As filed with the Securities and Exchange Commission on December 29,1998
File Nos.
33-31326
811-5878
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre- Effective Amendment No. _____
Post-Effective Amendment No. 19 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 20 (X)
FRANKLIN VALUE INVESTORS TRUST
(Formerly Franklin Balance Sheet Investment Fund)
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (650) 312-2000
HARMON E. BURNS, 777 MARINERS ISLAND BVLD., SAN MATEO, CA 94403
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[X] on March 1, 1999 pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on(date) pursuant to paragraph (a)(ii) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered:
Shares of Beneficial Interest of:
Franklin Balance Sheet Investment Fund
Franklin MicroCap Value Fund
Franklin Value Fund - Class A
Franklin Value Fund - Class B
Franklin Value Fund - Class C
Franklin Value Fund - Advisor Class
Prospectus
Franklin Balance Sheet Investment Fund
INVESTMENT STRATEGY Growth and Income * Value
MARCH 1, 1999
[Insert Franklin Templeton Ben Head]
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.
CONTENTS
THE FUND
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INFORMATION ABOUT [THE][EACH] FUND YOU SHOULD KNOW BEFORE INVESTING
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[insert page #] Goal and Strategies
[insert page #] Main Risks
[insert page #] Performance
[insert page #] Fees and Expenses
[insert page #] Management
[insert page #] Distributions and Taxes
[insert page #] Financial Highlights
YOUR ACCOUNT
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INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
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[insert page #] Sales Charges
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
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WHERE TO LEARN MORE ABOUT [THE][EACH] FUND
[End callout]
Back Cover
THE FUND
[Insert graphic of bullseye and arrows]GOAL AND STRATEGIES
GOAL The fund's principal investment goal is high total return, of which
capital appreciation and income are components.
PRINCIPAL INVESTMENTS The fund invests primarily in common stocks of
companies the fund's manager believes are undervalued in the marketplace
relative to underlying asset values and possess the potential for significant
capital appreciation. A company may be undervalued as a result of
overreaction by investors to unfavorable news about a company, an 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. The types of companies the fund may invest
in include those that are attempting to recover from business setbacks or
adverse events ("turnarounds"), cyclical downturns, or, in certain cases,
bankruptcy.
[begin callout]
The fund invests primarily in common stocks of companies the fund's manager
believes are undervalued in the marketplace relative to underlying asset
values and possess the potential for significant capital appreciation.
[end callout]
In its evaluation of securities, the manager conducts an in-depth analysis of
each company's balance sheet. The equity securities of companies bought by
the fund 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 80% of
those companies from which comparable data may be obtained. In addition to
book value, the manager may consider a variety of other factors in evaluating
a security, such as ownership of valuable franchises, trademarks or trade
names, control of distribution networks and market share for particular
products, and other factors that may identify the issuer as a potential
turnaround or takeover target.
The fund may invest in the securities of closed-end management investment
companies that the fund's manager believes are undervalued in the
marketplace. The manager currently expects that more than 50% of the fund's
assets will be invested in small capitalization companies (companies with
market capitalizations of less than $1.5 billion). Up to 100% of its assets
may be invested in securities of issuers (including closed-end funds) with
less than three years continuous operating history. The fund may invest up to
25% of total assets in foreign securities. In addition to common stocks, the
fund may invest in preferred stocks, debt obligations, convertible and other
securities.
The fund is designed for long-term investors and not as a trading vehicle. It
is not intended as a complete investment program. You should consider how
well the fund fits your individual investment goals as well as your other
investments before you buy.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goal, because it may not invest or may invest less in securities of companies
that the manager believes are undervalued in the marketplace relative to
underlying asset values.
[Insert graphic of chart with line going up and down] MAIN RISKS
[Begin callout]
Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
SMALL COMPANIES Investing in stocks of small companies may involve greater
risk than investing in larger company stocks. Historically, small company
securities have been more volatile in price than larger company securities,
especially over the short-term. Among the reasons for the greater price
volatility are the less certain growth prospects of smaller companies, the
lower degree of liquidity in the markets for such securities, and the greater
sensitivity of smaller companies to changing economic conditions.
Small company stocks may fluctuate independently of larger company stocks.
Small company stocks may decline in price as large company stocks rise or
vice versa.
In addition, these companies may lack depth of management, they may be unable
to generate funds necessary for growth or development, or they may be
developing or marketing new products or services for which markets are not
yet established and may never become established.
While smaller companies may offer greater opportunities for capital growth
than larger, more established companies, they also involve greater risks and
should be considered speculative.
VALUE INVESTING The fund's policy of investing in securities that may be out
of favor, including turnarounds, cyclical companies, companies emerging from
bankruptcy, companies reporting poor earnings, and companies whose share
prices have declined sharply or that are not widely followed by other
investors, differs from the approach followed by many other mutual funds.
There is always the possibility that the manager may be incorrect in its
assessment of a particular industry or company or that the manager may not
buy these securities at their lowest possible prices or sell them at their
highest.
Cyclical stocks in which the fund may invest tend to increase in value more
quickly during economic upturns than non-cyclical stocks, but they also tend
to lose value more quickly in economic downturns. Companies emerging from
bankruptcy may have difficulty retaining customers and suppliers. These
companies may have relatively weak balance sheets and during economic
downturns they may not have sufficient cash flow to pay their debt
obligations and may have difficulty finding additional financing needed for
their operations.
NON-DIVERSIFICATION The fund is non-diversified. This means it may invest a
greater portion of its assets in the securities of one issuer than a
diversified fund. Economic, business, political or other changes can affect
all securities of a similar type. The fund may be more sensitive to these
changes, which may result in greater fluctuation in the value of the fund's
portfolio and its net asset value.
FOREIGN SECURITIES Securities of companies located outside the U.S. may
offer significant opportunities for gain, but they also involve additional
risks that can increase the potential for losses in the fund. Investments in
depositary receipts also involve some or all of the following risks.
COUNTRY RISK. General securities market movements in any country where the
fund has investments are likely to affect the value of the securities the
fund owns which trade in that country. These movements will affect the fund's
share price.
COMPANY RISK. Foreign companies are not subject to the same accounting,
auditing and financial reporting standards and practices as U.S. companies
and their stocks may not be as liquid as stocks of similar U.S. companies.
Foreign stock exchanges, brokers and companies generally have less government
supervision and regulation than in the U.S.
EURO On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. If the fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the fund may hold in its
portfolio, and their impact on the value of fund shares. To the extent the
fund holds non-U.S. dollar (euro or other) denominated securities, it will
still be exposed to currency risk due to fluctuations in those currencies
versus the U.S. dollar.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may not be required to make the same
level of disclosure about Year 2000 readiness as is required in the U.S. The
manager, of course, cannot audit each company and its major suppliers to
verify their Year 2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page [#] for more information.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
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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.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past eight calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
ANNUAL TOTAL RETURNS1
[Insert bar graph]
35.09% 22.03 25.57% 1.50% 30.05% 17.50% 25.97% []%
91 92 93 94 95 96 97 98
YEAR
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BEST QUARTER:
Q[] '[] []%
WORST QUARTER:
Q[] '[] []%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
1 YEAR 5 YEARS INCEPTION
(4/2/90)
- --------------------------------------------------------------------------
Franklin Balance Sheet []% []% []%
Investment Fund2
Wilshire Small Companies Value []% []% []%
Index3
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. The unmanaged Wilshire Small Companies Value Index excludes companies with
high price/earnings ratios, low yields, or high price/book ratios. The Index
is selected from the Wilshire 2500 universe, includes companies that have
market capitalizations of at least $70 million, and contains approximately
200 securities. It includes reinvested dividends. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended October 31, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
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Maximum sales charge (load) as a
percentage of offering price %
Paid at time of purchase 1.50%
Paid at redemption None1
Please see "Sales Charges" on page [#] for an explanation of how and when
these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management fees 0.47%
Distribution and service
(12b-1) fees2 0.25%
Other expenses 0.17%
------------------------
Total annual fund operating expenses3 0.89%
========================
1. Except for investments of $1 million or more (see page [#])and purchases
by certain retirement plans without an initial sales charge.
2. Effective January 31, 1998, the 12b-1 fees payable by the fund were
limited to 0.25%. Because of the distribution and service (12b-1) fees, over
the long term you may indirectly pay more than the equivalent of the maximum
permitted initial sales charge.
3. Total annual fund operating expenses differ from the ratio of expenses to
average net assets shown on page [#] because total annual fund operating
expenses reflect the current 0.25% limitation on 12b-1 fees rather than the
maximum 0.50% 12b-1 fees that were in effect until January 31, 1998.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------
$239 1 $430 $636 $1,230
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisory Services, Inc. (Advisory Services), One Parker Plaza,
Sixteenth Floor, Fort Lee, New Jersey 07024, is the fund's investment
manager. Together, Advisory Services and its affiliates manage over $216
billion in assets.
The team responsible for the fund's management is:
BRUCE C. BAUGHMAN, SENIOR VICE PRESIDENT OF ADVISORY SERVICES
Mr. Baughman has been a manager on the fund since 1990. He joined the
Franklin Templeton Group in 1988.
WILLIAM J. LIPPMAN, PRESIDENT OF ADVISORY SERVICES
Mr. Lippman has been a manager on the fund since 1987 and has more than 30
years' experience in the securities industry.
GERARD P. SULLIVAN, SENIOR VICE PRESIDENT OF ADVISORY SERVICES
Mr. Sullivan has been a manager on the fund since March 1998. Previously, he
was a portfolio manager for SunAmerica Asset Management and Texas Commerce
Investment Management & Co.
MARGARET MCGEE, VICE PRESIDENT OF ADVISORY SERVICES
Ms. McGee has been a manager on the fund since 1988. She joined the Franklin
Templeton Group in 1988.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended September 30, 1998, the fund
paid 0.47% of its average monthly net assets to the manager.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a
non-standard leap year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others. The fund could experience difficulties in effecting transactions if
any of its foreign subcustodians, or if foreign broker-dealers or foreign
markets are not ready for Year 2000.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least quarterly representing its net investment income. Capital gains, if
any, may be distributed annually. The amount of these distributions will vary
and there is no guarantee the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution,
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will receive some of your investment back in the
form of a taxable distribution. If you would like information on upcoming
record dates for the fund's distributions, please call 1-800/DIAL BEN.]
TAX CONSIDERATIONS In general, fund distributions are taxable to you as
either ordinary income or capital gains. This is true whether you reinvest
your distributions in additional shares of the fund or receive them in cash.
Any capital gains the fund distributes are taxable to you as long-term
capital gains no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct taxpayer identification number (TIN) or
certify that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares, you may have a capital gain or loss. For tax
purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The individual tax rate on any gain
from the sale or exchange of your shares depends on how long you have held
your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Any foreign taxes the
fund pays on its investments may be passed through to you as a foreign tax
credit. Non-U.S. investors may be subject to U.S. withholding and estate tax.
You should consult your tax advisor about federal, state, local or foreign
tax consequences of your investment in the fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
YEAR ENDED OCTOBER 31,
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1998 1997 1996 1995 1994
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PER SHARE DATA ($)
Net asset value, 35.22 29.15 26.34 22.68 22.97
beginning of year
--------------------------------------------------
Net investment income .50 .48 .47 .30 .23
Net realized and
unrealized gains (losses) (1.55) 8.40 3.85 3.98 .51
--------------------------------------------------
Total from investment (1.05) 8.88 4.32 4.28 .74
operations
--------------------------------------------------
Dividends from net (.51) (.46) (.44) (.27) (.26)
investment income
Distributions from net (1.80) (2.35) (1.07) (.35) (.77)
realized gains
--------------------------------------------------
Total distributions (2.31) (2.81) (1.51) (.62) (1.03)
--------------------------------------------------
Net asset value, end of year 31.86 35.22 29.15 26.34 22.68
--------------------------------------------------
Total return (%)1 (3.14) 32.86 16.93 19.32 3.42
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year 1,467,207 1,222,953 657,002 387,540 134,255
($ x 1,000)
Ratios to average net
assets: (%)
Expenses .93 1.08 1.08 1.17 1.19
Expenses excluding waiver .93 1.08 1.08 1.17 1.34
and payments by affiliate
Net investment income 1.47 1.59 1.69 1.30 .99
Portfolio turnover rate (%) 11.81 24.63 35.46 28.63 24.96
1. Total return does not include sales charges, and is not annualized.
YOUR ACCOUNT
[Insert graphic of percentage sign] SALES CHARGES
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
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Under $500,000 1.50 1.52
$500,000 but under $1 million 1.00 1.01
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either
as a lump sum or through our cumulative quantity discount or letter of intent
programs (see page [#]), you can buy shares without an initial sales charge.
However, there is a 1% contingent deferred sales charge (CDSC) on any shares
you sell within 12 months of purchase.
The CDSC is based on the current value of the shares being sold or their net
asset value when purchased, whichever is less. There is no CDSC on shares you
acquire by reinvesting your dividends.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one
month on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to
a CDSC. If there are not enough of these to meet your request, we will sell
the shares in the order they were purchased. We will use this same method if
you exchange your shares into another Franklin Templeton Fund (please see
page [#] for exchange information).
DISTRIBUTION AND SERVICE (12B-1) FEES The fund has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution fees of up to 0.25% per year to those who provide services to
shareholders. Because these fees are paid out of the fund's assets on an
on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below,
please let us know at the time you make your investment to help ensure you
receive the lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases
in the Franklin Templeton Funds to take advantage of the lower sales charges
for large purchases of fund shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
may also combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts may also be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar
amount of shares over a 13-month period and lets you receive the same
sales charge as if all shares had been purchased at one time. We will
reserve a portion of your shares to cover any additional sales charge that
may apply if you do not buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE SECTION OF YOUR
ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you
may reinvest some or all of the proceeds within 365 days without an initial
sales charge. The proceeds must be reinvested within the same share class,
except proceeds from the sale of Class B shares will be reinvested in Class A
shares.
Certain Franklin Templeton Funds offer multiple share classes not offered by
this fund. For purposes of this privilege, the fund's shares are considered
Class A shares.
If you paid a CDSC when you sold your Class A shares, we will credit your
account with the amount of the CDSC paid but a new CDSC will apply. For Class
B shares reinvested in Class A, a new CDSC will not apply, although your
account will not be credited with the amount of any CDSC paid when you sold
your Class B shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD)
also may be reinvested without an initial sales charge if you reinvest them
within 365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject
to a sales charge.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS Shares of the fund may be
purchased without an initial sales charge or CDSC by investors who reinvest
within 365 days:
o certain payments received under an annuity contract that offers a
Franklin Templeton insurance fund option
o distributions from an existing retirement plan invested in the Franklin
Templeton Funds
o dividend or capital gain distributions from a real estate investment
trust sponsored or advised by Franklin Properties, Inc.
o redemption proceeds from a repurchase of Franklin Floating Rate Trust
shares held continuously for at least 12 months
o redemption proceeds from Class A of any Templeton Global Strategy Fund,
if you are a qualified investor. If you paid a CDSC when you sold your
shares, we will credit your account with the amount of the CDSC paid but a
new CDSC will apply.
WAIVERS FOR CERTAIN INVESTORS Shares of the fund also may be purchased
without an initial sales charge or CDSC by various individuals and
institutions, including:
o certain trust companies and bank trust departments investing $1 million
or more in assets over which they have full or shared investment discretion
o government entities that are prohibited from paying mutual fund sales
charges
o certain unit investment trusts and their holders reinvesting trust
distributions
o group annuity separate accounts offered to retirement plans
o employees and other associated persons or entities of Franklin Templeton
or of certain dealers
o Chilean retirement plans that meet the requirements for retirement plans
described below.
