securities acquired by the Fund outside the U.S. and that
are publicly traded in the U.S. or on a foreign securities exchange or in a
foreign securities market will not be considered illiquid so long as the Fund
acquires and holds the security with the intention of reselling the security in
the foreign trading market, the Fund reasonably believes it can readily dispose
of the security for cash in the U.S. or foreign market, and current market
quotations are readily available.
You should carefully consider the substantial risks involved in investing in
securities of foreign issuers - risks that are often heightened for investments
in developing markets. For example, the small size, inexperience and limited
volume of trading on securities markets in certain developing countries may make
the Fund's investments in developing countries illiquid and more volatile than
investments in more developed countries, and the Fund may be required to
establish special custody or other arrangements before making certain
investments in these countries. The laws of some foreign countries may also
limit the ability of the Fund to invest in securities of certain issuers located
in those countries.
OPTIONS. The purchase and sale of stock options and stock index options,
including the writing of covered call options, involve risks different from
those involved with direct investments in securities. A liquid secondary market
for any particular option may not be available when a position is sought to be
closed and the inability to close a position may have an adverse impact on the
Fund's ability to effectively hedge securities. In addition, there may be an
imperfect correlation between movements in the securities on which an option
contract is based and movements in the securities in the Fund's portfolio.
Successful use of option contracts is further dependent on Advisory Services'
ability to correctly predict movements in the securities markets, but no
assurance can be given that Advisory Services' judgment will be correct.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. Mortgage-backed and asset-backed
securities are often subject to more rapid repayment than their stated maturity
dates would indicate because of the pass-through of prepayments of principal on
the underlying loans. During periods of declining interest rates, prepayment of
loans underlying mortgage-backed and asset-backed securities can be expected to
accelerate, and thus impair the Fund's ability to reinvest the returns of
principal at comparable yields. Accordingly, the market value of these
securities will vary with changes in market interest rates generally and in
yield differentials among various kinds of U.S. government securities and other
mortgage-backed and asset-backed securities. Asset-backed securities present
certain additional risks that are not presented by mortgage-backed securities
because asset-backed securities generally do not have the benefit of a security
interest in collateral that is comparable to mortgage assets. There is the
possibility that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities.
SMALL COMPANIES. The Fund may invest in companies that have relatively small
revenues, limited product lines, and a small share of the market for their
products or services. Small companies may lack depth of management, the ability
to internally generate funds necessary for growth or potential development, or
the ability to generate funds through external financing on favorable terms.
They may also attempt to develop or market new products or services for which
markets are not yet established and may never become established. Due to these
and other factors, small companies may suffer significant losses, as well as
realize substantial growth.
Historically, small capitalization stocks have been more volatile in price than
larger capitalization stocks. Among the reasons for the greater price volatility
of these securities are the less certain growth prospects of smaller firms, the
lower degree of liquidity in the markets for these stocks, and the greater
sensitivity of small companies to changing economic conditions. Besides
exhibiting greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks. Small company stocks may decline in
price as large company stocks rise, or rise in price as large company stocks
decline. You should therefore expect that the shares of a fund that invests a
substantial portion of its net assets in small company stocks to be more
volatile than the shares of a fund that invests solely in larger capitalization
stocks.
HIGH YIELDING, FIXED-INCOME SECURITIES. Because of the Fund's policy of
investing in higher yielding, higher risk securities, an investment in the Fund
is accompanied by a higher degree of risk than is present with an investment in
higher rated, lower yielding securities. Accordingly, an investment in the Fund
should not be considered a complete investment program and should be carefully
evaluated for its appropriateness in light of your overall investment needs and
goals. If you are on a fixed income or retired, you should also consider the
increased risk of loss to principal that 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 securities rated BBB by S&P or Baa by Moody's, ratings which
are considered investment grade, possess some speculative characteristics.
Issuers of high yielding, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with acquiring the securities of these issuers is generally
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of high yielding securities may experience financial stress.
During these periods, these issuers may not have sufficient cash flow to meet
their interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific developments affecting
the issuer, the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss due
to default by the issuer may be significantly greater for the holders of high
yielding securities because the securities are generally unsecured and are often
subordinated to other creditors of the issuer. Current prices for defaulted
bonds are generally significantly lower than their purchase price, and the Fund
may have unrealized losses on defaulted securities that are reflected in the
price of the Fund's shares. In general, securities that default lose much of
their value in the time period before the actual default so that the Fund's net
assets are impacted before the default. The Fund may retain an issue that has
defaulted because the issue may present an opportunity for subsequent price
recovery.
High yielding, fixed-income securities frequently have call or buy-back features
that permit an issuer to call or repurchase the securities from the Fund.
Although these 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, Advisory Services may find it necessary to
replace the securities with lower yielding securities, which could result in
less net investment income to the Fund.
The Fund may have difficulty disposing of certain high yielding securities
because there may be a thin trading market for a particular security at any
given time. The market for lower rated, fixed-income securities generally tends
to be concentrated among a smaller number of dealers than is the case for
securities that trade in a broader secondary retail market. Reduced liquidity in
the secondary market may have an adverse impact on market price and the Fund's
ability to dispose of particular issues, when necessary, to meet the Fund's
liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of the issuer. Reduced liquidity in the
secondary market for certain securities may also make it more difficult for the
Fund to obtain market quotations based on actual trades for purposes of valuing
the Fund's portfolio. Current values for these high yield issues are obtained
from pricing services and/or a limited number of dealers and may be based upon
factors other than actual sales. For more information, please see "How are Fund
Shares Valued?" in the SAI.
The Fund is authorized to acquire high yielding, fixed-income securities that
are sold without registration under the federal securities laws and therefore
carry restrictions on resale. The Fund may acquire high yielding, fixed-income
securities during an initial underwriting. These securities involve special
risks because they are new issues. The Fund has no arrangement with its
underwriter or any other person concerning the acquisition of these securities.
ZERO COUPON SECURITIES AND PAY-IN-KIND BONDS. The credit risk factors pertaining
to lower rated securities also apply to lower rated zero coupon, deferred
interest and pay-in-kind bonds. These bonds carry an additional risk in that,
unlike bonds that pay interest throughout the period to maturity, the Fund will
realize no cash until the cash payment date and, if the issuer defaults, the
Fund may obtain no return at all on its investment. Zero coupon, deferred
interest and pay-in-kind bonds involve additional special considerations. During
periods when the Fund receives no cash interest payments on its zero coupon
securities or deferred interest or pay-in-kind bonds, it may be required to
dispose of portfolio securities to meet the distribution requirements and these
sales may be subject to the risk factors discussed above. The Fund is not
limited in the amount of its assets that may be invested in these types of
securities. For more information, please see "How Taxation Affects the Fund and
its Shareholders."
INTEREST RATE, CURRENCY AND MARKET RISK. To the extent the Fund invests in debt
securities, changes in interest rates in any country where the Fund is invested
will affect the value of the Fund's portfolio and its share price. Rising
interest rates, which often occur during times of inflation or a growing
economy, are likely to have a negative effect on the value of the Fund's shares.
To the extent the Fund invests in common stocks, a general market decline in any
country where the Fund is invested, may cause the value of what the Fund owns,
and thus the Fund's share price, to decline. Changes in currency valuations may
also affect the price of Fund shares. The value of stock markets, currency
valuations and interest rates throughout the world has increased and decreased
in the past. These changes are unpredictable and may happen again in the future.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. As of July 1, 1996, Advisory Services manages the Fund's
assets and makes its investment decisions. Advisory Services also performs
similar services for other funds. It is wholly owned by Resources, a publicly
owned company engaged in the financial services industry through its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources. Together, Advisory Services and its affiliates manage
over $179 billion in assets. Advisory Services employs the same individuals to
manage the Fund's portfolio as the previous manager. The terms and conditions of
the management services provided to the Fund remain the same. Please see
"Investment Management and Other Services" and "Miscellanous Information" in the
SAI for information on securities transactions and a summary of the Fund's Code
of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of
the Fund's portfolio since its inception is:
William Lippman
President of Advisory Services
Mr. Lippman holds a master of business administration degree from New
York University and a bachelor of business administration degree from
City College New York. Mr. Lippman has been in the securities industry
for over 30 years and with the Franklin Templeton Group since 1988.
Margaret McGee
Vice President of Advisory Services
Ms. McGee holds a bachelor of arts degree in business administration from
William Paterson College. She has been in the securities industry since 1985 and
with the Franklin Templeton Group since 1988.
Bruce C. Baughman
Vice President of Advisory Services
Mr. Baughman holds a master of science degree in accounting from New York
University and a bachelor of arts degree from Stanford University. He has been
the Franklin Templeton Group since 1988.
MANAGEMENT FEES. During the fiscal year ended October 31, 1996, management fees,
before any advance waiver, totaled 0.75% of the average daily net assets of the
Fund. Under an agreement by the investment manager to waive its fees, the Fund
paid no management fees. The investment manager may end this arrangement at any
time upon notice to the Board.
The Fund pays its own operating expenses. These expenses include Advisory
Services' management fees; taxes, if any; custodian, legal and auditing fees;
the fees and expenses of Board members who are not members of, affiliated with,
or interested persons of Advisory Services; fees of any personnel not affiliated
with Advisory Services; insurance premiums; trade association dues; expenses of
obtaining quotations for calculating the Fund's Net Asset Value; and printing
and other expenses that are not expressly assumed by Advisory Services.
Under its management agreement, the Fund pays Advisory Services a management fee
equal to an annual rate of 0.75% on the first $500 million of the average daily
net assets of the Fund, 0.625% per year on the next $500 million of the average
daily net assets of the Fund, and 0.50% per year on the average daily net assets
of the Fund in excess of $1 billion. The fee is computed daily and paid monthly.
Each class pays its proportionate share of the management fee.
For the current fiscal year, Advisory Services has agreed in advance to limit
its management fees and make certain payments to reduce expenses so the Fund's
total operating expenses do not exceed 1.00% for Advisor Class. After October
31, 1997, Advisory Services may end this agreement at any time.
PORTFOLIO TRANSACTIONS. Advisory Services tries to obtain the best execution on
all transactions. If Advisory Services believes more than one broker or dealer
can provide the best execution, consistent with internal policies it may
consider research and related services and the sale of Fund shares, as well as
shares of other funds in the Franklin Templeton Group of Funds, when selecting a
broker or dealer. Please see "How does the Fund Buy Securities for its
Portfolio?" in the SAI for more information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisory Services, FT
Services provides certain administrative services and facilities for
the Fund. Please see "Investment Management and Other Services" in the
SAI for more information.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, the Advisor Class of the Fund advertises its performance. The
more commonly used measures of performance are total return, current yield and
current distribution rate.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield shows the
income per share earned by Advisor Class. The current distribution rate shows
the dividends or distributions paid to shareholders of Advisor Class. This rate
is usually computed by annualizing the dividends paid per share during a certain
period and dividing that amount by the current Net Asset Value of the class.
Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of the Advisor Class will vary. Performance figures are
always based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund has elected and 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 that you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated for tax purposes as if paid by the
Fund and received by you on December 31 of the calendar year in which they are
declared.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or a loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to such shares.
For the fiscal year ended October 31, 1996, 65.93% of the income dividends paid
(including short-term capital gain distributions) 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.
The Fund will inform you of the source of its dividends and distributions at the
time they are paid, and will promptly after the close of each calendar year
advise you of the tax status for federal income tax purposes of these dividends
and distributions.
If you are not considered a U.S. person for federal income tax purposes, you
should consult with your financial or tax advisor regarding the applicability of
U.S. withholding or other taxes on distributions received by you from the Fund
and the application of foreign tax laws to these distributions.
You should consult your tax advisor with respect to the applicability of state
and local intangible property or income taxes to your shares in the Fund and to
distributions and redemption proceeds received from the Fund.
HOW IS THE TRUST ORGANIZED?
The Fund is a non-diversified series of Franklin Value Investors Trust (the
"Trust"), an open-end management investment company, commonly called a mutual
fund. It was organized as a Massachusetts business trust on September 11, 1989,
and is registered with the SEC under the 1940 Act. As of January 1, 1997, the
Fund began offering a new class of shares designated Franklin Value Fund -
Advisor Class. All shares outstanding before the offering of Advisor Class
shares have been designated Franklin Value Fund - Class I and Franklin Value
Fund Class II. Additional series and classes of shares may be offered in the
future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state law, or (3) required to be voted on
separately by the 1940 Act. Shares of each class of a series have the same
voting and other rights and preferences as the other classes and series of the
Trust for matters that affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
removing members of the Board.
As of February 3, 1997, Donald G. Taylor and Gigo H. Lee-Taylor owned of record
and beneficially more than 25% of the outstanding shares of Advisor Class of the
Fund.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
Shares of the Fund may be purchased without a sales charge. To open your
account, contact your investment representative or complete and sign the
enclosed shareholder application and return it to the Fund with your check.
MINIMUM
INVESTMENTS*
- --------------------------------------
To Open Your Account $5,000,000
To Add to Your Account $ 25
*We waive or lower these minimums for certain investors listed below. We may
also refuse any order to buy shares. Currently, the Fund does not allow
investments by Market Timers.
To determine if you meet the minimum investment requirement, the amount of your
current purchase is added to the cost or current value, whichever is higher, of
your existing shares in the Franklin Templeton Funds. At least $1 million of
this amount, however, must be invested in Advisor Class or Class Z shares of any
of the Franklin Templeton Funds.
The Fund's minimum initial investment requirement will not apply to purchases
by:
1. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
2. Qualified registered investment advisors or certified financial planners
who have clients invested in the Franklin Mutual Series Fund Inc. on
October 31, 1996, or who buy through a broker-dealer or service agent who
has entered into an agreement with Distributors
3. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group and their immediate family
members, subject to a $100 minimum investment requirement
4. Accounts managed by the Franklin Templeton Group
5. The Franklin Templeton Profit Sharing 401(k) Plan
6. Each series of the Franklin Templeton Fund Allocator Series, subject to a
$1,000 minimum initial and subsequent investment requirement
7. Employer stock, bonus, pension or profit sharing plans that meet the
requirements for qualification under Section 401 of the Code, including
salary reduction plans qualified under Section 401(k) of the Code, and that
(i) are sponsored by an employer with at least 5,000 employees, or (ii)
have plan assets of $50 million or more
8. Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a fiduciary,
agency, advisory, custodial or similar capacity and over which the trust
companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion
9. Defined benefit plans or governments, municipalities, and tax-exempt
entities that meet the requirements for qualification under Section 501 of
the Code, subject to a $1 million initial investment in Advisor Class
shares
10. Any other investor, including a private investment vehicle such as a family
trust or foundation, who is a member of a qualified group, if the group as a
whole meets the $5 million minimum investment requirement. A qualified group
is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group
members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission
of investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
If you currently own Class I shares of the Fund and you qualify to buy Advisor
Class shares, you may invest your existing Class I shares into the Fund's
Advisor Class by June 30, 1997. If you would like to do this, please send us
written instructions. Generally, for federal income tax purposes, there will be
no recognition of gain or loss on this transaction. You may want to consult with
your tax advisor to determine the effect of this transaction, if any, on state
income taxes.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
PAYMENTS TO SECURITIES DEALERS
Securities Dealers who initiate and are responsible for purchases of Advisor
Class shares may receive up to 0.25% of the purchase price. The payment is
subject to the sole discretion of Distributors, and is paid by Distributors or
one of its affiliates and not by the Fund or its shareholders.
For information on additional compensation payable to Securities Dealers in
connection with the sale of Fund shares, please see "How Do I Buy, Sell and
Exchange Shares? - Other Payments to Securities Dealers" in the SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and some do not offer Advisor
Class shares.
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------
BY MAIL 1. Send us written instructions signed by all account
owners
2. Include any outstanding share certificates for the
shares you're exchanging
- ------------------------------------------------------------------------
BY PHONE Call Shareholder Services
If you do not want the
ability to exchange by phone to apply to your account,
please let us know.
- ------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however,
exchange shares from a Fund account requiring two or more signatures
into an identically registered money fund account requiring only one
signature for all transactions. PLEASE NOTIFY US IN WRITING IF YOU DO
NOT WANT THIS OPTION TO BE AVAILABLE ON YOUR ACCOUNT. ADDITIONAL
PROCEDURES MAY APPLY. Please see "Transaction Procedures and Special
Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
If you want to exchange into a fund that does not currently offer an Advisor
Class, you may exchange your Advisor Class shares for Class I shares of that
fund at Net Asset Value. If you do not qualify to buy Advisor Class shares of
Templeton Developing Markets Trust, Templeton Foreign Fund or Templeton Growth
Fund, you may exchange the Advisor Class shares you own for Class I shares of
those funds or of Templeton Institutional Funds, Inc. at Net Asset Value. If you
do so and you later decide you would like to exchange into a fund that offers
an Advisor Class, you may exchange your Class I shares for Advisor Class shares
of that fund. You may also exchange your Advisor Class shares for Class Z
shares of Franklin Mutual Series Fund Inc.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------
BY MAIL 1. Send us written instructions signed by all account
owners
2. Include any outstanding share certificates for the
shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to
send additional documents. Accounts under court
jurisdiction may have other requirements.
- ------------------------------------------------------------------------
BY PHONE
(Only available if you have completed and sent to us the telephone redemption
agreement included with this prospectus)
Call Shareholder Services
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional
accounts may exceed $50,000 by completing a separate
agreement. Call Institutional Services to receive a
copy.
o If there are no share certificates issued for the shares you
want to sell or you have already returned them to the Fund
o Unless you are selling shares in a Trust Company
retirement plan account
o Unless the address on your account was changed by
phone within the last 30 days
- ------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------
Beginning on or about May 1, 1997, you will automatically be able to redeem
shares by telephone without completing a telephone redemption agreement. PLEASE
NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON YOUR
ACCOUNT. If you later decide you would like this option, send us written
instructions signed by all account owners, with a written signature guarantee.
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income quarterly, payable in
March, June, September and December, to shareholders of record on the first
business day before the 15th of that month and pays them on or about the last
day of the month. Capital gains, if any, may be distributed annually, usually in
December.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the
same class of the Fund by reinvesting capital gain distributions, or both
dividend and capital gain distributions. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton
Fund. You may also direct your distributions to buy Class I shares of another
Franklin Templeton Fund. Many shareholders find this a convenient way to
diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to
another person or to a checking account, you may need a signature guarantee.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. For Trust Company retirement plans, special forms are required to
receive distributions in cash. You may change your distribution option at any
time by notifying us by mail or phone. Please allow at least seven days before
the record date for us to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the scheduled close of the NYSE, generally 1:00 p.m.
Pacific time. You can find the prior day's closing Net Asset Value in many
newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
THE PRICE WE USE WHEN YOU BUY OR SELL SHARES
You buy and sell Advisor Class shares at the Net Asset Value per share. We
calculate it to two decimal places using standard rounding criteria. The Net
Asset Value we use when you buy or sell shares is the one next calculated after
we receive your transaction request in proper form. If you buy or sell shares
through your Securities Dealer, however, we will use the Net Asset Value next
calculated after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the
registered owners,
3) The proceeds are not being sent to the address of record,
preauthorized bank account, or preauthorized brokerage firm
account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against
potential claims based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. YOU SHOULD
VERIFY THAT THE INSTITUTION IS AN ELIGIBLE GUARANTOR BEFORE SIGNING. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We will also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by telephone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust, only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- ------------------------------------------------------------------------
CORPORATION Corporate Resolution
- ------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
- ------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- ------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
ELECTRONIC INSTRUCTIONS. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We will accept electronic instructions directly from your dealer
or representative without further inquiry. Electronic instructions may be
processed through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $1250. We will only do
this if the value of your account fell below this amount because you voluntarily
sold your shares and your account has been inactive (except for the reinvestment
of distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $2,500.
These minimums do not apply if you fall within categories 4, 5, 6 or 7 under
"How Do I Buy Shares? - Opening Your Account."
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the shareholder application included with this
prospectus or contact your investment representative. The market value of the
Fund's shares may fluctuate and a systematic investment plan such as this will
not assure a profit or protect against a loss. You may discontinue the program
at any time by notifying Investor Services by mail or phone.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund
may be available to institutional accounts. Institutional investors may
also be required to complete an institutional account application. For
more information, call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund and Distributors are also located at this address. Advisory Services is
located at One Parker Plaza, Sixteenth Floor, Fort Lee, New Jersey 07024. You
may also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.(Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1933 ACT - Securities Act of 1933, as amended
1940 ACT - Investment Company Act of 1940, as amended
ADVISORY SERVICES - Franklin Advisory Services, Inc., the Fund's
investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's
principal underwriter. The SAI lists the officers and Board members who
are affiliated with Distributors. See "Officers and Trustees."
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the
Franklin Group of Funds(R) and the Templeton Group of Funds except
Franklin Valuemark Funds, Franklin Government Securities Trust,
Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
MARKET TIMERS - 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.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an
affiliate of Distributors and both are wholly owned subsidiaries of
Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FRANKLIN
BALANCE SHEET
INVESTMENT FUND
FRANKLIN VALUE INVESTORS TRUST
STATEMENT OF
ADDITIONAL INFORMATION
MARCH 1, 1997
777 Mariners Island Blvd., P.O. Box 7777
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............................ 6
Officers and Trustees.............................. 7
Investment Management
and Other Services................................ 9
How does the Fund Buy Securities
for its Portfolio?................................ 10
How Do I Buy, Sell and Exchange Shares? ........... 12
How are Fund Shares Valued?........................ 15
Additional Information on
Distributions and Taxes........................... 15
The Fund's Underwriter............................. 17
How does the Fund Measure Performance? ............ 18
Miscellaneous Information.......................... 21
Financial Statements............................... 22
Useful Terms and Definitions....................... 22
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
The 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 seeks
to achieve its objective by primarily investing in securities that Advisory
Services believes are undervalued in the marketplace. The Fund will also seek
income when deemed consistent with its objective.
The Prospectus, dated March 1, 1997, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN or write the Fund at the address shown.
THIS 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 PROSPECTUS.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How does the Fund Invest its Assets?"
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.
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 NYSE, 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 S&P and 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 Advisory Services, 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 the 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 Advisory Services 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 the 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, Advisory Services 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 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 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 the 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 the instructions, or vote the shares held by it in the
same proportion as the vote of all other holders of the 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 this "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, 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 that 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 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
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 this information and the market value of the Depositary Receipts.
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 this
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.
NON-DIVERSIFICATION. 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.
WHAT ARE THE FUND'S POTENTIAL RISKS?
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.
HIGH YIELDING, Fixed-Income Securities. The premature disposition of a high
yielding security due to a call or buy-back feature, the deterioration of the
issuer's creditworthiness, or a default may make it more difficult for the Fund
to manage the timing of its receipt of income, which may have tax implications.
The Fund may be required under the Code and U.S. Treasury regulations to accrue
income for income tax purposes on defaulted obligations and to distribute such
income to the Fund's shareholders even though the Fund is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy any or all of these distribution requirements, the Fund
may be required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares.
Generally, purchasers of high yielding securities are dealers and other
institutional buyers, rather than individuals. To the extent the secondary
trading market for a particular high yielding, fixed-income security does exist,
it is generally not as liquid as the secondary market for higher-rated
securities.
While many high yielding securities have been sold with registration rights,
covenants and penalty provisions for delayed registration, if the Fund is
required to sell such restricted securities before the securities have been
registered, it may be deemed an underwriter of such securities under the
Securities Act of 1933, as amended ("1933 Act"), which entails special
responsibilities and liabilities. The Fund may incur special costs in disposing
of such securities; however, the Fund will generally incur no costs when the
issuer is responsible for registering the securities.
The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yielding securities and adversely affected the
value of outstanding securities and the ability of issuers of such securities to
meet their obligations. Although the economy has improved considerably and high
yielding securities have performed more consistently since that time, there is
no assurance that the adverse effects previously experienced will not recur. For
example, the highly publicized defaults of some high yield issuers during 1989
and 1990 and concerns regarding a sluggish economy which continued into 1993,
depressed the prices for many of these securities. While market prices may still
be temporarily somewhat depressed due to these factors, the ultimate price of
any security will generally reflect the true operating results of the issuer.
Factors adversely impacting the market value of high yielding securities owned
by the Fund will adversely impact the Fund's Net Asset Value. In addition, the
Fund may incur additional expenses to the extent it is required to seek recovery
upon a default in the payment of principal or interest on its portfolio
holdings. The Fund will rely on Advisory Services' judgment, analysis and
experience in evaluating the creditworthiness of an issuer. In this evaluation,
Advisory Services 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. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval 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, whichever is less. 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 SEC and the Board, 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 met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
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 has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
Positions and Offices Principal Occupations During
Name, Age and Address with the Trust Past Five Years
Frank T. Crohn (72) Trustee
7251 West Palmetto Park Road
Boca Raton, FL 33433
Chairman, Financial Benefit Life Insurance Company; Director, Unity Mutual Life
Insurance Company and AmVestors Financial Corporation; and trustee of three of
the investment companies in the Franklin Templeton Group of Funds.
*William J. Lippman (72) President
One Parker Plaza and Trustee
Fort Lee, NJ 07024
Senior Vice President, Franklin Resources, Inc. and Franklin Management, Inc.;
President and Director, Franklin Advisory Services, Inc. and officer and/or
director or trustee of seven of the investment companies in the Franklin
Templeton Group of Funds.
