PROSPECTUS & APPLICATION
FRANKLIN
BALANCE SHEET
INVESTMENT FUND
INVESTMENT STRATEGY
GROWTH & INCOME
O VALUE
MARCH 1, 1998 AS AMENDED SEPTEMBER 8, 1998
Franklin Value Investors Trust
Please read this prospectus before investing, and keep it for future reference.
It contains important information, including how the fund invests and the
services available to shareholders.
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.
To learn more about the fund and its policies, you may request a copy of the
fund's Statement of Additional Information ("SAI"), dated March 1, 1998, which
we may amend from time to time. We have filed the SAI with the SEC and have
incorporated it by reference into this prospectus.
For a free copy of the SAI or a larger print version of this prospectus, contact
your investment representative or call 1-800/DIAL BEN.
MUTUAL FUND SHARES 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. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
FRANKLIN BALANCE SHEET
INVESTMENT FUND
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.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary ............................................... 2
Financial Highlights .......................................... 3
How Does the Fund Invest Its Assets? .......................... 4
What Are the Risks of Investing in the Fund? .................. 12
Who Manages the Fund? ......................................... 18
How Taxation Affects the Fund and Its Shareholders ............ 21
How Is the Trust Organized? ................................... 24
ABOUT YOUR ACCOUNT
How Do I Buy Shares? .......................................... 24
May I Exchange Shares for Shares of Another Fund? ............. 31
How Do I Sell Shares? ......................................... 33
What Distributions Might I Receive From the Fund? ............. 37
Transaction Procedures and Special Requirements ............... 38
Services to Help You Manage Your Account ...................... 42
What If I Have Questions About My Account? .................... 44
GLOSSARY
Useful Terms and Definitions .................................. 45
APPENDIX
Description of Ratings ........................................ 47
FRANKLIN
BALANCE SHEET
INVESTMENT
FUND
March 1, 1998
as amended September 8, 1998
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our glossary section.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN(R)
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, 1997. 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.......................................... 0.48%
Rule 12b-1 Fees.......................................... 0.25%*
Other Expenses........................................... 0.14%
-------
Total Fund Operating Expenses............................ 0.87%*
=======
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
--------------------------------------------
$24** $42 $62 $121
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. A Contingent Deferred Sales
Charge may also apply to purchases by certain retirement plans that qualify to
buy shares without a front-end sales charge. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*Rule 12b-1 fees have been restated to reflect that, effective January 31, 1998,
these fees may not exceed 0.25%. For the fiscal year ended October 31, 1997,
Rule 12b-1 fees and total fund operating expenses were 0.46% and 1.08%,
respectively. 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 auditor. The audit
report covering each of the most recent five years appears in the Trust's Annual
Report to Shareholders for the fiscal year ended October 31, 1997. The Annual
Report to Shareholders also includes more information about the fund's
performance. For a free copy, please call Fund Information.
<TABLE>
<CAPTION>
APRIL 2, 1990*
YEAR ENDED OCTOBER 31 TO OCTOBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $29.15 $26.34 $22.68 $22.97 $17.37 $15.54 $11.48 $15.00
Income from investment operations:
Net investment income .48 .47 .30 .23 .39 .53 .52 .29
Net realized and unrealized gains 8.40 3.85 3.98 .51 6.26 1.83 4.10 (3.63)
---------------------------------------------------------------------------
Total from investment operations 8.88 4.32 4.28 .74 6.65 2.36 4.62 (3.34)
---------------------------------------------------------------------------
Less distributions from:
Net investment income (.46) (.44) (.27) (.26) (.43) (.53) (.56) (.18)
Net realized gains (2.35) (1.07) (.35) (.77) (.62) - - -
---------------------------------------------------------------------------
Total distributions (2.81) (1.51) (.62) (1.03) (1.05) (.53) (.56) (.18)
---------------------------------------------------------------------------
Net asset value, end of year $35.22 $29.15 $26.34 $22.68 $22.97 $17.37 $15.54 $11.48
===========================================================================
Total return** 32.86% 16.93% 19.32% 3.42% 37.78% 15.51% 40.96% (22.36)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000s) $1,222,953 $657,002 $387,540 $134,255 $22,317 $5,149 $3,572 $1,405
Ratio to average net assets:
Expenses 1.08% 1.08% 1.17% 1.19% - - - -
Expenses excluding waiver and payments
by affiliate 1.08% 1.08% 1.17% 1.34% 1.85% 2.60% 3.16% 3.54%+
Net investment income 1.59% 1.69% 1.30% .99% 1.89% 3.16% 3.79% 2.31%+
Portfolio turnover rate 24.63% 35.46% 28.63% 24.96% 31.36% 30.86% 31.94% 5.34%
Average commission rate paid*** $.0384 $.0453 - - - - - -
</TABLE>
*Effective date of registration.