IF YOU THINK YOU MAY BE ELIGIBLE FOR A SALES CHARGE WAIVER,
CALL YOUR INVESTMENT REPRESENTATIVE OR CALL SHAREHOLDER SERVICES
AT 1-800/632-2301 FOR MORE INFORMATION.
CDSC WAIVERS The CDSC generally will be waived:
o to pay account fees
o to make payments through systematic withdrawal plans, up to 1% monthly,
3% quarterly, 6% semiannually or 12% annually depending on the frequency
of your plan
o for redemptions by Franklin Templeton Trust Company employee benefit
plans or employee benefit plans serviced by ValuSelect(R)
o for IRA distributions due to death or disability or upon periodic
distributions based on life expectancy
o to return excess contributions (and earnings, if applicable) from
retirement plan accounts
o for redemptions following the death of the shareholder or beneficial owner
o for participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
RETIREMENT PLANS Certain retirement plans may buy shares of the fund without
an initial sales charge. To qualify, the plan must be sponsored by an
employer:
o with at least 100 employees, or
o with retirement plan assets of $1 million or more, or
o that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13-month period
A CDSC may apply. Retirement plans other than SIMPLEs, SEPs, or plans that
qualify under section 401 of the Internal Revenue Code also must qualify
under our group investment program to buy shares without an initial sales
charge.
FOR MORE INFORMATION, CALL YOUR INVESTMENT REPRESENTATIVE OR
RETIREMENT PLAN SERVICES AT 1-800/527-2020.
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors
to invest as a group. For sales charge purposes, the group's investments are
added together. There are certain other requirements and the group must have
a purpose other than buying fund shares at a discount.
[Insert graphic of a paper with lines
and someone writing] BUYING 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."
Certain Franklin Templeton Funds offer multiple share classes not offered by
this fund. Please note that for selling or exchanging your shares, or for
other purposes, the fund's shares are considered Class A shares. Before
January 1, 1999, the fund's shares were considered Class I shares.
BUYING SHARES
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ADDING TO AN ACCOUNT
- ---------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment
THROUGH YOUR representative
INVESTMENT
REPRESENTATIVE
- ---------------------------------------------------
Make your check payable to
[Insert graphic of Franklin Balance Sheet
envelope] Investment Fund. Include
your account number on the
BY MAIL check.
Fill out the deposit slip
from your account statement.
If you do not have a slip,
include a note with your
name, the fund name, and
your account number.
Mail the check and deposit
slip or note to Investor
Services.
- ---------------------------------------------------
[Insert graphic of Call to receive a wire
three lightning control number and wire
bolts] instructions.
To make a same day wire
investment, please call us
BY WIRE by 1:00 p.m. pacific time
and make sure your wire
1-800/632-2301 arrives by 3:00 p.m.
(or 1-650/312-2000
collect)
- ---------------------------------------------------
[Insert graphic of Call Shareholder Services at
two arrows pointing the number below or our
in opposite automated TeleFACTS system,
directions] or send signed written
instructions.
BY EXCHANGE
(Please see page # for
TeleFACTS(R) information on exchanges.)
1-800/247-1753
(around-the-clock
access)
- ---------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES 777 MARINERS ISLAND BLVD., P.O. BOX
7777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in the fund by automatically transferring money from your checking or
savings account each month to buy shares. To sign up, complete the
appropriate section of your account application.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in
shares of the fund by transferring money from your paycheck to the fund by
electronic funds transfer. If you are interested, indicate on your
application that you would like to receive an Automatic Payroll Deduction
Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the
fund in an existing account in the same share class of the fund or another
Franklin Templeton Fund. Initial sales charges and CDSCs will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class*, generally without paying any additional sales
charges. If you exchange shares held for less than 12 months, however, you
may be charged the difference between the initial sales charge of the two
funds if the difference is more than 0.25%. If you exchange shares from a
money fund, a sales charge may apply no matter how long you have held the
shares.
EXCHANGES INTO THE FUND FROM OTHER FRANKLIN TEMPLETON FUNDS WILL BE ACCEPTED
ONLY TO ADD TO AN EXISTING ACCOUNT AND NOT TO ESTABLISH A NEW ACCOUNT, OTHER
THAN A RETIREMENT PLAN ACCOUNT.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC
will continue to be calculated from the date of your initial investment and
will not be charged at the time of the exchange. The purchase price for
determining a CDSC on exchanged shares will be the price you paid for the
original shares. If you exchange shares subject to a CDSC into a Class A
money fund, the time your shares are held in the money fund will not count
towards the CDSC holding period.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page [#]).
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may
exchange into the fund without any sales charge. Advisor Class shareholders
of another Franklin Templeton Fund also may exchange into the fund without
any sales charge. Advisor Class shareholders who exchange their shares for
shares of the fund and later decide they would like to exchange into another
fund that offers Advisor Class may do so.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time. Please keep in mind that if you sell
all the shares in your account, your account will be closed and you will not
be able to buy additional fund shares or to reopen your account. This policy
does not apply to retirement plans.
SELLING SHARES IN WRITING Requests to sell $100,000 or less can generally be
made over the phone or with a simple letter. Sometimes, however, to protect
you and the fund we will need written instructions signed by all registered
owners, with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud.
You can obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
o you have changed the address on your account by phone within the last 15
days
We may also require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
fund against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares 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.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
RETIREMENT PLANS Before you can sell shares in a Franklin Templeton Trust
Company retirement plan, you may need to complete additional forms. For
participants under age 59 1/2, tax penalties may apply. Call Retirement Plan
Services at 1-800/527-2020 for details.
SELLING SHARES
- -------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- -------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
BY MAIL or trust accounts may need to send additional
documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. Be sure to include all necessary
signatures and any additional documents, as
well as signature guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise according
to your written instructions.
- -------------------------------------------------------------------------
[Insert graphic of As long as your transaction is for $100,000 or
phone] less, you do not hold share certificates and
you have not changed your address by phone
BY PHONE within the last 15 days, you can sell your
shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and
address on the account. Written instructions,
with a signature guarantee, are required to
send the check to another address or to make
it payable to another person.
- -------------------------------------------------------------------------
[Insert graphic of You can call or write to have redemption
three lightning bolts] proceeds of $1,000 or more wired to a bank or
escrow account. See the policies above for
selling shares by mail or phone.
Before requesting a wire, please make sure we
BY WIRE have your bank account information on file. If
we do not have this information, you will need
to send written instructions with your bank's
name and address, your bank account number,
the ABA routing number, and a signature
guarantee.
Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business
day.
- -------------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund you
arrows pointing in are considering.
opposite directions]
Call Shareholder Services at the number below
BY EXCHANGE or our automated TeleFACTS system, or send
signed written instructions. See the policies
TeleFACTS(R) above for selling shares by mail or phone.
1-800/247-1753
(around-the-clock If you hold share certificates, you will need
access) to return them to the fund before your
exchange can be processed.
- -------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES 777 MARINERS ISLAND BLVD., P.O. BOX
7777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE The fund calculates the net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. pacific time). [The fund's] [Class A's] NAV is
calculated by dividing its net assets by the number of its shares
outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the
NAV plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
The fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If the fund holds securities listed primarily on a foreign exchange
that trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $1,250
($50 for employee and UGMA/UTMA accounts) because you sell some of your
shares, we may mail you a notice asking you to bring the account back up to
$2,500 or its applicable minimum investment amount. If you choose not to do
so within 30 days, we may close your account and mail the proceeds to the
address of record.You will not be charged a CDSC if your account is closed
for this reason.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You will also receive the fund's
financial reports every six months. To reduce fund expenses, we try to
identify related shareholders in a household and send only one copy of the
financial reports. If you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she will also receive confirmations, account statements and
other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with
two or more owners are registered as "joint tenants with rights of
survivorship" (shown as "Jt Ten" on your account statement). To make any
ownership changes to a joint account, all owners must agree in writing,
regardless of the law in your state.
MARKET TIMERS The fund does not allow investments by market timers. You will
be considered a market timer if you have (i) requested an exchange out of the
fund within two weeks of an earlier exchange request, or (ii) exchanged
shares out of the fund more than twice in a calendar quarter, or (iii)
exchanged shares equal to at least $5 million, or more than 1% of the fund's
net assets, or (iv) otherwise made large or frequent exchanges. Shares under
common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies
and reserves certain rights, including:
o The fund may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the fund may change its investment minimums or waive or
lower its minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right to
make payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive
sales commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges , distribution and
service (12b-1) fees and its other resources.
- ---------------------------------------------------------
COMMISSION (%) ---
Investment under $500,000 1.50
$500,000 but under $1 million 1.00
$1 million or more up to 1.00 1
12B-1 FEE TO DEALER 0.25
A dealer commission of up to 1% may be paid on NAV purchases by certain
retirement plans1 and up to 0.25% on NAV purchases by certain trust companies
and bank trust departments, eligible governmental authorities, and
broker-dealers or others on behalf of clients participating in comprehensive
fee programs.
1. During the first year after purchase, dealers may not be eligible to
receive the 12b-1 fee.
[Insert graphic of question mark]QUESTIONS
If you have any questions about the fund or your account, you can write to us
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. You
can also call us at one of the following numbers. For your protection and to
help ensure we provide you with quality service, all calls may be monitored
or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- ---------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 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.
Dealer Services 1-800/524-4040 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.
- ------------------------------------------------------------------------------
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about the fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file #811-5878 150 P 03/99
Prospectus
Franklin MicroCap Value Fund
INVESTMENT STRATEGY Growth and Income * Value
MARCH 1, 1999
[Insert Franklin Templeton Ben Head]
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.
CONTENTS
THE FUND
[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
[insert page #] Goal and Strategies
[insert page #] Main Risks
[insert page #] Performance
[insert page #] Fees and Expenses
[insert page #] Management
[insert page #] Distributions and Taxes
[insert page #] Financial Highlights
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Sales Charges
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]
Back Cover
THE FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's principal investment goal is high total return, of which
capital appreciation and income are components.
PRINCIPAL INVESTMENTS The fund invests primarily in common stocks of
companies with market capitalization under $100 million that the fund's
manager believes are undervalued in the marketplace relative to underlying
asset values and possess the potential for significant capital appreciation.
A company may be undervalued as a result of overreaction by investors to
unfavorable news about a company, an 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. The types of companies the fund may invest in include those that
are attempting to recover from business setbacks or adverse events
("turnarounds"), cyclical downturns, or, in certain cases, bankruptcy.
[begin callout]
The fund will normally invest at least 65% of total assets in securities of
companies with market capitalization under $100 million that the fund's
manager believes are undervalued in the marketplace relative to underlying
asset values and possess the potential for significant capital appreciation.
The fund may invest up to 35% of its assets in securities of companies with
similar characteristics but that have market capitalization over $100 million.
[end callout]
In its evaluation of securities, the manager conducts an in-depth analysis of
each company's balance sheet. The equity securities of companies bought by
the fund will typically be purchased at prices below the book value of the
company. In addition to book value, the manager may consider a variety of
other factors in evaluating a security, such as ownership of valuable
franchises, trademarks or trade names, control of distribution networks and
market share for particular products, and other factors that may identify the
issuer as a potential turnaround or takeover target.
In addition to common stocks, the fund may invest in preferred stocks, debt
obligations, and convertible and other securities. The fund may invest up to
25% of total assets in foreign securities.
The fund is designed for long-term investors and not as a trading vehicle. It
is not intended as a complete investment program. You should consider how
well the fund fits your individual investment goals as well as your other
investments before you buy.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goals, because it may not invest or may invest less in securities of
companies that the manager believes are undervalued in the marketplace
relative to underlying asset values.
[Insert graphic of chart with line going up and down] MAIN RISKS
[Begin callout]
Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
SMALL COMPANIES Investing in stocks of small companies may involve greater
risk than investing in larger company stocks. Historically, small company
securities have been more volatile in price than larger company securities,
especially over the short-term. Among the reasons for the greater price
volatility are the less certain growth prospects of smaller companies, the
lower degree of liquidity in the markets for such securities, and the greater
sensitivity of smaller companies to changing economic conditions.
Small company stocks may fluctuate independently of larger company stocks.
Small company stocks may decline in price as large company stocks rise or
vice versa.
In addition, these companies may lack depth of management, they may be unable
to generate funds necessary for growth or development, or they may be
developing or marketing new products or services for which markets are not
yet established and may never become established.
While smaller companies may offer greater opportunities for capital growth
than larger, more established companies, they also involve greater risks and
should be considered speculative.
VALUE INVESTING The fund's policy of investing in securities that may be out
of favor, including turnarounds, cyclical companies, companies emerging from
bankruptcy, companies reporting poor earnings, and companies whose share
prices have declined sharply or that are not widely followed by other
investors, differs from the approach followed by many other mutual funds.
There is always the possibility that the manager may be incorrect in its
assessment of a particular industry or company or that the manager may not
buy these securities at their lowest possible prices or sell them at their
highest.
Cyclical stocks in which the fund may invest tend to increase in value more
quickly during economic upturns than non-cyclical stocks, but they also tend
to lose value more quickly in economic downturns. Companies emerging from
bankruptcy may have difficulty retaining customers and suppliers. These
companies may have relatively weak balance sheets and during economic
downturns they may not have sufficient cash flow to pay their debt
obligations and may have difficulty finding additional financing needed for
their operations.
NON-DIVERSIFICATION The fund is non-diversified. This means it may invest a
greater portion of its assets in the securities of one issuer than a
diversified fund. Economic, business, political or other changes can affect
all securities of a similar type. The fund may be more sensitive to these
changes, which may result in greater fluctuation in the value of the fund's
portfolio and its net asset value.
FOREIGN SECURITIES Securities of companies located outside the U.S. may
offer significant opportunities for gain, but they also involve additional
risks that can increase the potential for losses in the fund. Investments in
depositary receipts also involve some or all of the following risks.
COUNTRY RISK. General securities market movements in any country where the
fund has investments are likely to affect the value of the securities the
fund owns which trade in that country. These movements will affect the fund's
share price.
COMPANY RISK. Foreign companies are not subject to the same accounting,
auditing and financial reporting standards and practices as U.S. companies
and their stocks may not be as liquid as stocks of similar U.S. companies.
Foreign stock exchanges, brokers and companies generally have less government
supervision and regulation than in the U.S.
EURO On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. If the fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the fund may hold in its
portfolio, and their impact on the value of fund shares. To the extent the
fund holds non-U.S. dollar (euro or other) denominated securities, it will
still be exposed to currency risk due to fluctuations in those currencies
versus the U.S. dollar.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may not be required to make the same
level of disclosure about Year 2000 readiness as is required in the U.S. The
manager, of course, cannot audit each company and its major suppliers to
verify their Year 2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page [#] for more information.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
[Begin callout]
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.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past three calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
ANNUAL TOTAL RETURNS1
[Insert bar graph]
27.11% 27.71% []%
96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q[] '[] []%
WORST QUARTER:
Q[] '[] []%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Franklin MicroCap Value Fund2 []% []% []%
Wilshire Small Companies Value []% []% []%
Index3
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of December 31, 1998, the fund's year-to-date return was []%.]
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. The unmanaged Wilshire Small Companies Value Index excludes companies with
high price/earnings ratios, low yields, or high price/book ratios. The Index
is selected from the Wilshire 2500 universe, includes companies that have
market capitalizations of at least $70 million, and contains approximately
200 securities. It includes reinvested dividends. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended October 31, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge (load) as a
percentage of offering price %
Paid at time of purchase 5.75%
Paid at time of redemption None1
Please see "Sales Charges" on page [#] for an explanation of how and when
these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management fees 0.75%
Distribution and service
(12b-1) fees2 0.25%
Other expenses 0.20%
------------------------
Total annual fund operating expenses3 1.20%
========================
1. Except for investments of $1 million or more (see page [#])and purchases
by certain retirement plans without an initial sales charge.
2. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
3. The fund's total annual fund operating expenses differ from the ratio of
expenses to average net assets shown on page [#] due to a timing difference
between the end of the 12b-1 plan year and the fund's fiscal year end.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------
$690 1 $934 $1,197 $1,946
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisory Services, Inc. (Advisory Services), One Parker Plaza,
Sixteenth Floor, Fort Lee, New Jersey 07024, is the fund's investment
manager. Together, Advisory Services and its affiliates manage over $208
billion in assets.
The team responsible for the fund's management is
BRUCE C. BAUGHMAN, SENIOR VICE PRESIDENT OF ADVISORY SERVICES
Mr. Baughman has been a manager on the fund since 1990. He joined the
Franklin Templeton Group in 1988.
WILLIAM J. LIPPMAN, PRESIDENT OF ADVISORY SERVICES
Mr. Lippman has been a manager on the fund since 1987 and has more than 30
years' experience in the securities industry.
GERARD P. SULLIVAN, SENIOR VICE PRESIDENT OF ADVISORY SERVICES
Mr. Sullivan has been a manager on the fund since 1998. Previously, he was a
portfolio manager for SunAmerica Asset Management and Texas Commerce
Investment Management & Co.
MARGARET MCGEE, VICE PRESIDENT OF ADVISORY SERVICES
Ms. McGee has been a manager on the fund since 1988. She joined the Franklin
Templeton Group in 1988.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended October 31, 1998, the fund
paid 0.75% of its average monthly net assets to the manager.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a
non-standard leap year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others. The fund could experience difficulties in effecting transactions if
any of its foreign subcustodians, or if foreign broker-dealers or foreign
markets are not ready for Year 2000.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least quarterly representing its net investment income. Capital gains, if
any, may be distributed annually. The amount of these distributions will vary
and there is no guarantee the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution,
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will receive some of your investment back in the
form of a taxable distribution. If you would like information on upcoming
record dates for the fund's distributions, please call 1-800/DIAL BEN.
TAX CONSIDERATIONS In general, fund distributions are taxable to you as
either ordinary income or capital gains. This is true whether you reinvest
your distributions in additional shares of the fund or receive them in cash.
Any capital gains the fund distributes are taxable to you as long-term
capital gains no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct taxpayer identification number (TIN) or
certify that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares, you may have a capital gain or loss. For tax
purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The individual tax rate on any gain
from the sale or exchange of your shares depends on how long you have held
your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Any foreign taxes the
fund pays on its investments may be passed through to you as a foreign tax
credit. Non-U.S. investors may be subject to U.S. withholding and estate tax.
You should consult your tax advisor about federal, state, local or foreign
tax consequences of your investment in the fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past three
years. This information has been audited by PricewaterhouseCoopers LLP.
YEAR ENDED OCTOBER 31,
- -------------------------------------------------------------
1998 1997 1996 1
- -------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, 24.29 18.44 15.00
beginning of year
-----------------------------
Net investment income (.02) (.01) .14
(loss)
Net realized and unrealized (2.51) 6.33 3.41
gains (losses)
-----------------------------
Total from investment (2.53) 6.32 3.55
operations
-----------------------------
Dividends from net (.01) (.07) (.11)
investment income
Distributions from net (1.48) (.40) --
realized gains
-----------------------------
Total distributions (1.49) (.47) (.11)
-----------------------------
Net asset value, end of year 20.27 24.29 18.44
-----------------------------
Total return (%)2 (10.95) 35.05 23.72
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year 175,635 191,638 119,664
($ x 1,000)
Ratios to average net
assets: (%)
Expenses 1.21 1.22 1.243
Net investment income (.11) (.05) 1.283
(loss)
Portfolio turnover rate (%) 31.91 21.33 14.15
1. For the period December 12, 1995 (effective date) to October 31, 1996.
2. Total return does not include sales charges, and is not annualized.
3. Annualized.
YOUR ACCOUNT
[Insert graphic of percentage sign] SALES CHARGES
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $50,000 5.75 6.10
$50,000 but under $100,000 4.50 4.71
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either
as a lump sum or through our cumulative quantity discount or letter of intent
programs (see page [#]), you can buy shares without an initial sales charge.
However, there is a 1% contingent deferred sales charge (CDSC) on any shares
you sell within 12 months of purchase.
The CDSC is based on the current value of the shares being sold or their net
asset value when purchased, whichever is less. There is no CDSC on shares you
acquire by reinvesting your dividends.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one
month on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to
a CDSC. If there are not enough of these to meet your request, we will sell
the shares in the order they were purchased. We will use this same method if
you exchange your shares into another Franklin Templeton Fund (please see
page [#] for exchange information).
DISTRIBUTION AND SERVICE (12B-1) FEES The fund has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution fees of up to 0.25% per year to those who sell and distribute
the fund's shares and provide other services to shareholders. Because these
fees are paid out of the fund's assets on an on-going basis, over time these
fees will increase the cost of your investment and may cost you more than
paying other types of sales charges.
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below,
please let us know at the time you make your investment to help ensure you
receive the lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases
in the Franklin Templeton Funds to take advantage of the lower sales charges
for large purchases of fund shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
may also combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts may also be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar
amount of shares over a 13-month period and lets you receive the same
sales charge as if all shares had been purchased at one time. We will
reserve a portion of your shares to cover any additional sales charge that
may apply if you do not buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE SECTION OF YOUR
ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you
may reinvest some or all of the proceeds within 365 days without an initial
sales charge. The proceeds must be reinvested within the same share class,
except proceeds from the sale of Class B shares will be reinvested in Class A
shares.
Certain Franklin Templeton Funds offer multiple share classes not offered by
this fund. For purposes of this privilege, the fund's shares are considered
Class A shares.
If you paid a CDSC when you sold your Class A shares, we will credit your
account with the amount of the CDSC paid but a new CDSC will apply. For Class
B shares reinvested in Class A, a new CDSC will not apply, although your
account will not be credited with the amount of any CDSC paid when you sold
your Class B shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD)
also may be reinvested without an initial sales charge if you reinvest them
within 365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject
to a sales charge.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS Shares of the fund may be
purchased without an initial sales charge or CDSC by investors who reinvest
within 365 days:
o certain payments received under an annuity contract that offers a
Franklin Templeton insurance fund option
o dividend or capital gain distributions from a real estate investment
trust sponsored or advised by Franklin Properties, Inc.
WAIVERS FOR CERTAIN INVESTORS Shares of the fund also may be purchased
without an initial sales charge or CDSC by various individuals and
institutions, including:
o certain trust companies and bank trust departments investing $1 million
or more in assets over which they have full or shared investment discretion
o government entities that are prohibited from paying mutual fund sales
charges
o certain unit investment trusts and their holders reinvesting trust
distributions
o group annuity separate accounts offered to retirement plans
o employees and other associated persons or entities of Franklin Templeton
or of certain dealers
o Chilean retirement plans that meet the requirements for retirement plans
described below.
IF YOU THINK YOU MAY BE ELIGIBLE FOR A SALES CHARGE WAIVER,
CALL YOUR INVESTMENT REPRESENTATIVE OR CALL SHAREHOLDER SERVICES
AT 1-800/632-2301 FOR MORE INFORMATION.
CDSC WAIVERS The CDSC generally will be waived:
o to pay account fees
o to make payments through systematic withdrawal plans, up to 1% monthly,
3% quarterly, 6% semiannually or 12% annually depending on the frequency
of your plan
o for redemptions by Franklin Templeton Trust Company employee benefit
plans or employee benefit plans serviced by ValuSelect(R)
o for IRA distributions due to death or disability or upon periodic
distributions based on life expectancy
o to return excess contributions (and earnings, if applicable) from
retirement plan accounts
o for redemptions following the death of the shareholder or beneficial owner
o for participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
RETIREMENT PLANS Certain retirement plans may buy shares of the fund without
an initial sales charge. To qualify, the plan must be sponsored by an
employer:
o with at least 100 employees, or
o with retirement plan assets of $1 million or more, or
o that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13-month period
A CDSC may apply. Retirement plans other than SIMPLEs, SEPs, or plans that
qualify under section 401 of the Internal Revenue Code also must qualify
under our group investment program to buy shares without an initial sales
charge.
FOR MORE INFORMATION, CALL YOUR INVESTMENT REPRESENTATIVE OR
RETIREMENT PLAN SERVICES AT 1-800/527-2020.
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors
to invest as a group. For sales charge purposes, the group's investments are
added together. There are certain other requirements and the group must have
a purpose other than buying fund shares at a discount.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
The fund is closed to new investors, except retirement plan accounts. If you
were a shareholder of record as of July 5, 1996, you may continue to add to
your account with as little as $100 or buy additional shares through the
reinvestment of dividend or capital gain distributions. We may waive the
investment minimum for retirement plans.
Certain Franklin Templeton Funds offer multiple share classes not offered by
this fund. Please note that for selling or exchanging your shares, or for
other purposes, the fund's shares are considered Class A shares. Before
January 1, 1999, the fund's shares were considered Class I shares.
BUYING SHARES
- ---------------------------------------------------
ADDING TO AN ACCOUNT
- ---------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment
THROUGH YOUR representative
INVESTMENT
REPRESENTATIVE
- ---------------------------------------------------
Make your check payable to
[Insert graphic of Franklin MicroCap Value
envelope] Fund. Include your account
number on the check.
BY MAIL
Fill out the deposit slip
from your account statement.
If you do not have a slip,
include a note with your
name, the fund name, and
your account number.
Mail the check and deposit
slip or note to Investor
Services.
- ---------------------------------------------------
[Insert graphic of Call to receive a wire
three lightning control number and wire
bolts] instructions.
To make a same day wire
investment, please call us
BY WIRE by 1:00 p.m. pacific time
and make sure your wire
1-800/632-2301 arrives by 3:00 p.m.
(or 1-650/312-2000
collect)
- ---------------------------------------------------
[Insert graphic of Call Shareholder Services at
two arrows pointing the number below or our
in opposite automated TeleFACTS system,
directions] or send signed written
instructions.
BY EXCHANGE
(Please see page # for
TeleFACTS(R) information on exchanges.)
1-800/247-1753
(around-the-clock
access)
- ---------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES 777 MARINERS ISLAND BLVD., P.O. BOX
7777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in the fund by automatically transferring money from your checking or
savings account each month to buy shares. To sign up, complete the
appropriate section of your account application.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in
shares of the fund by transferring money from your paycheck to the fund by
electronic funds transfer. If you are interested, indicate on your
application that you would like to receive an Automatic Payroll Deduction
Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the
fund in an existing account in the same share class of the fund or another
Franklin Templeton Fund. Initial sales charges and CDSCs will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class, generally without paying any additional sales
charges. If you exchange shares held for less than six months, however, you
may be charged the difference between the initial sales charge of the two
funds if the difference is more than 0.25%.
NO EXCHANGES INTO THE FUND FROM OTHER FRANKLIN TEMPLETON FUNDS WILL BE
ACCEPTED.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC
will continue to be calculated from the date of your initial investment and
will not be charged at the time of the exchange. The purchase price for
determining a CDSC on exchanged shares will be the price you paid for the
original shares. If you exchange shares subject to a CDSC into a Class A
money fund, the time your shares are held in the money fund will not count
towards the CDSC holding period.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page [#]).
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time. Please keep in mind that if you sell
all the shares in your account, your account will be closed and you will not
be able to buy additional fund shares or to reopen your account. This policy
does not apply to retirement plans.
SELLING SHARES IN WRITING Requests to sell $100,000 or less can generally be
made over the phone or with a simple letter. Sometimes, however, to protect
you and the fund we will need written instructions signed by all registered
owners, with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud.
You can obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
o you have changed the address on your account by phone within the last 15
days
We may also require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
fund against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares 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.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
RETIREMENT PLANS Before you can sell shares in a Franklin Templeton Trust
Company retirement plan, you may need to complete additional forms. For
participants under age 59 1/2, tax penalties may apply. Call Retirement Plan
Services at 1-800/527-2020 for details.
SELLING SHARES
- -------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- -------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
BY MAIL or trust accounts may need to send additional
documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. Be sure to include all necessary
signatures and any additional documents, as
well as signature guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise according
to your written instructions.
- -------------------------------------------------------------------------
[Insert graphic of As long as your transaction is for $100,000 or
phone] less, you do not hold share certificates and
you have not changed your address by phone
BY PHONE within the last 15 days, you can sell your
shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and
address on the account. Written instructions,
with a signature guarantee, are required to
send the check to another address or to make
it payable to another person.
- -------------------------------------------------------------------------
[Insert graphic of You can call or write to have redemption
three lightning bolts] proceeds of $1,000 or more wired to a bank or
escrow account. See the policies above for
selling shares by mail or phone.
Before requesting a wire, please make sure we
BY WIRE have your bank account information on file. If
we do not have this information, you will need
to send written instructions with your bank's
name and address, your bank account number,
the ABA routing number, and a signature
guarantee.
Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business
day.
- -------------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund you
arrows pointing in are considering.
opposite directions]
Call Shareholder Services at the number below
BY EXCHANGE or our automated TeleFACTS system, or send
signed written instructions. See the policies
TeleFACTS(R) above for selling shares by mail or phone.
1-800/247-1753
(around-the-clock If you hold share certificates, you will need
access) to return them to the fund before your
exchange can be processed.
- -------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES 777 MARINERS ISLAND BLVD., P.O. BOX
7777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE The fund calculates the net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. pacific time). The fund's NAV is calculated by
dividing its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the
NAV plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
The fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If the fund holds securities listed primarily on a foreign exchange
that trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $1,250
($50 for employee and UGMA/UTMA accounts)] because you sell some of your
shares, we may mail you a notice asking you to bring the account back up to
$2,500 or its applicable minimum investment amount. If you choose not to do
so within 30 days, we may close your account and mail the proceeds to the
address of record. You will not be charged a CDSC if your account is closed
for this reason.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You will also receive the fund's
financial reports every six months. To reduce fund expenses, we try to
identify related shareholders in a household and send only one copy of the
financial reports. If you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she will also receive confirmations, account statements and
other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with
two or more owners are registered as "joint tenants with rights of
survivorship" (shown as "Jt Ten" on your account statement). To make any
ownership changes to a joint account, all owners must agree in writing,
regardless of the law in your state.
MARKET TIMERS The fund does not allow investments by market timers. You will
be considered a market timer if you have (i) requested an exchange out of the
fund within two weeks of an earlier exchange request, or (ii) exchanged
shares out of the fund more than twice in a calendar quarter, or (iii)
exchanged shares equal to at least $5 million, or more than 1% of the fund's
net assets, or (iv) otherwise made large or frequent exchanges. Shares under
common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies
and reserves certain rights, including:
o The fund may refuse any order to buy shares.
o At any time, the fund may change its investment minimums or waive or
lower its minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right to
make payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive
sales commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and
service (12b-1) fees and its other resources.
[CLASS A]
- ---------------------------------------------------------
COMMISSION (%) ---
Investment under $50,000 5.00
$50,000 but under $100,000 3.75
$100,000 but under $250,000 2.80
$250,000 but under $500,000 2.00
$500,000 but under $1 million 1.60
$1 million or more up to 1.00 1
12B-1 FEE TO DEALER 0.25
A dealer commission of up to 1% may be paid on NAV purchases by certain
retirement plans1 and up to 0.25% on NAV purchases by certain trust companies
and bank trust departments, eligible governmental authorities, and
broker-dealers or others on behalf of clients participating in comprehensive
fee programs.