Charles Rubens II (66) Trustee
18 Park Road
Scarsdale, NY 10583
Private investor; and trustee of four of the investment companies in the
Franklin Templeton Group of Funds.
Leonard Rubin (71) Trustee
2 Executive Drive
Suite 560
Fort Lee, New Jersey 07024
Partner in LDR Equities, LLC (manages various personal investments); Vice
President, Trimtex Co., Inc. (manufactures and markets specialty fabrics); and
trustee of four of the investment companies in the Franklin Templeton Group of
Funds.
Harmon E. Burns (52) 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. and Franklin Templeton
Services, Inc.; Director, Franklin/Templeton Investor Services, Inc.; officer
and/or director, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc.; and officer and/or director or trustee of 61 of the
investment companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (36) 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.; President, Franklin Templeton Services, 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.; Treasurer, Franklin
Advisory Services, Inc. and Franklin Investment Advisory Services, Inc.; officer
of most of the other subsidiaries of Franklin Resources, Inc.; and officer,
director and/or trustee of 61 of the investment companies in the Franklin
Templeton Group of Funds.
Deborah R. Gatzek (48) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc., and officer of 61
of the investment companies in the Franklin Templeton Group of Funds.
Rupert H. Johnson, Jr. (56) 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.; Senior Vice President and Director, Franklin
Advisory Services, Inc. and Franklin Investment
Advisory Services, Inc.; Director, Franklin/Templeton Investor Services, Inc.;
and officer and/or director, trustee or managing general partner, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of 61
of the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (58) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 38 of the investment
companies in the Franklin Templeton Group of Funds.
Edward V. McVey (59) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 33 of the investment companies in the Franklin Templeton
Group of Funds.
R. Martin Wiskemann (70) 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 officer and/or director, as the case
may be, of 21 of the investment companies in the Franklin Templeton Group of
Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisory Services. Nonaffiliated members of the Board are
currently paid $1,800 per quarter plus $600 per meeting attended. As shown
above, some of the nonaffiliated Board members also serve as directors, trustees
or managing general partners of other investment companies in the Franklin
Templeton Group of Funds. They may receive fees from these funds for their
services. The following table provides the total fees paid to nonaffiliated
Board members by the Trust and by other funds in the Franklin Templeton Group of
Funds.
NUMBER OF
TOTAL FEES BOARDS IN THE
TOTAL FEE RECEIVED FROMTHE FRANKLIN TEMPLETON
RECEIVED FRANKLIN TEMPLETO GROUP OF FUNDS ON
NAME FROM THE TRUST* GROUP OF FUNDS** WHICH EACH SERVES***
Frank T. Crohn........... $6,300 $18,600 3
Charles Rubens II........ 6,900 20,100 4
Leonard Rubin............ 6,900 24,600 4
*For the fiscal year ended October 31, 1996.
**For the calendar year ended December 31, 1996.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 62 registered investment companies, with approximately 171 U.S. based
funds or series.
Nonaffiliated members of the Board 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 Board member received any other
compensation, including pension or retirement benefits, directly or indirectly
from the Fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in the
fees paid to its subsidiaries.
As of February 3, 1997, the officers and Board members, as a group, owned of
record and beneficially approximately 63,149 shares, or less than 1% of the
Fund's total outstanding shares. Many of the Board members also own shares in
other funds in the Franklin Templeton Group of Funds.
INVESTMENT MANAGEMENT
AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
Advisory Services. Advisory Services provides investment research and portfolio
management services, including the selection of securities for the Fund to buy,
hold or sell and the selection of brokers through whom the Fund's portfolio
transactions are executed. Advisory Services' activities are subject to the
review and supervision of the Board to whom Advisory Services renders periodic
reports of the Fund's investment activities. Advisory Services is covered by
fidelity insurance on its officers, directors and employees for the protection
of the Fund.
Advisory Services and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisory Services may give advice and take
action with respect to any of the other funds it manages, or for its own
account, that may differ from action taken by Advisory Services on behalf of the
Fund. Similarly, with respect to the Fund, Advisory Services is not obligated to
recommend, buy or sell, or to refrain from recommending, buying or selling any
security that Advisory Services and access persons, as defined by the 1940 Act,
may buy or sell for its or their own account or for the accounts of any other
fund. Advisory Services is not obligated to refrain from investing in securities
held by the Fund or other funds that it manages. Of course, any transactions for
the accounts of Advisory Services and other access persons will be made in
compliance with the Fund's Code of Ethics. Please see "Miscellaneous Information
- - Summary of Code of Ethics."
MANAGEMENT FEES. Under its management agreement, the Fund pays Advisory Services
a management fee equal to 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 fee is computed at the close of business on the
last business day of each month.
For the fiscal year ended October 31, 1994, management fees, before any advance
waiver, totaled $111,747. Under an agreement by the investment manager to waive
its fees, the Fund paid no management fees. For the fiscal years ended October
31, 1995 and 1996, management fees totaling $1,325,910 and $2,785,163,
respectively, were paid to the investment manager.
MANAGEMENT AGREEMENT. The management agreement is in effect until March 31,
1997. It may continue in effect for successive annual periods if 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 Board members who are not parties to the
management agreement or interested persons of any such party (other than as
members of the Board), 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 Advisory Services on 30 days' written notice, and will
automatically terminate in the event of its assignment, as defined in the 1940
Act.
ADMINISTRATIVE SERVICES. Under an agreement with Advisory Services, FT Services
provides certain administrative services and facilities for the Fund. These
include preparing and maintaining books, records, and tax and financial reports,
and monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under its administration agreement, Advisory Services pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
The fee is paid by Advisory Services. It is not a separate expense of the Fund.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the Fund's shareholder servicing agent 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.
CUSTODIANS. 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.
AUDITORS. 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, 1996, their auditing services consisted of rendering an opinion on the
financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended October 31, 1996.
HOW DOES THE FUND BUY
SECURITIES FOR ITS PORTFOLIO?
Advisory Services selects brokers and dealers to execute transactions in the
Fund's portfolio is made by Advisory Services in accordance with criteria set
forth in the management agreement and any directions that the Board may give.
When placing a portfolio transaction, Advisory Services seeks to obtain prompt
execution of orders at the most favorable net price. When portfolio transactions
are done on a securities exchange, the amount of commission paid by the Fund is
negotiated between Advisory Services and the broker executing the transaction.
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 the transactions. These opinions are based on the experience of
these individuals in the securities industry and information available to them
about the level of commissions being paid by other institutional investors of
comparable size. Advisory Services will ordinarily place orders to buy and sell
over-the-counter securities on a principal rather than agency basis with a
principal market maker unless, in the opinion of Advisory Services, 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.
Advisory Services may pay certain brokers commissions that are higher than those
another broker may charge, if Advisory Services determines in good faith that
the amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or Advisory Services' overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to Advisory Services include, among others, supplying
information about particular companies, markets, countries, or local, regional,
national or transnational economies, statistical data, quotations and other
securities pricing information, and other information that provides lawful and
appropriate assistance to Advisory Services in carrying out its investment
advisory responsibilities. These services may not always directly benefit the
Fund. They must, however, be of value to Advisory Services in carrying out its
overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services Advisory Services receives from dealers effecting transactions
in portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisory Services to supplement its own
research and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, Advisory Services and its affiliates may use
this research and data in their investment advisory capacities with other
clients. If the Fund's officers are satisfied that the best execution is
obtained, consistent with internal policies the sale of Fund shares, as well as
shares of other funds in the Franklin Templeton Group of Funds, may also be
considered a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive 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 Advisory Services will be reduced by the amount of any fees
received by Distributors in cash, less any costs and expenses incurred in
connection with the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisory Services are considered at or about
the same time, transactions in these securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all by
Advisory Services, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. In some cases this procedure could
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 fiscal years ended October 31, 1994, 1995 and 1996, the Fund paid
brokerage commissions totaling $922,550, $851,495 and $968,118, respectively.
As of October 31, 1996, the Fund owned securities issued by Lehman Brothers,
Inc. valued in the aggregate at $5,025,000. Except as noted, the Fund did not
own any securities issued by its regular broker-dealers as of the end of the
fiscal year.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities Dealers may at times receive the entire
sales charge. A Securities Dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - Quantity
Discounts" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.
Shares of the Fund may be offered to investors in Taiwan through securities
advisory firms known locally as Securities Investment Consulting
Enterprises.
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors may 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
to $2 million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on
sales over $3 million to $50 million, plus 0.25% on sales over $50 million to
$100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases by certain retirement plans pursuant to a sales charge waiver, as
discussed in the Prospectus: 1% on sales of $500,000 to $2 million, plus 0.80%
on sales over $2 million to $3 million, plus 0.50% on sales over $3 million to
$50 million, plus 0.25% on sales over $50 million to $100 million, plus 0.15% on
sales over $100 million. Distributors may make these payments in the form of
contingent advance payments, which may be recovered from the Securities Dealer
or set off against other payments due to the dealer if shares are sold within 12
months of the calendar month of purchase. Other conditions may apply. All terms
and conditions may be imposed by an agreement between Distributors, or one of
its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy Fund
shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
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 on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds 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 during the 13
month period, except in the case of certain retirement plans, 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
on the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute a
Letter before a change in the sales charge structure of the Fund, you may
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
until you fulfill the Letter. This policy of reserving shares does not apply to
certain retirement plans. If 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 total purchases, less
redemptions, exceed the amount specified under the Letter and is an amount that
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 the purchases had been made at a single
time. Upon 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
before 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 certain retirement plans, 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.
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 and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. 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 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
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 Board reserves 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 these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell 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.
SPECIAL SERVICES. The Franklin Templeton Institutional Services Department
providesspecialized services, including recordkeeping, for institutional
investors. 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 that the Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the scheduled close of the
NYSE, generally 1:00 p.m. Pacific time, each day that the NYSE is open for
trading. As of the date of this SAI, the Fund is informed that the NYSE 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 that 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 Advisory Services.
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 before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the scheduled close of trading
on the NYSE, if that is earlier. The 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 that affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and the
close of the exchange and will, therefore, not be reflected in the computation
of the Fund's Net Asset Value. If events materially affecting the values of
these foreign securities occur during this period, the 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 before
the scheduled close of the NYSE. 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 these securities may occur between
the times at which they are determined and the scheduled close of the NYSE that
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 this
period, the securities will be valued at their fair value as determined in good
faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
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 capital loss carryforward) may generally be
made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the 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.
TAXES
As stated in the Prospectus, the Fund has elected and qualified to be treated as
a regulated investment company under Subchapter M of the Code. The Board
reserves the right not to maintain the qualification of the Fund as a regulated
investment company if it determines this course of action to be beneficial to
shareholders. In that case, the Fund will be subject to federal and possibly
state corporate taxes on its taxable income and gains, and distributions to
shareholders will be taxable to the extent of the Fund's available earnings and
profits.
Subject to the limitations discussed below, all or a portion of the income
distributions paid by the Fund may be treated by corporate shareholders as
qualifying dividends for purposes of the dividends received deduction under
federal income tax law. If the aggregate qualifying dividends received by the
Fund (generally, dividends from U.S. domestic corporations, the stock in which
is not debt-financed by the Fund and is held for at least a minimum holding
period) is less than 100% of its distributable income, then the amount of the
Fund's dividends paid to corporate shareholders which may be designated as
eligible for such deduction will not exceed the aggregate qualifying dividends
received by the Fund for the taxable year. The amount or percentage of income
qualifying for the corporate dividends-received deduction will be provided by
the Fund annually in the Fund's fiscal year end annual report.
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. 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 your hands, gain or loss will be capital gain or loss and will
be long-term for federal income tax purposes if the shares have been held for
more than one year.
All or a portion of 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.
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 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.
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, 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 if
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 Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), 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.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal years ended October 31, 1994, 1995 and 1996, were
$953,869, $1,801,511 and $1,640,279, respectively. After allowances to dealers,
Distributors retained $31,319, $0 and $346 in net underwriting discounts and
commissions for the respective years. Distributors received $15,125 in
connection with redemptions or repurchases of shares for the fiscal year ended
October 31, 1996. Distributors may be entitled to reimbursement under the Fund's
Rule 12b-1 plan, as discussed below. Except as noted, Distributors received no
other compensation from the Fund for acting as underwriter.
THE RULE 12B-1 PLAN
The Fund has adopted a distribution plan or "Rule 12b-1 plan" pursuant to Rule
12b-1 of the 1940 Act. Under the plan, the Fund may pay up to a maximum of 0.50%
per year of its average daily net assets, payable quarterly, for expenses,
including service fees, incurred in the promotion and distribution of its
shares.
In addition to the payments that Distributors or others are entitled to under
the plan, the plan also provides that to the extent the Fund, Advisory Services
or Distributors or other parties on behalf of the Fund, Advisory Services or
Distributors make payments that are deemed to be 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 under the rules of the NASD.
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. These 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 these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this 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 renewable annually by a vote of the Board, including a majority vote of
the Board members who are not 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 Board members be done by the non-interested
members of the Board. The plan and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members 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 Advisory Services or the underwriting agreement with
Distributors, or by vote of a majority of the Fund's outstanding shares.
Distributors or any dealer or other firm may also terminate their respective
distribution or service agreement at any time upon written notice.
The plan and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the Fund's outstanding shares, and all material amendments to the plan or any
related agreements shall be approved by a vote of the non-interested members of
the Board, 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, 1996, Distributors had eligible
expenditures of $2,799,081 for advertising, printing, and payments to
underwriters and broker-dealers pursuant to the plan, of which the Fund paid
Distributors $2,479,186.
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. 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.
Average annual total return and current yield quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the Fund to compute or express performance follows. Regardless of the method
used, past performance does not guarantee future results, and is an indication
of the return to shareholders only for the limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual 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, and income dividends and capital gain distributions 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 to 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 total return for the indicated periods ended October
31, 1996, was as follows:
One Year............................... 15.18%
Five Year.............................. 18.08%
From inception (April 2, 1990)......... 15.02%
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)
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at Net Asset Value. Cumulative total return, however, 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 cumulative total return for the indicated periods ended October 31, 1996,
was as follows:
One Year..................... 15.18%
Five Year.................... 129.52%
From inception (April 2, 1990) 151.22%
Yield
CURRENT YIELD. Current yield shows the income per share earned by the Fund. It
is calculated 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, 1996, was 1.39%.
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
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 usually computed by
annualizing the dividends paid per share during a certain period and dividing
that amount by the current maximum Offering Price. 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. The Fund's current distribution rate for the 30-day
period ended October 31, 1996, was 1.49%.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance 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
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative 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.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin 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 about 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. These
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 NYSE.
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 mutual 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.
o) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk adjusted performance of a fund over specified
time periods relative to other funds within its category.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the Fund's performance to the
return on CDs 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 CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, if any, as well as the value of its shares that 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. CDs 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 these other averages.
MISCELLANEOUS INFORMATION
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
other long-term goals. The Franklin College Costs Planner may help 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 these goals will be met.
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 49 years and
now services more than 2.6 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. Mutual Series Fund Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $179 billion in
assets under management for more than 4.9 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 120
U.S. based open-end investment companies to the public. 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 eight years.
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.
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.
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, before 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 IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group 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.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended October 31, 1996, including the
auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISORY SERVICES - Franklin Advisory Services, Inc., the Fund's investment
manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - Certain funds in the Franklin Templeton Funds offer two
classes of shares, designated "Class I" and "Class II." The two classes have
proportionate interests in the same portfolio of investment securities. They
differ, however, primarily in their sales charge structures and Rule 12b-1
plans. Because the Fund's sales charge structure and Rule 12b-1 plan are similar
to those of Class I shares, shares of the Fund are considered Class I shares for
redemption, exchange and other purposes.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the 1.50% sales charge.
PROSPECTUS - The prospectus for the Fund dated March 1, 1997, as may be amended
from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
FRANKLIN
MICROCAP
VALUE FUND
FRANKLIN VALUE INVESTORS TRUST
STATEMENT OF
ADDITIONAL INFORMATION
MARCH 1, 1997
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
How does the Fund Invest its Assets?..................... 2
What are the Fund's Potential Risks?..................... 4
Investment Restrictions.................................. 5
Officers and Trustees.................................... 6
Investment Management
and Other Services...................................... 9
How does the Fund Buy
Securities for its Portfolio?........................... 9
How Do I Buy, Sell and Exchange Shares?.................. 10
How are Fund Shares Valued? ............................. 13
Additional Information on
Distributions and Taxes................................. 14
The Fund's Underwriter................................... 17
How does the Fund
Measure Performance?.................................... 18
Miscellaneous Information ............................... 20
Financial Statements..................................... 21
Useful Terms and Definitions ............................ 21
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
The MicroCap Value 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 seeks to achieve its objective
by investing at least 65% of its total assets in securities of companies with
market capitalization under $100 million at the time of purchase and which the
Fund's investment manager believes possess intrinsic values in excess of the
current market price of such securities.
The Prospectus, dated March 1, 1997, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN or write the Fund at the address shown.
THIS 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 PROSPECTUS.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How does the Fund Invest its Assets?"
The Fund's emphasis on securities believed to be undervalued by the market uses
a technique followed by certain very wealthy investors and a number of private
partnerships with very high minimum investments. It requires not only the
resources to undertake exhaustive research of little followed, out-of-favor
securities, but also the patience and discipline to hold these investments until
their intrinsic values are ultimately recognized by others in the marketplace.
There can be no assurance that this technique will be successful for the Fund or
that the Fund will achieve its investment objective.
AMERICAN DEPOSITARY RECEIPTS. The Fund may purchase sponsored or unsponsored
American Depositary Receipts ("ADRs"), which are certificates issued by U.S.
banks representing the right to receive securities of a foreign issuer deposited
with that bank or a correspondent bank. A sponsored ADR is an ADR where
establishment of the issuing facility is brought about by the participation of
the issuer and the depositary institution pursuant to a deposit agreement that
sets out the rights and responsibilities of the issuer, the depositary and the
ADR holder. Under the terms of most sponsored arrangements, depositaries agree
to distribute notices of shareholder meetings and voting instructions, thereby
ensuring that ADR holders will be able to exercise voting rights through the
depositary with respect to the deposited securities.
An unsponsored ADR has no sponsorship by the issuing facility and more than one
depositary institution may be involved in its issuance. An unsponsored ADR
typically clears through a depositary, such as the Depository Trust Company, and
therefore, there should be no additional delays in selling the security or in
obtaining dividends. Although not required, the depositary normally requests a
letter of non-objection from the issuer and is not required to distribute
notices of shareholder's meetings or financial information to the holder.
SHORT-SELLING. In a short sale, the Fund sells a security it does not own in
anticipation of a decline in the market value of that security. The security
sold must be listed on a national exchange. To complete the transaction, the
Fund must borrow the security to make delivery to the buyer. The Fund is then
obligated to replace the security borrowed by buying it at the market price at
the time of replacement. Until the security is replaced, the Fund must pay the
lender any dividends or interest that accrue during the period of the loan. To
borrow the security, the Fund may also be required to pay a premium, which would
increase the cost of the security sold. The proceeds of the short sale will be
retained by the broker, to the extent necessary to meet margin requirements,
until the short position is closed out.
The Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security and will realize a gain if the security
declines in price between those same dates. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of any premium,
dividends or interest the Fund is required to pay in connection with the short
sale.
No securities will be sold short if, after the sale, the total market value of
all the Fund's open short positions would exceed 25% of the value of the Fund's
net assets. In addition, short sales of the securities of any one issuer may not
exceed the lesser of 2% of the Fund's net assets or 2% of the securities of any
class of the issuer.
The Fund will place in a segregated account with its custodian bank an amount of
cash or U.S. government securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short and
(b) any cash or U.S. government securities required to be deposited as
collateral with the broker in connection with the short sale (not including the
proceeds from the short sale). The segregated account will be marked-to-market
daily and at no time will the amount deposited in the segregated account and
with the broker as collateral be less than the market value of the securities at
the time they were sold short.
In addition to the short sales discussed above, the Fund may also make short
sales "against the box," which occur 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.
OPTIONS. As noted in the Prospectus, the Fund may write covered call options on
securities listed on a national securities exchange, and purchase listed call
and put options on securities and securities indices for portfolio hedging
purposes.
The writer of an option may have no control over when the underlying securities
must be sold, in the case of a call option, since the writer may be assigned an
exercise notice at any time prior to the termination of the obligation. Whether
or not an option expires unexercised, the writer retains the amount of the
premium paid by the purchaser of the option, an amount reflects, among other
things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand and interest rates. This amount may, in the case of a covered call
option, be offset by a decline in the market value of the underlying security
during the option period. If a call option is exercised, the writer experiences
a profit or loss from the sale of the underlying security.
The writer of an option that wants to terminate its obligation may effect a
"closing purchase transaction." This is done by buying an option of the same
series as the option previously written which will cancel the writer's position
by the clearing corporation. A writer may not effect a closing purchase
transaction, however, after being notified of the exercise of an option.
Likewise, an investor who is the holder of an option may liquidate its position
by effecting a "closing sale transaction." This is done by selling an option of
the same series as the option previously purchased. There is no guarantee that
either a closing purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both. In addition, effecting a
closing transaction will permit the cash or proceeds from the sale of any
securities subject to the option to be used for other Fund investments. If the
Fund desires to sell a particular security from its portfolio on which it has
written a call option, it will effect a closing transaction prior to or at the
same time as the sale of the security.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option. The Fund will realize a loss from
a closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to purchase
the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
The Fund may purchase call options on securities it intends to purchase to limit
the risk of a substantial increase in the market price of the security or on
securities indices. The Fund may also purchase call options on securities held
in its portfolio and on which it has written call options. Prior to its
expiration, a call option may be sold in a closing sale transaction. Profit or
loss from such a sale will depend on whether the amount received is more or less
than the premium paid for the call option plus any related transaction costs.
The Fund may also purchase put options on securities and securities indices and
enter into closing sale transactions with respect to such options, exercise them
or permit them to expire. The Fund may purchase a put option on an underlying
security (a "protective put") owned by the Fund as a hedging technique in order
to protect against an anticipated decline in the value of the security. Such
hedge protection is provided only during the life of the put option when the
Fund, as the holder of the put option, is able to sell the underlying security
at the put exercise price, regardless of any decline in the underlying
security's market price. For example, a put option may be purchased in order to
protect unrealized appreciation of a security when the investment manager deems
it desirable to continue to hold the security because of tax considerations. The
premium paid for the put option and any transaction costs would reduce any
capital gain otherwise available for distribution when the security is
eventually sold.
NON-DIVERSIFICATION. 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.
CONVERSION TO A MASTER/FEEDER STRUCTURE
The Fund currently invests directly in securities. Certain Franklin Templeton
Funds, however, are "feeder funds" in a master/feeder fund structure. This means
they invest their assets in a "master fund" that, in turn, invests its assets
directly in securities. The Fund's investment objective and other fundamental
policies allow it to invest either directly in securities or indirectly in
securities through a master fund. In the future, the Board may decide to convert
the Fund to a master/feeder structure. If this occurs, your purchase of Fund
shares will be considered your consent to a conversion and we will not seek
further shareholder approval. We will, however, notify you in advance of the
conversion. If the Fund converts to a master/feeder structure, its fees and
total operating expenses are not expected to increase.
WHAT ARE THE FUND'S POTENTIAL RISKS?
HIGH-YIELDING, FIXED-INCOME SECURITIES. The premature disposition of a high
yielding security due to a call or buy-back feature, the deterioration of the
issuer's creditworthiness, or a default may make it more difficult for the Fund
to manage the timing of its receipt of income, which may have tax implications.
The Fund may be required under the Code and U.S. Treasury regulations to accrue
income for income tax purposes on defaulted obligations and to distribute such
income to the Fund's shareholders even though the Fund is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy any or all of these distribution requirements, the Fund
may be required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares.
Generally, purchasers of high yielding securities are dealers and other
institutional buyers, rather than individuals. To the extent the secondary
trading market for a particular high yielding, fixed-income security does exist,
it is generally not as liquid as the secondary market for higher-rated
securities.
While many high yielding securities have been sold with registration rights,
covenants and penalty provisions for delayed registration, if the Fund is
required to sell such restricted securities before the securities have been
registered, it may be deemed an underwriter of such securities under the
Securities Act of 1933, as amended ("1933 Act"), which entails special
responsibilities and liabilities. The Fund may incur special costs in disposing
of such securities; however, the Fund will generally incur no costs when the
issuer is responsible for registering the securities.
The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yielding securities and adversely affected the
value of outstanding securities and the ability of issuers of such securities to
meet their obligations. Although the economy has improved considerably and high
yielding securities have performed more consistently since that time, there is
no assurance that the adverse effects previously experienced will not recur. For
example, the highly publicized defaults of some high yield issuers during 1989
and 1990 and concerns regarding a sluggish economy which continued into 1993,
depressed the prices for many of these securities. While market prices may still
be temporarily somewhat depressed due to these factors, the ultimate price of
any security will generally reflect the true operating results of the issuer.