**Total return does not reflect sales commissions or the Contingent Deferred
Sales Charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the Offering Price.
***Relates to purchases and sales of equity securities. Prior to fiscal year end
1996 disclosure of average commission rate was not required.
+Annualized
HOW DOES THE FUND INVEST ITS ASSETS?
WHAT IS THE FUND'S OBJECTIVE?
The investment objective of the fund is to seek high total return, of which
capital appreciation and income are components. This objective is fundamental,
which means that it may not be changed without shareholder approval.
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 relative to underlying asset values.
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.
WHAT KINDS OF SECURITIES DOES THE FUND BUY?
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 equity
securities of these companies will typically be purchased at a low price
relative to the book value of the company. Although the price may be above the
company's book value, the ratio of price-to-book value typically will be lower
than that of 80% of the universe of companies from which comparable data may be
obtained. 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 YIELD, 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
Risks of Investing in the Fund?" below for more information.
CONVERTIBLE SECURITIES. The fund may invest in convertible securities; these
investments will be less than 25% of its total assets. 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 credit worthiness 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 determine 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 Risks of Investing in the
Fund? - Foreign Securities" in this prospectus and "How Does the Fund Invest Its
Assets? - Depositary Receipts" in the SAI.
OPTIONS. 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 on securities and securities indices
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 Risks of Investing in the Fund? - Options" below and
"How Does the Fund Invest Its Assets?" in the SAI.
WHAT ARE SOME OF THE FUND'S OTHER INVESTMENT STRATEGIES AND PRACTICES?
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, if
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 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
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. In a repurchase agreement, the fund buys U.S. government
securities from a bank or broker-dealer at one price and agrees to sell them
back to the bank or broker-dealer at a higher price on a specified date. The
securities subject to resale are held on behalf of the fund by a custodian bank
approved by the Board. The bank or broker-dealer must transfer to the custodian
securities with an initial market value of at least 102% of the repurchase price
to help secure the obligation to repurchase the securities at a later date. The
securities are then marked-to-market daily to maintain coverage of at least
100%. If the bank or broker-dealer does not repurchase the securities as agreed,
the fund may experience a loss or delay in the liquidation of the securities
underlying the repurchase agreement and may also incur liquidation costs. The
fund, however, intends to enter into repurchase agreements only with banks or
broker-dealers that are considered creditworthy by Advisory Services.
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.
OTHER POLICIES AND RESTRICTIONS. The fund has a number of additional investment
policies and restrictions that govern its activities. Those that are identified
as "fundamental" may only be changed with shareholder approval. The others may
be changed by the Board alone. For a list of these restrictions and more
information about the fund's investment policies, including those described
above, please see "How Does the Fund Invest Its Assets?" and "Investment
Restrictions" in the SAI.
Generally, the policies and restrictions discussed in this prospectus and in the
SAI apply when the fund makes an investment. In most cases, the fund is not
required to sell a security because circumstances change and the security no
longer meets one or more of the fund's policies or restrictions.
TAX CONSIDERATIONS. The fund's investment in options, foreign securities and
other complex securities are subject to special tax rules that may affect the
amount, timing or character of the income earned by the fund and distributed to
you. The fund may also be subject to withholding taxes on earnings from certain
of its foreign securities. These special tax rules are discussed in the
"Additional Information on Distributions and Taxes" section of the SAI.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
There is no assurance that the fund will meet its investment objective.
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
Investment Company Act of 1940, 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 YIELD SECURITIES. Because the fund may invest in securities below
investment grade, an investment in the fund is subject to a higher degree of
risk than an investment in a fund that invests primarily in higher-quality
securities. You should 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. 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 objectives.