1. During the first year after purchase, dealers may not be eligible to
receive the 12b-1 fee.
[Insert graphic of question mark]QUESTIONS
If you have any questions about the fund or your account, you can write to us
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. You
can also call us at one of the following numbers. For your protection and to
help ensure we provide you with quality service, all calls may be monitored
or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- ---------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 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.
Dealer Services 1-800/524-4040 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.
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about the fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file #811-5878 189 P 03/98
Prospectus
Franklin
Value Fund
CLASS A, B & C
INVESTMENT STRATEGY GROWTH & INCOME * VALUE
MARCH 1, 1999
[Insert Franklin Templeton Ben Head]
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.
CONTENTS
THE FUND
[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
[insert page #] Goal and Strategies
[insert page #] Main Risks
[insert page #] Performance
[insert page #] Fees and Expenses
[insert page #] Management
[insert page #] Distributions and Taxes
[insert page #] Financial Highlights
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Choosing a Share Class
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]
Back Cover
THE FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is long-term total return.
PRINCIPAL INVESTMENTS The fund normally invests at least 65% of its assets in
the common stocks of companies that the fund's manager believes are
undervalued. In choosing investments that are undervalued, the fund's manager
focuses on companies that have:
o Low price to earnings ratio relative to the market, including
industry group or earnings growth
o Low price relative to book value or cash flow
o Suffered sharp price declines but in the fund's manager's opinion
still have significant potential ("fallen angels")
In addition, the fund may consider a variety of other factors in choosing an
investment, such as ownership of valuable franchises, trademarks, trade
names, control of distribution networks and market share for particular
products, and other factors that may identify the issuer as a potential
turnaround or takeover target.
[Begin Callout]
The fund invests at least 65% of total assets in companies of various sizes
that the manager believes are selling substantially below the underlying
value of their assets or their private market value, which is what a
sophisticated investor would pay for the entire company.
[End Callout]
The fund may invest in securities of small capitalization companies, which
have market capitalization of less than $1.5 billion at the time of the
fund's investment. Market capitalization is the total market value of a
company's outstanding stock. The fund may invest up to 25% of its assets in
foreign securities.
The fund is designed for long-term investors and not as a trading vehicle. It
is not intended as a complete investment program. You should consider how
well the fund fits your individual investment goals as well as your other
investments before you buy.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goal, because it may not invest or may invest less in securities of companies
that the manager believes are undervalued in the market place relative to
underlying asset values.
[Insert graphic of chart with line going up and down] MAIN RISKS
[Begin callout]
Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
SMALLER COMPANIES Investing in stocks of small companies may involve greater
risk than investing in larger company stocks. Historically, small company
securities have been more volatile in price than larger company securities,
especially over the short-term. Among the reasons for the greater price
volatility are the less certain growth prospects of smaller companies, the
lower degree of liquidity in the markets for such securities, and the greater
sensitivity of smaller companies to changing economic conditions.
Small company stocks may fluctuate independently of larger company stocks.
Small company stocks may decline in price as large company stocks rise or
vice versa.
In addition, these companies may lack depth of management, they may be unable
to generate funds necessary for growth or development, or they may be
developing or marketing new products or services for which markets are not
yet established and may never become established.
While smaller companies may offer greater opportunities for capital growth
than larger, more established companies, they also involve greater risks and
should be considered speculative.
VALUE INVESTING The fund's policy of investing in securities that may be out
of favor, including turnarounds, cyclical companies, companies emerging from
bankruptcy, and companies reporting poor earnings, and companies whose share
prices have declined sharply or that are not widely followed by other
investors, differs from the approach followed by many other mutual funds.
There is always the possibility that the manager may be incorrect in its
assessment of a particular industry or company or that the manager may not
buy these securities at their lowest possible prices or sell them at their
highest.
Cyclical stocks in which the fund may invest tend to increase in value more
quickly during economic upturns than non-cyclical stocks, but they also tend
to lose value more quickly in economic downturns. Companies emerging from
bankruptcy may have difficulty retaining customers and suppliers. These
companies may have relatively weak balance sheets and during economic
downturns they may not have sufficient cash flow to pay their debt
obligations and may have difficulty finding additional financing needed for
their operations.
NON-DIVERSIFICATION The fund is non-diversified. This means it may invest a
greater portion of its assets in the securities of one issuer than a
diversified fund. Economic, business, political or other changes can affect
all securities of a similar type. The fund may be more sensitive to these
changes, which may result in greater fluctuation in the value of the fund's
portfolio and its net asset value.
FOREIGN SECURITIES RISK Securities of companies located outside the U.S. may
offer significant opportunities for gain, but they also involve additional
risks that can increase the potential for losses in the fund. Investments in
American, European and Global Depositary Receipts also involve some or all of
the following risks.
COUNTRY RISK. General securities market movements in any country where the
fund has investments are likely to affect the value of the securities the
fund owns which trade in that country. These movements will affect the fund's
share price.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, expropriation, restrictions on removal of
currency or other assets, nationalization of assets and punitive taxes.
COMPANY RISK. Foreign companies are not subject to the same accounting,
auditing and financial reporting standards and practices as U.S. companies
and their stocks may not be as liquid as stocks of similar U.S. companies.
Foreign stock exchanges, brokers and companies generally have less government
supervision and regulation than in the U.S. The fund may have greater
difficulty voting proxies, exercising shareholder rights, pursuing legal
remedies and obtaining judgments with respect to foreign investments in
foreign courts than with respect to U.S. companies in U.S. courts.
CURRENCY RISK Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
EURO. On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. If the fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the fund may hold in its
portfolio, and their impact on the value of fund shares. To the extent the
fund holds non-U.S. dollar (euro or other) denominated securities, it will
still be exposed to currency risk due to fluctuations in those currencies
versus the U.S. dollar.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is only one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S. may not be required to make the same level of disclosure about Year 2000
readiness as is required in the U.S. The manager, of course, cannot audit
each company and its major suppliers to verify their Year 2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page [#] for more information.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
[Begin callout]
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.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 2 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS1
[Insert bar graph]
29.37% []%
97 98
YEAR
[Begin callout]
BEST QUARTER:
Q[] '[] []%
WORST QUARTER:
Q[] '[] []%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
1 YEAR INCEPTION
(3/11/96)
- --------------------------------------------------------------------------
Franklin Value Fund - Class A2 []% []%
Wilshire Small Companies Value Index3 []% []%
SINCE
INCEPTION
1 YEAR (3/11/96)
- --------------------------------------------------------------------------
Franklin Value Fund - Class C2 []% []%
Wilshire Small Companies Value Index3 []% []%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of December 31, 1998, the fund's year-to-date return was []% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. The unmanaged Wilshire Small Companies Value Index excludes companies with
high price/earnings ratios, low yields, or high price/book ratios. The Index
is selected from the Wilshire 2500 universe, includes companies that have
market capitalizations of at least $70 million, and contains approximately
200 securities. It includes reinvested dividends. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended October 31, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A1 CLASS B2 CLASS C1
- ----------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75% 4.00% 1.99%
Paid at time of purchase 5.75% None 1.00%
Paid at redemption None3 4.00% 0.99%4
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A1 CLASS B2 CLASS C1
- ----------------------------------------------------------------------------
Management fees5 0.75% 0.75% 0.75%
Distribution and service
(12b-1) fees6 0.35% 0.99% 1.00%
Other expenses 0.28% 0.28% 0.28%
------------------------------------
Total annual fund operating
expenses5 1.38% 2.02% 2.03%
------------------------------------
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A and C for the fiscal
year ended October 31, 1998. The distribution and service (12b-1) fees are
based on the maximum fees allowed under Class B's Rule 12b-1 plan.
3. Except for investments of $1 million or more (see page [#]) and purchases
by certain retirement plans without an initial sales charge.
4. This is equivalent to a charge of 1% based on net asset value.
5. For the period shown, the manager had agreed in advance to limit its
management fees. With this reduction, management fees were 0.69% and total
annual fund operating expenses were 1.32% for Class A, and 1.97% for Class C.
The manager may end this arrangement at any time upon notice to the fund's
Board of Trustees.
6. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
CLASS A $707 1 $987 $1,287 $2,137
CLASS B
Assuming you sold your shares
at the end of the period $605 $934 $1,288 $2,184 2
Assuming you stayed in the
fund $205 $634 $1,088 $2,184 2
CLASS C $402 3 $730 $1,182 $2,435
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
3. For the same Class C investment, your costs would be $304 if you did not
sell your shares at the end of the first year. Your costs for the remaining
periods would be the same.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisory Services, Inc., (Advisory Services) One Parker Plaza,
Sixteenth Floor, Fort Lee, New Jersey 07024, is the fund's investment
manager. Together, Franklin Advisory Services, Inc. and its affiliates
manage over $216 billion in assets.
The team responsible for the fund's management is:
WILLIAM J. LIPPMAN, PRESIDENT OF ADVISORY SERVICES
Mr. Lippman has been a manager on the fund since inception and has more than
30 years' experience in the securities industry.
GERARD P. SULLIVAN, SENIOR VICE PRESIDENT OF ADVISORY SERVICES
Mr. Sullivan has been a manager on the fund since March 1998. Previously, he
was a portfolio manager for SunAmerica Asset Management and Texas Commerce
Investment Management & Co.
BRUCE C. BAUGHMAN, SENIOR VICE PRESIDENT OF ADVISORY SERVICES
Mr. Baughman has been a manager on the fund since inception. He joined the
Franklin Templeton Group in 1988.
MARGARET MCGEE, VICE PRESIDENT OF ADVISORY SERVICES
Ms. McGee has been a manager on the fund since inception. She joined the
Franklin Templeton Group in 1988.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended October 31, 1998, management
fees, before any advance waiver, were 0.75% of the fund's average daily net
assets. Under an agreement by the manager to limit its fees, the fund paid
0.69% of its average daily net assets to the manager. The manager may end
this arrangement at any time upon notice to the fund's Board of Trustees.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a
non-standard leap year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others. The fund could experience difficulties in effecting transactions if
any of its foreign subcustodians, or if foreign broker-dealers or foreign
markets are not ready for Year 2000.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least quarterly representing its net investment income. Capital gains, if
any, may be distributed annually. The amount of these distributions will vary
and there is no guarantee the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution,
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will receive some of your investment back in the
form of a taxable distribution. If you would like information on upcoming
record dates for the fund's distributions, please call 1-800/DIAL BEN.
TAX CONSIDERATIONS In general, fund distributions are taxable to you as
either ordinary income or capital gains. This is true whether you reinvest
your distributions in additional shares of the fund or receive them in cash.
Any capital gains the fund distributes are taxable to you as long-term
capital gains no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct taxpayer identification number (TIN) or
certify that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares, you may have a capital gain or loss. For tax
purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The individual tax rate on any gain
from the sale or exchange of your shares depends on how long you have held
your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Non-U.S. investors may be
subject to U.S. withholding and estate tax. You should consult your tax
advisor about federal, state, local or foreign tax consequences of your
investment in the fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past three
years. This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED OCTOBER 31,
- --------------------------------------------------------------
1998 1997 1996 3
- --------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 24.68 17.15 15.00
-----------------------------
Net investment income (loss) (.03) .08 .05
Net realized and unrealized
gains (losses) (6.45) 7.90 2.15
-----------------------------
Total from investment operations
(6.48) 7.98 2.20
-----------------------------
Dividends from net
investment income (.01) (.08) (.05)
Distributions from net
realized gains (.21) (.37) --
-----------------------------
Total distributions (.22) (.45) (.05)
-----------------------------
Net asset value, end of year 17.98 24.68 17.15
-----------------------------
Total return (%)1 (26.48%) 47.43 14.69
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 98,288 78,897 7,828
Ratios to average net
assets: (%)
Expenses 1.32 1.32 1.35 2
Expenses excluding waiver
and payments by affiliate 1.38 1.41 2.87 2
Net investment income (.16) .27 .57 2
Portfolio turnover rate (%) 36.88 13.92 32.52
CLASS C
- --------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 24.59 17.14 16.38
-----------------------------
Net investment income (loss) (.13) (.02) .01
Net realized and unrealized
gains (losses) (6.43) 7.84 .76
-----------------------------
Total from investment operations
(6.56) 7.82 .77
Dividends from net
investment income -- -- (.01)
Distributions from net
realized gains (.21) (.37) --
-----------------------------
Total distributions (.21) (.37) (.01)
-----------------------------
Net asset value, end of year 17.82 24.59 17.14
-----------------------------
Total return (%)1 (26.93) 46.40 4.68
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 41,694 21,554 434
Ratios to average net
assets: (%)
Expenses 1.97 1.87 2.002
Expenses excluding waiver
and payments by affiliate 2.03 1.96 3.52 2
Net investment loss (.81) (.30) (.08) 2
Portfolio turnover rate (%) 36.88 13.92 32.52
1. Total return does not include sales charges, and is not annualized.
2. Annualized.
3. For the period September 1, 1996 (effective date) to October 31, 1996.
YOUR ACCOUNT
[Insert graphic of pencil marking an "X"] CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. Your investment
representative can help you decide.
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------
o Initial sales o No initial sales o Initial sales
charge of 5.75% or charge charge of 1%
less
o Deferred sales o Deferred sales o Deferred sales
charge of 1% on charge of 4% or charge of 1% on
purchases of $1 less on shares you shares you sell
million or more sold sell within six within 18 months
within 12 months years
o Lower annual o Higher annual o Higher annual
expenses than Class expenses than Class expenses than Class
B or C due to lower A (same as Class C) A (same as Class B)
distribution fees due to higher due to higher
distribution fees. distribution fees.
Automatic No conversion to
conversion to Class Class A shares, so
A shares after annual expenses do
eight years, not decrease.
reducing future
annual expenses.
BEFORE JANUARY 1, 1999, CLASS A SHARES WERE DESIGNATED CLASS I AND CLASS C
SHARES WERE DESIGNATED CLASS II. THE FUND BEGAN OFFERING CLASS B SHARES ON
JANUARY 1, 1999.
SALES CHARGES - CLASS A
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $50,000 5.75 6.10
$50,000 but under $100,000 4.50 4.71
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either
as a lump sum or through our cumulative quantity discount or letter of intent
programs (see page [#]), you can buy Class A shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC
is the same for each class (please see page [#]).
DISTRIBUTION AND SERVICE (12B-1) FEES Class A has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution fees of up to 0.35% per year to those who sell and distribute
Class A shares and provide other services to shareholders. Because these fees
are paid out of Class A's assets on an on-going basis, over time these fees
will increase the cost of your investment and may cost you more than paying
other types of sales charges.
SALES CHARGES - CLASS B
IF YOU SELL YOUR SHARES
WITHIN THIS MANY YEARS AFTER BUYING THIS % IS DEDUCTED FROM
THEM YOUR PROCEEDS AS A CDSC
- --------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
With Class B shares, there is no initial sales charge. However, there is a
CDSC if you sell your shares within six years, as described in the table
above. The way we calculate the CDSC is the same for each class (please see
page [#]). After 8 years, your Class B shares automatically convert to Class
A shares, lowering your annual expenses from that time on.
MAXIMUM PURCHASE AMOUNT The maximum amount you may invest in Class B shares
at one time is $249,999. We invest any investment of $250,000 or more in
Class A shares, since a reduced initial sales charge is available and Class
A's annual expenses are lower.
RETIREMENT PLANS Class B shares are not available to all retirement plans.