Factors adversely impacting the market value of high yielding securities owned
by the Fund will adversely impact the Fund's Net Asset Value. In addition, the
Fund may incur additional expenses to the extent it is required to seek recovery
upon a default in the payment of principal or interest on its portfolio
holdings. The Fund will rely on Advisory Services' judgment, analysis and
experience in evaluating the creditworthiness of an issuer. In this evaluation,
Advisory Services 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.
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 the income to the Fund's shareholders
even though the Fund is not currently receiving interest or principal payments
on these 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.
OPTIONS. The Fund's ability to hedge effectively all or a portion of its
securities through transactions in options on securities and securities indices
depends on the degree to which price movements in the underlying indices or
securities correlate with price movements in the relevant portion of the Fund's
portfolio. Inasmuch as such securities will not duplicate the components of any
index or underlying securities, the correlation will not be perfect.
Consequently, the Fund bears the risk that the prices of the securities being
hedged will not move in the same amount as the hedging instrument. It is also
possible that there may be a negative correlation between the index or other
securities underlying the hedging instrument and the hedged securities which
would result in a loss on both the securities and the hedging instrument.
Accordingly, successful use by the Fund of options on securities and securities
indices will be subject to Advisory Services' ability to correctly predict
movements in the direction of the securities markets generally or of a
particular segment. This requires different skills and techniques than
predicting changes in the price of individual stocks.
Positions in stock index options and options on securities may be closed out
only on an exchange which provides a secondary market. There can be no assurance
that a liquid secondary market will exist for any particular option at any
specific time. Thus, it may not be possible to close such an option. The
inability to close an option position could also have an adverse impact on the
Fund's ability to effectively hedge its securities. The Fund will enter into an
option position only if there appears to be a liquid secondary market for such
option.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval 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, whichever is less. The Fund MAY NOT:
1. Invest in securities for purposes of exercising management or control of the
issuer, except that all or substantially all of the assets of the Fund may be
invested in another registered investment company having the same investment
objective and policies as the Fund.
2. Borrow money, except in the form of reverse repurchase agreements or from
banks in order to meet redemption requests or for other temporary or emergency
purposes in an amount up to 15% of the value of the Fund's total assets
(including the amount borrowed) based on the lesser of cost or market, less
liabilities (not including the amount borrowed) at the time the borrowing is
made. While borrowings exceed 5% of the Fund's total assets, the Fund will not
make any additional investments.
3. Pledge, hypothecate, mortgage or otherwise encumber its assets, except to
secure borrowings to meet redemption requests or for temporary or emergency
purposes and permissible options, short selling or other hedging transactions.
4. Purchase securities on margin or underwrite securities of other issuers,
except insofar as the Fund may be technically deemed an underwriter under the
federal securities laws in connection with the disposition of portfolio
securities. (This does not preclude the Fund from obtaining such short-term
credit as may be necessary for the clearance of purchases and sales of its
portfolio securities.)
5. Invest directly in interests in real estate, oil, gas or other mineral
leases, exploration or development programs, including limited partnership
interests. (This restriction does not preclude investments in marketable
securities of issuers engaged in such activities.)
6. Make loans to other persons, except by the purchase of debt obligations, or
through loans of the Fund's portfolio securities, or to the extent the entry
into a repurchase agreement or similar transaction may be deemed a loan.
7. Purchase or sell commodities or commodity futures contracts or financial
futures contracts; or invest in put, call, straddle or spread options on
financial or other futures contracts or stock index futures contracts.
8. Invest directly in warrants (valued at the lower of cost or market) in
excess of 5% of the value of the Fund's net assets. No more than 2% of the value
of the Fund's net assets may be invested in warrants (valued at the lower of
cost or market) which are not listed on the New York or American Stock
Exchanges.
9. Purchase from or sell to its officers and trustees, or any firm of which any
officer or trustee is a member, as principal, any securities, but the Fund may
deal with such persons or firms as brokers and pay a customary brokerage
commission; nor invest in securities of any issuer if any officer, director or
trustee of the Fund or the investment advisor owns beneficially more than
one-half of 1% of the outstanding securities of such issuer and all such
officers, directors and trustees together own beneficially more than 5% of such
securities.
10. Invest in the securities of other investment companies, except where there
is no commission other than the customary brokerage commission or sales charge,
or except that securities of another investment company may be acquired pursuant
to a plan of reorganization, merger, consolidation or acquisition; or except
further that all or substantially all of the assets of the Fund may be invested
in another registered investment company having the same investment objective
and policies as the Fund. Pursuant to available exemptions from the 1940 Act,
the Fund may invest in shares of one or more money market funds managed by
Advisory Services or its affiliates.
In addition to the restrictions above, the Fund does not intend to invest more
than 5% of its assets in securities of issuers with less than three years
continuous operation, including the operations of any predecessor companies or
to purchase or hold securities of any issuer if, as a result, in the aggregate,
more than 10% of the value of the Fund's total assets would be invested in
securities that are subject to legal or contractual restrictions on resale, in
securities that are not readily marketable (including over-the-counter options)
or in repurchase agreements maturing in more than seven days. The Fund may not
issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making any
permitted borrowings, mortgages or pledges or (ii) entering into repurchase
transactions or engage in the short sales of securities, except short sales
"against the box," if the cash or securities deposited in the segregated account
with the Fund's custodian to collateralize its short positions in the aggregate
exceed 25% of the Fund's net assets.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
POSITIONS AND OFFICES
NAME, AGE AND ADDRESS WITH THE TRUST PRINCIPAL OCCUPATION DURING THE
PAST FIVE YEARS
- -------------------------------------------------------------------------------
Frank T. Crohn (72) Trustee
7251 West Palmetto Park Road
Boca Raton, FL 33433
Chairman, Financial Benefit Life Insurance Company; Director, Unity Mutual Life
Insurance Company and AmVestors Financial Corporation; and trustee of three of
the investment companies in the Franklin Templeton Group of Funds.
*William J. Lippman (72) President and
One Parker Plaza Trustee
Fort Lee, NJ 07024
Senior Vice President, Franklin Resources, Inc., and Franklin Management, Inc.;
President and Director, Franklin Advisory Services, Inc. and officer and/or
director or trustee of seven of the investment companies in the Franklin
Templeton Group of Funds.
Charles Rubens II (66) Trustee
18 Park Road
Scarsdale, NY 10583
Private investor; and trustee of four of the investment companies in the
Franklin Templeton Group of Funds.
Leonard Rubin (71) Trustee
LDR EQUITIES, LLC
2 Executive Drive
Suite 560
Fort Lee, New Jersey 07024
Partner in LDR Equities, LLC (manages various personal investments); Vice
President, Trimtex Co., Inc. (manufactures and markets specialty fabrics); and
trustee of four of the investment companies in the Franklin Templeton Group of
Funds.
Harmon E. Burns (52) 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 most of
the other subsidiaries of Franklin Resources, Inc.; and officer and/or director
or trustee of 61 of the investment companies in the Franklin Templeton Group of
Funds.
Martin L. Flanagan (36) 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.; Treasurer, Franklin Advisory Services, Inc. and Franklin Investment
advisory Services, Inc.; officer of most other subsidiaries of Franklin
Resources, Inc.; and officer, director and/or trustee of 61 of the investment
companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (48) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc., and officer of 61
of the investment companies in the Franklin Templeton Group of Funds.
Rupert H. Johnson, Jr. (56) 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.;
Senior Vice President and Director, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, 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 61 of the investment companies in the Franklin Templeton
Group of Funds.
Diomedes Loo-Tam (58) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 38 of the investment
companies in the Franklin Templeton Group of Funds.
Edward V. McVey (59) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 33 of the investment companies in the Franklin Templeton
Group of Funds.
R. Martin Wiskemann (70) 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 officer and/or director, as the case
may be, of 21 of the investment companies in the Franklin Templeton Group of
Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisory Services. Nonaffiliated members of the Board are
currently paid $1800 per quarter plus $600 per meeting attended. As shown above,
some of the nonaffiliated Board members also serve as directors, trustees or
managing general partners of other investment companies in the Franklin
Templeton Group of Funds. They may receive fees from these funds for their
services. The following table provides the total fees paid to nonaffiliated
Board members by the Trust and by other funds in the Franklin Templeton Group of
Funds.
TOTAL FEES NUMBER OF BOARDS IN
TOTAL FEES RECEIVED FROM THE THE FRANKLIN TEMPLETON
RECEIVED FROM FRANKLIN TEMPLETON GROUP OF FUNDS ON
NAME THE TRUST* GROUP OF FUNDS** WHICH EACH SERVES***
- ------------------------------------------------------------------------------
Frank T. Crohn ............ $6,300 $18,600 3
Charles Rubens II.......... $6,900 $20,100 4
Leonard Rubin ............. $6,900 $24,600 4
*For the fiscal year ended October 31, 1996.
**For the calendar year ended December 31, 1996.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 62 registered investment companies, with approximately 171 U.S. based
funds or series.
Nonaffiliated members of the Board 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 Board member received any other
compensation, including pension or retirement benefits, directly or indirectly
from the Fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in the
fees paid to its subsidiaries.
As of February 3, 1997, the officers and Board members, as a group, owned of
record and beneficially approximately 23,402 shares, or less than 1% of the
Fund's total outstanding shares. Many of the Board members also own shares in
other funds in the Franklin Templeton Group of Funds.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
Advisory Services. Advisory Services provides investment research and portfolio
management services, including the selection of securities for the Fund to buy,
hold or sell and the selection of brokers through whom the Fund's portfolio
transactions are executed. Advisory Services activities are subject to the
review and supervision of the Board to whom Advisory Services renders periodic
reports of the Fund's investment activities. Advisory Services is covered by
fidelity insurance on its officers, directors and employees for the protection
of the Fund.
Advisory Services and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisory Services may give advice and take
action with respect to any of the other funds it manages, or for its own
account, that may differ from action taken by Advisory Services on behalf of the
Fund. Similarly, with respect to the Fund, Advisory Services is not obligated to
recommend, buy or sell, or to refrain from recommending, buying or selling any
security that Advisory Services and access persons, as defined by the 1940 Act,
may buy or sell for its or their own account or for the accounts of any other
fund. Advisory Services is not obligated to refrain from investing in securities
held by the Fund or other funds that it manages. Of course, any transactions for
the accounts of Advisory Services and other access persons will be made in
compliance with the Fund's Code of Ethics. Please see "Miscellaneous Information
- - Summary of Code of Ethics."
MANAGEMENT FEES. For the period December 12, 1995 (inception of the Fund) to
October 31, 1996, management fees totaling $425,197 were paid to the investment
manager.
MANAGEMENT AGREEMENT. The management agreement is in effect until March 31,
1997. It may continue in effect for successive annual periods if 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 Board members who are not parties to the
management agreement or interested persons of any such party (other than as
members of the Board), 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 Advisory Services on 60 days' written notice, and will
automatically terminate in the event of its assignment, as defined in the 1940
Act.
ADMINISTRATIVE SERVICES. Under an agreement with Advisory Services, FT Services
provides certain administrative services and facilities for the Fund. These
include preparing and maintaining books, records, and tax and financial reports,
and monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under its administration agreement, Advisory Services pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the Fund's shareholder servicing agent 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.
CUSTODIANS. 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.
AUDITORS. 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, 1996, their auditing services consisted of rendering an opinion on the
financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended October 31, 1996.
HOW DOES THE FUND BUY
SECURITIES FOR ITS PORTFOLIO?
Advisory Services selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the Board may give.
When placing a portfolio transaction, Advisory Services seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid by the Fund is
negotiated between Advisory Services and the broker executing the transaction.
The determination and evaluation of the reasonableness of the brokerage
commissions paid are based to a large degree on the professional opinions of the
persons responsible for placement and review of the transactions. These opinions
are based on the experience of these individuals in the securities industry and
information available to them about the level of commissions being paid by other
institutional investors of comparable size. Advisory Services will ordinarily
place orders to buy and sell over-the-counter securities on a principal rather
than agency basis with a principal market maker unless, in the opinion of
Advisory Services, 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.
Advisory Services may pay certain brokers commissions that are higher than those
another broker may charge, if Advisory Services determines in good faith that
the amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or Advisory Services' overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to Advisory Services include, among others, supplying
information about particular companies, markets, countries, or local, regional,
national or transnational economies, statistical data, quotations and other
securities pricing information, and other information that provides lawful and
appropriate assistance to Advisory Services in carrying out its investment
advisory responsibilities. These services may not always directly benefit the
Fund. They must, however, be of value to Advisory Services in carrying out its
overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services Advisory Services receives from dealers effecting transactions
in portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisory Services to supplement its own
research and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, Advisory Services and its affiliates may use
this research and data in their investment advisory capacities with other
clients. If the Fund's officers are satisfied that the best execution is
obtained, consistent with internal policies the sale of Fund shares, as well as
shares of other funds in the Franklin Templeton Group of Funds, may also be
considered a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive 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 Advisory Services will be reduced by the amount of any fees
received by Distributors in cash, less any costs and expenses incurred in
connection with the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisory Services are considered at or about
the same time, transactions in these securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all by
Advisory Services, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. In some cases this procedure could
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 period December 12, 1995 (inception of the Fund) to October 31, 1996,
the Fund paid brokerage commissions totaling $340,629.
As of October 31, 1996, the Fund did not own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities Dealers may at times receive the entire
sales charge. A Securities Dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - Quantity
Discounts" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.
Shares of the Fund may be offered to investors in Taiwan through securities
advisory firms known locally as Securities Investment Consulting Enterprises. In
conformity with local business practices in Taiwan, shares may be offered with
the following schedule of sales charges:
SALES
SIZE OF PURCHASE - U.S. DOLLARS CHARGE
Under $30,000............................... 3.0%
$30,000 but less than $50,000............... 2.5%
$50,000 but less than $100,000.............. 2.0%
$100,000 but less than $200,000............. 1.5%
$200,000 but less than $400,000............. 1.0%
$400,000 or more............................ 0%
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors may 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
to $2 million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on
sales over $3 million to $50 million, plus 0.25% on sales over $50 million to
$100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases by certain retirement plans pursuant to a sales charge waiver, as
discussed in the Prospectus: 1% on sales of $500,000 to $2 million, plus 0.80%
on sales over $2 million to $3 million, plus 0.50% on sales over $3 million to
$50 million, plus 0.25% on sales over $50 million to $100 million, plus 0.15% on
sales over $100 million. Distributors may make these payments in the form of
contingent advance payments, which may be recovered from the Securities Dealer
or set off against other payments due to the dealer if shares are sold within 12
months of the calendar month of purchase. Other conditions may apply. All terms
and conditions may be imposed by an agreement between Distributors, or one of
its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy Fund
shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
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 on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds 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 during the 13
month period, except in the case of certain retirement plans, 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
on the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute a
Letter before a change in the sales charge structure of the Fund, you may
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
until you fulfill the Letter. This policy of reserving shares does not apply to
certain retirement plans. If 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 total purchases, less
redemptions, exceed the amount specified under the Letter and is an amount that
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 the purchases had been made at a single
time. Upon 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
before 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 certain retirement plans, 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.
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 and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. 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 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
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 Board reserves 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 these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell 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.
SPECIAL SERVICES. The Franklin Templeton Institutional Services Department
provides specialized services, including recordkeeping, for institutional
investors. 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 that the Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the scheduled close of the
NYSE, generally 1:00 p.m. Pacific time each day that the NYSE is open for
trading. As of the date of this SAI, the Fund is informed that the NYSE 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 that 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 Advisory Services.
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 before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the scheduled close of trading
on the NYSE, if that is earlier. The 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 that affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and the
close of the exchange and will, therefore, not be reflected in the computation
of the Fund's Net Asset Value. If events materially affecting the values of
these foreign securities occur during this period, the 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 before
the scheduled close of the NYSE. 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 these securities may occur between
the times at which they are determined and the scheduled close of the NYSE that
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 this
period, the securities will be valued at their fair value as determined in good
faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
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 capital loss carryforward) may generally be
made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the 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.
TAXES
As stated in the Prospectus, the Fund has elected and qualified to be treated as
a regulated investment company under Subchapter M of the Code. The Board
reserves the right not to maintain the qualification of the Fund as a regulated
investment company if it determines this course of action to be beneficial to
shareholders. In that case, the Fund will be subject to federal and possibly
state corporate taxes on its taxable income and gains, and distributions to
shareholders will be taxable to the extent of the Fund's available earnings and
profits.
Subject to the limitations discussed below, all or a portion of the income
distributions paid by the Fund may be treated by corporate shareholders as
qualifying dividends for purposes of the dividends-received deduction under
federal income tax law. If the aggregate qualifying dividends received by the
Fund (generally, dividends from U.S. domestic corporations, the stock in which
is not debt-financed by the Fund and is held for at least a minimum holding
period) is less than 100% of its distributable income, then the amount of the
Fund's dividends paid to corporate shareholders which may be designated as
eligible for such deduction will not exceed the aggregate qualifying dividends
received by the Fund for the taxable year. The amount or percentage of income
qualifying for the corporate dividends-received deduction will be provided by
the Fund annually in the Fund's fiscal year-end Annual Report.
Corporate shareholders should note that dividends paid by the Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividend-received deduction. For example, any interest income and net short-term
capital gain (in excess of any net long-term capital loss or capital loss
carryover) included in investment company taxable income and distributed by the
Fund as a dividend will not qualify for the dividends-received deduction.
Corporate shareholders should also note that the availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless Fund shares have been held (or deemed held)
for at least 46 days in a substantially unhedged manner. The dividends-received
deduction may also be reduced to the extent interest paid or accrued by a
corporate shareholder is directly attributable to its investment in Fund shares.
The entire dividend, including the portion which is treated as a deduction, is
includable in the tax base on which the federal alternative minimum tax is
computed and may also result in a reduction in the shareholder's tax basis in
its Fund shares, under certain circumstances, if the shares have been held for
less than two years. Corporate shareholders whose investment in the Fund is
"debt financed" for these tax purposes should consult with their tax advisors
concerning the availability of the dividends-received deduction.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. Under these rules, certain distributions
which are declared in October, November or December but which, for operational
reasons, may not be paid to the shareholder until the following January, will be
treated for tax purposes as if paid by the Fund and received by the shareholder
on December 31 of the calendar year in which they are declared. The Fund intends
as a matter of policy to declare such dividends, if any, in December and to pay
these dividends in December or January to avoid the imposition of this tax, but
does not guarantee that its distributions will be sufficient to avoid any or all
federal excise taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between the shareholder's basis
in the shares and the amount received, subject to the rules described below. If
such shares are a capital asset in the hands of the shareholder, gain or loss
will be capital gain or loss and will be long-term for federal income tax
purposes if the shares have been held for more than one year.
All or a portion of the sales charge incurred in purchasing shares of the Fund
will not be included in the federal tax basis of such shares sold or exchanged
within 90 days of their purchase (for purposes of determining gain or loss with
respect to such shares) if the sales proceeds are reinvested in the Fund or in
another fund in the Franklin Templeton Group and a sales charge which would
otherwise apply to the reinvestment is reduced or eliminated. Any portion of
such sales charge excluded from the tax basis of the shares sold will be added
to the tax basis of the shares acquired in the reinvestment. Shareholders should
consult with their tax advisors concerning the tax rules applicable to the
redemption or exchange of Fund shares.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares purchased.
The Fund's investment in options and certain transactions involving actual or
deemed short sales are subject to many complex and special tax rules. For
example, over-the-counter options on debt securities and equity options,
including options on stock and on narrow-based stock indices, will be subject to
tax under Section 1234 of the Code, generally producing a long-term or
short-term capital gain or loss upon exercise, lapse or closing out of the
option or sale of the underlying stock or security. The Fund's treatment of
certain other options entered into by the Fund is generally governed by Section
1256 of the Code. These Section 1256 positions generally include listed options
on debt securities, options on broad-based stock indexes, and options on
securities indexes.
Absent a tax election to the contrary, each such Section 1256 position held by
the Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Fund's fiscal year, and all gain
or loss associated with fiscal year transactions and mark-to-market positions at
fiscal year end (except certain foreign currency gain or loss covered by Section
988 of the Code) will generally be treated as 60% long-term capital gain or loss
and 40% short-term capital gain or loss. The effect of Section 1256
mark-to-market rules may be to accelerate income or to convert what otherwise
would have been long-term capital gains into short-term capital gains or
short-term capital losses into long-term capital losses within the Fund. The
acceleration of income on Section 1256 positions may require the Fund to accrue
taxable income without the corresponding receipt of cash. In order to generate
cash to satisfy the distribution requirements of the Code, the Fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares. In these ways, any or all of these rules may affect both the
amount, character and time of income distributed to shareholders by the Fund.
When the Fund holds an option or contract which substantially diminishes the
Fund's risk of loss with respect to another position of the Fund (as might occur
in some hedging transactions), this combination of positions could be treated as
a "straddle" for tax purposes, resulting in possible deferral of losses,
adjustments in the holding periods of Fund securities and conversion of
short-term capital losses into long-term capital losses.
As a regulated investment company, the Fund is also subject to the requirement
that less than 30% of its annual gross income be derived from the sale or other
disposition of securities and certain other investments held for less than three
months ("short-short income"). This requirement may limit the Fund's ability to
engage in options and hedging transactions because these transactions are often
consummated in less than three months, may require the sale of portfolio
securities held less than three months and may, as in the case of short sales of
portfolio securities, reduce the holding periods of certain securities within
the Fund, resulting in additional short-short income for the Fund.
The Fund will monitor its transactions in such options and contracts and may
make certain other tax elections in order to mitigate the effect of the above
rules and prevent disqualification of the Fund as a regulated investment company
under Subchapter M of the Code.
Gain realized by the Fund from transactions that are deemed to constitute
"conversion transactions" under the Code and which would otherwise produce
capital gain may be recharacterized as ordinary income to the extent that such
gain does not exceed an amount defined by the Code as the "applicable imputed
income amount." A conversion transaction is any transaction in which
substantially all of the Fund's expected return is attributable to the time
value of the Fund's net investment in such transaction and any one of the
following criteria are met: 1) there is an acquisition of property with a
substantially contemporaneous agreement to sell the same or substantially
identical property in the future; 2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the Fund on the basis that it would
have the economic characteristics of a loan but would be taxed as capital gain;
or 4) the transaction is specified in Treasury regulations to be promulgated in
the future. The applicable imputed income amount, which represents the deemed
return on the conversion transaction based upon the time value of money, is
computed using a yield equal to 120 percent of the applicable federal rate,
reduced by any prior recharacterizations under this provision or Section 263(g)
of the Code concerning capitalized carrying costs.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, 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 if
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 Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), 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.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the period December 12, 1995, to October 31, 1996, were
3,785,060. After allowances to dealers, Distributors retained $425,966 in net
underwriting discounts and commissions, and received no compensation in
connection with redemptions or repurchases of shares. Distributors may be
entitled to reimbursement under the Rule 12b-1 plan, as discussed below. Except
as noted, Distributors received no other compensation from the Fund for acting
as underwriter.
THE RULE 12B-1 PLAN
The Fund has adopted a distribution plan or "Rule 12b-1 plan" pursuant to Rule
12b-1 of the 1940 Act. Under the plan, the Fund may pay up to a maximum of 0.25%
per year of its average daily net assets, payable quarterly, primarily as a
service fee to reimburse Distributors or others for personal services to
shareholders of the Fund and/or maintenance of shareholder accounts and also, to
the extent authorized by the Board, for other marketing purposes.
In addition to the payments that Distributors or others are entitled to under
the plan, the plan also provides that to the extent the Fund, Advisory Services
or Distributors or other parties on behalf of the Fund, Advisory Services or
Distributors make payments that are deemed to be 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 under the rules of the NASD.
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. These 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 these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this 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 renewable annually by a vote of the Board, including a majority vote of
the Board members who are not 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 Board members be done by the non-interested
members of the Board. The plan and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members 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 Advisory Services, or by vote of a majority of the
Fund's outstanding shares. Distributors or any dealer or other firm may also
terminate their respective distribution or service agreement at any time upon
written notice.
The plan and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the Fund's outstanding shares, and all material amendments to the plan or any
related agreements shall be approved by a vote of the non-interested members of
the Board, 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 period December 12, 1995, to October 31, 1996, Distributors had eligible
expenditures of $227,104 for advertising, printing, and payments to underwriters
and broker-dealers pursuant to the plan, of which the Fund paid Distributors
$126,344.
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. 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.
Average annual total return and current yield quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the Fund to compute or express performance follows. Regardless of the method
used, past performance does not guarantee future results, and is an indication
of the return to shareholders only for the limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual 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, and income dividends and capital gain distributions 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 to the sales charge structure,
historical performance information will be restated to reflect the maximum
front-end sales charge currently in effect.
These figures will be calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five- or ten-year periods at the end of the one-, five-
or ten-year periods (or fractional portion thereof)
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at Net Asset Value. Cumulative total return, however, 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 cumulative total return for the period from December 12, 1995 (inception
of the Fund) to October 31, 1996, was 18.12%.
YIELD
CURRENT YIELD. Current yield shows the income per share earned by the Fund. It
is calculated 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, 1996, was 0.93%.
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
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 usually computed by
annualizing the dividends paid per share during a certain period and dividing
that amount by the current maximum Offering Price. 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. The Fund's current distribution rate for the 30-day
period ended October 31, 1996, was 0.57%.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance 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
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative 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.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin 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 about 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. These
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 NYSE.