The market value of high yield, lower-quality fixed-income securities, commonly
known as junk bonds, tends to reflect individual developments affecting the
issuer to a greater degree than the market value of higher-quality securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality securities also tend to be more sensitive to economic conditions
than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with buying the securities of these issuers is generally
greater than the risk associated with higher-quality securities. For example,
during an economic downturn or a sustained period of rising interest rates,
issuers of lower-quality securities may experience financial stress and may not
have sufficient cash flow to make interest payments. The issuer's ability to
make timely interest and principal payments may also be adversely affected by
specific developments affecting the issuer, including the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the fund's portfolio defaults, the fund may have unrealized losses on the
security, which may lower the fund's Net Asset Value. Defaulted securities tend
to lose much of their value before they default. Thus, the fund's Net Asset
Value may be adversely affected before an issuer defaults. In addition, the fund
may incur additional expenses if it must try to recover principal or interest
payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the fund. Although these
securities are typically not callable for a period of time, usually for three to
five years from the date of issue, if an issuer calls its securities 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 for the fund.
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 have increased and decreased
in the past. These changes are unpredictable.
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. 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 $236 billion in assets. 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: Bruce Baughman, William J. Lippman and Margaret McGee since
inception and Gerard P. Sullivan since March 1998.
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.
William J. 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.
Gerard P. Sullivan
Portfolio Manager of Advisory Services
Mr. Sullivan holds a Master of Business Administration degree in Finance and
Accounting from the Columbia Graduate School of Business and a Bachelor of Arts
degree in Political Science from Columbia University. He has been with the
Franklin Templeton Group since March 1998. Previously, he was a Portfolio
Manager for SunAmerica Asset Management from February 1995 to February 1998 and
a Portfolio Manager for Texas Commerce Investment Management & Co. from July
1993 to February 1995.
Margaret McGee
Vice President of Advisory Services
Ms. McGee holds a Bachelor of Arts degree in Business Administration from
William Paterson University. 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, 1997, management fees
totaling 0.48% of the average daily net assets of the fund were paid to Advisory
Services. Total expenses of the fund, including fees paid to Advisory Services,
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, 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.
YEAR 2000 ISSUE. Like other mutual funds, the fund could be adversely affected
if the computer systems used by Advisory Services and other service providers do
not properly process date-related information on or after January 1, 2000 ("Year
2000 Issue"). The Year 2000 Issue, and in particular foreign service providers'
responsiveness to the issue, could affect portfolio and operational areas
including securities trade processing, interest and dividend payments,
securities pricing, shareholder account services, reporting, custody functions,
and others. While there can be no assurance that the fund will not be adversely
affected, Advisory Services and its affiliated service providers are taking
steps that they believe are reasonably designed to address the Year 2000 Issue,
including seeking reasonable assurances from the fund's other major service
providers.
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 the expenses of activities that are
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; a prorated portion of Distributors' overhead expenses; and the
expenses of printing prospectuses and reports used for sales purposes, and
preparing and distributing sales literature and advertisements.
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.
Although the plan has not been amended, effective January 31, 1998, the fund
discontinued payments to Distributors and others for the promotion and
distribution of the fund's shares.
During the first year after certain purchases made without a sales charge,
Securities Dealers may not be eligible to receive the Rule 12b-1 fees associated
with the purchase. For more information, please see "The Fund's Underwriter" in
the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
TAXATION OF THE FUND'S INVESTMENTS
The fund invests your money in the stocks, bonds and other securities that are
described in the section "How Does the Fund Invest Its Assets?" Special tax
rules may apply in determining the income and gains that the fund earns on its
investments. These rules may, in turn, affect the amount of distributions that
the fund pays to you. These special tax rules are discussed in the SAI.
TAXATION OF THE FUND. As a regulated investment company, the fund generally pays
no federal income tax on the income and gains that it distributes to you.
FOREIGN TAXES. Foreign governments may impose taxes on the income and gains from
the fund's investments in foreign stocks and bonds. These taxes will reduce the
amount of the fund's distributions to you.
HOW DOES THE FUND EARN
INCOME AND GAINS?