Class B shares are only available to IRAs (of any type), Franklin Templeton
Trust Company 403(b) plans, and Franklin Templeton Trust Company qualified
plans with participant or earmarked accounts.
DISTRIBUTION AND SERVICE (12B-1) FEES Class B has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution and other fees of up to 1% per year for the sale of Class B
shares and for services provided to shareholders. Because these fees are paid
out of Class B's assets on an on-going basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
SALES CHARGES - CLASS C
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $1 million 1.00 1.01
WE INVEST ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS A SHARES, SINCE THERE
IS NO INITIAL SALES CHARGE AND CLASS A'S ANNUAL EXPENSES ARE LOWER.
CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C
shares you sell within 18 months of purchase. The way we calculate the CDSC
is the same for each class (please see below).
DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution and other fees of up to 1% per year for the sale of Class C
shares and for services provided to shareholders. Because these fees are paid
out of Class C's assets on an on-going basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A, B & C
The CDSC for each class is based on the current value of the shares being
sold or their net asset value when purchased, whichever is less. There is no
CDSC on shares you acquire by reinvesting your dividends.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one
month on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to
a CDSC. If there are not enough of these to meet your request, we will sell
the shares in the order they were purchased. We will use this same method if
you exchange your shares into another Franklin Templeton Fund (please see
page [#] for exchange information).
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below,
please let us know at the time you make your investment to help ensure you
receive the lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases
in the Franklin Templeton Funds to take advantage of the lower sales charges
for large purchases of Class A shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
may also combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts may also be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar
amount of shares over a 13-month period and lets you receive the same
sales charge as if all shares had been purchased at one time. We will
reserve a portion of your shares to cover any additional sales charge that
may apply if you do not buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE SECTION OF YOUR
ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you
may reinvest some or all of the proceeds within 365 days without an initial
sales charge. The proceeds must be reinvested within the same share class,
except proceeds from the sale of Class B shares will be reinvested in Class A
shares.
If you paid a CDSC when you sold your Class A or C shares, we will credit
your account with the amount of the CDSC paid but a new CDSC will apply. For
Class B shares reinvested in Class A, a new CDSC will not apply, although
your account will not be credited with the amount of any CDSC paid when you
sold your Class B shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD)
also may be reinvested without an initial sales charge if you reinvest them
within 365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject
to a sales charge.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS Class A shares may be
purchased without an initial sales charge or CDSC by investors who reinvest
within 365 days:
o certain payments received under an annuity contract that offers a
Franklin Templeton insurance fund option
o distributions from an existing retirement plan invested in the Franklin
Templeton Funds
o dividend or capital gain distributions from a real estate investment
trust sponsored or advised by Franklin Properties, Inc.
o redemption proceeds from a repurchase of Franklin Floating Rate Trust
shares held continuously for at least 12 months
o redemption proceeds from Class A of any Templeton Global Strategy Fund,
if you are a qualified investor. If you paid a CDSC when you sold your
shares, we will credit your account with the amount of the CDSC paid but a
new CDSC will apply.
WAIVERS FOR CERTAIN INVESTORS Class A shares also may be purchased without an
initial sales charge or CDSC by various individuals and institutions,
including:
o certain trust companies and bank trust departments investing $1 million
or more in assets over which they have full or shared investment discretion
o government entities that are prohibited from paying mutual fund sales
charges
o certain unit investment trusts and their holders reinvesting trust
distributions
o group annuity separate accounts offered to retirement plans
o employees and other associated persons or entities of Franklin Templeton
or of certain dealers
o Chilean retirement plans that meet the requirements for retirement plans
described below.
IF YOU THINK YOU MAY BE ELIGIBLE FOR A SALES CHARGE WAIVER,
CALL YOUR INVESTMENT REPRESENTATIVE OR CALL SHAREHOLDER SERVICES
AT 1-800/632-2301 FOR MORE INFORMATION.
CDSC WAIVERS The CDSC for each class generally will be waived:
o to pay account fees
o to make payments through systematic withdrawal plans, up to 1% monthly,
3% quarterly, 6% semiannually or 12% annually depending on the frequency
of your plan
o for redemptions by Franklin Templeton Trust Company employee benefit
plans or employee benefit plans serviced by ValuSelect(R) (not applicable to
Class B)
o for IRA distributions due to death or disability or upon periodic
distributions based on life expectancy (for Class B, this applies to all
retirement plan accounts, not only IRAs)
o to return excess contributions (and earnings, if applicable) from
retirement plan accounts
o for redemptions following the death of the shareholder or beneficial owner
o for participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans (not applicable to Class B)
RETIREMENT PLANS Certain retirement plans may buy Class A shares without an
initial sales charge. To qualify, the plan must be sponsored by an employer:
o with at least 100 employees, or
o with retirement plan assets of $1 million or more, or
o that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13-month period
A CDSC may apply. Retirement plans other than SIMPLEs, SEPs, or plans that
qualify under section 401 of the Internal Revenue Code also must qualify
under our group investment program to buy Class A shares without an initial
sales charge.
FOR MORE INFORMATION, CALL YOUR INVESTMENT REPRESENTATIVE OR
RETIREMENT PLAN SERVICES AT 1-800/527-2020.
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors
to invest as a group. For sales charge purposes, the group's investments are
added together. There are certain other requirements and the group must have
a purpose other than buying fund shares at a discount.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
MINIMUM INVESTMENTS
- --------------------------------------------------------------------------
INITIAL ADDITIONAL
- --------------------------------------------------------------------------
Regular accounts $2,500 $50
- --------------------------------------------------------------------------
UGMA/UTMA accounts $100 $50
- --------------------------------------------------------------------------
Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers, Education
IRAs or Roth IRAs)
- --------------------------------------------------------------------------
IRAs, IRA rollovers, Education IRAs or Roth
IRAs $250 $50
- --------------------------------------------------------------------------
Broker-dealer sponsored wrap account
programs $250 $50
- --------------------------------------------------------------------------
Full-time employees, officers, trustees and
directors of Franklin Templeton entities,
and their immediate family members
$100 $50
- --------------------------------------------------------------------------
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. Make sure you indicate the share class
you have chosen. If you do not indicate a class, we will invest your purchase
in Class A shares. To save time, you can sign up now for services you may
want on your account by completing the appropriate sections of the
application (see the next page).
BUYING SHARES
- ------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- ------------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
- ------------------------------------------------------------------------------
Make your check payable to Make your check payable to
[Insert graphic of Franklin Value Fund. Franklin Value Fund. Include
envelope] your account number on the
Mail the check and your check.
BY MAIL signed application to
Investor Services. Fill out the deposit slip
from your account statement.
If you do not have a slip,
include a note with your
name, the fund name, and
your account number.
Mail the check and deposit
slip or note to Investor
Services.
- ------------------------------------------------------------------------------
[Insert graphic of Call to receive a wire Call to receive a wire
three lightning control number and wire control number and wire
bolts] instructions. instructions.
Mail your signed application To make a same day wire
to Investor Services. Please investment, please call us
BY WIRE include the wire control by 1:00 p.m. pacific time
number or your new account and make sure your wire
1-800/632-2301 number on the application. arrives by 3:00 p.m.
(or 1-650/312-2000
collect) To make a same day wire
investment, please call us
by 1:00 p.m. pacific time
and make sure your wire
arrives by 3:00 p.m.
- ------------------------------------------------------------------------------
[Insert graphic of Call Shareholder Services at Call Shareholder Services at
two arrows pointing the number below, or send the number below or our
in opposite signed written instructions. automated TeleFACTS system,
directions] The TeleFACTS system cannot or send signed written
be used to open a new instructions.
BY EXCHANGE account.
(Please see page # for (Please see page # for
TeleFACTS(R) information on exchanges.) information on exchanges.)
1-800/247-1753
(around-the-clock
access)
- ------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES 777 MARINERS ISLAND BLVD., P.O. BOX
7777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in the fund by automatically transferring money from your checking or
savings account each month to buy shares. The minimum investment to open an
account with an automatic investment plan is $50 ($25 for an Education IRA).
To sign up, complete the appropriate section of your account application.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in Class
A shares of the fund by transferring money from your paycheck to the fund by
electronic funds transfer. If you are interested, indicate on your
application that you would like to receive an Automatic Payroll Deduction
Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the
fund in an existing account in the same share class* of the fund or another
Franklin Templeton Fund. Initial sales charges and CDSCs will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
*Class B and C shareholders may reinvest their distributions in Class A
shares of any Franklin Templeton money fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class*, generally without paying any additional sales
charges. If you exchange shares held for less than six months, however, you
may be charged the difference between the initial sales charge of the two
funds if the difference is more than 0.25%. If you exchange shares from a
money fund, a sales charge may apply no matter how long you have held the
shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC
will continue to be calculated from the date of your initial investment and
will not be charged at the time of the exchange. The purchase price for
determining a CDSC on exchanged shares will be the price you paid for the
original shares. If you exchange shares subject to a CDSC into a Class A
money fund, the time your shares are held in the money fund will not count
towards the CDSC holding period.
If you exchange your Class B shares for the same class of shares of another
Franklin Templeton Fund, the time your shares are held in that fund will
count towards the eight year period for automatic conversion to Class A
shares.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page [#]).
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may
exchange into Class A without any sales charge.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Requests to sell $100,000 or less can generally be
made over the phone or with a simple letter. Sometimes, however, to protect
you and the fund we will need written instructions signed by all registered
owners, with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud.
You can obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
o you have changed the address on your account by phone within the last 15
days
We may also require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
fund against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares 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.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
RETIREMENT PLANS Before you can sell shares in a Franklin Templeton Trust
Company retirement plan, you may need to complete additional forms. For
participants under age 59 1/2, tax penalties may apply. Call Retirement Plan
Services at 1-800/527-2020 for details.
SELLING SHARES
- -------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- -------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
BY MAIL or trust accounts may need to send additional
documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. If you own both Class A and B shares,
also specify the class of shares, otherwise we
will sell your Class A shares first. Be sure
to include all necessary signatures and any
additional documents, as well as signature
guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise according
to your written instructions.
- -------------------------------------------------------------------------
[Insert graphic of As long as your transaction is for $100,000 or
phone] less, you do not hold share certificates and
you have not changed your address by phone
BY PHONE within the last 15 days, you can sell your
shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and
address on the account. Written instructions,
with a signature guarantee, are required to
send the check to another address or to make
it payable to another person.
- -------------------------------------------------------------------------
[Insert graphic of You can call or write to have redemption
three lightning bolts] proceeds of $1,000 or more wired to a bank or
escrow account. See the policies above for
selling shares by mail or phone.
Before requesting a wire, please make sure we
BY WIRE have your bank account information on file. If
we do not have this information, you will need
to send written instructions with your bank's
name and address, your bank account number,
the ABA routing number, and a signature
guarantee.
Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business
day.
- -------------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund you
arrows pointing in are considering.
opposite directions]
Call Shareholder Services at the number below
BY EXCHANGE or our automated TeleFACTS system, or send
signed written instructions. See the policies
TeleFACTS(R) above for selling shares by mail or phone.
1-800/247-1753
(around-the-clock If you hold share certificates, you will need
access) to return them to the fund before your
exchange can be processed.
- -------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES 777 MARINERS ISLAND BLVD., P.O. BOX
7777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE The fund calculates the net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. pacific time). Each class's NAV is calculated
by dividing its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the
NAV plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
The fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If the fund holds securities listed primarily on a foreign exchange
that trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $1,250
($50 for employee and UGMA/UTMA accounts) because you sell some of your
shares, we may mail you a notice asking you to bring the account back up to
its applicable minimum investment amount. If you choose not to do so within
30 days, we may close your account and mail the proceeds to the address of
record. You will not be charged a CDSC if your account is closed for this
reason.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You will also receive the fund's
financial reports every six months. To reduce fund expenses, we try to
identify related shareholders in a household and send only one copy of the
financial reports. If you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she will also receive confirmations, account statements and
other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with
two or more owners are registered as "joint tenants with rights of
survivorship" (shown as "Jt Ten" on your account statement). To make any
ownership changes to a joint account, all owners must agree in writing,
regardless of the law in your state.
MARKET TIMERS The fund does not allow investments by market timers. You will
be considered a market timer if you have (i) requested an exchange out of the
fund within two weeks of an earlier exchange request, or (ii) exchanged
shares out of the fund more than twice in a calendar quarter, or (iii)
exchanged shares equal to at least $5 million, or more than 1% of the fund's
net assets, or (iv) otherwise made large or frequent exchanges. Shares under
common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies
and reserves certain rights, including:
o The fund may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the fund may change its investment minimums or waive or
lower its minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right to
make payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive
sales commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and
service (12b-1) fees and its other resources.
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
COMMISSION (%) --- 4.00 2.00
Investment under $50,000 5.00 --- ---
$50,000 but under $100,000 3.75 --- ---
$100,000 but under $250,000 2.80 --- ---
$250,000 but under $500,000 2.00 --- ---
$500,000 but under $1 million 1.60 --- ---
$1 million or more up to 1.00 1 --- ---
12B-1 FEE TO DEALER 0.35 0.25 2 1.00 3
A dealer commission of up to 1% may be paid on Class A NAV purchases by
certain retirement plans1 and up to 0.25% on Class A NAV purchases by certain
trust companies and bank trust departments, eligible governmental
authorities, and broker-dealers or others on behalf of clients participating
in comprehensive fee programs.
1. During the first year after purchase, dealers may not be eligible to
receive the 12b-1 fee.
2. Dealers may be eligible to receive up to 0.25% from the date of purchase.
After 8 years, Class B shares convert to Class A shares and dealers may then
receive the 12b-1 fee applicable to Class A.
3. Dealers may be eligible to receive up to 0.25% during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the
13th month.
[Insert graphic of question mark]QUESTIONS
If you have any questions about the fund or your account, you can write to us
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. You
can also call us at one of the following numbers. For your protection and to
help ensure we provide you with quality service, all calls may be monitored
or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- ---------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 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.
Dealer Services 1-800/524-4040 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.
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about the fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file #811-5878 482 P
Prospectus
Franklin Value Fund
ADVISOR CLASS
INVESTMENT STRATEGY GROWTH & INCOME * VALUE
MARCH 1, 1999
[Insert Franklin Templeton Ben Head]
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.
CONTENTS
THE FUND
[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
[insert page #] Goals and Strategies
[insert page #] Main Risks
[insert page #] Performance
[insert page #] Fees and Expenses
[insert page #] Management
[insert page #] Distributions and Taxes
[insert page #] Financial Highlights
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Qualified Investors
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]
Back Cover
THE FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is long-term total return.
PRINCIPAL INVESTMENTS The fund normally invests at least 65% of its assets in
the common stocks of companies that the fund's manager believes are
undervalued. In choosing investments that are undervalued, the fund's manager
focuses on companies that have:
o Low price to earnings ratio relative to the market, including
industry group or earnings growth
o Low price relative to book value or cash flow
o Suffered sharp price declines but in the fund's manager's opinion
still have significant potential ("fallen angels")
In addition, the fund may consider a variety of other factors in choosing an
investment, such as ownership of valuable franchises, trademarks, trade
names, control of distribution networks and market share for particular
products, and other factors that may identify the issuer as a potential
turnaround or takeover target.
[Begin Callout]
The fund invests at least 65% of total assets in companies of various sizes
that the manager believes are selling substantially below the underlying
value of their assets or their private market value, which is what a
sophisticated investor would pay for the entire company.
[End Callout]
The fund may invest in securities of small capitalization companies, which
have market capitalization of less than $1.5 billion at the time of the
fund's investment. Market capitalization is the total market value of a
company's outstanding stock. The fund may invest up to 25% of its assets in
foreign securities.