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 mutual funds.
h) Financial publications: The Wall Street Journal, Business Week, Changing
Times,
Financial World, Forbes, Fortune, and Money magazines - provide performance
statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
l) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
m) Standard & Poor's 100 Stock Index - an unmanaged index based on the prices of
100 blue-chip stocks, including 92 industrials, one utility, two transportation
companies, and 5 financial institutions. The S&P 100 Stock Index is a smaller
more flexible index for options trading.
n) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk adjusted performance of a fund over specified
time periods relative to other funds within its category.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the Fund's performance to the
return on CDs 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 CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, if any, as well as the value of its shares that 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. CDs 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 these other averages.
MISCELLANEOUS INFORMATION
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
other long-term goals. The Franklin College Costs Planner may help 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 these goals will be met.
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 49 years and
now services more than 2.6 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. Mutual Series Fund Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $179 billion in
assets under management for more than 4.9 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 120
U.S. based open-end investment companies to the public. 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 eight years.
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.
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.
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, before 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 IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group 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.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended October 31, 1996, including the
auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISORY SERVICES - Franklin Advisory Services, Inc., the Fund's investment
manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - Certain funds in the Franklin Templeton Funds offer two
classes of shares, designated "Class I" and "Class II." The two classes have
proportionate interests in the same portfolio of investment securities. They
differ, however, primarily in their sales charge structures and Rule 12b-1
plans. Because the Fund's sales charge structure and Rule 12b-1 plan are similar
to those of Class I shares, shares of the Fund are considered Class I shares for
redemption, exchange and other purposes.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the 4.50% sales charge.
PROSPECTUS - The prospectus for the Fund dated March 1, 1997, as may be amended
from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
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FRANKLIN
VALUE FUND
FRANKLIN VALUE INVESTORS TRUST
STATEMENT OF
ADDITIONAL INFORMATION
MARCH 1, 1997
777 MARINERS ISLAND BLVD., P.O. BOX 7777 SAN
MATEO, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
How does the Fund Invest its Assets? .............. 2
What are the Fund's Potential Risks?............... 6
Investment Restrictions............................ 8
Officers and Trustees.............................. 9
Investment Management
and Other Services................................ 11
How does the Fund Buy
Securities for its Portfolio?..................... 12
How Do I Buy, Sell and Exchange Shares? ........... 13
How are Fund Shares Valued?........................ 16
Additional Information on
Distributions and Taxes........................... 17
The Fund's Underwriter............................. 20
How does the Fund Measure Performance?............. 22
Miscellaneous Information.......................... 24
Financial Statements............................... 26
Useful Terms and Definitions....................... 26
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
The Franklin Value 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 long-term total return. The Fund
seeks to achieve its objective by investing at least 65% of its assets in the
securities of companies that Advisory Services believes are undervalued. Income
is a secondary consideration of the Fund, although it is not part of the Fund's
investment objective.
The Prospectus, dated March 1, 1997, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN or write the Fund at the address shown.
This SAI describes the Fund's Class I and Class II shares. The Fund currently
offers another class of shares with a different sales charge and expense
structure, which affects performance. This class is described in a separate SAI
and prospectus. For more information, contact your investment representative or
call 1-800/DIAL BEN.
THIS 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 PROSPECTUS.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How does the Fund Invest its Assets?"
OPTIONS AND FUTURES
OPTIONS. The Fund may write covered call options that are listed on a national
securities exchange and buy listed options on securities and securities indices
for portfolio hedging purposes. The Fund may also write covered call options and
buy put options that are traded over-the-counter ("OTC"). In addition, the Fund
may enter into closing transactions with respect to its open option positions.
CALL OPTIONS. The Fund may buy call options on securities which it intends to
buy. By buying these options, the Fund limits the risk of a substantial increase
in the market price of these securities. The Fund may also buy call options on
securities held in its portfolio and on which it has written call options as
described below.
A writer of a call option retains the amount of the premium paid by the buyer of
the option regardless of whether it is exercised. The premium amount reflects,
among other things, the relationship of the exercise price to the market price,
the volatility of the underlying security, the remaining term of the option,
supply and demand, and interest rates. A premium received by the writer of a
covered call option may be offset by a decline in the market value of the
underlying security during the option period. Because the writer of a call
option may be assigned an exercise notice at any time before the termination of
the call, the writer may have no control over when the underlying securities
must be sold. If a call option is exercised, the writer experiences a profit or
loss from the sale of the underlying security. Also, by writing a covered call
option, the Fund gives up the opportunity to profit from any price increase in
the underlying security above the option exercise price while the option is in
effect.
Unless a writer of an option has already been notified of the exercise of an
option, the writer may terminate its obligation by buying an option of the same
series as the option previously written. This is known as a "closing purchase
transaction," and it allows the writer's position to be canceled by the clearing
corporation. A holder of an option liquidates its position by selling an option
of the same series as the option previously purchased, which is known as a
"closing sale transaction." There is no guarantee that either a closing purchase
or a closing sale transaction can be completed.
The Fund may conduct a closing transaction on a written call option to permit
the Fund to (i) write another call option on the underlying security with either
a different exercise price, expiration date or both or (ii) use the cash or
proceeds from the sale of the underlying security for other Fund investments. If
the Fund wants to sell a security from its portfolio on which it has written a
call option, it may conduct a closing transaction before or at the same time as
it sells the security. Profit or loss from such a sale will depend on whether
the amount received is more or less than the premium paid for the call option
plus any related transaction costs.
If the price of a closing transaction is less than the premium received from
writing the option or the premium paid to buy the option, the Fund makes a
profit on the transaction; if the price is more, the Fund realizes a loss.
Because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the purchase of a call option is likely to be offset by appreciation of the
underlying security owned by the Fund.
PUT OPTIONS. The Fund may also buy put options. The Fund may enter into closing
sale transactions with respect to such options, exercise them, or permit them to
expire. The Fund may buy a put option on an underlying security (a "protective
put") owned by the Fund as a hedging technique in order to protect against an
anticipated decline in the value of the security. This allows the Fund to sell
the underlying security at the put exercise price, regardless of any decline in
the underlying security's market price, until the put expires. If the investment
manger decides to hold the underlying security for tax considerations, for
example, a put option may be purchased in order to protect any unrealized
appreciation. Of course any capital gain realized when the security is sold
would be reduced by the premium paid for the put option and any transaction
costs.
OPTIONS ON INDICES. Options on indices, which are described in the Prospectus,
give the holder the right to receive cash equal to the difference between the
closing price of the index and the exercise price of the option, expressed in
dollars, multiplied by a specified number. Options on indices differ from
options on individual securities in that all settlements are in cash, and gain
or loss depends on price movements in the stock market generally (or in a
particular industry or segment of the market) rather than on price movements in
individual securities.
FORWARD CONVERSIONS. In a forward conversion, the Fund buys securities and
writes call options and buys put options on such securities. By purchasing puts,
the Fund protects the underlying security from depreciation in value. By selling
or writing calls on the same security, the Fund receives premiums which may
offset part or all of the cost of purchasing the puts while forgoing the
opportunity for appreciation in the value of the underlying security. The Fund
will not exercise a put it has purchased while a call option on the same
security is outstanding.
Forward conversions are intended to hedge against fluctuations in the market
value of the underlying security. Although it is generally intended that the
exercise price of put and call options would be identical, situations might
occur in which some option positions are acquired with different exercise
prices. Therefore, the Fund's return may depend in part on movements in the
price of the underlying security. The Fund's return on forward conversions may
be greater or less than it would otherwise have been if it had hedged the
security only by purchasing put options.
SPREAD AND STRADDLE OPTIONS TRANSACTIONS. In "spread" transactions, the Fund
buys and writes a put or buys and writes a call on the same underlying security
with the options having different exercise prices and/or expiration dates. In
"straddles," the Fund purchases or writes combinations of put and call options
on the same security. When the Fund engages in spread and straddle transactions,
it seeks to profit from differentials in the option premiums paid and received
and in the market prices of the related options positions when they are closed
out or sold. Because these transactions require the Fund to buy and/or write
more than one option simultaneously, the Fund's ability to enter into such
transactions and to liquidate its positions when necessary or deemed advisable
may be more limited than if the Fund was to buy or sell a single option.
Similarly, costs incurred by the Fund in connection with these transactions will
in many cases be greater than if the Fund was to buy or sell a single option.
FUTURES. The Fund may enter into contracts for the purchase or sale for future
delivery of securities, contracts based upon financial indices, and the Fund may
buy options on such contracts ("financial futures"). Financial futures contracts
are contracts that obligate the long or short holder to take or make delivery of
a specified quantity of a financial instrument, such as a security, or the cash
value of a securities index during a specified future period at a specified
price. A "sale" of a futures contract means the seller has a contractual
obligation to deliver the securities described in the contract at a specified
price on a specified date. A "purchase" of a futures contract means the buyer
has a contractual obligation to acquire the securities described in the contract
at a specified price on a specified date. Futures contracts have been designed
by exchanges that have been designated "contracts markets" by the Commodity
Futures Trading Commission ("CFTC") and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by buying
(or selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation to take
delivery of the securities. Since all transactions in the futures market are
made, offset or fulfilled through a clearinghouse associated with the exchange
on which the contracts are traded, the Fund will incur brokerage fees when it
purchases or sells futures contracts.
The Fund will not engage in transactions in futures contracts or related options
for speculation but only as a hedge against changes resulting from market
conditions in the values of its securities or securities which it intends to
purchase. The Fund will not enter into any stock index future or related option
if, immediately thereafter, more than one-third of the Fund's net assets would
be represented by futures contracts or related options. In addition, the Fund
may not buy or sell futures contracts or buy or sell related options if,
immediately thereafter, the sum of the amount of margin deposits on its existing
futures and related options positions, and premiums paid for related options,
would exceed 5% of the market value of the Fund's total assets.
The purpose of the acquisition or sale of a futures contract is to attempt to
protect the Fund from fluctuations in price of portfolio securities without
actually buying or selling the underlying security. To the extent the Fund
enters into futures contracts or related options, it will deposit in a
segregated account with its custodian bank cash or other U.S. Treasury
obligations equal to a specified percentage of the value of the futures contract
(the "initial margin"), as required by the relevant contract market and futures
commission merchant. The futures contract will be marked-to-market daily. If the
value of the futures contract declines relative to the Fund's position, the Fund
will be required to pay the futures commission merchant an amount equal to the
change in value.
STOCK INDEX FUTURES CONTRACTS. The Fund may purchase and sell stock index
futures contracts traded on domestic exchanges and, to the extent such contracts
have been approved by the CFTC for sale to customers in the U.S., on foreign
exchanges. A stock index futures contract obligates the seller to deliver (and
the purchaser to take) an amount of cash equal to a specific dollar amount times
the difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement is made.
Open futures contracts are valued on a daily basis and the Fund may be obligated
to provide or receive cash reflecting any decline or increase in the contract's
value. No physical delivery of the underlying stocks in the index is made in the
future.
The Fund may sell stock index futures contracts in anticipation of or during a
market decline in an attempt to offset the decrease in market value of its
securities that might otherwise result. When the Fund is not fully invested in
stocks and anticipates a significant market advance, it may purchase stock index
futures in order to gain rapid market exposure that may offset increases in the
cost of common stocks that it intends to purchase.
FUTURE DEVELOPMENTS. The Fund may take advantage of opportunities in the area of
options and futures contracts and any other derivative investments that are not
presently contemplated for use by the Fund or that are not currently available
but which may be developed, to the extent such opportunities are both consistent
with the Fund's investment objective and legally permissible for the Fund. Prior
to investing in any such investment vehicle, the Fund will supplement its
Prospectus, if appropriate.
OTHER TYPES OF SECURITIES AND POLICIES
DEPOSITARY RECEIPTS. Many securities of foreign issuers are represented by
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
and Global Depositary Receipts ("GDRs") (collectively "Depositary Receipts").
ADRs evidence ownership of, and represent the right to receive, securities of
foreign issuers deposited in a domestic bank or trust company or a foreign
correspondent bank. EDRs and GDRs are typically issued by foreign banks or trust
companies, although they also may be issued by U.S. banks or trust companies,
and evidence ownership of underlying securities issued by either a foreign or a
U.S. corporation. Generally, Depositary Receipts in registered form are designed
for use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the U.S.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on
exchanges or over-the-counter. While ADRs do not eliminate all the risk
associated with foreign investments, by investing in ADRs rather than directly
in the stock of foreign issuers, the Fund will avoid currency risks during the
settlement period for either purchases or sales. In general, there is a large,
liquid market in the U.S. for ADRs quoted on a national securities exchange or
on NASDAQ. The information available for ADRs is subject to the accounting,
auditing and financial reporting standards of the U.S. market or exchange on
which they are traded, which standards are more uniform and more exacting than
those to which many foreign issuers may be subject. EDRs and GDRs may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted.
Depositary Receipts may be issued under sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of Depositary Receipts. In unsponsored programs, the issuer
may not be directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs and there may not be a correlation
between such information and the market value of the Depositary Receipts.
TRADE CLAIMS. Trade claims are bought from creditors of companies in financial
difficulty who seek to reduce the number of debt obligations they are owed. Such
trade creditors generally sell their claims in an attempt to improve their
balance sheets and reduce uncertainty regarding payments. For buyers, trade
claims offer the potential for profits since they are often purchased at a
significantly discounted value and, consequently, have the potential for higher
income and capital appreciation should the debt issuer's financial position
improve. Trade claims are generally liquid, as there is a secondary market, but
the Board will monitor their liquidity. An investment in trade claims is
speculative and there can be no guarantee that the debt issuer will ever be able
to satisfy the obligation. Further, trading in trade claims is not regulated by
federal securities laws but primarily by bankruptcy and commercial laws. Because
trade claims are unsecured obligations, holders may have a lower priority than
secured or preferred creditors.
WARRANTS. A warrant is typically a long-term option issued by a corporation
which gives the holder the privilege of buying a specified number of shares of
the underlying common stock at a specified exercise price at any time on or
before an expiration date. Stock index warrants entitle the holder to receive,
upon exercise, an amount in cash determined by reference to fluctuations in the
level of a specified stock index. If the Fund does not exercise or dispose of a
warrant prior to its expiration, it will expire worthless. Further, the Fund
does not intend to invest directly in warrants (valued at the lower of cost or
market) in excess of 5% of the value of the Fund's net assets. No more than 2%
of the value of the Fund's net assets may be invested in warrants (valued at the
lower of cost or market) which are not listed on the New York or American Stock
Exchange.
SHORT-SELLING. In a short sale, the Fund sells a security it does not own in
anticipation of a decline in the market value of that security. The security
sold must be listed on a national exchange. To complete the transaction, the
Fund must borrow the security to make delivery to the buyer. The Fund is then
obligated to replace the security borrowed by purchasing it at the market price
at the time of replacement. Until the security is replaced, the Fund must pay
the lender any dividends or interest that accrue during the period of the loan.
To borrow the security, the Fund may also be required to pay a premium, which
would increase the cost of the security sold. The proceeds of the short sale
will be retained by the broker, to the extent necessary to meet margin
requirements, until the short position is closed out.
The Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security, and the Fund will realize a gain if the
security declines in price between those same dates. The amount of any gain will
be decreased, and the amount of any loss increased, by the amount of any
premium, dividends or interest the Fund is required to pay in connection with
the short sale.
In addition to the short sales discussed above, the Fund may also make short
sales "against the box." A short sale is "against the box" to the extent that
the Fund contemporaneously owns or has the right to obtain at no added cost
securities identical to those sold short. The Fund at no time will have more
than 15% of the value of its net assets in deposits on short sales against the
box.
No securities will be sold short if, after the sale, the total market value of
all the Fund's open short positions, including short sales against the box,
would exceed 25% of the value of the Fund's net assets. In addition, short sales
of the securities of any one issuer may not exceed the lesser of 2% of the
Fund's net assets or 2% of the securities of any class of the issuer.
The Fund will place in a segregated account with its custodian bank an amount of
cash or U.S. government securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short and
(b) any cash or U.S. government securities required to be deposited as
collateral with the broker in connection with the short sale (not including the
proceeds from the short sale). The segregated account will be marked-to-market
daily and at no time will the amount deposited in the segregated account and
with the broker as collateral be less than the market value of the securities at
the time they were sold short.
NON-DIVERSIFICATION. As a non-diversified investment company under the 1940 Act,
the Fund may invest more than 5% and up to 25% of its assets in the securities
of any one issuer at the time of purchase. For purposes of the Code, however, as
of the last day of any fiscal quarter, the Fund may not have more than 25% of
its total assets invested in any one issuer, and, with respect to 50% of its
total assets, the Fund may not have more than 5% of its total assets invested in
any one issuer, nor may it own more than 10% of the outstanding voting
securities of any one issuer. These limitations do not apply to investments in
securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities or to securities of investment companies that qualify as
regulated investment companies under the Code.
WHAT ARE THE FUND'S POTENTIAL RISKS?
Options, Futures and Options on Futures. The Fund's ability to hedge effectively
all or a portion of its securities through transactions in options on stock
indices, financial futures and related options depends on the degree to which
price movements in the underlying index or underlying securities correlate with
price movements in the relevant portion of the Fund's portfolio. Inasmuch as
these securities will not duplicate the components of the index or such
underlying securities, the correlation will not be perfect. Consequently, the
Fund bears the risk that the prices of the securities being hedged will not move
in the same amount as the hedging instrument. It is also possible that there may
be a negative correlation between the index or other securities underlying the
hedging instrument and the hedged securities that would result in a loss on both
such securities and the hedging instrument. Accordingly, successful use by the
Fund of options on stock indices, financial futures and other options will be
subject to Advisory Services' ability to correctly predict movements in the
direction of the securities markets generally or in a particular segment. This
requires different skills and techniques than predicting changes in the price of
individual stocks.
Positions in stock index options and financial futures and related options may
be closed out only on an exchange which provides a secondary market. There can
be no assurance that a liquid secondary market will exist for any particular
stock index option or futures contract or related option at any specific time.
Thus, it may not be possible to close such an option or futures position. The
inability to close options or futures positions also could have an adverse
impact on the Fund's ability to effectively hedge its securities. Of course, the
Fund will enter into an option or futures position only if there appears to be a
liquid secondary market for such options or futures.
OTC options may be subject to more risks than exchange-traded options because
OTC options are arranged with dealers, not with a clearing corporation, and
because pricing of OTC options is typically done by reference to information
from market makers. There can be no assurance that a continuous liquid secondary
market will exist for any particular OTC option at any specific time.
Consequently, the Fund may be able to realize the value of an OTC option it has
purchased only by exercising it or entering into a closing sale transaction with
the dealer that issued it. Similarly, when the Fund writes an OTC option, it
generally can close out that option prior to its expiration only by entering
into a closing purchase transaction with the dealer to which the Fund originally
wrote it. If a covered call option writer cannot effect a closing transaction,
it cannot sell the underlying security until the option expires or the option is
exercised. Therefore, a covered call option writer of an OTC option may not be
able to sell an underlying security even though it might otherwise be
advantageous to do so. Likewise, a secured put writer of an OTC option may be
unable to sell the securities pledged to secure the put for other investment
purposes while it is obligated as a put writer. Similarly, a purchaser of such
put or call option might also find it difficult to terminate its position on a
timely basis in the absence of a secondary market.
The CFTC and the various exchanges have established limits, referred to as
"speculative position limits," on the maximum net long or net short position
which any person may hold or control in a particular futures contract. Trading
limits are imposed on the maximum number of contracts which any person may trade
on a particular trading day. An exchange may order the liquidation of positions
found to be in violation of these limits and it may impose other sanctions or
restrictions. The Fund does not believe that these trading and positions limits
will have an adverse impact on the Fund's strategies for hedging its securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by Advisory Services may still
not result in a successful transaction.
In addition, futures contracts entail risks. Although the Fund believes that use
of such contracts will benefit the Fund, if Advisory Services' judgment about
the general direction of interest rates is incorrect, the Fund's overall
performance would be poorer than if it had not entered into any such contract.
For example, if the Fund has hedged against the possibility of an increase in
interest rates that would adversely affect the price of bonds held in its
portfolio and interest rates decrease instead, the Fund will lose part or all of
the benefit of the increased value of its bonds which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities
from its portfolio to meet daily variation margin requirements. Such sales may
be, but will not necessarily be, at increased prices which reflect the rising
market. The Fund may have to sell securities at a time when it may be
disadvantageous to do so.
The Fund's sale of futures contracts and purchase of put options on futures
contracts will be solely to protect its investments against declines in value.
The Fund expects that in the normal course it will purchase securities upon
termination of long futures contracts and long call options on future contracts,
but under unusual market conditions it may terminate any of such positions
without a corresponding purchase of securities.
DEPOSITARY RECEIPTS. Depositary Receipts, such as American Depositary Receipts
and Global Depositary Receipts, reduce but do not eliminate all the risk
inherent in investing in the securities of foreign issuers. To the extent that
the Fund acquires Depositary Receipts through banks which do not have a
contractual relationship with the foreign issuer of the security underlying the
Depositary Receipt to issue and service such Depositary Receipts, there may be
an increased possibility that the Fund would not become aware of and be able to
respond to corporate actions such as stock splits or rights offerings involving
the foreign issuer in a timely manner.
HIGH YIELDING, FIXED-INCOME SECURITIES. The premature disposition of a high
yielding security due to a call or buy-back feature, the deterioration of the
issuer's creditworthiness, or a default may make it more difficult for the Fund
to manage the timing of its receipt of income, which may have tax implications.
The Fund may be required under the Code and U.S. Treasury regulations to accrue
income for income tax purposes on defaulted obligations and to distribute such
income to the Fund's shareholders even though the Fund is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy any or all of these distribution requirements, the Fund
may be required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares.
Generally, purchasers of high yielding securities are dealers and other
institutional buyers, rather than individuals. To the extent the secondary
trading market for a particular high yielding, fixed-income security does exist,
it is generally not as liquid as the secondary market for higher-rated
securities.
While many high yielding securities have been sold with registration rights,
covenants and penalty provisions for delayed registration, if the Fund is
required to sell such restricted securities before the securities have been
registered, it may be deemed an underwriter of such securities under the
Securities Act of 1933, as amended ("1933 Act"), which entails special
responsibilities and liabilities. The Fund may incur special costs in disposing
of such securities; however, the Fund will generally incur no costs when the
issuer is responsible for registering the securities.
The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yielding securities and adversely affected the
value of outstanding securities and the ability of issuers of such securities to
meet their obligations. Although the economy has improved considerably and high
yielding securities have performed more consistently since that time, there is
no assurance that the adverse effects previously experienced will not recur. For
example, the highly publicized defaults of some high yield issuers during 1989
and 1990 and concerns regarding a sluggish economy which continued into 1993,
depressed the prices for many of these securities. While market prices may still
be temporarily somewhat depressed due to these factors, the ultimate price of
any security will generally reflect the true operating results of the issuer.
Factors adversely impacting the market value of high yielding securities owned
by the Fund will adversely impact the Fund's net asset value. In addition, the
Fund may incur additional expenses to the extent it is required to seek recovery
upon a default in the payment of principal or interest on its portfolio
holdings. The Fund will rely on Advisory Services' judgment, analysis and
experience in evaluating the creditworthiness of an issuer. In this evaluation,
Advisory Services will take into consideration, among other things, the issuer's
financial resources, its sensitivity to economic conditions and trends, its
operating history, the quality of the issuer's management and regulatory
matters.
RESTRICTED SECURITIES. The Board has authorized the Fund to invest in restricted
securities and to consider them liquid (and thus not subject to the 10%
limitation on illiquid securities) to the extent Advisory Services determines
that there is a liquid institutional or other market for these securities. For
example, restricted securities may be freely transferred among qualified
institutional buyers under Rule 144A of the 1933 Act, and in some cases a liquid
institutional market has developed.
On an ongoing basis, the Board will review Advisory Services' decisions to treat
restricted securities as liquid - including Advisory Services' assessment of
current trading activity and the availability of reliable price information. In
determining whether a restricted security can be considered liquid, Advisory
Services and the Board will take into account the following factors: (i) the
frequency of trades and quotes for the security, (ii) the number of dealers
willing to buy or sell the security and the number of potential buyers, (iii)
dealer undertakings to make a market in the security, and (iv) the nature of the
security and nature of the marketplace trades (e.g., the time needed to dispose
of the security, the method of soliciting offers, and the mechanics of
transfer). To the extent the Fund invests in restricted securities that are
deemed to be liquid, the general level of illiquidity in the Fund may be
increased if qualified institutional buyers become uninterested in buy-ing these
securities or the market for these securities contracts.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval 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, whichever is less. The Fund MAY NOT:
1. Borrow money, except that the Fund may borrow money in a manner consistent
with the Fund's investment objective and policies in an amount not exceeding
331/3% of the value of the Fund's total assets (including the amount borrowed).
The Fund may borrow in connection with short-sales and short-sales "against the
box," and the Fund may borrow from banks, other Franklin Templeton Funds or
other persons to the extent permitted by applicable law.
2. Underwrite securities of other issuers, except insofar as the Fund may be
technically deemed an underwriter under the federal securities laws in
connection with the disposition of portfolio securities. (This does not preclude
the Fund from obtaining such short-term credit as may be necessary for the
clearance of purchases and sales of its portfolio securities.)