The fund earns dividends and interest (the fund's "income") on its investments.
When the fund sells a security for a price that is higher than it paid, it has a
gain. When the fund sells a security for a price that is lower than it paid, it
has a loss. If the fund has held the security for more than one year, the gain
or loss will be a long-term capital gain or loss. If the fund has held the
security for one year or less, the gain or loss will be a short-term capital
gain or loss. The fund's gains and losses are netted together, and, if the fund
has a net gain (the fund's "gains"), that gain will generally be distributed to
you.
TAXATION OF SHAREHOLDERS
DISTRIBUTIONS. Distributions from the fund, whether you receive them in cash or
in additional shares, are generally subject to income tax. The fund will send
you a statement in January of the current year that reflects the amount of
ordinary dividends, capital gain distributions and non-taxable distributions you
received from the fund in the prior year. This statement will include
distributions declared in December and paid to you in January of the current
year, but which are taxable as if paid on December 31 of the prior year. The IRS
requires you to report these amounts on your income tax return for the prior
year.
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your qualified
retirement plan, such as a Section 401(k) plan or IRA, are generally
tax-deferred; this means that you are not required to report fund distributions
on your income tax return when paid to your plan, but, rather, when your plan
makes payments to you. Special rules apply to payouts from Roth and Education
IRAs.
WHAT IS A DISTRIBUTION?
As a shareholder, you will receive your share of the fund's income and gains on
its investments in stocks, bonds and other securities. The fund's income and
short term capital gains are paid to you as ordinary dividends. The fund's
long-term capital gains are paid to you as capital gain distributions. If the
fund pays you an amount in excess of its income and gains, this excess will
generally be treated as a non-taxable distribution. These amounts, taken
together, are what we call the fund's distributions to you.
DIVIDENDS-RECEIVED DEDUCTION. Corporate investors may be entitled to a
dividends-received deduction on a portion of the ordinary dividends they receive
from the fund.
REDEMPTIONS AND EXCHANGES. If you redeem your shares or if you exchange your
shares in the fund for shares in another Franklin Templeton Fund, you will
generally have a gain or loss that the IRS requires you to report on your income
tax return. If you exchange fund shares held for 90 days or less and pay no
sales charge, or a reduced sales charge, for the new shares, all or a portion of
the sales charge you paid on the purchase of the shares you exchanged is not
included in their cost for purposes of computing gain or loss on the exchange.
If you hold your shares for six months or less, any loss you have will be
treated as a long-term capital loss to the extent of any capital gain
distributions received by you from the fund. All or a portion of any loss on the
redemption or exchange of your shares will be disallowed by the IRS if you
purchase other shares in the fund within 30 days before or after your redemption
or exchange.
WHAT IS A REDEMPTION?
A redemption is a sale by you to the fund of some or all of your shares in the
fund. The price per share you receive when you redeem fund shares may be more or
less than the price at which you purchased those shares. An exchange of shares
in the fund for shares of another Franklin Templeton Fund is treated as a
redemption of fund shares and then a purchase of shares of the other fund. When
you redeem or exchange your shares, you will generally have a gain or loss,
depending upon whether the amount you receive for your shares is more or less
than your cost or other basis in the shares. Call Fund Information for a free
shareholder Tax Information Handbook if you need more information in calculating
the gain or loss on the redemption or exchange of your shares.
FOREIGN TAXES. If more than 50% of the value of the fund's assets consist of
foreign securities, the fund may elect to pass-through to you the amount of
foreign taxes it paid. If the fund makes this election, your year-end statement
will show more taxable income than was actually distributed to you. However, you
will be entitled to either deduct your share of such taxes in computing your
taxable income or claim a foreign tax credit for such taxes against your U.S.
federal income tax. Your year-end statement, showing the amount of deduction or
credit available to you, will be distributed to you in January along with other
shareholder information records including your Fund Form 1099-DIV.
WHAT IS A
FOREIGN TAX CREDIT?
A foreign tax credit is a tax credit for the amount of taxes imposed by a
foreign country on earnings of the fund. When a foreign company in which the
fund invests pays a dividend to the fund, the dividend will generally be subject
to a withholding tax. The taxes withheld in foreign countries create credits
that you may use to offset your U.S. federal income tax.