The fund is designed for long-term investors and not as a trading vehicle. It
is not intended as a complete investment program. You should consider how
well the fund fits your individual investment goals as well as your other
investments before you buy.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goal, because it may not invest or may invest less in securities of companies
that the manager believes are undervalued in the market place relative to
underlying asset values.
[Insert graphic of chart with line going up and down] MAIN RISKS
[Begin callout]
Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
SMALLER COMPANIES Investing in stocks of small companies may involve greater
risk than investing in larger company stocks. Historically, small company
securities have been more volatile in price than larger company securities,
especially over the short-term. Among the reasons for the greater price
volatility are the less certain growth prospects of smaller companies, the
lower degree of liquidity in the markets for such securities, and the greater
sensitivity of smaller companies to changing economic conditions.
Small company stocks may fluctuate independently of larger company stocks.
Small company stocks may decline in price as large company stocks rise or
vice versa.
In addition, these companies may lack depth of management, they may be unable
to generate funds necessary for growth or development, or they may be
developing or marketing new products or services for which markets are not
yet established and may never become established.
While smaller companies may offer greater opportunities for capital growth
than larger, more established companies, they also involve greater risks and
should be considered speculative.
VALUE INVESTING The fund's policy of investing in securities that may be out
of favor, including turnarounds, cyclical companies, companies emerging from
bankruptcy, and companies reporting poor earnings, and companies whose share
prices have declined sharply or that are not widely followed by other
investors, differs from the approach followed by many other mutual funds.
There is always the possibility that the manager may be incorrect in its
assessment of a particular industry or company or that the manager may not
buy these securities at their lowest possible prices or sell them at their
highest.
Cyclical stocks in which the fund may invest tend to increase in value more
quickly during economic upturns than non-cyclical stocks, but they also tend
to lose value more quickly in economic downturns. Companies emerging from
bankruptcy may have difficulty retaining customers and suppliers. These
companies may have relatively weak balance sheets and during economic
downturns they may not have sufficient cash flow to pay their debt
obligations and may have difficulty finding additional financing needed for
their operations.
NON-DIVERSIFICATION The fund is non-diversified. This means it may invest a
greater portion of its assets in the securities of one issuer than a
diversified fund. Economic, business, political or other changes can affect
all securities of a similar type. The fund may be more sensitive to these
changes, which may result in greater fluctuation in the value of the fund's
portfolio and its net asset value.
FOREIGN SECURITIES RISK Securities of companies located outside the U.S. may
offer significant opportunities for gain, but they also involve additional
risks that can increase the potential for losses in the fund. Investments in
American, European and Global Depositary Receipts also involve some or all of
the following risks.
COUNTRY RISK. General securities market movements in any country where the
fund has investments are likely to affect the value of the securities the
fund owns which trade in that country. These movements will affect the fund's
share price.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, expropriation, restrictions on removal of
currency or other assets, nationalization of assets and punitive taxes.
COMPANY RISK. Foreign companies are not subject to the same accounting,
auditing and financial reporting standards and practices as U.S. companies
and their stocks may not be as liquid as stocks of similar U.S. companies.
Foreign stock exchanges, brokers and companies generally have less government
supervision and regulation than in the U.S. The fund may have greater
difficulty voting proxies, exercising shareholder rights, pursuing legal
remedies and obtaining judgments with respect to foreign investments in
foreign courts than with respect to U.S. companies in U.S. courts.
CURRENCY RISK Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
EURO. On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. If the fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the fund may hold in its
portfolio, and their impact on the value of fund shares. To the extent the
fund holds non-U.S. dollar (euro or other) denominated securities, it will
still be exposed to currency risk due to fluctuations in those currencies
versus the U.S. dollar.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is only one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S. may not be required to make the same level of disclosure about Year 2000
readiness as is required in the U.S. The manager, of course, cannot audit
each company and its major suppliers to verify their Year 2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page [#] for more information.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
[Begin callout]
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.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 2 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
ADVISOR CLASS ANNUAL TOTAL RETURNS 1,2
Insert bar graph
29.86% []%
97 98
YEAR
[Begin callout]
BEST QUARTER:
Q[] '[] []%
WORST QUARTER:
Q[] '[] []%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
1 YEAR INCEPTION
(1/2/97)
- -------------------------------------------------------------------
Franklin Value Fund - Advisor Class 2 []% []%
Wilshire Small Companies Value Index 3 []% []%
1. As of December 31, 1998, the fund's year-to-date return was []%.
2. Performance figures reflect a "blended" figure combining the following
methods of calculation: (a) For periods before January 1, 1997, a restated
figure is used based on the fund's Class A performance, excluding the effect
of Class A's maximum initial sales charge and including the effect of the
Class A distribution and service (12b-1) fees; and (b) for periods after
January 1, 1997, an actual Advisor Class figure is used reflecting a
deduction of all applicable charges and fees for that class. This blended
figure assumes reinvestment of dividends and capital gains.
3. The unmanaged Wilshire Small Companies Value Index excludes companies with
high price/earnings ratios, low yields, or high price/book ratios. The Index
is selected from the Wilshire 2500 universe, includes companies that have
market capitalizations of at least $70 million, and contains approximately
200 securities. It includes reinvested dividends. One cannot invest directly
in an index, nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended October 31, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ADVISOR CLASS
- -------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
ADVISOR CLASS
- -------------------------------------------------------------------------------
Management fees1 0.75%
Distribution and service (12b-1) fees None
Other expenses 0.28%
---------------------------
Total annual fund operating expenses1 1.03%
===========================
1. For the period shown, the manager had agreed in advance to limit its
management fees. With this reduction, management fees were 0.69% and total
annual fund operating expenses were 0.97%. The manager may end this
arrangement at any time upon notice to the fund's Board of Trustees.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------
$105 $328 $569 $1,259
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisory Services, Inc., (Advisory Services) One Parker Plaza,
Sixteenth Floor, Fort Lee, New Jersey 07024, is the fund's investment
manager. Together, Franklin Advisory Services, Inc. and its affiliates manage
over $216 billion in assets.
The team responsible for the fund's management is:
WILLIAM J. LIPPMAN, PRESIDENT OF ADVISORY SERVICES
Mr. Lippman has been a manager on the fund since inception and has more than
30 years' experience in the securities industry.
GERARD P. SULLIVAN, SENIOR VICE PRESIDENT OF ADVISORY SERVICES
Mr. Sullivan has been a manager on the fund since March 1998. Previously, he
was a portfolio manager for SunAmerica Asset Management and Texas Commerce
Investment Management & Co.
BRUCE C. BAUGHMAN, SENIOR VICE PRESIDENT OF ADVISORY SERVICES
Mr. Baughman has been a manager on the fund since inception. He joined the
Franklin Templeton Group in 1988.
MARGARET MCGEE, VICE PRESIDENT OF ADVISORY SERVICES
Ms. McGee has been a manager on the fund since inception. She joined the
Franklin Templeton Group in 1988.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended October 31, 1998, management
fees, before any advance waiver, were 0.75% of the fund's average daily net
assets. Under an agreement by the manager to limit its fees, the fund paid
0.69% of its average daily net assets to the manager. The manager may end
this arrangement at any time upon notice to the fund's Board of Trustees.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a
non-standard leap year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others. The fund could experience difficulties in effecting transactions if
any of its foreign subcustodians, or if foreign broker-dealers or foreign
markets are not ready for Year 2000.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least quarterly representing its net investment income. Capital gains, if
any, may be distributed annually. The amount of these distributions will vary
and there is no guarantee the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution,
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will receive some of your investment back in the
form of a taxable distribution. If you would like information on upcoming
record dates for the fund's distributions, please call 1-800/DIAL BEN.
TAX CONSIDERATIONS In general, fund distributions are taxable to you as
either ordinary income or capital gains. This is true whether you reinvest
your distributions in additional shares of the fund or receive them in cash.
Any capital gains the fund distributes are taxable to you as long-term
capital gains no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct taxpayer identification number (TIN) or
certify that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares, you may have a capital gain or loss. For tax
purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The individual tax rate on any gain
from the sale or exchange of your shares depends on how long you have held
your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Non-U.S. investors may be
subject to U.S. withholding and estate tax. You should consult your tax
advisor about federal, state, local or foreign tax consequences of your
investment in the fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Advisor Class since its
inception. This information has been audited by PricewaterhouseCoopers LLP.
ADVISOR CLASS YEAR ENDED OCTOBER 31,
- ------------------------------------------------------
1998 1997 3
- ------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 24.72 18.75
-----------------------
Net investment income .04 .10
Net realized and
unrealized gains (losses) (6.45) 5.95
-----------------------
Total from investment
operations (6.41) 6.05
-----------------------
Less distributions from:
Net investment income (.03) (.08)
-----------------------
Net realized gains (.21) --
-----------------------
Total distributions (.24) (.08)
-----------------------
Net asset value, end of year 18.07 24.72
=======================
Total return (%)1 (26.18) 32.35
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x
1,000) 4,739 4,495
Ratios to average net assets:
(%)
Expenses 0.97 .98 2
Expenses excluding waiver
and payments by affiliate 1.03 1.07 2
Net investment income 0.19 .59 2
Portfolio turnover rate (%) 36.88 13.92
1. Total return is not annualized.
2. Annualized.
3. For the period January 1, 1997 (effective date) to October 31, 1997)
YOUR ACCOUNT
[Insert graphic of pencil marking an "X"]QUALIFIED INVESTORS
The following investors may qualify to buy Advisor Class shares of the fund.
o Qualified registered investment advisors or certified financial planners
with clients invested in any series of Franklin Mutual Series Fund Inc. on
October 31, 1996, or who buy through a broker-dealer or service agent who
has an agreement with Franklin Templeton Distributors, Inc.
(Distributors). Minimum investments: $1,000 initial and $50 additional.
o Broker-dealers, registered investment advisors or certified financial
planners who have an agreement with Distributors for clients participating
in comprehensive fee programs. Minimum investments: $250,000 initial
($100,000 initial for an individual client) and $50 additional.
o Officers, trustees, directors and full-time employees of Franklin
Templeton and their immediate family members. Minimum investments: $100
initial ($50 for accounts with an automatic investment plan) and $50
additional.
o Each series of the Franklin Templeton Fund Allocator Series. Minimum
investments: $1,000 initial and $1,000 additional.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund
[End callout]
o Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under section 501 of the Internal Revenue
Code. Minimum investments: $1 million initial investment in Advisor Class
or Class Z shares of any of the Franklin Templeton Funds and $50
additional.
o Accounts managed by the Franklin Templeton Group. Minimum investments: No
initial minimum and $50 additional.
o The Franklin Templeton Profit Sharing 401(k) Plan. Minimum investments:
No initial or additional minimums.
o Defined contribution plans such as employer stock, bonus, pension or
profit sharing plans that meet the requirements for qualification under
section 401 of the Internal Revenue Code, including salary reduction plans
qualified under section 401(k) of the Internal Revenue Code, and that are
sponsored by an employer (i) with at least 10,000 employees, or (ii) with
retirement plan assets of $100 million or more. Minimum investments: No
initial or additional minimums.
o Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which
the trust companies and bank trust departments or other plan fiduciaries
or participants, in the case of certain retirement plans, have full or
shared investment discretion. Minimum investments: No initial or
additional minimums.
o Individual investors. Minimum investments: $5 million initial and $50
additional. You may combine all of your shares in the Franklin Templeton
Funds for purposes of determining whether you meet the $5 million minimum,
as long as $1 million is in Advisor Class or Class Z shares of any of the
Franklin Templeton Funds.
o Any other investor, including a private investment vehicle such as a
family trust or foundation, who is a member of an established group of 11
or more investors. Minimum investments: $5 million initial and $50
additional. For minimum investment purposes, the group's investments are
added together. The group may combine all of its shares in the Franklin
Templeton Funds for purposes of determining whether it meets the $5
million minimum, as long as $1 million is in Advisor Class or Class Z
shares of any of the Franklin Templeton Funds. There are certain other
requirements and the group must have a purpose other than buying fund
shares without a sales charge.
Please note that Advisor Class shares of the fund are no longer available to
retirement plans through Franklin Templeton's ValuSelect(R) program. Retirement
plans in the ValuSelect program before January 1, 1998, however, may continue
to invest in the fund's Advisor Class shares.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. To save time, you can sign up now for
services you may want on your account by completing the appropriate sections
of the application (see the next page).
BUYING SHARES
- -------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- -------------------------------------------------------------------------------
[Insert graphic
of hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------------
Make your check payable to Make your check payable to
[Insert graphic Franklin Value Fund. Franklin Value Fund. Include
of envelope] your account number on the
Mail the check and your check.
BY MAIL signed application to
Investor Services. Fill out the deposit slip
from your account statement.
If you do not have a slip,
include a note with your
name, the fund name, and
your account number.
Mail the check and deposit
slip or note to Investor
Services.
- -------------------------------------------------------------------------------
[Insert graphic Call to receive a wire Call to receive a wire
of three control number and wire control number and wire
lightning bolts] instructions. instructions.
Mail your signed application To make a same day wire
to Investor Services. Please investment, please call us
BY WIRE include the wire control by 1:00 p.m. pacific time
number or your new account and make sure your wire
1-800/632-2301 number on the application. arrives by 3:00 p.m.
(or
1-650/312-2000 To make a same day wire
collect) investment, please call us
by 1:00 p.m. pacific time
and make sure your wire
arrives by 3:00 p.m.
- -------------------------------------------------------------------------------
[Insert graphic Call Shareholder Services at Call Shareholder Services at
of two arrows the number below, or send the number below, or send
pointing in signed written instructions. signed written instructions.
opposite (Please see page [#] for (Please see page [#] for
directions] information on exchanges.) information on exchanges.)
BY EXCHANGE
- -------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES 777 MARINERS ISLAND BLVD., P.O. BOX
7777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in the fund by automatically transferring money from your checking or
savings account each month to buy shares. To sign up, complete the
appropriate section of your account application.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the
fund in an existing account in the same share class of the fund or in Advisor
Class or Class A shares of another Franklin Templeton Fund. To reinvest your
distributions in Advisor Class shares of another Franklin Templeton Fund, you
must qualify to buy that fund's Advisor Class shares. For distributions
reinvested in Class A shares of another Franklin Templeton Fund, initial
sales charges and contingent deferred sales charges (CDSCs) will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class. You also may exchange your Advisor Class shares
for Class A shares of a fund that does not currently offer an Advisor Class
(without any sales charge)* or for Class Z shares of Franklin Mutual Series
Fund Inc.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
If you do not qualify to buy Advisor Class shares of Templeton Developing
Markets Trust, Templeton Foreign Fund or Templeton Growth Fund, you also may
exchange your shares for Class A shares of those funds (without any sales
charge)* or for shares of Templeton Institutional Funds, Inc.
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page [#]).
*If you exchange into Class A shares and you later decide you would like to
exchange into a fund that offers an Advisor Class, you may exchange your
Class A shares for Advisor Class shares if you otherwise qualify to buy the
fund's Advisor Class shares.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. Certain terms and
minimums apply. To sign up, complete the appropriate section of your
application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Requests to sell $100,000 or less can generally be
made over the phone or with a simple letter. Sometimes, however, to protect
you and the fund we will need written instructions signed by all registered
owners, with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud.
You can obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
o you have changed the address on your account by phone within the last 15
days
We may also require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
fund against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares 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.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
RETIREMENT PLANS Before you can sell shares in a Franklin Templeton Trust
Company retirement plan, you may need to complete additional forms. For
participants under age 59 1/2, tax penalties may apply. Call Retirement Plan
Services at 1-800/527-2020 for details.