3. Invest directly in interests in real estate, oil, gas or other mineral
leases, exploration or development programs, including limited partnership
interests. This restriction does not preclude investments in marketable
securities of issuers engaged in such activities.
4. Loan money, except as consistent with the Fund's investment objectives, and
except that the Fund may (a) purchase a portion of an issue of publicly
distributed bonds, debentures, notes and other evidences of indebtedness, (b)
enter into repurchase agreements, (c) lend its portfolio securities, and (d)
participate in an interfund lending program with other Franklin Templeton Funds
to the extent permitted by the 1940 Act and any rules or orders thereunder.
5. Purchase or sell commodities or commodity contracts; except that the Fund may
enter into interest rate and financial futures contracts, options thereon, and
forward contracts.
6. Issue securities senior to the Fund's presently authorized shares of
beneficial interest.
7. Invest more than 25% of the Fund's assets (at the time of the most recent
investment) in any single industry.
ADDITIONAL RESTRICTIONS. The Fund has adopted the following additional
restrictions which are not fundamental and which may be changed without
shareholder approval, to the extent permitted by applicable law, regulation or
regulatory policy. Under these restrictions, the Fund may not:
1. Invest in any company for the purpose of exercising control or management,
except that all or substantially all of the assets of the Fund may be invested
in another registered investment company having the same investment objective
and policies as the Fund.
2. Purchase securities on margin, except that the Fund may make margin payments
in connection with futures, options and currency transactions.
3. Purchase or retain securities of any company in which officers or directors
of the Fund, or of its investment manager, individually owning more than 1/2 of
1% of the securities of such company, in the aggregate own more than 5% of the
securities of such company.
4. Purchase securities of open-end or closed-end investment companies, except in
compliance with the 1940 Act, and except that the Fund may invest in another
registered investment company as described in Restriction 1, above.
5. Invest more than 5% of its assets in securities of issuers with less than
three years continuous operation, including the operations of any predecessor
companies.
6. Hold or purchase the securities of any issuer if, as a result, in the
aggregate, more than 10% of the value of the Fund's net assets would be invested
in (i) securities that are not readily marketable or (ii) repurchase agreements
maturing in more than seven days. The Fund may, however, invest in registered
investment companies as described in Restriction 1, above.
If a percentage restriction is met at the time of
investment, a later increase or decrease in the percentage due to a change in
the value or liquidity of portfolio securities or the amount of assets will not
be considered a violation of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
Positions and Offices Principal Occupations
Name, Age and Address with the Trust During the Past Five
Years
- ------------------------------------------------------------------------------
Frank T. Crohn (72) Trustee
7251 West Palmetto Park Road
Boca Raton, FL 33433
Chairman, Financial Benefit Life Insurance Company; Director, Unity Mutual Life
Insurance Company and AmVestors Financial Corporation; and trustee of three of
the investment companies in the Franklin Templeton Group of Funds.
*William J. Lippman (72) President
One Parker Plaza and Trustee
Fort Lee, NJ 07024
Senior Vice President, Franklin Resources, Inc. and Franklin Management, Inc.;
President and Director Franklin Advisory Services, Inc. and officer and/or
director or trustee of seven of the investment companies in the Franklin
Templeton Group of Funds.
Charles Rubens II (66) Trustee
18 Park Road
Scarsdale, NY 10583
Private Investor; and trustee of four of the investment companies in the
Franklin Templeton Group of Funds.
Leonard Rubin (71) Trustee
2 Executive Drive
Suite 560
Fort Lee, New Jersey 07024
Partner in LDR Equities, L.L.C. (manages various personal investments); Vice
President, Trimtex Co. Inc. (manufactures and markets specialty fabrics); and
trustee of four of the investment companies in the Franklin Templeton Group of
Funds.
Harmon E. Burns (52) 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. and Franklin Templeton
Services, Inc.; Director, Franklin/Templeton Investor Services, Inc.; officer
and/or director, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc.; and officer and/or director or trustee of 61 of the
investment companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (36) 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.; President, Franklin Templeton Services, 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.; Treasurer, Franklin
Advisory Services, Inc. and Franklin Investment Advisory Services, Inc.; officer
of most of the other subsidiaries of Franklin Resources, Inc.; and officer,
director and/or trustee of 61 of the investment companies in the Franklin
Templeton Group of Funds.
Deborah R. Gatzek (48) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc., and officer of 61
of the investment companies in the Franklin Templeton Group of Funds.
Rupert H. Johnson, Jr. (56) 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.;
Senior Vice President and Director, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director, trustee or managing
general partner, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 61 of the investment companies in the Franklin
Templeton Group of Funds.
Diomedes Loo-Tam (58) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting
Officer
Employee of Franklin Advisers, Inc.; and officer of 38 of the investment
companies in the Franklin Templeton Group of Funds.
Edward V. McVey (59) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 33 of the investment companies in the Franklin Templeton
Group of Funds.
R. Martin Wiskemann (70) 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 officer and/or director, as the case
may be, of 21 of the investment companies in the Franklin Templeton Group of
Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisory Services. Nonaffiliated members of the Board are
currently paid $1,800 per quarter plus $600 per meeting attended. As shown
above, some of the nonaffiliated Board members also serve as directors, trustees
or managing general partners of other investment companies in the Franklin
Templeton Group of Funds. They may receive fees from these funds for their
services. The following table provides the total fees paid to nonaffiliated
Board members by the Trust and by other funds in the Franklin Templeton Group of
Funds.
Number of Boards
Total Fees in the Franklin
Total Fees Received from the Templeton Group
Received from Franklin Templeton of Funds on Which
Name the Trust* Group of Funds** Each Serves***
Frank T. Crohn...............$6,300 $18,600 3
Charles Rubens, II...........$6,900 $20,100 4
Leonard Rubin................$6,900 $24,600 4
*For the fiscal year ended October 31, 1996.
**For the calendar year ended December 31, 1996.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 62 registered investment companies, with approximately 171 U.S. based
funds or series.
Nonaffiliated members of the Board 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 Board member received any other
compensation, including pension or retirement benefits, directly or indirectly
from the Fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in the
fees paid to its subsidiaries.
As of February 3, 1997, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately 12,704
Class I shares, or 1.6% of the total outstanding Class I shares of the Fund.
Many of the Board members also own shares in other funds in the Franklin
Templeton Group of Funds.
INVESTMENT MANAGEMENT
AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
Advisory Services. Advisory Services provides investment research and portfolio
management services, including the selection of securities for the Fund to buy,
hold or sell and the selection of brokers through whom the Fund's portfolio
transactions are executed. Advisory Services' activities are subject to the
review and supervision of the Board to whom Advisory Services renders periodic
reports of the Fund's investment activities. Advisory Services is covered by
fidelity insurance on its officers, directors and employees for the protection
of the Fund.
Advisory Services and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisory Services may give advice and take
action with respect to any of the other funds it manages, or for its own
account, that may differ from action taken by Advisory Services on behalf of the
Fund. Similarly, with respect to the Fund, Advisory Services is not obligated to
recommend, buy or sell, or to refrain from recommending, buying or selling any
security that Advisory Services and access persons, as defined by the 1940 Act,
may buy or sell for its or their own account or for the accounts of any other
fund. Advisory Services is not obligated to refrain from investing in securities
held by the Fund or other funds that it manages. Of course, any transactions for
the accounts of Advisory Services and other access persons will be made in
compliance with the Fund's Code of Ethics. Please see "Miscellaneous Information
- - Summary of Code of Ethics."
MANAGEMENT FEES. For the period March 11, 1996 (inception of the Fund) to
October 31, 1996, management fees, before any advance waiver, totaled $19,727.
Under an agreement by the investment manager to waive its fees, the Fund paid no
management fees.
MANAGEMENT AGREEMENT. The management agreement is in effect until March 11,
1997. It may continue in effect for successive annual periods if 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 Board members who are not parties to the
management agreement or interested persons of any such party (other than as
members of the Board), 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 Advisory Services on 60 days' written notice, and will
automatically terminate in the event of its assignment, as defined in the 1940
Act.
ADMINISTRATIVE SERVICES. Under an agreement with Advisory Services, FT Services
provides certain administrative services and facilities for the Fund. These
include preparing and maintaining books, records, and tax and financial reports,
and monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under its administration agreement, Advisory Services pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
The fee is paid by Advisory Services. It is not a separate expense of the Fund.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the Fund's shareholder servicing agent 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.
CUSTODIANS. 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.
AUDITORS. 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, 1996, their auditing services consisted of rendering an opinion on the
financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended October 31, 1996.
HOW DOES THE FUND BUY
SECURITIES FOR ITS PORTFOLIO?
Advisory Services selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the Board may give.
When placing a portfolio transaction, Advisory Services seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid by the Fund is
negotiated between Advisory Services and the broker executing the transaction.
The determination and evaluation of the reasonableness of the brokerage
commissions paid are based to a large degree on the professional opinions of the
persons responsible for the placement and review of the transactions. These
opinions are based on the experience of these individuals in the securities
industry and information available to them about the level of commissions being
paid by other institutional investors of comparable size. Advisory Services will
ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in the
opinion of Advisory Services, 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.
Advisory Services may pay certain brokers commissions that are higher than those
another broker may charge, if Advisory Services determines in good faith that
the amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or Advisory Services' overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to Advisory Services include, among others, supplying
information about particular companies, markets, countries, or local, regional,
national or transnational economies, statistical data, quotations and other
securities pricing information, and other information that provides lawful and
appropriate assistance to Advisory Services in carrying out its investment
advisory responsibilities. These services may not always directly benefit the
Fund. They must, however, be of value to Advisory Services in carrying out its
overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services Advisory Services receives from dealers effecting transactions
in portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisory Services to supplement its own
research and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, Advisory Services and its affiliates may use
this research and data in their investment advisory capacities with other
clients. If the Fund's officers are satisfied that the best execution is
obtained, consistent with internal policies the sale of Fund shares, as well as
shares of other funds in the Franklin Templeton Group of Funds, may also be
considered a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive 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 Advisory Services will be reduced by the amount of any fees
received by Distributors in cash, less any costs and expenses incurred in
connection with the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisory Services are considered at or about
the same time, transactions in these securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all by
Advisory Services, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. In some cases this procedure could
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 period March 11, 1996, to October 31, 1996, the Fund paid brokerage
commissions totaling $28,078.
As of October 31, 1996, the Fund did not own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities Dealers may at times receive the entire
sales charge. A Securities Dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the 1933 Act.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - Purchase
Price of Fund Shares" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these 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.
Class I shares of the Fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
Sales
Size of Purchase - U.S. dollars Charge
- --------------------------------------------
Under $30,000...................... 3.0%
$30,000 but less than $50,000...... 2.5%
$50,000 but less than $100,000..... 2.0%
$100,000 but less than $200,000 ... 1.5%
$200,000 but less than $400,000.... 1.0%
$400,000 or more................... 0%
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares of $1 million or more: 1% on
sales of $1 million to $2 million, plus 0.80% on sales over $2 million to $3
million, plus 0.50% on sales over $3 million
to $50 million, plus 0.25% on sales over $50 million to $100 million, plus 0.15%
on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases of Class I shares by certain retirement plans pursuant to a sales
charge waiver, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on sales
over $3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million. Distributors may make these
payments in the form of contingent advance payments, which may be recovered from
the Securities Dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy Class
I shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
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 on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds 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 during the 13
month period, except in the case of certain retirement plans, 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
on the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute a
Letter before a change in the sales charge structure of the Fund, you may
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 Class I shares of the Fund registered in
your name until you fulfill the Letter. This policy of reserving shares does not
apply to certain retirement plans. If 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 total
purchases, less redemptions, exceed the amount specified under the Letter and is
an amount that 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 the purchases had
been made at a single time. Upon 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 before 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 certain retirement plans, 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.
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 and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
Systematic Withdrawal Plan. 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 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day for Class I shares and on the prior
business day for Class II shares. If the processing dates are different, the
date of the Net Asset Value used to redeem the shares will also be different for
Class I and Class II shares.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
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 Board reserves 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 these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell 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.
SPECIAL SERVICES. The Franklin Templeton Institutional Services Department
provides specialized services, including recordkeeping, for institutional
investors. 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 that the Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share of each class as of the scheduled
close of the NYSE, generally 1:00 p.m. Pacific time, each day that the NYSE is
open for trading. As of the date of this SAI, the Fund is informed that the NYSE
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 that 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 Advisory Services.
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 before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the scheduled close of trading
on the NYSE, if that is earlier. The 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 that 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 Net Asset Value of each class. If events materially affecting the values
of these foreign securities occur during this period, the 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 before
the scheduled close of the NYSE. The value of these securities used in computing
the Net Asset Value of each class is determined as of such times. Occasionally,
events affecting the values of these securities may occur between the times at
which they are determined and the scheduled close of the NYSE that will not be
reflected in the computation of the Net Asset Value of each class. If events
materially affecting the values of these securities occur during this period,
the securities will be valued at their fair value as determined in good faith by
the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
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 capital loss carryforward) may generally be
made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the 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.
TAXES
As stated in the Prospectus, the Fund has elected and qualified to be treated as
a regulated investment company under Subchapter M of the Code. The Board
reserves the right not to maintain the qualification of the Fund as a regulated
investment company if it determines this course of action to be beneficial to
shareholders. In that case, the Fund will be subject to federal and possibly
state corporate taxes on its taxable income and gains, and distributions to
shareholders will be taxable to the extent of the Fund's available earnings and
profits.
Subject to the limitations discussed below, all or a portion of the income
distributions paid by the Fund may be treated by corporate shareholders as
qualifying dividends for purposes of the dividends-received deduction under
federal income tax law. If the aggregate qualifying dividends received by the
Fund (generally, dividends from U.S. domestic corporations, the stock in which
is not debt-financed by the Fund and is held for at least a minimum holding
period) is less than 100% of its distributable income, then the amount of the
Fund's dividends paid to corporate shareholders which may be designated as
eligible for such deduction will not exceed the aggregate qualifying dividends
received by the Fund for the taxable year. The amount or percentage of income
qualifying for the corporate dividends-received deduction will be provided by
the Fund annually in the Fund's fiscal year end annual report.
Corporate shareholders should note that dividends paid by the Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividend-received deduction. For example, any interest income and net short-term
capital gain (in excess of any net long-term capital loss or capital loss
carryover) included in investment company taxable income and distributed by the
Fund as a dividend will not qualify for the dividends-received deduction.
Corporate shareholders should also note that availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless Fund shares have been held (or deemed held)
for at least 46 days in a substantially unhedged manner. The dividends-received
deduction may also be reduced to the extent interest paid or accrued by a
corporate shareholder is directly attributable to its investment in Fund shares.
The entire dividend, including the portion which is treated as a deduction, is
includable in the tax base on which the federal alternative minimum tax is
computed and may also result in a reduction in your tax basis in Fund shares,
under certain circumstances, if the shares have been held for less than two
years. Corporate shareholders whose investment in the Fund is "debt financed"
for these tax purposes should consult with their tax advisors concerning the
availability of the dividends-received deduction.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. The Fund intends as a matter of policy
to declare such dividends, if any, in December and to pay these dividends in
December or January to avoid the imposition of this tax, but does not guarantee
that its distributions will be sufficient to avoid any or all federal excise
taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between your basis in the shares
and the amount received, subject to the rules described below. If such shares
are a capital asset in your hands, gain or loss will be capital gain or loss and
will be long-term for federal income tax purposes if the shares have been held
for more than one year.
All or a portion of the sales charge incurred in buying shares of the Fund will
not be included in the federal tax basis of shares sold or exchanged within 90
days of their purchase (for purposes of determining gain or loss with respect to
such shares) if the sales proceeds are reinvested in the Fund or in another fund
in the Franklin Templeton Group of Funds and a sales charge which would
otherwise apply to the reinvestment is reduced or eliminated. Any portion of
such sales charge excluded from the tax basis of the shares sold will be added
to the tax basis of the shares acquired in the reinvestment. You should consult
with your tax advisor concerning the tax rules applicable to the redemption or
exchange of Fund shares.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares purchased.
THE FUND'S INVESTMENTS - GENERAL. The Fund's investment in options, futures and
forward conversions, options on futures, stock indices, foreign currencies and
securities, synthetic and enhanced convertible securities, structured notes,
zero coupon/deferred interest securities and pay-in-kind bonds, and its
participation in spread and straddle transactions, or actual or deemed short
sales may be limited by the Code and may require the application of many complex
and special tax rules.
Absent a tax election to the contrary, each Section 1256 position held by the
Fund will be marked-to-market (i.e., treated as if it were sold for fair market
value) on the last business day of the Fund's fiscal year, and all gain or loss
associated with fiscal year transactions and mark-to-market positions at fiscal
year end (except certain foreign currency gain or loss covered by Section 988 of
the Code) will generally be treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss. The effect of Section 1256 mark-to-market
rules may be to accelerate income or to convert what otherwise would have been
long-term capital gains into short-term capital gains or short-term capital
losses into long-term capital losses within the Fund. The acceleration of income
on Section 1256 positions may require the Fund to accrue taxable income without
the corresponding receipt of cash. In order to generate cash to satisfy the
distribution requirements of the Code, the Fund may be required to dispose of
portfolio securities that it otherwise would have continued to hold or to use
cash flows from other sources such as the sale of Fund shares. In these ways,
any or all of these rules may affect both the amount, character and timing of
income distributed to you by the Fund.
OPTIONS AND RELATED TAX RULES. When the Fund holds an option or future 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. Certain tax elections exist for mixed straddles (i.e.-,
straddles comprised of at least one Section 1256 position and at least one
non-Section 1256 position) which may reduce or eliminate the operation of these
straddles rules.
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 futures contracts and
may make certain other tax elections in order to mitigate the effect of the
above rules and to prevent disqualification of the Fund as a regulated
investment company under Subchapter M of the Code.
FOREIGN SECURITIES. The Fund may invest in foreign securities. These
investments, if made, will have the following tax consequences.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currencies, foreign currency payables or
receivables, foreign currency-denominated debt securities, foreign currency
forward contracts, and options or futures contracts on foreign currencies are
subject to special tax rules which may cause such gains and losses to be treated
as ordinary income and losses rather than capital gains and losses, and may
affect the amount and timing of the Fund's income or loss from such transactions
and in turn it distributions to you.
In order for a Fund to qualify as a regulated investment company, at least 90%
of the Fund's annual gross income must consist of dividends, interest and
certain other types of qualifying income, and no more than 30% of its annual
gross income may be derived from the sale or other disposition of securities or
certain other instruments held for less than 3 months. Foreign exchange gains,
derived by a Fund with respect to a Fund's business of investing in stock or
securities, or options or futures with respect to such stock or securities,
constitutes qualifying income for purposes of the 90% limitation.
The Fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. Because the Fund intends to invest 50% or less of its
total assets in securities of foreign corporations, it will not be entitled
under the Code to pass-through to its shareholders their pro rata share of the
foreign taxes paid by the Fund. These taxes will be taken as a deduction by the
Fund.
CONVERSION TRANSACTIONS. Gain realized by the Fund from transactions that are
deemed to constitute "conversion transactions" under the Code and which would
otherwise produce capital gain may be recharacterized as ordinary income to the
extent that such gain does not exceed an amount defined by the Code as the
"applicable imputed income amount." A conversion transaction is any transaction
in which substantially all of the Fund's expected return is attributable to the
time value of the Fund's net investment in such transaction and any one of the
following criteria are met: 1) there is an acquisition of property with a
substantially contemporaneous agreement to sell the same or substantially
identical property in the future; 2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the Fund on the basis that it would
have the economic characteristics of a loan but would be taxed as capital gain;
or 4) the transaction is specified in Treasury regulations to be promulgated in
the future. The applicable imputed income amount, which represents the deemed
return on the conversion transaction based upon the time value of money, is
computed using a yield equal to 120 percent of the applicable federal rate,
reduced by any prior recharacterizations under this provision or Section 263(g)
of the Code concerning capitalized carrying costs.
ZERO COUPON AND PAY-IN-KIND BONDS. The Fund's investment in zero coupon or
pay-in-kind bonds that provide for the payment of delayed interest may cause the
Fund to recognize income and make distributions to shareholders prior to the
receipt of cash payments on these obligations. These debt instruments are
subject to special tax rules concerning the amount, character and timing of
income required to be accrued by the Fund. The Fund may be required to accrue
income for income tax purposes on these obligations and to distribute such
income to shareholders even though the Fund is not currently receiving interest
or principal payments on the obligations. In order to generate cash to satisfy
distribution requirements, the Fund may be required to dispose of portfolio
securities that it otherwise would have continued to hold or to use cash flows
from other sources such as the sale of Fund shares.
U.S. GOVERNMENT SECURITIES. The Fund may also invest for temporary or defensive
purposes in securities of the U.S. government and certain of its agencies or
instrumentalities. Many states grant tax-free status to dividends paid to
shareholders of regulated investment companies from interest earned by the fund
from direct obligations of the U.S. government, subject in some states to
minimum investment requirements that must be met by the Fund. Investments in
mortgage-backed securities and repurchase agreements collateralized by U.S.
government securities do not generally qualify for tax-free treatment. At the
end of each calendar year, the Fund will provide you with the percentage of any
dividends paid which may qualify for such tax-free treatment. You should then
consult with your tax adviser with respect to the application of your state and
local income tax laws to these distributions.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering for each class of the Fund's shares.
The underwriting agreement will continue in effect for successive annual periods
if 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 Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), 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.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the period March 11, 1996, to October 31, 1996, were $136,088.
After allowances to dealers, Distributors retained $14,930 in net underwriting
discounts and commissions, and received no compensation in connection with
redemptions or repurchases of shares. Distributors may be entitled to
reimbursement under the Rule 12b-1 plan for each class, as discussed below.
Except as noted, Distributors received no other compensation from the Fund for
acting as underwriter.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 plans" that
were adopted pursuant to Rule 12b-1 of the 1940 Act.
The Class I Plan. Under the Class I plan, the Fund may pay up to a maximum of
0.25% per year of Class I's average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of Class I shares. In
addition, the Fund is permitted to pay Distributors up to an additional 0.10%
per year of Class I's average daily net assets for reimbursement of distribution
expenses.
THE CLASS II PLAN. Under the Class II plan, the Fund pays Distributors up to
0.75% per year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the Fund.
Under the Class II plan, the Fund also pays an additional 0.25% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
THE CLASS I AND CLASS II PLANS. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the Fund, Advisory Services or Distributors or other parties on behalf of
the Fund, Advisory Services or Distributors make payments that are deemed to be
for the financing of any activity primarily intended to result in the sale of
shares of each class 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. The terms
and provisions of each plan relating to required reports, term, and approval are
consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
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 plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this 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.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the Board, including a majority vote
of the Board members who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such Board members be done by the non-interested
members of the Board. The plans and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members 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 Advisory Services or by vote of a majority of the
outstanding shares of the class. Distributors or any dealer or other firm may
also terminate their respective distribution or service agreement at any time
upon written notice.
The plans 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 outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the non-interested
members of the Board, 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 plans 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 plans should be continued.
For the period March 11, 1996, to October 31, 1996, Distributors had eligible
expenditures of $9,879 and $4,074 for advertising, printing, and payments to
underwriters and broker-dealers pursuant to the Class I and Class II plans,
respectively, of which the Fund paid Distributors $6,572 and $264 under the
Class I and Class II plans.
HOW DOES THE FUND
MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. 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.
Average annual total return and current yield quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the Fund to compute or express performance for each class follows. Regardless of
the method used, past performance does not guarantee future results, and is an
indication of the return to shareholders only for the limited historical period
used.
TOTAL RETURN
Average Annual Total Return. Average annual total return is determined by
finding the average annual 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, and income dividends and capital gain distributions 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 to the sales charge structure,
historical performance information will be restated to reflect the maximum
front-end sales charge currently in effect.
These figures will be calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five- or ten-year periods at the end of the one-, five-
or ten-year periods (or fractional portion thereof)
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at Net Asset Value. Cumulative total return, however, will be based
on the actual return for each class for a specified period rather than on the
average return over one-, five- and ten-year periods , or fractional portion
thereof. The cumulative total return for Class I for the period March 11, 1996
(inception of the Fund) to October 31, 1996, was 9.50%. The cumulative total
return for Class II for the period September 3, 1996 (inception of Class II) to
October 31, 1996, was 3.06%.
YIELD
CURRENT YIELD. Current yield of each class shows the income per share earned by
the Fund. It is calculated by dividing the net investment income per share of
each class earned during a 30-day base period by the applicable 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 of
the class during the base period. The yield for Class I for the 30-day period
ended October 31, 1996, was 0.29%.
These figures were obtained using the following SEC formula:
6
Yield = 2 [(a-b + 1) - 1]
----
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to
receive dividends
d = the maximum Offering Price per share on the last day of the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the SEC,
is not indicative of the amounts which were or will be paid to shareholders of a
class. Amounts paid to shareholders are reflected in the quoted current
distribution rate. The current distribution rate is usually computed by
annualizing the dividends paid per share by a class during a certain period and
dividing that amount by the current maximum Offering Price. 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. The current
distribution rate for each class for the 30-day period ended October 31, 1996,
was 0.28% for Class I and 0.04% for Class II.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance 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
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative 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.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and under-writer of the Franklin 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 about the Fund may
discuss certain measures of each class' 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.