For tax years beginning in 1998 you can claim these credits directly on your
income tax return (Form 1040) without having to complete a detailed supporting
form. To qualify, you must have $600 or less in joint return foreign taxes ($300
or less on a single return), all of which are reported to you on IRS Form
1099-DIV.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income
tax withholding. Your home country may also tax ordinary dividends, capital gain
distributions and gains arising from redemptions or exchanges of your fund
shares. Fund shares held by the estate of a non-U.S. investor may be subject to
U.S. estate tax. You may wish to contact your tax advisor to determine the U.S.
and non-U.S. tax consequences of your investment in the fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you receive
from the fund, and gains arising from redemptions or exchanges of your fund
shares will generally be subject to state and local income tax. The holding of
fund shares may also be subject to state and local intangibles taxes. You may
wish to contact your tax advisor to determine the state and local tax
consequences of your investment in the fund.
BACKUP WITHHOLDING. When you open an account, IRS regulations require that you
provide your taxpayer identification number ("TIN"), certify that it is correct,
and certify that you are not subject to backup withholding under IRS rules. If
you fail to provide a correct TIN or the proper tax certifications, the fund is
required to withhold 31% of all the distributions (including ordinary dividends
and capital gain distributions), and redemption proceeds paid to you. The fund
is also required to begin backup withholding on your account if the IRS
instructs the fund to do so. The fund reserves the right not to open your
account, or, alternatively, to redeem your shares at the current Net Asset
Value, less any taxes withheld, if you fail to provide a correct TIN, fail to
provide the proper tax certifications, or the IRS instructs the fund to begin
backup withholding on your account.
WHAT IS A BACKUP WITHHOLDING?
Backup withholding occurs when the fund is required to withhold and pay over to
the IRS 31% of your distributions and redemption proceeds. You can avoid backup
withholding by providing the fund with your TIN, and by completing the tax
certifications on your shareholder application that you were asked to sign when
you opened your account. However, if the IRS instructs the fund to begin backup
withholding, it is required to do so even if you provided the fund with your TIN
and these tax certifications, and backup withholding will remain in place until
the fund is instructed by the IRS that it is no longer required.
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND. A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS IS CONTAINED IN THE SECTION
ENTITLED "ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES" IN THE SAI. THE TAX
TREATMENT TO YOU OF DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS, FOREIGN TAXES PAID
AND INCOME TAXES WITHHELD IS ALSO DISCUSSED IN A FREE FRANKLIN TEMPLETON TAX
INFORMATION HANDBOOK WHICH IS AVAILABLE BY CONTACTING FUND INFORMATION.
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. 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. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares. In
certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
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.
Make your investment using the table below:
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------------
BY MAIL Send a check made payable to the fund. Please
include your account number on the check.
- ------------------------------------------------------------------------------
BY WIRE Call Shareholder Services or, if that number is busy,
call 1-650/312-2000 collect, to receive a wire
control number and wire instructions. You need a new
wire control number every time you wire money into
your account. If you do not have a currently
effective wire control number, we will return the
money to the bank, and we will not credit the
purchase to your account.
IMPORTANT DEADLINES: If we receive your call before 1:00
p.m. Pacific time and the bank receives the wired funds
and reports the receipt of wired funds to the fund by
3:00 p.m. Pacific time, we will credit the purchase to
your account that day. If we receive your call after
1:00 p.m. or the bank receives the wire after 3:00 p.m.,
we will credit the purchase to your account the
following business day.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
SALES CHARGE REDUCTIONS AND WAIVERS
- - If you qualify to buy shares under one of the sales charge reduction or
waiver categories described below, please include a written statement with
each purchase order explaining which privilege applies. If you don't include
this statement, we cannot guarantee that you will receive the sales charge
reduction or waiver.
QUANTITY DISCOUNTS. The sales charge you pay depends on the dollar amount you
invest, as shown in the table below.
<TABLE>
<CAPTION>
TOTAL SALES CHARGE 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
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
*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.
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions. 403(b) plans that only allow salary deferral
contributions and that purchased shares of the fund at a reduced sales charge
under the group purchase privilege before February 1, 1998, however, may
continue to do so.