SELLING SHARES
- -------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- -------------------------------------------------------------------
[Insert graphic
of hands shaking]
Contact your investment representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------
[Insert graphic Send written instructions and endorsed share
of envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
BY MAIL or trust accounts may need to send additional
documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. Be sure to include all necessary
signatures and any additional documents, as
well as signature guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise according
to your written instructions.
- -------------------------------------------------------------------
[Insert graphic As long as your transaction is for $100,000 or
of phone] less, you do not hold share certificates and
you have not changed your address by phone
BY PHONE within the last 15 days, you can sell your
shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and
address on the account. Written instructions,
with a signature guarantee, are required to
send the check to another address or to make
it payable to another person.
- -------------------------------------------------------------------
[Insert graphic You can call or write to have redemption
of three proceeds of $1,000 or more wired to a bank or
lightning bolts] escrow account. See the policies above for
selling shares by mail or phone.
Before requesting a wire, please make sure we
have your bank account information on file. If
BY WIRE we do not have this information, you will need
to send written instructions with your bank's
name and address, your bank account number,
the ABA routing number, and a signature
guarantee.
Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business
day.
- -------------------------------------------------------------------
[Insert graphic Obtain a current prospectus for the fund you
of two arrows are considering.
pointing in
opposite Call Shareholder Services at the number below,
directions] or send signed written instructions. See the
policies above for selling shares by mail or
BY EXCHANGE phone.
If you hold share certificates, you will need
to return them to the fund before your
exchange can be processed.
- -------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES 777 MARINERS ISLAND BLVD., P.O. BOX
7777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE The fund calculates the net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. pacific time). The NAV for Advisor Class is
calculated by dividing its net assets by the number of its shares
outstanding.
The fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If the fund holds securities listed primarily on a foreign exchange
that trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250
($50 for employee accounts) because you sell some of your shares, we may mail
you a notice asking you to bring the account back up to its applicable
minimum investment amount. If you choose not to do so within 30 days, we may
close your account and mail the proceeds to the address of record.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You will also receive the fund's
financial reports every six months. To reduce fund expenses, we try to
identify related shareholders in a household and send only one copy of the
financial reports. If you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she will also receive confirmations, account statements and
other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with
two or more owners are registered as "joint tenants with rights of
survivorship" (shown as "Jt Ten" on your account statement). To make any
ownership changes to a joint account, all owners must agree in writing,
regardless of the law in your state.
MARKET TIMERS The fund does not allow investments by market timers. You
will be considered a market timer if you have (i) requested an exchange out
of the fund within two weeks of an earlier exchange request, or (ii)
exchanged shares out of the fund more than twice in a calendar quarter, or
(iii) exchanged shares equal to at least $5 million, or more than 1% of the
fund's net assets, or (iv) otherwise made large or frequent exchanges. Shares
under common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies
and reserves certain rights, including:
o The fund may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the fund may change its investment minimums or waive or
lower its minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right to
make payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell Advisor Class shares may
receive up to 0.25% of the amount invested. This amount is paid by Franklin
Templeton Distributors, Inc. from its own resources.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the fund or your account, you can write to us
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. You
can also call us at one of the following numbers. For your protection and to
help ensure we provide you with quality service, all calls may be monitored
or recorded.
HOURS (PACIFIC TIME, MONDAY
DEPARTMENT NAME TELEPHONE NUMBER THROUGH FRIDAY)
- -------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 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.
Dealer Services 1-800/524-4040 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.
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about the fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file #811-5878 482 PA
FRANKLIN BALANCE SHEET INVESTMENT FUND
FRANKLIN VALUE INVESTORS TRUST
STATEMENT OF
ADDITIONAL INFORMATION
MARCH 1, 1999
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the fund's prospectus.
The fund's prospectus, dated March 1, 1999, which we may amend from time to
time, contains the basic information you should know before investing in the
fund. You should read this SAI together with the fund's prospectus.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended October 31, 1998, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goal and Strategies
Risks
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Appendix - Description of Bond Ratings
- ------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- ------------------------------------------------------------------------------
GOAL AND STRATEGIES
- ------------------------------------------------------------------------------
The fund's principal investment goal is high total return, of which capital
appreciation and income are components. This goal is fundamental, which means
it may not be changed without shareholder approval. Income will also be
sought when consistent with the fund's goal. The fund invests primarily in
common stocks of companies the fund's manager believes are undervalued in the
marketplace relative to underlying asset values and possess the potential for
significant capital appreciation. The fund will also invest a portion of its
total assets in the securities of closed-end management investment companies.
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 the manager, 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 those companies with market capitalizations of at
least $80 million from which comparable data may be obtained. The manager,
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, the manager may consider the following
factors among others: valuable franchises or other intangibles; ownership of
valuable trademarks or trade names; control of distribution networks or of
market share for particular products; ownership of real estate the value of
which is understated; underutilized liquidity and other factors that would
identify the issuer as a potential takeover target or turnaround candidate.
The fund will generally invest in 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
the manager's appraisal of what securities will best meet the fund's
objective of high total return.
The fund's emphasis on securities believed to be undervalued by the market
uses a technique followed by certain very wealthy investors highlighted by
the media and a number of private partnerships with very high minimum
investments. It requires not only the resources to undertake exhaustive
research of little followed, out-of-favor securities, but also the patience
and discipline to hold these investments until their intrinsic values are
ultimately recognized by others in the marketplace. There can be no assurance
that this technique will be successful for the fund or that the fund will
achieve its investment goal.
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 policies used to seek to achieve the fund's goal are not fundamental,
unless otherwise noted, and are subject to change without shareholder
approval. Generally, the policies and restrictions discussed in the
Prospectus and in this 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.
The following is a description of the various types of securities the fund
may buy.
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. The purchaser of an equity security typically
receives an ownership interest in the company as well as certain voting
rights. The owner of an equity security may participate in a company's
success through the receipt of dividends, which are distributions of earnings
by the company to its owners. Equity security owners may also participate in
a company's success or lack of success through increases or decreases in the
value of the company's shares as traded in the public trading market for such
shares. Equity securities generally take the form of common stock or
preferred stock, as well as securities convertible into common stocks.
Preferred stockholders typically receive greater dividends but may receive
less appreciation than common stockholders and may have greater voting rights
as well. Equity securities may also include convertible securities, warrants,
or rights. Warrants or rights give the holder the right to buy a common stock
at a given time for a specified price.
CLOSED-END FUNDS The fund invests a portion of its total assets (but may
invest without limitation) in the common shares of registered closed-end
management investment companies ("closed-end funds") that are traded on a
national securities exchange or in the over-the-counter markets and that the
manager 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 the manager's view, these securities are
trading at a discount from net asset value. The fund's investment in the
securities of closed-end funds and UITs will be subject to certain
restrictions and conditions imposed by the Investment Company Act of 1940
("1940 Act"). 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.
The manager will consider the following, among other factors, in evaluating
closed-end funds: (i) historical market discounts, (ii) portfolio
characteristics, (iii) repurchase, tender offer, and dividend reinvestment
programs, (iv) provisions for converting into an open-end fund, and (v)
quality of management.
The 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 the manager, 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.
Typically, the common shares of closed-end funds are offered to the public in
a one-time initial public offering by a group of underwriters who retain a
spread or underwriting commission of between 4% and 6% of the initial public
offering price. These securities may then be listed for trading on the NYSE,
the American Stock Exchange, the National Association of Securities Dealers
Automated Quotation ("NASDAQ") System and, in some cases, may be traded in
other over-the-counter markets. Because the common shares of closed-end funds
cannot be redeemed upon demand to the issuer like the shares of an open-end
investment company (such as the fund), investors seek to buy and sell common
shares of closed-end funds in the secondary market.
The fund also may invest in senior securities, such as preferred stock and
debt obligations, of closed-end funds. Closed-end funds may issue senior
securities for the purpose of leveraging the closed-end fund's common shares
in an attempt to enhance the current return to closed-end fund's common
shareholders. The fund's investment in the common shares of closed-end funds
that are financially leveraged may create an opportunity for greater total
return on its investment, but at the same time may be expected to exhibit
more volatility in market price and net asset value than an investment in
shares of investment companies without a leveraged capital structure. The
fund will not invest in senior securities of closed-end funds rated lower
than A by S&P and Moody's and the fund will not own more than 3% of the total
outstanding stock (including common and preferred stock and certain senior
securities that have been afforded voting rights as a consequence of the
existence of dividend arrears) of any single closed-end fund.
The fund generally will only purchase securities of closed-end funds in the
secondary market. The fund will incur normal brokerage costs on these
purchases similar to the expenses the fund would incur for the purchase of
securities of any other type of issuer in the secondary market. The fund may,
however, also purchase securities of a closed-end fund in an initial public
offering when, in the opinion of the manager, based on a consideration of the
nature of the closed-end fund's proposed investments, the prevailing market
conditions and the level of demand for such securities, they represent an
attractive opportunity for capital appreciation. The initial offering price
will include a dealer spread, which may be higher than the applicable
brokerage cost if the fund purchased the securities in the secondary market.
Closed-end funds invest the net proceeds of their public offering in the
securities of other companies consistent with their investment objectives and
policies. Certain closed-end funds seek to provide current income to
investors, others seek to provide appreciation in value, while others may
seek a combination of both income and appreciation. Closed-end funds may have
a policy of investing in certain types of securities such as equity or debt
securities; some may concentrate in particular industry sectors or geographic
areas, while others may invest in a variety of securities to achieve a
particular type of return or a particular tax result. The indicated
characteristics and risks apply to the securities of closed-end funds
regardless of whether such securities trade at a market discount or premium.
According to a report from Lipper Analytical Services, Inc., as of December
31, 1998, there were approximately 500 closed-end funds with assets in excess
of $146 billion. In order to comply with federal tax regulations, the fund
will generally invest in closed-end funds that qualify as "regulated
investment companies" under federal income tax law.
The common shares of many closed-end funds, after their initial public
offering, frequently trade at a price per share which is less than the net
asset value per share, the difference representing the "market discount" of
such common shares. This market discount may be due in part to the investment
objective of long-term appreciation, which is sought by many closed-end
funds, as well as the fact that the common shares of closed-end funds are not
redeemable by the holder upon demand to the issuer at the next-determined net
asset value but rather are subject to the principles of supply and demand in
the secondary market. A relative lack of secondary market purchasers of
closed-end fund common shares also may contribute to the common shares
trading at a discount to their net asset value.
Although the fund intends primarily to purchase common shares of closed-end
funds that trade at a market discount and that the manager believes present
the opportunity for capital appreciation or increased income due in part to
such market discount, there can be no assurance that the market discount on
common shares of any closed-end fund will ever decrease. In fact, it is
possible that this market discount may increase and the fund may suffer
realized or unrealized capital losses due to a further decline in the market
price of the securities of the closed-end funds, thereby adversely affecting
the Net Asset Value of the fund's shares. Similarly, there can be no
assurance that the common shares of closed-end funds which trade at a premium
will continue to trade at a premium or that the premium will not decrease
subsequent to a purchase of shares by the fund. Although no assurances can be
given, the manager believes that its market research and analysis and the
diversification policies of the fund will enable the fund to avoid
significant declines in the Net Asset Value of the fund's shares due to
losses related to an individual issuer.
The fund may also invest in the securities of closed-end funds which (i)
concentrate their portfolios in the issuers of specific industries or in
specific geographic areas and (ii) are non-diversified for purposes of the
1940 Act. However, because the fund does not intend to concentrate its
investments in any single industry and because the closed-end funds in which
the fund will invest will generally satisfy the diversification requirements
applicable to a regulated investment company under the Code, the fund does
not believe that its investment in closed-end funds that concentrate in
specific industries or geographic areas or which are non-diversified for
purposes of the 1940 Act present any special risks to you. The fund will
treat its entire investment in the securities of a closed-end fund that
concentrates in a specific industry as an investment in securities of an
issuer in the industry in which such fund concentrates its portfolio.
The fund will not invest in the securities of closed-end funds that invest
more than 10% of their assets in the securities of other investment
companies. The fund will also not invest directly in the securities of
open-end investment companies; however, the fund may retain the securities of
a closed-end investment company that has converted to open-end fund status
subsequent to the fund's investment in the securities of the closed-end fund.
1940 ACT PROVISIONS. The fund will structure its investments in the
securities of closed-end funds and UITs to comply with applicable provisions
of the 1940 Act. The presently applicable provisions require that (i) the
fund and affiliated persons of the fund not own together more than 3% of the
total outstanding stock of any one investment company, (ii) the fund not
offer its shares at a public offering price that includes a sales charge of
more than 1.5% and (iii) the fund will either seek instructions from its
shareholders with regard to the voting of all proxies with respect to its
investment in the securities of closed-end funds and UITs and vote such
proxies only in accordance with the instructions, or vote the shares held by
it in the same proportion as the vote of all other holders of the securities.
For purposes of applying the 3% of total outstanding stock limitation, the
fund will aggregate its purchases of a closed-end fund or a UIT with the
purchases, if any, by other investment companies managed or sponsored by the
investment manager. The fund intends to vote the shares of any closed-end
fund held by it in the same proportion as the vote of all other holders of
such fund's securities. The effect of this "mirror" voting is to neutralize
the fund's influence on corporate governance matters regarding the closed-end
funds in which the fund invests.
Closed-end funds may, under certain circumstances, convert into open-end
investment companies. Pursuant to applicable provisions of the 1940 Act, the
fund may not redeem more than 1% of the outstanding redeemable securities of
an open-end investment company during any period of 30 days or less.
Consequently, should the fund own more than 1% of the outstanding redeemable
securities of an open-end investment company after such fund's conversion
from closed-end fund status, the amount in excess of 1% may be treated as an
investment in illiquid securities. Because the fund may not hold at any time
more than 10% of the value of its total assets in illiquid securities, the
fund may seek to divest itself, prior to any such conversion, of securities
in excess of 1% of the outstanding redeemable securities of a converting
fund. The fund may, however, retain such securities and any amount in excess
of 1% of the open-end fund, thereby subject to the limits on redemption,
would be treated as an investment in illiquid securities subject to the
aggregate limit of 10% of the fund's total assets.
The fund will not invest in the securities of closed-end funds that are
managed by the investment manager or UITs that are sponsored by the
investment manager. The foregoing policy is not a fundamental policy of the
fund and can therefore be changed by a majority vote of the board of trustees
without any requirement for a vote of the fund's shareholders.
WARRANTS A warrant is typically a long-term option issued by a corporation
which gives the holder the privilege of buying a specified number of shares
of the underlying common stock at a specified exercise price at any time on
or before an expiration date. Stock index warrants entitle the holder to
receive, upon exercise, an amount in cash determined by reference to
fluctuations in the level of a specified stock index. If the fund does not
exercise or dispose of a warrant prior to its expiration, it will expire
worthless. Further, the fund does not intend to invest directly in warrants
(valued at the lower of cost or market) in excess of 5% of the value of the
fund's net assets. No more than 2% of the value of the fund's net assets may
be invested in warrants (valued at the lower of cost or market) which are not
listed on the New York or American Stock Exchange.
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 "Risks -
Foreign securities risk" for more information.