These 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 NYSE.
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 mutual funds.
h) Financial publications: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
l) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
m) Standard & Poor's 100 Stock Index - an unmanaged index based on the prices of
100 blue-chip stocks, including 92 industrials, one utility, two transportation
companies, and 5 financial institutions. The S&P 100 Stock Index is a smaller
more flexible index for options trading.
n) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk adjusted performance of a fund over specified
time periods relative to other funds within its category.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an invest ment
in the Fund. The advertisements or information may include symbols, headlines,
or other material that highlights or summarizes the information discussed in
more detail in the communication.
Advertisements or information may also compare a class' performance to the
return on CDs 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 CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, if any, as well as the value of its shares that 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. CDs 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 these other averages.
MISCELLANEOUS INFORMATION
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
other long-term goals. The Franklin College Costs Planner may help 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 these goals will be met.
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 49 years and
now services more than 2.6 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. Mutual Series Fund Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $179 billion in
assets under management for more than 4.9 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 120
U.S. based open-end investment companies to the public. 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 eight years.
As of February 3, 1997, the principal shareholders of the Fund, beneficial or of
record, were as follows:
Name and Address Share Amount Percentage
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CLASS I
Franklin Resources, Inc.
Corporate Treasury
1850 Gateway Dr., 6th Flr.
San Mateo, CA 94404-2467 68,348.259 8.56%
CLASS II
NFSC FEBO
NFSC/FMTC IRA Rollover
FBO William E. McChan Jr.
7230 Jonestown Rd.arrisburg, PA 17112 4,247.211 6.55%
ADVISOR CLASS
William J. Lippman &
Doris Lippman Jt ten
18 Daniel Dr.
Englewood, NJ 07631-3736 2,027.441 13.55%
Victoria T. Lee
2918 Van Ness Ave. #3
San Francisco, CA 94109-1020 3,084.671 20.61%
Donald G. Taylor &
Gigo H. Lee-Taylor Jt ten
300 N Murray Ave.
Ridgewood, NJ 07450-3011 5,353.439 35.77%
Franklin Resources, Inc.
Corporate Treasury
1850 Gateway Dr., 6th Flr.
San Mateo, CA 94404-2467 1,063.844 7.11%
F/T Fund Allocator Growth
Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470 760.519 5.08%
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
As 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.
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, before 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 IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group 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.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended October 31, 1996, including the
auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISORY SERVICES - Franklin Advisory Services, Inc., the Fund's investment
manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
PROSPECTUS - The prospectus for the Fund's Class I and Class II shares dated
March 1, 1997, as may be amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
FRANKLIN
VALUE FUND-
ADVISOR CLASS
FRANKLIN VALUE INVESTORS TRUST
STATEMENT OF
ADDITIONAL INFORMATION
MARCH 1, 1997
777 MARINERS ISLAND BLVD., P.O. BOX 7777
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SAN MATEO, CA 94403-7777 1-800/DIAL BEN
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TABLE OF CONTENTS
How does the Fund Invest its Assets? 2
What are the Fund's Potential Risks? 6
Investment Restrictions...... 8
Officers and Trustees........ 9
Investment Management
and Other Services.......... 11
How does the Fund Buy
Securities for its Portfolio? 12
How Do I Buy, Sell and Exchange Shares? 13
How are Fund Shares Valued?.. 15
Additional Information on
Distributions and Taxes..... 16
The Fund's Underwriter....... 19
How does the Fund
Measure Performance?........ 19
Miscellaneous Information.... 22
Financial Statements......... 24
Useful Terms and Definitions. 24
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When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
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The Franklin Value 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 long-term total return. The Fund
seeks to achieve its objective by investing at least 65% of its assets in the
securities of companies that Advisory Services believes are undervalued. Income
is a secondary consideration of the Fund, although it is not part of the Fund's
investment objective.
This SAI describes the Fund's Advisor Class shares. The Prospectus, dated March
1, 1997, as may be amended from time to time, contains the basic information you
should know before investing in the Fund. For a free copy, call 1-800/DIAL BEN
or write the Fund at the address shown.
THIS 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 PROSPECTUS.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE
U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY ANY
BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How does the Fund Invest its Assets?"
OPTIONS AND FUTURES
OPTIONS. The Fund may write covered call options that are listed on a national
securities exchange and buy listed options on securities and securities indices
for portfolio hedging purposes. The Fund may also write covered call options and
buy put options that are traded over-the-counter ("OTC"). In addition, the Fund
may enter into closing transactions with respect to its open option positions.
CALL OPTIONS. The Fund may buy call options on securities which it intends to
buy. By buying these options, the Fund limits the risk of a substantial increase
in the market price of these securities. The Fund may also buy call options on
securities held in its portfolio and on which it has written call options as
described below.
A writer of a call option retains the amount of the premium paid by the buyer of
the option regardless of whether it is exercised. The premium amount reflects,
among other things, the relationship of the exercise price to the market price,
the volatility of the underlying security, the remaining term of the option,
supply and demand, and interest rates. A premium received by the writer of a
covered call option may be offset by a decline in the market value of the
underlying security during the option period. Because the writer of a call
option may be assigned an exercise notice at any time before the termination of
the call, the writer may have no control over when the underlying securities
must be sold. If a call option is exercised, the writer experiences a profit or
loss from the sale of the underlying security. Also, by writing a covered call
option, the Fund gives up the opportunity to profit from any price increase in
the underlying security above the option exercise price while the option is in
effect.
Unless a writer of an option has already been notified of the exercise of an
option, the writer may terminate its obligation by buying an option of the same
series as the option previously written. This is known as a "closing purchase
transaction," and it allows the writer's position to be canceled by the clearing
corporation. A holder of an option liquidates its position by selling an option
of the same series as the option previously purchased, which is known as a
"closing sale transaction." There is no guarantee that either a closing purchase
or a closing sale transaction can be completed.
The Fund may conduct a closing transaction on a written call option to permit
the Fund to (i) write another call option on the underlying security with either
a different exercise price, expiration date or both or (ii) use the cash or
proceeds from the sale of the underlying security for other Fund investments. If
the Fund wants to sell a security from its portfolio on which it has written a
call option, it may conduct a closing transaction before or at the same time as
it sells the security. Profit or loss from such a sale will depend on whether
the amount received is more or less than the premium paid for the call option
plus any related transaction costs.
If the price of a closing transaction is less than the premium received from
writing the option or the premium paid to buy the option, the Fund makes a
profit on the transaction; if the price is more, the Fund realizes a loss.
Because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the purchase of a call option is likely to be offset by appreciation of the
underlying security owned by the Fund.
PUT OPTIONS. The Fund may also buy put options. The Fund may enter into closing
sale transactions with respect to such options, exercise them, or permit them to
expire. The Fund may buy a put option on an underlying security (a "protective
put") owned by the Fund as a hedging technique in order to protect against an
anticipated decline in the value of the security. This allows the Fund to sell
the underlying security at the put exercise price, regardless of any decline in
the underlying security's market price, until the put expires. If the investment
manger decides to hold the underlying security for tax considerations, for
example, a put option may be purchased in order to protect any unrealized
appreciation. Of course any capital gain realized when the security is sold
would be reduced by the premium paid for the put option and any transaction
costs.
OPTIONS ON INDICES. Options on indices, which are described in the Prospectus,
give the holder the right to receive cash equal to the difference between the
closing price of the index and the exercise price of the option, expressed in
dollars, multiplied by a specified number. Options on indices differ from
options on individual securities in that all settlements are in cash, and gain
or loss depends on price movements in the stock market generally (or in a
particular industry or segment of the market) rather than on price movements in
individual securities.
FORWARD CONVERSIONS. In a forward conversion, the Fund buys securities and
writes call options and buys put options on such securities. By purchasing puts,
the Fund protects the underlying security from depreciation in value. By selling
or writing calls on the same security, the Fund receives premiums which may
offset part or all of the cost of purchasing the puts while forgoing the
opportunity for appreciation in the value of the underlying security. The Fund
will not exercise a put it has purchased while a call option on the same
security is outstanding.
Forward conversions are intended to hedge against fluctuations in the market
value of the underlying security. Although it is generally intended that the
exercise price of put and call options would be identical, situations might
occur in which some option positions are acquired with different exercise
prices. Therefore, the Fund's return may depend in part on movements in the
price of the underlying security. The Fund's return on forward conversions may
be greater or less than it would otherwise have been if it had hedged the
security only by purchasing put options.
SPREAD AND STRADDLE OPTIONS TRANSACTIONS. In "spread" transactions, the Fund
buys and writes a put or buys and writes a call on the same underlying security
with the options having different exercise prices and/or expiration dates. In
"straddles," the Fund purchases or writes combinations of put and call options
on the same security. When the Fund engages in spread and straddle transactions,
it seeks to profit from differentials in the option premiums paid and received
and in the market prices of the related options positions when they are closed
out or sold. Because these transactions require the Fund to buy and/or write
more than one option simultaneously, the Fund's ability to enter into such
transactions and to liquidate its positions when necessary or deemed advisable
may be more limited than if the Fund was to buy or sell a single option.
Similarly, costs incurred by the Fund in connection with these transactions will
in many cases be greater than if the Fund was to buy or sell a single option.
FUTURES. The Fund may enter into contracts for the purchase or sale for future
delivery of securities, contracts based upon financial indices, and the Fund may
buy options on such contracts ("financial futures"). Financial futures contracts
are contracts that obligate the long or short holder to take or make delivery of
a specified quantity of a financial instrument, such as a security, or the cash
value of a securities index during a specified future period at a specified
price. A "sale" of a futures contract means the seller has a contractual
obligation to deliver the securities described in the contract at a specified
price on a specified date. A "purchase" of a futures contract means the buyer
has a contractual obligation to acquire the securities described in the contract
at a specified price on a specified date. Futures contracts have been designed
by exchanges that have been designated "contracts markets" by the Commodity
Futures Trading Commission ("CFTC") and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by buying
(or selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation to take
delivery of the securities. Since all transactions in the futures market are
made, offset or fulfilled through a clearinghouse associated with the exchange
on which the contracts are traded, the Fund will incur brokerage fees when it
purchases or sells futures contracts.
The Fund will not engage in transactions in futures contracts or related options
for speculation but only as a hedge against changes resulting from market
conditions in the values of its securities or securities which it intends to
purchase. The Fund will not enter into any stock index future or related option
if, immediately thereafter, more than one-third of the Fund's net assets would
be represented by futures contracts or related options. In addition, the Fund
may not buy or sell futures contracts or buy or sell related options if,
immediately thereafter, the sum of the amount of margin deposits on its existing
futures and related options positions, and premiums paid for related options,
would exceed 5% of the market value of the Fund's total assets.
The purpose of the acquisition or sale of a futures contract is to attempt to
protect the Fund from fluctuations in price of portfolio securities without
actually buying or selling the underlying security. To the extent the Fund
enters into futures contracts or related options, it will deposit in a
segregated account with its custodian bank cash or other U.S. Treasury
obligations equal to a specified percentage of the value of the futures contract
(the "initial margin"), as required by the relevant contract market and futures
commission merchant. The futures contract will be marked-to-market daily. If the
value of the futures contract declines relative to the Fund's position, the Fund
will be required to pay the futures commission merchant an amount equal to the
change in value.
STOCK INDEX FUTURES CONTRACTS. The Fund may purchase and sell stock index
futures contracts traded on domestic exchanges and, to the extent such contracts
have been approved by the CFTC for sale to customers in the U.S., on foreign
exchanges. A stock index futures contract obligates the seller to deliver (and
the purchaser to take) an amount of cash equal to a specific dollar amount times
the difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement is made.
Open futures contracts are valued on a daily basis and the Fund may be obligated
to provide or receive cash reflecting any decline or increase in the contract's
value. No physical delivery of the underlying stocks in the index is made in the
future.
The Fund may sell stock index futures contracts in anticipation of or during a
market decline in an attempt to offset the decrease in market value of its
securities that might otherwise result. When the Fund is not fully invested in
stocks and anticipates a significant market advance, it may purchase stock index
futures in order to gain rapid market exposure that may offset increases in the
cost of common stocks that it intends to purchase.
FUTURE DEVELOPMENTS. The Fund may take advantage of opportunities in the area of
options and futures contracts and any other derivative investments that are not
presently contemplated for use by the Fund or that are not currently available
but which may be developed, to the extent such opportunities are both consistent
with the Fund's investment objective and legally permissible for the Fund. Prior
to investing in any such investment vehicle, the Fund will supplement its
Prospectus, if appropriate.
OTHER TYPES OF SECURITIES AND POLICIES
DEPOSITARY RECEIPTS. Many securities of foreign issuers are represented by
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
and Global Depositary Receipts ("GDRs") (collectively "Depositary Receipts").
ADRs evidence ownership of, and represent the right to receive, securities of
foreign issuers deposited in a domestic bank or trust company or a foreign
correspondent bank. EDRs and GDRs are typically issued by foreign banks or trust
companies, although they also may be issued by U.S. banks or trust companies,
and evidence ownership of underlying securities issued by either a foreign or a
U.S. corporation. Generally, Depositary Receipts in registered form are designed
for use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the U.S.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on
exchanges or over-the-counter. While ADRs do not eliminate all the risk
associated with foreign investments, by investing in ADRs rather than directly
in the stock of foreign issuers, the Fund will avoid currency risks during the
settlement period for either purchases or sales. In general, there is a large,
liquid market in the U.S. for ADRs quoted on a national securities exchange or
on NASDAQ. The information available for ADRs is subject to the accounting,
auditing and financial reporting standards of the U.S. market or exchange on
which they are traded, which standards are more uniform and more exacting than
those to which many foreign issuers may be subject. EDRs and GDRs may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted.
Depositary Receipts may be issued under sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of Depositary Receipts. In unsponsored programs, the issuer
may not be directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs and there may not be a correlation
between such information and the market value of the Depositary Receipts.
TRADE CLAIMS. Trade claims are bought from creditors of companies in financial
difficulty who seek to reduce the number of debt obligations they are owed. Such
trade creditors generally sell their claims in an attempt to improve their
balance sheets and reduce uncertainty regarding payments. For buyers, trade
claims offer the potential for profits since they are often purchased at a
significantly discounted value and, consequently, have the potential for higher
income and capital appreciation should the debt issuer's financial position
improve. Trade claims are generally liquid, as there is a secondary market, but
the Board will monitor their liquidity. An investment in trade claims is
speculative and there can be no guarantee that the debt issuer will ever be able
to satisfy the obligation. Further, trading in trade claims is not regulated by
federal securities laws but primarily by bankruptcy and commercial laws. Because
trade claims are unsecured obligations, holders may have a lower priority than
secured or preferred creditors.
WARRANTS. A warrant is typically a long-term option issued by a corporation
which gives the holder the privilege of buying a specified number of shares of
the underlying common stock at a specified exercise price at any time on or
before an expiration date. Stock index warrants entitle the holder to receive,
upon exercise, an amount in cash determined by reference to fluctuations in the
level of a specified stock index. If the Fund does not exercise or dispose of a
warrant prior to its expiration, it will expire worthless. Further, the Fund
does not intend to invest directly in warrants (valued at the lower of cost or
market) in excess of 5% of the value of the Fund's net assets. No more than 2%
of the value of the Fund's net assets may be invested in warrants (valued at the
lower of cost or market) which are not listed on the New York or American Stock
Exchange.
SHORT-SELLING. In a short sale, the Fund sells a security it does not own in
anticipation of a decline in the market value of that security. The security
sold must be listed on a national exchange. To complete the transaction, the
Fund must borrow the security to make delivery to the buyer. The Fund is then
obligated to replace the security borrowed by purchasing it at the market price
at the time of replacement. Until the security is replaced, the Fund must pay
the lender any dividends or interest that accrue during the period of the loan.
To borrow the security, the Fund may also be required to pay a premium, which
would increase the cost of the security sold. The proceeds of the short sale
will be retained by the broker, to the extent necessary to meet margin
requirements, until the short position is closed out.
The Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security, and the Fund will realize a gain if the
security declines in price between those same dates. The amount of any gain will
be decreased, and the amount of any loss increased, by the amount of any
premium, dividends or interest the Fund is required to pay in connection with
the short sale.
In addition to the short sales discussed above, the Fund may also make short
sales "against the box." A short sale is "against the box" to the extent that
the Fund contemporaneously owns or has the right to obtain at no added cost
securities identical to those sold short. The Fund at no time will have more
than 15% of the value of its net assets in deposits on short sales against the
box.
No securities will be sold short if, after the sale, the total market value of
all the Fund's open short positions, including short sales against the box,
would exceed 25% of the value of the Fund's net assets. In addition, short sales
of the securities of any one issuer may not exceed the lesser of 2% of the
Fund's net assets or 2% of the securities of any class of the issuer.
The Fund will place in a segregated account with its custodian bank an amount of
cash or U.S. government securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short and
(b) any cash or U.S. government securities required to be deposited as
collateral with the broker in connection with the short sale (not including the
proceeds from the short sale). The segregated account will be marked-to-market
daily and at no time will the amount deposited in the segregated account and
with the broker as collateral be less than the market value of the securities at
the time they were sold short.
NON-DIVERSIFICATION. As a non-diversified investment company under the 1940 Act,
the Fund may invest more than 5% and up to 25% of its assets in the securities
of any one issuer at the time of purchase. For purposes of the Code, however, as
of the last day of any fiscal quarter, the Fund may not have more than 25% of
its total assets invested in any one issuer, and, with respect to 50% of its
total assets, the Fund may not have more than 5% of its total assets invested in
any one issuer, nor may it own more than 10% of the outstanding voting
securities of any one issuer. These limitations do not apply to investments in
securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities or to securities of investment companies that qualify as
regulated investment companies under the Code.
WHAT ARE THE FUND'S POTENTIAL RISKS?
OPTIONS, FUTURES AND OPTIONS ON FUTURES. The Fund's ability to hedge effectively
all or a portion of its securities through transactions in options on stock
indices, financial futures and related options depends on the degree to which
price movements in the underlying index or underlying securities correlate with
price movements in the relevant portion of the Fund's portfolio. Inasmuch as
these securities will not duplicate the components of the index or such
underlying securities, the correlation will not be perfect. Consequently, the
Fund bears the risk that the prices of the securities being hedged will not move
in the same amount as the hedging instrument. It is also possible that there may
be a negative correlation between the index or other securities underlying the
hedging instrument and the hedged securities that would result in a loss on both
such securities and the hedging instrument. Accordingly, successful use by the
Fund of options on stock indices, financial futures and other options will be
subject to Advisory Services' ability to correctly predict movements in the
direction of the securities markets generally or in a particular segment. This
requires different skills and techniques than predicting changes in the price of
individual stocks.
Positions in stock index options and financial futures and related options may
be closed out only on an exchange which provides a secondary market. There can
be no assurance that a liquid secondary market will exist for any particular
stock index option or futures contract or related option at any specific time.
Thus, it may not be possible to close such an option or futures position. The
inability to close options or futures positions also could have an adverse
impact on the Fund's ability to effectively hedge its securities. Of course, the
Fund will enter into an option or futures position only if there appears to be a
liquid secondary market for such options or futures.
OTC options may be subject to more risks than exchange-traded options because
OTC options are arranged with dealers, not with a clearing corporation, and
because pricing of OTC options is typically done by reference to information
from market makers. There can be no assurance that a continuous liquid secondary
market will exist for any particular OTC option at any specific time.
Consequently, the Fund may be able to realize the value of an OTC option it has
purchased only by exercising it or entering into a closing sale transaction with
the dealer that issued it. Similarly, when the Fund writes an OTC option, it
generally can close out that option prior to its expiration only by entering
into a closing purchase transaction with the dealer to which the Fund originally
wrote it. If a covered call option writer cannot effect a closing transaction,
it cannot sell the underlying security until the option expires or the option is
exercised. Therefore, a covered call option writer of an OTC option may not be
able to sell an underlying security even though it might otherwise be
advantageous to do so. Likewise, a secured put writer of an OTC option may be
unable to sell the securities pledged to secure the put for other investment
purposes while it is obligated as a put writer. Similarly, a purchaser of such
put or call option might also find it difficult to terminate its position on a
timely basis in the absence of a secondary market.
The CFTC and the various exchanges have established limits, referred to as
"speculative position limits," on the maximum net long or net short position
which any person may hold or control in a particular futures contract. Trading
limits are imposed on the maximum number of contracts which any person may trade
on a particular trading day. An exchange may order the liquidation of positions
found to be in violation of these limits and it may impose other sanctions or
restrictions. The Fund does not believe that these trading and positions limits
will have an adverse impact on the Fund's strategies for hedging its securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by Advisory Services may still
not result in a successful transaction.
In addition, futures contracts entail risks. Although the Fund believes that use
of such contracts will benefit the Fund, if Advisory Services' judgment about
the general direction of interest rates is incorrect, the Fund's overall
performance would be poorer than if it had not entered into any such contract.
For example, if the Fund has hedged against the possibility of an increase in
interest rates that would adversely affect the price of bonds held in its
portfolio and interest rates decrease instead, the Fund will lose part or all of
the benefit of the increased value of its bonds which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities
from its portfolio to meet daily variation margin requirements. Such sales may
be, but will not necessarily be, at increased prices which reflect the rising
market. The Fund may have to sell securities at a time when it may be
disadvantageous to do so.
The Fund's sale of futures contracts and purchase of put options on futures
contracts will be solely to protect its investments against declines in value.
The Fund expects that in the normal course it will purchase securities upon
termination of long futures contracts and long call options on future contracts,
but under unusual market conditions it may terminate any of such positions
without a corresponding purchase of securities.
DEPOSITARY RECEIPTS. Depositary Receipts, such as American Depositary Receipts
and Global Depositary Receipts, reduce but do not eliminate all the risk
inherent in investing in the securities of foreign issuers. To the extent that
the Fund acquires Depositary Receipts through banks which do not have a
contractual relationship with the foreign issuer of the security underlying the
Depositary Receipt to issue and service such Depositary Receipts, there may be
an increased possibility that the Fund would not become aware of and be able to
respond to corporate actions such as stock splits or rights offerings involving
the foreign issuer in a timely manner.
HIGH YIELDING, FIXED INCOME SECURITIES. The premature disposition of a high
yielding security due to a call or buy-back feature, the deterioration of the
issuer's creditworthiness, or a default may make it more difficult for the Fund
to manage the timing of its receipt of income, which may have tax implications.
The Fund may be required under the Code and U.S. Treasury regulations to accrue
income for income tax purposes on defaulted obligations and to distribute such
income to the Fund's shareholders even though the Fund is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy any or all of these distribution requirements, the Fund
may be required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares.
Generally, purchasers of high yielding securities are dealers and other
institutional buyers, rather than individuals. To the extent the secondary
trading market for a particular high yielding, fixed-income security does exist,
it is generally not as liquid as the secondary market for higher-rated
securities.
While many high yielding securities have been sold with registration rights,
covenants and penalty provisions for delayed registration, if the Fund is
required to sell such restricted securities before the securities have been
registered, it may be deemed an underwriter of such securities under the
Securities Act of 1933, as amended ("1933 Act"), which entails special
responsibilities and liabilities. The Fund may incur special costs in disposing
of such securities; however, the Fund will generally incur no costs when the
issuer is responsible for registering the securities.
The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yielding securities and adversely affected the
value of outstanding securities and the ability of issuers of such securities to
meet their obligations. Although the economy has improved considerably and high
yielding securities have performed more consistently since that time, there is
no assurance that the adverse effects previously experienced will not recur. For
example, the highly publicized defaults of some high yield issuers during 1989
and 1990 and concerns regarding a sluggish economy which continued into 1993,
depressed the prices for many of these securities. While market prices may still
be temporarily somewhat depressed due to these factors, the ultimate price of
any security will generally reflect the true operating results of the issuer.
Factors adversely impacting the market value of high yielding securities owned
by the Fund will adversely impact the Fund's net asset value. In addition, the
Fund may incur additional expenses to the extent it is required to seek recovery
upon a default in the payment of principal or interest on its portfolio
holdings. The Fund will rely on Advisory Services' judgment, analysis and
experience in evaluating the creditworthiness of an issuer. In this evaluation,
Advisory Services will take into consideration, among other things, the issuer's
financial resources, its sensitivity to economic conditions and trends, its
operating history, the quality of the issuer's management and regulatory
matters.
RESTRICTED SECURITIES. The Board has authorized the Fund to invest in restricted
securities and to consider them liquid (and thus not subject to the 10%
limitation on illiquid securities) to the extent Advisory Services determines
that there is a liquid institutional or other market for these securities. For
example, restricted securities may be freely transferred among qualified
institutional buyers under Rule 144A of the 1933 Act, and in some cases a liquid
institutional market has developed.