SALES CHARGE WAIVERS. If one of the following sales charge waivers applies to
you or your purchase of fund shares, you may buy shares of the fund without a
front-end sales charge or a Contingent Deferred Sales Charge.
Certain distributions, payments or redemption proceeds that you receive may be
used to buy shares of the fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same class of
shares. Certain exceptions apply, however, to Class II shareholders of
another Franklin Templeton Fund who chose to reinvest their distributions
in the fund before November 17, 1997, and to Advisor Class or Class Z
shareholders of a Franklin Templeton Fund who may reinvest their
distributions in the fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton Fund
if you originally paid a sales charge on the shares and you reinvest the
money in the same class of shares. This waiver does not apply to
exchanges.
If you paid a Contingent Deferred Sales Charge when you redeemed your
shares from a Franklin Templeton Fund, a Contingent Deferred Sales Charge
will apply to your purchase of fund shares and a new Contingency Period
will begin. We will, however, credit your fund account with additional
shares based on the Contingent Deferred Sales Charge you paid and the
amount of redemption proceeds that you reinvest.
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.
3. Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
4. 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 or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any
tax consequences that may apply.
5. Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD
or a Franklin Templeton money fund, you may reinvest them as described
above. The proceeds must be reinvested within 365 days from the date the
CD matures, including any rollover, or the date you redeem your money fund
shares.
6. Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a contingent deferred sales charge when you redeemed your
Class A shares from a Templeton Global Strategy Fund, a Contingent
Deferred Sales Charge will apply to your purchase of fund shares and a new
Contingency Period will begin. We will, however, credit your fund account
with additional shares based on the contingent deferred sales charge you
paid and the amount of the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
7. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
Various individuals and institutions also may buy shares of the fund without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. 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.
2. 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.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs. The minimum initial
investment is $250.
4. Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
5. Registered Securities Dealers and their affiliates, for their investment
accounts only
6. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
7. 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. The minimum initial investment
is $100.
8. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
9. Accounts managed by the Franklin Templeton Group
10. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
11. Group annuity separate accounts offered to retirement plans
12. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with at
least 100 employees, or (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 may buy shares without a front-end sales charge. Retirement plans
that are not Qualified Retirement Plans, SIMPLEs or SEPs must also meet the
requirements described under "Group Purchases" above to be able to buy shares
without a front-end sales charge. We may enter into a special arrangement with a
Securities Dealer, based on criteria established by the fund, to add together
certain small Qualified Retirement Plan accounts for the purpose of meeting
these requirements.
For retirement plan accounts opened on or after May 1, 1997, a Contingent
Deferred Sales Charge may apply if the retirement plan is transferred out of the
Franklin Templeton Funds or terminated within 365 days of the retirement plan
account's initial purchase in the Franklin Templeton Funds. Please see "How Do I
Sell Shares? - Contingent Deferred Sales Charge" for details.
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, call Retirement Plan Services.
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 amount invested.
2. Purchases made without a front-end sales charge by certain retirement
plans described under "Sales Charge Reductions and Waivers - Retirement
Plans" above - up to 1% of the amount invested.
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
amount invested.
4. Purchases by Chilean retirement plans - up to 1% of the amount invested.
A Securities Dealer may receive only one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1 or 4 above or a payment of up to 1% for investments
described in paragraph 2 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.
FOR INVESTORS OUTSIDE THE U.S.
The distribution of this prospectus and the offering of fund shares may be
limited in many jurisdictions. An investor who wishes to buy shares of the fund
should determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
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 signed written instructions
2. Include any outstanding share certificates for the
shares you want to exchange
- ------------------------------------------------------------------------------
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 the difference is more than 0.25%. 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, we will
first exchange any shares in your account that are not subject to the charge. If
there are not enough of these to meet your exchange request, we will exchange
shares subject to the charge 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 "How Do I
Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You must meet the applicable minimum investment amount of the fund you are
exchanging into, or exchange 100% of your fund shares
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 Retirement Plan Services 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, operations 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. Certain shareholders of Class Z shares of Franklin Mutual
Series Fund Inc. may also exchange their Class Z shares 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 signed written instructions. If you
would like your redemption proceeds wired
to a bank account, your instructions should
include:
o The name, address and telephone number of
the bank where you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or
credit union, the name of the corresponding
bank and the account number
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 Call Shareholder Services. If you would like
your redemption proceeds wired to a bank
account, other than an escrow account, you must
first sign up for the wire feature. To sign up,
send us written instructions, with a signature
guarantee. To avoid any delay in processing,
the instructions should include the items
listed in "By Mail" above.