On an ongoing basis, the Board will review Advisory Services' decisions to treat
restricted securities as liquid - including Advisory Services' assessment of
current trading activity and the availability of reliable price information. In
determining whether a restricted security can be considered liquid, Advisory
Services and the Board will take into account the following factors: (i) the
frequency of trades and quotes for the security, (ii) the number of dealers
willing to buy or sell the security and the number of potential buyers, (iii)
dealer undertakings to make a market in the security, and (iv) the nature of the
security and nature of the marketplace trades (e.g., the time needed to dispose
of the security, the method of soliciting offers, and the mechanics of
transfer). To the extent the Fund invests in restricted securities that are
deemed to be liquid, the general level of illiquidity in the Fund may be
increased if qualified institutional buyers become uninterested in buying these
securities or the market for these securities contracts.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval 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, whichever is less. The Fund MAY NOT:
1. Borrow money, except that the Fund may borrow money in a manner consistent
with the Fund's investment objective and policies in an amount not exceeding
331/3% of the value of the Fund's total assets (including the amount borrowed).
The Fund may borrow in connection with short-sales and short-sales "against the
box," and the Fund may borrow from banks, other Franklin Templeton Funds or
other persons to the extent permitted by applicable law.
2. Underwrite securities of other issuers, except insofar as the Fund may be
technically deemed an underwriter under the federal securities laws in
connection with the disposition of portfolio securities. (This does not preclude
the Fund from obtaining such short-term credit as may be necessary for the
clearance of purchases and sales of its portfolio securities.)
3. Invest directly in interests in real estate, oil, gas or other mineral
leases, exploration or development programs, including limited partnership
interests. This restriction does not preclude investments in marketable
securities of issuers engaged in such activities.
4. Loan money, except as consistent with the Fund's investment objectives, and
except that the Fund may (a) purchase a portion of an issue of publicly
distributed bonds, debentures, notes and other evidences of indebtedness, (b)
enter into repurchase agreements, (c) lend its portfolio securities, and (d)
participate in an interfund lending program with other Franklin Templeton Funds
to the extent permitted by the 1940 Act and any rules or orders thereunder.
5. Purchase or sell commodities or commodity contracts; except that the Fund may
enter into interest rate and financial futures contracts, options thereon, and
forward contracts.
6. Issue securities senior to the Fund's presently authorized shares of
beneficial interest.
7. Invest more than 25% of the Fund's assets (at the time of the most
recent investment) in any single industry.
ADDITIONAL RESTRICTIONS. The Fund has adopted the following additional
restrictions which are not fundamental and which may be changed without
shareholder approval, to the extent permitted by applicable law, regulation or
regulatory policy. Under these restrictions, the Fund may not:
1. Invest in any company for the purpose of exercising control or management,
except that all or substantially all of the assets of the Fund may be invested
in another registered investment company having the same investment objective
and policies as the Fund.
2. Purchase securities on margin, except that the Fund may make margin payments
in connection with futures, options and currency transactions.
3. Purchase or retain securities of any company in which officers or directors
of the Fund, or of its investment manager, individually owning more than 1/2 of
1% of the securities of such company, in the aggregate own more than 5% of the
securities of such company.
4. Purchase securities of open-end or closed-end investment companies, except in
compliance with the 1940 Act, and except that the Fund may invest in another
registered investment company as described in Restriction 1, above.
5. Invest more than 5% of its assets in securities of issuers with less than
three years continuous operation, including the operations of any predecessor
companies.
6. Hold or purchase the securities of any issuer if, as a result, in the
aggregate, more than 10% of the value of the Fund's net assets would be invested
in (i) securities that are not readily marketable or (ii) repurchase agreements
maturing in more than seven days. The Fund may, however, invest in registered
investment companies as described in Restriction 1, above.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
POSITIONS AND OFFICES
NAME, AGE AND ADDRESS WITH THE TRUST PRINCIPAL OCCUPATIONS
DURING THE PAST FIVE YEARS
Frank T. Crohn (72)
7251 West Palmetto Park Road
Boca Raton, FL 33433
Trustee
Chairman, Financial Benefit Life Insurance Company; Director, Unity Mutual Life
Insurance Company and AmVestors Financial Corporation; and trustee of three of
the investment companies in the Franklin Templeton Group of Funds.
*William J. Lippman (72)
One Parker Plaza
Fort Lee, NJ 07024
President and Trustee
Senior Vice President, Franklin Resources, Inc., and Franklin Management, Inc.;
President and Director Franklin Advisory Services, Inc. and officer and/or
director or trustee of seven of the investment companies in the Franklin
Templeton Group of Funds.
Charles Rubens II (66)
18 Park Road
Scarsdale, NY 10583
Trustee
Private Investor; and trustee of four of the investment companies in the
Franklin Templeton Group of Funds.
Leonard Rubin (71)
2 Executive Drive
Suite 560
Fort Lee, New Jersey 07024
Trustee
Partner in LDR Equities, LLC (manages various personal investments);
Vice President, Trimtex Co. Inc. (manufactures and markets specialty
fabrics); and trustee of four of the investment companies in the
Franklin Templeton Group of Funds.
Harmon E. Burns (52)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc. and Franklin Templeton
Services, Inc.; Director, Franklin/Templeton Investor Services, Inc.; officer
and/or director, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc.; and officer and/or director or trustee of 61 of the
investment companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (36)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; President, Franklin Templeton Services, 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.; Treasurer, Franklin
Advisory Services, Inc. and Franklin Investment Advisory Services, Inc.; officer
of most of the other subsidiaries of Franklin Resources, Inc.; and officer,
director and/or trustee of 61 of the investment companies in the Franklin
Templeton Group of Funds.
Deborah R. Gatzek (48)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc., and officer of 61
of the investment companies in the Franklin Templeton Group of Funds.
Rupert H. Johnson, Jr. (56)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Senior Vice President and Director, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director, trustee or managing
general partner, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 61 of the investment companies in the Franklin
Templeton Group of Funds.
Diomedes Loo-Tam (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 38 of the investment
companies in the Franklin Templeton Group of Funds.
Edward V. McVey (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 33 of the investment companies in the Franklin Templeton
Group of Funds.
R. Martin Wiskemann (70)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President, Portfolio Manager and Director, Franklin Advisers, Inc.;
Senior Vice President, Franklin Management, Inc.; Vice President, Treasurer and
Director, ILA Financial Services, Inc.; and officer and/or director, as the case
may be, of 21 of the investment companies in the Franklin Templeton Group of
Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisory Services. Nonaffiliated members of the Board are
currently paid $1,800 per quarter plus $600 per meeting attended. As shown
above, some of the nonaffiliated Board members also serve as directors, trustees
or managing general partners of other investment companies in the Franklin
Templeton Group of Funds. They may receive fees from these funds for their
services. The following table provides the total fees paid to nonaffiliated
Board members by the Trust and by other funds in the Franklin Templeton Group of
Funds.
NUMBER OF BOARDS
IN THE FRANKLIN
TOTAL FEES TEMPLETON GROUP
TOTAL FEES RECEIVED FROM THE OF FUNDS
RECEIVED FROM FRANKLIN TEMPLETON ON WHICH
NAME THE TRUST* GROUP OF FUNDS** EACH SERVES***
- -----------------------------------------------------------------------------
Frank T. Crohn............... $6,300 $18,600 3
Charles Rubens, II........... $6,900 $20,100 4
Leonard Rubin................ $6,900 $24,600 4
*For the fiscal year ended October 31, 1996.
**For the calendar year ended December 31, 1996.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 62 registered investment companies, with approximately 171 U.S. based
funds or series.
Nonaffiliated members of the Board 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 Board member received any other
compensation, including pension or retirement benefits, directly or indirectly
from the Fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in the
fees paid to its subsidiaries.
As of February 3, 1997, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately 12,704
Class I shares, or 1.6% of the total outstanding Class I shares of the Fund.
Many of the Board members also own shares in other funds in the Franklin
Templeton Group of Funds.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
Advisory Services. Advisory Services provides investment research and portfolio
management services, including the selection of securities for the Fund to buy,
hold or sell and the seRlection of brokers through whom the Fund's portfolio
transactions are executed. Advisory Services' activities are subject to the
review and supervision of the Board to whom Advisory Services renders periodic
reports of the Fund's investment activities. Advisory Services is covered by
fidelity insurance on its officers, directors and employees for the protection
of the Fund.
Advisory Services and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisory Services may give advice and take
action with respect to any of the other funds it manages, or for its own
account, that may differ from action taken by Advisory Services on behalf of the
Fund. Similarly, with respect to the Fund, Advisory Services is not obligated to
recommend, buy or sell, or to refrain from recommending, buying or selling any
security that Advisory Services and access persons, as defined by the 1940 Act,
may buy or sell for its or their own account or for the accounts of any other
fund. Advisory Services is not obligated to refrain from investing in securities
held by the Fund or other funds that it manages. Of course, any transactions for
the accounts of Advisory Services and other access persons will be made in
compliance with the Fund's Code of Ethics. Please see "Miscellaneous Information
- - Summary of Code of Ethics."
MANAGEMENT FEES. For the period March 11, 1996 (inception of the Fund) to
October 31, 1996, management fees, before any advance waiver, totaled $19,727.
Under an agreement by the investment manager to waive its fees, the Fund paid no
management fees.
MANAGEMENT AGREEMENT. The management agreement is in effect until March 11,
1997. It may continue in effect for successive annual periods if 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 Board members who are not parties to the
management agreement or interested persons of any such party (other than as
members of the Board), 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 Advisory Services on 60 days' written notice, and will
automatically terminate in the event of its assignment, as defined in the 1940
Act.
ADMINISTRATIVE SERVICES. Under an agreement with Advisory Services, FT Services
provides certain administrative services and facilities for the Fund. These
include preparing and maintaining books, records, and tax and financial reports,
and monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under its administration agreement, Advisory Services pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
The fee is paid by Advisory Services. It is not a separate expense of the Fund.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the Fund's shareholder servicing agent 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.
Third party plan administrators of tax-qualified retirement plans and other
entities may provide sub-transfer agent services to the Fund. If this happens,
the Fund may pay the third party an annual sub-transfer agency fee that is not
more than the Fund otherwise would have paid for these services.
CUSTODIANS. 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.
AUDITORS. 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, 1996, their auditing services consisted of rendering an opinion on the
financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended October 31, 1996.
HOW DOES THE FUND BUY
SECURITIES FOR ITS PORTFOLIO?
Advisory Services selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the Board may give.
When placing a portfolio transaction, Advisory Services seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
done on a securities exchange, the amount of commission paid by the Fund is
negotiated between Advisory Services and the broker executing the transaction.
The determination and evaluation of the reasonableness of the brokerage
commissions paid are based to a large degree on the professional opinions of the
persons responsible for the placement and review of the transactions. These
opinions are based on the experience of these individuals in the securities
industry and information available to them about the level of commissions being
paid by other institutional investors of comparable size. Advisory Services will
ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in the
opinion of Advisory Services, 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.
Advisory Services may pay certain brokers commissions that are higher than those
another broker may charge, if Advisory Services determines in good faith that
the amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or Advisory Services' overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to Advisory Services include, among others, supplying
information about particular companies, markets, countries, or local, regional,
national or transnational economies, statistical data, quotations and other
securities pricing information, and other information that provides lawful and
appropriate assistance to Advisory Services in carrying out its investment
advisory responsibilities. These services may not always directly benefit the
Fund. They must, however, be of value to Advisory Services in carrying out its
overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services Advisory Services receives from dealers effecting transactions
in portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisory Services 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, Advisory Services and its affiliates may use
this research and data in their investment advisory capacities with other
clients. If the Fund's officers are satisfied that the best execution is
obtained, consistent with internal policies the sale of Fund shares, as well as
shares of other funds in the Franklin Templeton Group of Funds, may also be
considered a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive 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 Advisory Services will be reduced by the amount of any fees
received by Distributors in cash, less any costs and expenses incurred in
connection with the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisory Services are considered at or about
the same time, transactions in these securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all by
Advisory Services, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. In some cases this procedure could
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 period March 11, 1996 to October 31, 1996, the Fund paid brokerage
commissions totaling $28,078.
As of October 31, 1996, the Fund did not own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities laws of states where the Fund offers its
shares may differ from federal law. Banks and financial institutions that sell
shares of the Fund may be required by state law to register as Securities
Dealers.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors and/or its affiliates provide
financial support to various Securities Dealers that sell shares of the Franklin
Templeton Group of Funds. This support is based primarily on the amount of sales
of fund shares. The amount of support may be affected by: total sales; net
sales; levels of redemptions; the proportion of a Securities Dealer's sales and
marketing efforts in the Franklin Templeton Group of Funds; a Securities
Dealer's support of, and participation in, Distributors' marketing programs; a
Securities Dealer's compensation programs for its registered representatives;
and the extent of a Securities Dealer's marketing programs relating to the
Franklin Templeton Group of Funds. Financial support to Securities Dealers may
be made by payments from Distributors' resources, from Distributors' retention
of underwriting concessions and, in the case of funds that have Rule 12b-1
plans, from payments to Distributors under such plans. In addition, certain
Securities Dealers may receive brokerage commissions generated by fund portfolio
transactions in accordance with the NASD's rules.
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 and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. 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 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the prior business day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
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 Board reserves 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 these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell 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.
SPECIAL SERVICES. The Franklin Templeton Institutional Services
Department provides specialized services, including recordkeeping, for
institutional investors. 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 that the Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share of each class of the Fund's shares as
of the scheduled close of the NYSE, generally 1:00 p.m. Pacific time, each day
that the NYSE is open for trading. As of the date of this SAI, the Fund is
informed that the NYSE 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 that 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 Advisory Services.
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 before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the scheduled close of trading
on the NYSE, if that is earlier. The 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 that 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 Net Asset Value. If events materially affecting the values of these
foreign securities occur during this period, the 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 before
the scheduled close of the NYSE. The value of these securities used in computing
the Net Asset Value is determined as of such times. Occasionally, events
affecting the values of these securities may occur between the times at which
they are determined and the scheduled close of the NYSE that will not be
reflected in the computation of the Net Asset Value. If events materially
affecting the values of these securities occur during this period, the
securities will be valued at their fair value as determined in good faith by the
Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
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 capital loss carryforward) may generally be
made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the 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.
TAXES
As stated in the Prospectus, the Fund has elected and qualified to be treated as
a regulated investment company under Subchapter M of the Code. The Board
reserves the right not to maintain the qualification of the Fund as a regulated
investment company if it determines this course of action to be beneficial to
shareholders. In that case, the Fund will be subject to federal and possibly
state corporate taxes on its taxable income and gains, and distributions to
shareholders will be taxable to the extent of the Fund's available earnings and
profits.
Subject to the limitations discussed below, all or a portion of the income
distributions paid by the Fund may be treated by corporate shareholders as
qualifying dividends for purposes of the dividends-received deduction under
federal income tax law. If the aggregate qualifying dividends received by the
Fund (generally, dividends from U.S. domestic corporations, the stock in which
is not debt-financed by the Fund and is held for at least a minimum holding
period) is less than 100% of its distributable income, then the amount of the
Fund's dividends paid to corporate shareholders which may be designated as
eligible for such deduction will not exceed the aggregate qualifying dividends
received by the Fund for the taxable year. The amount or percentage of income
qualifying for the corporate dividends-received deduction will be provided by
the Fund annually in the Fund's fiscal year end annual report.
Corporate shareholders should note that dividends paid by the Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividend-received deduction. For example, any interest income and net short-term
capital gain (in excess of any net long-term capital loss or capital loss
carryover) included in investment company taxable income and distributed by the
Fund as a dividend will not qualify for the dividends-received deduction.
Corporate shareholders should also note that availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless Fund shares have been held (or deemed held)
for at least 46 days in a substantially unhedged manner. The dividends-received
deduction may also be reduced to the extent interest paid or accrued by a
corporate shareholder is directly attributable to its investment in Fund shares.
The entire dividend, including the portion which is treated as a deduction, is
includable in the tax base on which the federal alternative minimum tax is
computed and may also result in a reduction in your tax basis in Fund shares,
under certain circumstances, if the shares have been held for less than two
years. Corporate shareholders whose investment in the Fund is "debt financed"
for these tax purposes should consult with their tax advisors concerning the
availability of the dividends-received deduction.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. The Fund intends as a matter of policy
to declare such dividends, if any, in December and to pay these dividends in
December or January to avoid the imposition of this tax, but does not guarantee
that its distributions will be sufficient to avoid any or all federal excise
taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between your basis in the shares
and the amount received, subject to the rules described below. If such shares
are a capital asset in your hands, gain or loss will be capital gain or loss and
will be long-term for federal income tax purposes if the shares have been held
for more than one year.
All or a portion of the sales charge incurred in buying shares of the Fund will
not be included in the federal tax basis of shares sold or exchanged within 90
days of their purchase (for purposes of determining gain or loss with respect to
such shares) if the sales proceeds are reinvested in the Fund or in another fund
in the Franklin Templeton Group of Funds and a sales charge which would
otherwise apply to the reinvestment is reduced or eliminated. Any portion of
such sales charge excluded from the tax basis of the shares sold will be added
to the tax basis of the shares acquired in the reinvestment. You should consult
with your tax advisor concerning the tax rules applicable to the redemption or
exchange of Fund shares.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares purchased.
THE FUND'S INVESTMENTS - GENERAL. The Fund's investment in options, futures and
forward conversions, options on futures, stock indices, foreign currencies and
securities, synthetic and enhanced convertible securities, structured notes,
zero coupon/deferred interest securities and pay-in-kind bonds, and its
participation in spread and straddle transactions, or actual or deemed short
sales may be limited by the Code and may require the application of many complex
and special tax rules.
Absent a tax election to the contrary, each Section 1256 position held by the
Fund will be marked-to-market (i.e., treated as if it were sold for fair market
value) on the last business day of the Fund's fiscal year, and all gain or loss
associated with fiscal year transactions and mark-to-market positions at fiscal
year end (except certain foreign currency gain or loss covered by Section 988 of
the Code) will generally be treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss. The effect of Section 1256 mark-to-market
rules may be to accelerate income or to convert what otherwise would have been
long-term capital gains into short-term capital gains or short-term capital
losses into long-term capital losses within the Fund. The acceleration of income
on Section 1256 positions may require the Fund to accrue taxable income without
the corresponding receipt of cash. In order to generate cash to satisfy the
distribution requirements of the Code, the Fund may be required to dispose of
portfolio securities that it otherwise would have continued to hold or to use
cash flows from other sources such as the sale of Fund shares. In these ways,
any or all of these rules may affect both the amount, character and timing of
income distributed to you by the Fund.
OPTIONS AND RELATED TAX RULES. When the Fund holds an option or future 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. Certain tax elections exist for mixed straddles (i.e.-,
straddles comprised of at least one Section 1256 position and at least one
non-Section 1256 position) which may reduce or eliminate the operation of these
straddles rules.
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 futures contracts and
may make certain other tax elections in order to mitigate the effect of the
above rules and to prevent disqualification of the Fund as a regulated
investment company under Subchapter M of the Code.
FOREIGN SECURITIES. The Fund may invest in foreign securities. These
investments, if made, will have the following tax consequences.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currencies, foreign currency payables or
receivables, foreign currency-denominated debt securities, foreign currency
forward contracts, and options or futures contracts on foreign currencies are
subject to special tax rules which may cause such gains and losses to be treated
as ordinary income and losses rather than capital gains and losses, and may
affect the amount and timing of the Fund's income or loss from such transactions
and in turn it distributions to you.
In order for a Fund to qualify as a regulated investment company, at least 90%
of the Fund's annual gross income must consist of dividends, interest and
certain other types of qualifying income, and no more than 30% of its annual
gross income may be derived from the sale or other disposition of securities or
certain other instruments held for less than 3 months. Foreign exchange gains,
derived by a Fund with respect to a Fund's business of investing in stock or
securities, or options or futures with respect to such stock or securities,
constitutes qualifying income for purposes of the 90% limitation.
The Fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. Because the Fund intends to invest 50% or less of its
total assets in securities of foreign corporations, it will not be entitled
under the Code to pass-through to its shareholders their pro rata share of the
foreign taxes paid by the Fund. These taxes will be taken as a deduction by the
Fund.
CONVERSION TRANSACTIONS. Gain realized by the Fund from transactions that are
deemed to constitute "conversion transactions" under the Code and which would
otherwise produce capital gain may be recharacterized as ordinary income to the
extent that such gain does not exceed an amount defined by the Code as the
"applicable imputed income amount." A conversion transaction is any transaction
in which substantially all of the Fund's expected return is attributable to the
time value of the Fund's net investment in such transaction and any one of the
following criteria are met: 1) there is an acquisition of property with a
substantially contemporaneous agreement to sell the same or substantially
identical property in the future; 2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the Fund on the basis that it would
have the economic characteristics of a loan but would be taxed as capital gain;
or 4) the transaction is specified in Treasury regulations to be promulgated in
the future. The applicable imputed income amount, which represents the deemed
return on the conversion transaction based upon the time value of money, is
computed using a yield equal to 120 percent of the applicable federal rate,
reduced by any prior recharacterizations under this provision or Section 263(g)
of the Code concerning capitalized carrying costs.
ZERO COUPON AND PAY-IN-KIND BONDS. The Fund's investment in zero coupon or
pay-in-kind bonds that provide for the payment of delayed interest may cause the
Fund to recognize income and make distributions to shareholders prior to the
receipt of cash payments on these obligations. These debt instruments are
subject to special tax rules concerning the amount, character and timing of
income required to be accrued by the Fund. The Fund may be required to accrue
income for income tax purposes on these obligations and to distribute such
income to shareholders even though the Fund is not currently receiving interest
or principal payments on the obligations. In order to generate cash to satisfy
distribution requirements, the Fund may be required to dispose of portfolio
securities that it otherwise would have continued to hold or to use cash flows
from other sources such as the sale of Fund shares.
U.S. GOVERNMENT SECURITIES. The Fund may also invest for temporary or defensive
purposes in securities of the U.S. government and certain of its agencies or
instrumentalities. Many states grant tax-free status to dividends paid to
shareholders of regulated investment companies from interest earned by the fund
from direct obligations of the U.S. government, subject in some states to
minimum investment requirements that must be met by the Fund. Investments in
mortgage-backed securities and repurchase agreements collateralized by U.S.
government securities do not generally qualify for tax-free treatment. At the
end of each calendar year, the Fund will provide you with the percentage of any
dividends paid which may qualify for such tax-free treatment. You should then
consult with your tax adviser with respect to the application of your state and
local income tax laws to these distributions.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering for each class of the Fund's shares.
The underwriting agreement will continue in effect for successive annual periods
if 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 Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), 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.
Distributors does not receive compensation from the Fund for acting as
underwriter of the Fund's Advisor Class shares.
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. 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.
Average annual total return and current yield quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation.
For periods before January 1, 1997, standardized performance quotations for
Advisor Class are calculated by substituting Class I performance for the
relevant time period, excluding the effect of Class I's maximum initial sales
charge, and including the effect of the Rule 12b-1 fees applicable to Class I
shares of the Fund. For periods after January 1, 1997, standardized performance
quotations for Advisor Class are calculated as described below.
An explanation of these and other methods used by the Fund to compute or express
performance for Advisor Class follows. Regardless of the method used, past
performance does not guarantee future results, and is an indication of the
return to shareholders only for the limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual 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 income dividends and capital gain distributions 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 to the sales charge structure, historical
performance information will be restated to reflect the maximum front-end sales
charge currently in effect.
These figures will be calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five- or ten-year periods at the end of the one-,
five- or ten-year periods (or fractional portion thereof)
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes income dividends and capital gain distributions are reinvested at
Net Asset Value. Cumulative total return, however, will be based on the actual
return for each class for a specified period rather than on the average return
over one-, five- and ten-year periods, or fractional portion thereof. Advisor
Class shares were offered beginning January 1, 1997. The Fund's inception date
was March 11, 1997. Had Advisor Class shares been offered since the Fund's
inception, cumulative total return, calculated as noted above, for the period
March 11, 1996 through October 31, 1996 would have been 14.69%.
YIELD
CURRENT YIELD. Current yield shows the income per share earned by the Fund. It
is calculated by dividing the net investment income per share of Advisor Class
earned during a 30-day base period by the Net Asset Value 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 of the class during the base
period. Advisor Class shares were offered beginning January 1, 1997. The Fund's
inception date was March 11, 1996. Had Advisor Class shares been offered since
the Fund's inception, the yield for Advisor Class for the 30-day period ended
October 31, 1996 would have been 0.31%.
These figures were 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 Net Asset Value per share on the last day of the period
CURRENT DISTRIBUTION RATE
Current yield which is calculated according to a formula prescribed by the SEC,
is not indicative of the amounts which were or will be paid to shareholders.
Amounts paid to shareholders are reflected in the quoted current distribution
rate. For Advisor Class, the current distribution rate is usually computed by
annualizing the dividends paid per share by the class during a certain period
and dividing that amount by the current Net Asset Value. 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. Advisor Class shares
were offered beginning January 1, 1997. The Fund's inception date was March 11,
1996. Had Advisor Class shares been offered since the Fund's inception, the
current distribution rate for Advisor Class for the 30-day period ended October
31, 1996, would have been 0.29%.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance 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
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.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin 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 about the Fund may
discuss certain measures of 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. These
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 NYSE.
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 mutual funds.
h) Financial publications: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines provide performance
statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the
U.S. Savings & Loan League Fact Book.
l) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill
Lynch, Lehman Brothers and Bloomberg L.P.
m) Standard & Poor's 100 Stock Index - an unmanaged index based on the prices of
100 blue-chip stocks, including 92 industrials, one utility, two transportation
companies, and 5 financial institutions. The S&P 100 Stock Index is a smaller
more flexible index for options trading.
n) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk adjusted performance of a fund over specified
time periods relative to other funds within its category.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the performance of Advisor Class
to the return on CDs 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 CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, if any, as well as the value of its shares that 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. CDs 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 these other averages.
MISCELLANEOUS INFORMATION
- -------------------------
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
other long-term goals. The Franklin College Costs Planner may help 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 these goals will be met.
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 49 years and
now services more than 2.6 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. Mutual Series Fund Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $179 billion in
assets under management for more than 4.9 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 120
U.S. based open-end investment companies to the public. 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 eight years.
As of February 3, 1997, the principal shareholders of the Fund, beneficial or of
record, were as follows:
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
- ------------------------------------------------------------------------
CLASS I
Franklin Resources, Inc.
Corporate Treasury
1850 Gateway Dr., 6th Flr.
San Mateo, CA 94404-2467................... 68,348.259 8.56%
CLASS II
NFSC FEBO
NFSC/FMTC IRA Rollover
FBO William E. McChan Jr.
7230 Jonestown Rd.
Harrisburg, PA 17112 ...................... 4,247.211 6.55%
ADVISOR CLASS
William J. Lippman &
Doris Lippman Jt ten
18 Daniel Dr.
Englewood, NJ 07631-3736................... 2,027.441 13.55%
Victoria T. Lee
2918 Van Ness Ave. #3
San Francisco, CA 94109-1020............... 3,084.671 20.61%
Donald G. Taylor &
Gigo H. Lee-Taylor Jt ten
300 N Murray Ave.
Ridgewood, NJ 07450-3011................... 5,353.439 35.77%
Franklin Resources, Inc.
Corporate Treasury
1850 Gateway Dr., 6th Flr.
San Mateo, CA 94404-2467................... 1,063.844 7.11%
F/T Fund Allocator Growth
Target Fund
1810 Gateway Dr., 3rd Flr.
San Mateo, CA 94404-2470................... 760.519 5.08%
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
As 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.
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, before 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 IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group 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.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended October 31, 1996, including the
auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISORY SERVICES - Franklin Advisory Services, Inc., the Fund's
investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's
principal underwriter
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment
companies in the Franklin Group of Funds(R) and the Templeton Group of
Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's
administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange.
PROSPECTUS - The prospectus for Advisor Class shares of the Fund dated March 1,
1997, as may be amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
FRANKLIN VALUE INVESTORS TRUST
File Nos. 33-31326
811-5878
FORM N-1A
PART C
Other Information
Item 24 Financial Statements and Exhibits
a) Franklin Value Investors Trust Audited Financial Statements incorporated
herein by reference to the Registrant's Annual Report to Shareholders dated
October 31, 1996 as filed with the SEC on Form Type N-30D on January 10,
1997
(i) Report of Independent Auditors
(ii) Statement of Investments in Securities and Net
Assets - October 31, 1996
(iii)Statement of Assets and Liabilities - October 31,
1996
(iv) Statement of Operations - for the year ended
October 31, 1996
(v) Statements of Changes in Net Assets - for the
years ended October 31, 1996 and 1995
(vi) Notes to Financial Statements
b) Exhibits:
The following exhibits are incorporated by reference to the filings noted,
with the exception of Exhibits 11(i), 27(i), 27(ii), 27(iii), and 27(iv),
which are attached herewith:
(1) copies of the charter as now in effect;
(i) Agreement and Declaration of Trust dated September 11, 1989
Filing: Post-Effective Amendment No. 8 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: September 21, 1995
(ii) Certificate of Amendment of Agreement and Declaration of
Trust of Franklin Balance Sheet Investment Fund dated
September 21, 1995
Filing: Post-Effective Amendment No. 9 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: December 26, 1995
(2) copies of the existing By-Laws or instruments corresponding thereto,
defining the rights of the holders of such securities, and copies of
each security being registered;
(i) By-Laws
Filing: Post-Effective Amendment No. 8 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: September 21, 1995
(3) copies of any voting trust agreement with respect to more than five
percent of any class of equity securities of the Registrant;
Not Applicable
(4) specimens or copies of each security issued by the Registrant,
including copies of all constituent instruments, defining the rights
of the holders of such securities, and copies of each security being
registered;
Not Applicable
(5) copies of all investment advisory contracts relating to the
management of the assets of the Registrant;
(i) Management Agreement between the Registrant on behalf of
Franklin Balance Sheet Investment Fund and Franklin
Advisory Services, Inc., dated July 1, 1996
Filing: Post-Effective Amendment No. 12 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: June 27, 1996
(ii) Management Agreement between the Registrant on behalf of
Franklin MicroCap Value Fund and Franklin Advisory
Services, Inc., dated July 1, 1996
Filing: Post-Effective Amendment No. 12 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: June 27, 1996
(iii)Management Agreement between the Registrant on behalf of
Franklin Value Fund and Franklin Advisory Services,
Inc., dated July 1, 1996
Filing: Post-Effective Amendment No. 12 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: June 27, 1996
(6) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies of
all agreements between principal underwriters and dealers;
(i) Amended and Restated Distribution Agreement between the
Registrant and Franklin/Templeton Distributors, Inc.,
dated April 23, 1995
Filing: Post-Effective Amendment No. 12 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: June 27, 1996
(ii) Forms of dealer agreements between the Registrant and
Franklin/Templeton Distributors, Inc.
Registrant: Franklin Tax-Free Trust
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(7) copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
trustees or officers of the Registrant in their capacity as such; any
such plan that is not set forth in a formal document, furnish a
reasonably detailed description thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts under
Section 17(f) of the Investment Company Act of 1940 (the "1940 Act"),
with respect to securities and similar investments of the Registrant,
including the schedule of remuneration;
(i) Custodian Agreement between Registrant and Bank of
America NT & SA dated June 12, 1991
Filing: Post-Effective Amendment No. 8 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: September 21, 1995
(ii) Copy of Custodian Agreements between Registrant and
Citibank Delaware:
1. Citicash Management ACH Customer Agreement
2. Citibank Cash Management Services Master Agreement
3. Short Form Bank Agreement - Deposit and
Disbursements of Funds
Incorporated herein by reference to:
Registrant: Franklin Asset Allocation Fund
Filing: Post-Effective Amendment No. 55 to Registration
on Form N-1A
File No. 2-12647
Filing Date: May 17, 1996
(iii)Master Custodian Agreement between the Registrant and
Bank of New York dated February 16, 1996
Filing: Post-Effective Amendment No. 11 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: March 8, 1996
(iv) Terminal Link Agreement between the Registrant and Bank
of New York dated February 16, 1996
Filing: Post-Effective Amendment No. 11 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: March 8, 1996
(9) copies of all other material contracts not made in the ordinary
course of business which are to be performed in whole or in part at
or after the date of filing the Registration Statement;
Not Applicable
(10) an opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will when sold
be legally issued, fully paid and nonassessable;
Not Applicable
(11) copies of any other opinions, appraisals or rulings and consents to
the use thereof relied on in the preparation of this registration
statement and required by Section 7 of the 1933 Act;
(i) Consent of Independent Auditors
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in consideration for
providing the initial capital between or among the Registrant, the
underwriter, adviser, promoter or initial stockholders and written
assurances from promoters or initial stockholders that their
purchases were made for investment purposes without any present
intention of redeeming or reselling;
(i) Letter of Understanding relating to Initial Capital of
Franklin Balance Sheet Investment Fund dated November
17, 1989
Filing: Post-Effective Amendment No. 7 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: September 21, 1995
(ii) Letter of Understanding relating to Initial Capital of
Franklin MicroCap Value Fund dated November 29, 1995
Filing: Post-Effective Amendment No. 8 to Registration
Statement on Form N-1A
File No. 33-31326
Filing date: December 1, 1995
(iii)Letter of Understanding relating to Initial Capital of
Franklin Value Fund
Filing: Post-Effective Amendment No. 11 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: March 8, 1996
(iv) Letter of Understanding relating to Initial Capital of
Franklin Value Fund dated August 30, 1996
Filing: Post-Effective Amendment No. 13 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: August 7, 1996
(14) copies of the model plan used in the establishment of any retirement
plan in conjunction with which Registrant offers its securities, any
instructions thereto and any other documents making up the model
plan. Such form(s) should disclose the costs and fees charged in
connection therewith;
(i) Copy of Model Retirement Plan
Registrant: AGE High Income Fund, Inc.
Filing: Post-Effective Amendment No. 26 to Registration
Statement on Form N-1A
File No. 2-30203
Filing Date: August 1, 1989
(15) copies of any plan entered into by Registrant pursuant to Rule 12b-l
under the 1940 Act, which describes all material aspects of the
financing of distribution of Registrant's shares, and any agreements
with any person relating to implementation of such plan.
(i) Amended and Restated Distribution Plan between Franklin
Balance Sheet Investment Fund and Franklin/Templeton
Distributors, Inc., Pursuant to Rule 12b-1 dated July 1,
1993
Filing: Post-Effective Amendment No. 8 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: September 21, 1995
(ii) Distribution Plan between Franklin Value Investors Trust
on behalf of Franklin MicroCap Value Fund and
Franklin/Templeton Distributors, Inc., pursuant to Rule
12b-1 dated December 12, 1995
Filing: Post-Effective Amendment No. 9 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: December 26, 1995
(iii)Distribution Plan Pursuant to Rule 12b-1 between
Franklin Value Fund and Franklin/Templeton Distributors,
Inc., dated March 11, 1996
Filing: Post-Effective Amendment No. 9 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: December 26, 1995
(iv) Class II Distribution Plan between Franklin Value
Investors Trust on behalf of Franklin Value Fund and
Franklin/Templeton Distributors, Inc., dated September
3, 1996
Filing: Post-Effective Amendment No. 15 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: December 31, 1996
(16) schedule for computation of each performance quotation provided in
the registration statement in response to Item 22.
Not Applicable
(17) Power of Attorney
(i) Power of Attorney dated December 11, 1995
Filing: Post-Effective Amendment No. 9 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: December 26, 1995
(ii) Certificate of Secretary dated December 11, 1995
Filing: Post-Effective Amendment No. 9 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: December 26, 1995
(18) Copies of any plan entered into by registrant pursuant to
Rule 18f-3 under the 1940 Act
(i) Multiple Class Plan for Franklin Value Fund
Filing: Post Effective Amendment No. 15 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: December 31, 1996
(27) Financial Data Schedules
(i) Financial Data Schedule for Franklin Balance Sheet Investment
Fund
(ii) Financial Data Schedule for Franklin MicroCap Value Fund
(iii)Financial Data Schedule for Franklin Value Fund-Class I
(iv) Financial Data Schedule for Franklin Value Fund-Class II
Item 25 Persons Controlled by or under Common Control with Registrant
None
Item 26 Number of Holders of Securities
As of November 30, 1996 the number of record holders of the only classes of
securities of the Registrant was as follows:
Number of Record
Title of Class Holders
Class I Class II Advisor Class
Franklin Balance Sheet 36,203 N/A N/A
Investment Fund
Franklin MicroCap Value Fund 11,445 N/A N/A
Franklin Value Fund 666 47 N/A
Item 27 Indemnification
Reference is made to Article VI of the Registrant's By-Laws previously filed,
which is incorporated herein by reference.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to officers and trustees and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a trustee, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such trustee, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court or
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
Notwithstanding the provisions contained in the Registrant's By-Laws, in the
absence of authorization by the appropriate court on the merits pursuant to
Sections 4 and 5 of Article VI of said By-Laws, any indemnification under said
Article shall be made by Registrant only if authorized in the manner provided
in either subsection (a) or (b) of Section 6 of Article VI.
Item 28 Business and Other Connections of Investment Adviser
The officers and directors of the Registrant's manager also serve as officers
and/or directors for (1) the manager's corporate parent, Franklin Resources,
Inc., and/or (2) other investment companies in the Franklin Group of Funds(R).
In addition, Mr. Charles B. Johnson is a director of General Host Corporation.
For additional information please see Part B and Schedules A and D of Form ADV
of the Registrant's Investment Manager (SEC File 801-51967), incorporated herein
by reference, which sets forth the officers and directors of the Investment
Manager and information as to any business, profession, vocation or employment
of a substantial nature engaged in by those officers and directors during the
past two years.
Item 29 Principal Underwriters
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts
as principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund, Inc.
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Advantaged High Yield Securities Fund
Franklin Tax-Advantaged International Bond Fund
Franklin Tax-Advantaged U.S.Government Securities Fund
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Institutional Fiduciary Trust
Franklin Templeton Japan Fund
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
(b) The information required by this Item 29 with respect to each director and
officer of Distributors is incorporated by reference to Part B of this N-1A and
Schedule A of Form BD filed by Distributors with the Securities and Exchange
Commission pursuant to the Securities Act of 1934 (SEC File No. 8-5889).
Item 30 Location of Accounts and Records
The accounts, books or other documents required to be maintained by Section 31
(a) of the Investment Company Act of 1940 are kept by the Registrant or its
shareholder services agent, Franklin/Templeton Investor Services, Inc., both
of whose address is 777 Mariners Island Blvd., San Mateo, CA 94404.
Item 31 Management Services
There are no management-related service contracts not discussed in Part A or
Part B.
Item 32 Undertakings
(a) The Registrant hereby undertakes to promptly call a meeting of shareholders
for the purpose of voting upon the question of removal of any trustee or
trustees when requested in writing to do so by the record holders of not
less than 10 per cent of the Registrant's outstanding shares to assist its
shareholders in the communicating with other shareholders in accordance
with the requirements of Section 16(c) of the Investment Company Act of
1940.
(b) The Registrant hereby undertakes to comply with the information requirement
in Item 5A of the Form N1-A by including the required information in the
Registrant's annual report and to furnish each person to whom a prospectus
is delivered a copy of the annual report upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Amendment to its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of San
Mateo and the State of California, on the 27th day of February 1997.
Franklin Value Investors Trust
(Registrant)
By: WILLIAM J. LIPPMAN*
William J. Lippman
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
William J. Lippman* Trustee and Principal
William J. Lippman Executive Officer
Dated: February 27, 1997
Martin L. Flanagan* Principal Financial Officer
Martin L. Flanagan Dated: February 27, 1997
Diomedes Loo-Tam* Principal Accounting Officer
Diomedes Loo-Tam Dated: February 27, 1997
Frank T. Crohn* Trustee
Frank T. Crohn Dated: February 27, 1997
Charles Rubens, II* Trustee
Charles Rubens, II Dated: February 27, 1997
Leonard Rubin* Trustee
Leonard Rubin Dated: February 27, 1997
*By /s/Larry L. Greene, Attorney-in-Fact
(Pursuant to Powers of Attorney previously filed)
FRANKLIN VALUE INVESTORS TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.B1(i) Agreement and Declaration of Trust *
dated September 11, 1989
EX-99.B1(ii) Certificate of Amendment of *
Agreement and Declaration of Trust
of Franklin Balance Sheet Investment
Fund dated September 21, 1995
EX-99.B2(i) By-Laws *
EX-99.B5(i) Management Agreement on behalf of *
Franklin Balance Sheet Investment
Fund and Franklin Advisory Services,
Inc., dated July 1, 1996
EX-99.B5(ii) Management Agreement on behalf of *
Franklin MicroCap Value Fund
and Franklin Advisory Services, Inc.,
dated July 1, 1996
EX-99.B5(iii) Management Agreement on behalf of *
Franklin Value Fund and Franklin
Advisory Services, Inc., dated July
1, 1996
EX-99.B6(i) Amended and Restated Distribution *
Agreement between Registrant and
Franklin/Templeton Distributors,
Inc., dated April 23, 1995
EX-99.B6(ii) Forms of Dealer Agreements between *
Registrant and
Franklin/Templeton Distributors, Inc.
EX-99.B8(i) Custodian Agreement between *
Registrant and Bank of America dated
June 12, 1991
EX-99.B8(ii) Copy of Custodian Agreement between *
Registrant and Citibank Delaware
EX-99.B8(iii) Master Custodian Agreement between *
Registrant and Bank of New
York dated February 16, 1996
EX-99.B8(iv) Terminal Link Agreement between *
Registrant and Bank of New York
dated February 16, 1996
EX-99.11(i) Consent of Independent Auditors Attached
EX-99.13(i) Letter of Understanding relating to *
Initial Capital of Franklin Balance
Sheet Investment Fund dated November
17, 1989
EX-99.13(ii) Letter of Understanding relating to *
Initial Capital of Franklin MicroCap Value
Fund dated November 29, 1995
EX-99.13(iii) Letter of Understanding relating to *
Initial Capital of Franklin Value
Fund
EX-99.13(iv) Letter of Understanding relating to *
Initial Capital of Franklin Value Fund
dated August 30, 1996
EX-99.14(i) Copy of Model Retirement Plan *
EX-99.15(i) Amended and Restated Distribution *
Plan between Franklin Balance Sheet
Investment Fund and
Franklin/Templeton Distributors,
Inc., pursuant to Rule 12b-1 dated
July 1, 1993
EX-99.15(ii) Distribution Plan between Franklin *
Value Investors Trust on behalf of
Franklin MicroCap Value Fund and
Franklin/Templeton Distributors, Inc.,
pursuant to Rule 12b-1 dated December 12,
1995
EX-99.15(iii) Distribution Plan Pursuant to Rule *
12b-1 between Franklin Value Fund and
Franklin/Templeton Distributors, Inc.,
dated March 11, 1996
EX-99.15(iv) Class II Distribution Plan between *
Franklin Value Investors Trust on
behalf of Franklin Value Fund and
Franklin/Templeton Distributors,
Inc., dated September 3, 1996
EX-99.17(i) Power of Attorney dated December 11, *
1995
Ex-99.17(ii) Certificate of Secretary dated *
December 11, 1995
EX-99.18(i) Multiple Class Plan for Franklin *
Value Fund
EX-27.B(i) Financial Data Schedule for Franklin Attached
Balance Sheet Investment Fund
EX-27.B(ii) Financial Data Schedule for Franklin Attached
MicroCap Value Fund
EX-27.B(iii) Financial Data Schedule for Franklin Attached
Value Fund-Class I
EX-27.B(iv) Financial Data Schedule for Franklin Attached
Value Fund-Class II
*Incorporated by Reference
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective
Amendment No. 16 to the Registration Statement of Franklin Value
Investors Trust on Form N-1A File No. 33-31326 of our report
dated December 4, 1996 on our audit of the financial statements
and financial highlights of Franklin Value Investors Trust, which
report is included in the Annual Report to Shareholders for the
year ended October 31, 1996, which is incorporated by reference
in the Registration Statement.
/s/COOPERS & LYBRAND L.L.P.
San Francisco, California
February 24, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
VALUE INVESTORS TRUST OCTOBER 31, 1996 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 011
<NAME> FRANKLIN BALANCE SHEET INVESTMENT FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 493,014,990
<INVESTMENTS-AT-VALUE> 535,742,320
<RECEIVABLES> 125,040,598
<ASSETS-OTHER> 467,033
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 661,249,951
<PAYABLE-FOR-SECURITIES> 3,065,949
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,181,877
<TOTAL-LIABILITIES> 4,247,826
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 559,403,331
<SHARES-COMMON-STOCK> 22,535,474
<SHARES-COMMON-PRIOR> 14,713,128
<ACCUMULATED-NII-CURRENT> 1,188,669
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 53,682,795
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 42,727,330
<NET-ASSETS> 657,002,125
<DIVIDEND-INCOME> 7,770,425
<INTEREST-INCOME> 7,847,753
<OTHER-INCOME> 0
<EXPENSES-NET> (6,073,852)
<NET-INVESTMENT-INCOME> 9,544,326
<REALIZED-GAINS-CURRENT> 53,678,790
<APPREC-INCREASE-CURRENT> 19,022,910
<NET-CHANGE-FROM-OPS> 82,246,026
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,792,315)
<DISTRIBUTIONS-OF-GAINS> (17,015,078)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 11,153,902
<NUMBER-OF-SHARES-REDEEMED> (4,146,493)
<SHARES-REINVESTED> 814,937
<NET-CHANGE-IN-ASSETS> 269,462,593
<ACCUMULATED-NII-PRIOR> 440,663
<ACCUMULATED-GAINS-PRIOR> 17,015,080
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,785,163
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,073,852
<AVERAGE-NET-ASSETS> 563,588,138
<PER-SHARE-NAV-BEGIN> 26.340
<PER-SHARE-NII> .470
<PER-SHARE-GAIN-APPREC> 3.846
<PER-SHARE-DIVIDEND> (.442)
<PER-SHARE-DISTRIBUTIONS> (1.064)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 29.150
<EXPENSE-RATIO> 1.080
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN MICROCAP VALUE FUND OCTOBER 31, 1996 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 021
<NAME> FRANKLIN MICROCAP VALUE FUND
<S> <C>
<PERIOD-TYPE> 11-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 83,731,283
<INVESTMENTS-AT-VALUE> 88,157,795
<RECEIVABLES> 32,437,022
<ASSETS-OTHER> 2,806
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 120,597,623
<PAYABLE-FOR-SECURITIES> 568,419
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 365,498
<TOTAL-LIABILITIES> 933,917
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 112,370,195
<SHARES-COMMON-STOCK> 6,488,300
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 226,652
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,640,347
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,426,512
<NET-ASSETS> 119,663,706
<DIVIDEND-INCOME> 452,953
<INTEREST-INCOME> 969,308
<OTHER-INCOME> 0
<EXPENSES-NET> (698,962)
<NET-INVESTMENT-INCOME> 723,299
<REALIZED-GAINS-CURRENT> 2,640,347
<APPREC-INCREASE-CURRENT> 4,426,512
<NET-CHANGE-FROM-OPS> 7,790,158
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (496,647)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,856,466
<NUMBER-OF-SHARES-REDEEMED> (392,609)
<SHARES-REINVESTED> 24,443
<NET-CHANGE-IN-ASSETS> 119,663,706
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 425,197
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 698,962
<AVERAGE-NET-ASSETS> 63,666,418
<PER-SHARE-NAV-BEGIN> 15.000
<PER-SHARE-NII> .140
<PER-SHARE-GAIN-APPREC> 3.410
<PER-SHARE-DIVIDEND> (.110)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 18.440
<EXPENSE-RATIO> 1.240
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN VALUE FUND OCTOBER 31, 1996 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 031
<NAME> FRANKLIN VALUE FUND CLASS I
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 7,780,683
<INVESTMENTS-AT-VALUE> 8,093,830
<RECEIVABLES> 173,341
<ASSETS-OTHER> 8,061
<OTHER-ITEMS-ASSETS> 2,600
<TOTAL-ASSETS> 8,277,832
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 16,059
<TOTAL-LIABILITIES> 16,059
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,737,585
<SHARES-COMMON-STOCK> 456,407
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 627
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 210,414
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 313,147
<NET-ASSETS> 8,261,773
<DIVIDEND-INCOME> 32,442
<INTEREST-INCOME> 17,234
<OTHER-INCOME> 0
<EXPENSES-NET> (34,957)
<NET-INVESTMENT-INCOME> 14,719
<REALIZED-GAINS-CURRENT> 209,875
<APPREC-INCREASE-CURRENT> 313,147
<NET-CHANGE-FROM-OPS> 537,741
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (13,553)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 498,882
<NUMBER-OF-SHARES-REDEEMED> (43,212)
<SHARES-REINVESTED> 737
<NET-CHANGE-IN-ASSETS> 8,261,773
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 19,727
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 74,497
<AVERAGE-NET-ASSETS> 4,052,557
<PER-SHARE-NAV-BEGIN> 15.000
<PER-SHARE-NII> .053
<PER-SHARE-GAIN-APPREC> 2.147
<PER-SHARE-DIVIDEND> (.050)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 17.150
<EXPENSE-RATIO> 1.350
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN VALUE FUND OCTOBER 31, 1996 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 032
<NAME> FRANKLIN VALUE FUND CLASS II
<S> <C>
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 7,780,683
<INVESTMENTS-AT-VALUE> 8,093,830
<RECEIVABLES> 173,341
<ASSETS-OTHER> 8,061
<OTHER-ITEMS-ASSETS> 2,600
<TOTAL-ASSETS> 8,277,832
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 16,059
<TOTAL-LIABILITIES> 16,059
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,737,585
<SHARES-COMMON-STOCK> 25,318
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 627
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 210,414
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 313,147
<NET-ASSETS> 8,261,773
<DIVIDEND-INCOME> 32,442
<INTEREST-INCOME> 17,234
<OTHER-INCOME> 0
<EXPENSES-NET> (34,957)
<NET-INVESTMENT-INCOME> 14,719
<REALIZED-GAINS-CURRENT> 209,875
<APPREC-INCREASE-CURRENT> 313,147
<NET-CHANGE-FROM-OPS> 537,741
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 25,854
<NUMBER-OF-SHARES-REDEEMED> (536)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 8,261,773
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 19,727
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 74,497
<AVERAGE-NET-ASSETS> 4,052,557
<PER-SHARE-NAV-BEGIN> 16.380
<PER-SHARE-NII> .006
<PER-SHARE-GAIN-APPREC> .761
<PER-SHARE-DIVIDEND> (.007)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 17.140
<EXPENSE-RATIO> 2.000
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