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 15 days
- If you do not want the ability to redeem by
phone to apply to your account, please let us
know.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds until your check or draft has cleared, which may take
seven business days or more. A certified or cashier's check may clear in less
time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
591/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
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.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy shares without a front-end sales charge may also be subject to a
Contingent Deferred Sales Charge if the retirement plan is transferred out of
the Franklin Templeton Funds or terminated within 365 days of the account's
initial purchase in the Franklin Templeton Funds.
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 Account fees
o Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997, or
(ii) the Securities Dealer of record received a payment from Distributors of
0.25% or less, or (iii) Distributors did not make any payment in connection
with the purchase, or (iv) the Securities Dealer of record has entered into a
supplemental agreement with Distributors
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, at a rate of up to 1% a month of an account's Net Asset Value. For
example, if you maintain an annual balance of $1 million, you can redeem up
to $120,000 annually through a systematic withdrawal plan free of charge.
o Distributions from IRAs due to death or disability or upon periodic
distributions based on life expectancy
o Returns of excess contributions from employee benefit plans
o Redemptions by Trust Company employee benefit plans or employee benefit
plans serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee benefit
plans
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The fund declares dividends from its net investment income quarterly 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. 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. For Trust Company retirement plans, special forms are required
to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value per
share, plus any applicable sales charges. When you sell shares, you receive the
Net Asset Value per share.
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.
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 close of the NYSE, normally 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.
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 are 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.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of transactions
or account changes. These include transactions or account changes that you could
also make by phone, such as certain redemptions of $50,000 or less, exchanges
between identically registered accounts, and changes to the address of record.
For most other types of transactions or changes, written instructions must be
signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed by
all registered owners on the account.
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. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association.
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 and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account 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 may also record calls. 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.
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. We also will not be liable for any loss if we
follow instructions by phone that we reasonably believe are genuine or if you
are unable to execute a transaction by phone.
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 Retirement Plan Services.
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, we cannot accept instructions to change owners on the account unless all
owners agree in writing, even if the law in your state says otherwise. 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.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the fund. Telephone instructions
directly from your representative will be accepted unless you have told us that
you do not want telephone privileges to apply to your account.
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.
These minimums may not apply to retirement plan accounts or to accounts managed
by the Franklin Templeton Group.
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 calling Shareholder Services.
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. Once your plan
is established, any distributions paid by the fund will be automatically
reinvested in your 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.
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 by mail or by
phone 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(R) 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 (within the same class) between identically registered
Franklin Templeton Class I and Class II accounts; and
o request duplicate statements and deposit slips for Franklin Templeton
accounts.
You will need the fund's code number to use TeleFACTS(R). 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.
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 Plan Services 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
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
multiple classes of shares. The different 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. The holding period begins on the first day of the month
in which you buy shares. Regardless of when during the month you buy 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, Templeton Capital Accumulator Fund, Inc., 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
IRA - Individual retirement account or annuity qualified under section 408 of
the Code
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
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 or whose transactions include
frequent or large exchanges.
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 front-end sales charge. The maximum front-end sales
charge is 1.50%. We calculate the offering price to two decimal places using
standard rounding criteria.
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.
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
SIMPLE (Savings Incentive Match Plan for Employees) - An employer sponsored
salary deferral plan established under section 408(p) 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.
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 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 that 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 that 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. These
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. These 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 that are speculative to a high degree.
These 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 a 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 these bonds will likely have some quality and protective
characteristics, they 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): Strong capacity for repayment.
Prime-1 repayment ability will often be evidenced by many of the following
characteristics:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
o 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. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
S&P NOTES
A S&P note rating reflects the liquidity concerns and market access risks unique
to notes. Notes due in three years or less will likely receive a note rating.
Notes maturing beyond three years will most likely receive a long-term debt
rating. The following criteria will be used in making that assessment:
o Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
o 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.