DEPOSITARY RECEIPTS Many securities of foreign issuers are represented by
ADRs, EDRs, and GDRs (collectively "Depositary Receipts"). ADRs evidence
ownership of, and represent the right to receive, securities of foreign
issuers deposited in a domestic bank or trust company or a foreign
correspondent bank. EDRs and GDRs are typically issued by foreign banks or
trust companies, although they also may be issued by U.S. banks or trust
companies, and evidence ownership of underlying securities issued by either a
foreign or a U.S. corporation. Generally, Depositary Receipts in registered
form are designed for use in the U.S. securities market and Depositary
Receipts in bearer form are designed for use in securities markets outside
the U.S. Please see "Risks - Depositary receipt risk" for more information.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on
exchanges or over-the-counter. While ADRs do not eliminate all the risk
associated with foreign investments, by investing in ADRs rather than
directly in the stock of foreign issuers, the fund will avoid currency risks
during the settlement period for either purchases or sales. In general, there
is a large, liquid market in the U.S. for ADRs quoted on a national
securities exchange or on NASDAQ. The information available for ADRs is
subject to the accounting, auditing and financial reporting standards of the
U.S. market or exchange on which they are traded, which standards are more
uniform and more exacting than those to which many foreign issuers may be
subject. EDRs and GDRs may not necessarily be denominated in the same
currency as the underlying securities into which they may be converted.
Depositary Receipts may be issued under sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of Depositary Receipts. In unsponsored programs, the
issuer may not be directly involved in the creation of the program. Although
regulatory requirements with respect to sponsored and unsponsored programs
are generally similar, in some cases it may be easier to obtain financial
information from an issuer that has participated in the creation of a
sponsored program. Accordingly, there may be less information available
regarding issuers of securities underlying unsponsored programs and there may
not be a correlation between this information and the market value of the
Depositary Receipts.
DEBT SECURITIES A debt security typically has a fixed payment schedule that
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it
declares and pays any dividend to holders of its equity securities. Bonds,
notes, debentures, and commercial paper differ in the length of the issuer's
payment schedule, with bonds carrying the longest repayment schedule and
commercial paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the fund's net asset value per share.
HIGH YIELD 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 Standard & Poor's Corporation ("S&P") or Ba or lower by Moody's Investors
Services, Inc. ("Moody's") and unrated securities of comparable quality that
the manager 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 "Risks - High yield securities risk" and the appendix 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.
ENHANCED CONVERTIBLES. 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 non-convertible 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 the manager
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 the manager
determines that such a combination would better promote the fund's investment
objectives. In addition, the component parts of a synthetic convertible
security may be purchased simultaneously or separately; and the holder of a
synthetic convertible faces the risk that the price of the stock, or the
level of the market index underlying the convertibility component will
decline.
SHORT-SELLING The fund may make short sales. In a short sale, the fund sells
a security it does not own in anticipation of a decline in the market value
of that security. To complete this transaction, the fund must borrow the
security to make delivery to the buyer. The fund then is obligated to replace
the security borrowed by purchasing it at the market price at the time of
replacement. The price at this time may be more or less than the price at
which the security was sold by the fund. Until the security is replaced, the
fund is required to pay to the lender any dividends or interest which accrue
during the period of the loan. To borrow the security, the fund also may be
required to pay a premium, which would increase the cost of the security
sold. The proceeds of the short sale will be retained by the broker, to the
extent necessary to meet margin requirements, until the short position is
closed out.
The fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which
the fund replaces the borrowed security. The fund will realize a gain if the
security declines in price between those dates. The amount of any gain will
be decreased, and the amount of any loss increased, by the amount of any
premium, dividends or interest the fund may be required to pay in connection
with a short sale.
No securities will be sold short if, after effect is given to any such short
sale, the total market value of all securities sold short would exceed 25% of
the value of the fund's net assets. In addition, short sales of the
securities of any single issuer, which must be listed on a national exchange,
may not exceed 5% of the fund's net assets or 5% of any class of such
issuer's securities.
The fund will place in a segregated account with its custodian bank an amount
of cash or U.S. government securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short
and (b) any cash or U.S. government securities required to be deposited as
collateral with the broker in connection with the short sale (not including
the proceeds from the short sale). This segregated account will be
marked-to-market daily, provided that at no time will the amount deposited in
it plus the amount deposited with the broker as collateral be less than the
market value of the securities at the time they were sold short.
In addition to the short sales discussed above, the fund also may make short
sales "against the box," i.e., when a security identical to one owned by the
fund is borrowed and sold short. The fund at no time will have more than 15%
of the value of its net assets in deposits on short sales against the box.
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 writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, since the writer may
be assigned an exercise notice at any time prior to the termination of the
obligation. Whether or not an option expires unexercised, the writer retains
the amount of the premium paid by the purchaser of the option, an amount
reflects, among other things, the relationship of the exercise price to the
market price and volatility of the underlying security, the remaining term of
the option, supply and demand and interest rates. This amount may, in the
case of a covered call option, be offset by a decline in the market value of
the underlying security during the option period. If a call option is
exercised, the writer experiences a profit or loss from the sale of the
underlying security.
The writer of an option that wants to terminate its obligation may effect a
"closing purchase transaction." This is done by buying an option of the same
series as the option previously written which will cancel the writer's
position by the clearing corporation. A writer may not effect a closing
purchase transaction, however, after being notified of the exercise of an
option. Likewise, an investor who is the holder of an option may liquidate
its position by effecting a "closing sale transaction." This is done by
selling an option of the same series as the option previously purchased.
There is no guarantee that either a closing purchase or a closing sale
transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit the fund to write another call option on the underlying security with
either a different exercise price or expiration date or both. In addition,
effecting a closing transaction will permit the cash or proceeds from the
sale of any securities subject to the option to be used for other fund
investments. If the fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or at the same time as the sale of the security.
The fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option. The fund will realize a
loss from a closing transaction if the price of the transaction is more than
the premium received from writing the option or is less than the premium paid
to purchase the option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option is likely
to be offset in whole or in part by appreciation of the underlying security
owned by the fund.
The fund may purchase call options on securities it intends to purchase to
limit the risk of a substantial increase in the market price of the security
or on securities indices. The fund may also purchase call options on
securities held in its portfolio and on which it has written call options.
Prior to its expiration, a call option may be sold in a closing sale
transaction. Profit or loss from such a sale will depend on whether the
amount received is more or less than the premium paid for the call option
plus any related transaction costs.
The fund may also purchase put options on securities and securities indices
and enter into closing sale transactions with respect to such options,
exercise them or permit them to expire. The fund may purchase a put option on
an underlying security (a "protective put") owned by the fund as a hedging
technique in order to protect against an anticipated decline in the value of
the security. Such hedge protection is provided only during the life of the
put option when the fund, as the holder of the put option, is able to sell
the underlying security at the put exercise price, regardless of any decline
in the underlying security's market price. For example, a put option may be
purchased in order to protect unrealized appreciation of a security when the
investment manager deems it desirable to continue to hold the security
because of tax considerations. The premium paid for the put option and any
transaction costs would reduce any capital gain otherwise available for
distribution when the security is eventually sold.
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" below.
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 "Risks - Options risk" below.
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. A custodian bank approved by the fund's Board of Directors holds the
securities subject to resale on behalf of the fund. 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 (I.E., banks or
broker-dealers that have been determined by the fund's manager to present no
serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction). Please see "Risks -
Repurchase agreement risk" below for more information.
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. Such loans must be secured by
collateral (consisting of any combination of cash, U.S. government securities
or irrevocable letters of credit) in an amount equal (on a daily
marked-to-market basis) to the current market value of the securities loaned.
The fund retains all or a portion of the interest received on the investment
of the cash collateral or receive a fee from the borrower. The fund will
continue to receive any interest or dividends paid on any loaned securities
and will continue to have voting rights with respect to the securities.
However, as with other extensions of credit, there are risks of delay in
recovery or even loss of rights in the collateral should the borrower fail.
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.
NON-DIVERSIFICATION The fund intends to comply with the diversification and
other requirements applicable to regulated investment companies under the
Internal Revenue Code ("Code"). As a non-diversified investment company under
the 1940 Act, the fund may invest more than 5% and up to 25% of its assets in
the securities of any one issuer at the time of purchase. For purposes of the
Code, however, as of the last day of any fiscal quarter, the fund may not
have more than 25% of its total assets invested in any one issuer, and, with
respect to 50% of its total assets, the fund may not have more than 5% of its
total assets invested in any one issuer, nor may it own more than 10% of the
outstanding voting securities of any one issuer. These limitations do not
apply to investments in securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities or to securities of
investment companies that qualify as regulated investment companies under the
Code.
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.
TEMPORARY INVESTMENTS In anticipation of and during temporary defensive
periods or when investments of the type in which the fund intends to invest
are not available at prices that the manager believes are attractive, the
fund may invest up to 100% of its total assets in: (1) securities of the U.S.
government and certain of its agencies and instrumentalities 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 the manager 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 the
manager to be high grade or that are rated within the two highest rating
categories by S&P and Moody's. Please see the appendix for a discussion of
ratings.
INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50%
of the fund's outstanding shares are represented at the meeting in person or
by proxy, whichever is less.
The fund may not:
1. Have invested as of the last day of any fiscal quarter (i) more than 25%
of its total assets in the securities of any one issuer, or (ii) with respect
to 50% of the fund's total assets, more than 5% of its total assets in the
obligations of any one issuer, except for securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities.
2. Purchase more than 10% of the voting securities, or more than 10% of any
class of securities, of any issuer. For purposes of this restriction, all
outstanding fixed-income securities of an issuer are considered as one class.
3. Invest in the stock of any investment company if a purchase of such stock
would result in the fund and affiliates of the fund owning together more than
3% of the total outstanding stock of such investment company.
4. Borrow money, except from banks, in order to meet redemption requests
that might otherwise require the untimely disposition of portfolio securities
or for other temporary or emergency (not leveraging) purposes in an amount up
to 15% of the value of the fund's total assets (including the amount
borrowed) based on the lesser of cost or market, less liabilities (not
including the amount borrowed) at the time the borrowing is made. While
borrowings exceed 5% of the fund's total assets, the fund will not make any
additional investments.
5. Pledge, hypothecate, mortgage or otherwise encumber its assets, except to
secure borrowings for temporary or emergency purposes and permissible
options, short selling or other hedging transactions.
6. Purchase securities on margin or underwrite securities. (Does not
preclude the fund from obtaining such short-term credit as may be necessary
for the clearance of purchases and sales of its portfolio securities.)
7. Buy or sell interests in oil, gas or mineral exploration or development
programs or leases, or real estate. (Does not preclude investments in
marketable securities of issuers engaged in such activities.)
8. Make loans to others except through the purchase of debt obligations
referred to in the Prospectus and the entry into repurchase agreements and
portfolio lending agreements, provided that the value of securities subject
to such lending agreements may not exceed 25% of the value of the fund's
total assets. Any loans of portfolio securities will be made according to
guidelines established by the SEC and the board, including maintenance of
collateral of the borrower equal at all times to at least 102% of the current
market value of the securities loaned.
9. Purchase or sell commodities or commodity futures contracts or financial
futures contracts; or invest in put, call, straddle or spread options on
financial or other futures contracts or stock index futures contracts.
10. Invest in warrants (valued at the lower of cost or market) in excess of
5% of the value of the fund's net assets. No more than 2% of the value of the
fund's net assets may be invested in warrants (valued at the lower of cost or
market) which are not listed on the New York or American Stock Exchanges.
11. Purchase from or sell to its officers and trustees, or any firm of which
any officer or trustee is a member, as principal, any securities, but the
fund may deal with such persons or firms as brokers and pay a customary
brokerage commission; nor invest in securities of any company if, to the
knowledge of the fund, any officer, director or trustee of the fund or the
investment advisor owns more than 0.5% of the outstanding securities of such
company and such officers, directors and trustees (who own more than 0.5%) in
the aggregate own more than 5% of the outstanding securities of such company.
12. Underwrite the securities of other issuers, except insofar as the fund
may be technically deemed an underwriter under the federal securities laws in
connection with the disposition of portfolio securities.
13. Purchase or hold the securities of any issuer if, as a result, in the
aggregate, more than 10% of the value of the fund's total assets would be
invested in securities that are subject to legal or contractual restrictions
on resale ("restricted securities"), in securities that are not readily
marketable (including over-the-counter options) or in repurchase agreements
maturing in more than seven days.
14. Invest in any issuer for purposes of exercising control or management.
15. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the fund from (i) making any
permitted borrowings, mortgages or pledges or (ii) entering into repurchase
transactions.
16. Engage in the short sales of securities, except short sales "against the
box," if the cash or securities deposited in the segregated account with the
fund's custodian to collateralize its short positions in the aggregate exceed
25% of the fund's net assets.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities or the amount of assets will not be
considered a violation of any of the foregoing restrictions.
RISKS
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VALUE INVESTING RISK The fund will invest principally in the securities of
companies believed by the manager to be undervalued. Securities of a company
may be undervalued as a result of overreaction by investors to unfavorable
news about a company, industry 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 non-cyclical stocks, but they also tend
to lose value more quickly in economic downturns. As with all investments,
there is always the possibility when investing in these securities that the
manager may be incorrect in its assessment of a particular industry or
company or that the manager may not 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, cyclical stocks 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. The manager believes,
however, that these securities may provide a greater total investment return
than securities whose prices appear to reflect anticipated favorable
developments.
CLOSED-END FUNDS RISK 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 the manager believes
are undervalued in the marketplace.
FOREIGN SECURITIES RISK The value of foreign (and U.S.) securities is
affected by general economic conditions and individual company and industry
earnings prospects. While foreign securities may offer significant
opportunities for gain, they also involve additional risks that can increase
the potential for losses in the fund. These risks can be significantly
greater for investments in emerging markets. Investments in depositary
receipts also involve some or all of the risks described below.
There is the possibility of cessation of trading on national exchanges,
expropriation, nationalization of assets, confiscatory or punitive taxation,
withholding and other foreign taxes on income or other amounts, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), restrictions on removal of assets, political
or social instability, or diplomatic developments that could affect
investments in securities of issuers in foreign nations.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or
financial reporting standards, and auditing practices and requirements may
not be comparable to those applicable to U.S. companies. The fund, therefore,
may encounter difficulty in obtaining market quotations for purposes of
valuing its portfolio and calculating its net asset value.
Certain countries' financial markets and services are less developed than
those in the U.S. or other major economies. In many foreign countries there
is less government supervision and regulation of stock exchanges, brokers,
and listed companies than in the U.S. Foreign markets have substantially less
volume than the New York Stock Exchange and securities of some foreign
companies are less liquid and more volatile than securities of comparable
U.S. companies. Commission rates in foreign countries, which are generally
fixed rather than subject to negotiation as in the U.S., are likely to be
higher. Settlement practices may be cumbersome and result in delays that may
affect portfolio liquidity. The fund may have greater difficulty voting
proxies, exercising shareholder rights, pursuing legal remedies, and
obtaining judgments with respect to foreign investments in foreign courts
than with respect to domestic issuers in U.S. courts.
The fund's investments in foreign securities may increase the risks with
respect to the liquidity of the fund's portfolio. This could inhibit the
fund's ability to meet a large number of shareholder redemption requests in
the event of economic or political turmoil in a country in which the fund has
a substantial portion of its assets invested or deterioration in relations
between the U.S. and the foreign country.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less economic stability; (ii) political and social uncertainty
(for example, regional conflicts and risk of war); (iii) pervasiveness of
corruption and crime; (iv) the small current size of the markets for such
securities and the currently low or nonexistent volume of trading, which
result in a lack of liquidity and in greater price volatility; (v) delays in
settling portfolio transactions; (vi) risk of loss arising out of the system
of share registration and custody; (vii) certain national policies that may
restrict the fund's investment opportunities, including restrictions on
investment in issuers or industries deemed sensitive to national interests;
(viii) foreign taxation; (ix) the absence of developed legal structures
governing private or foreign investment or allowing for judicial redress for
injury to private property; (x) the absence of a capital market structure or
market-oriented economy; and (xi) the possibility that recent favorable
economic developments may be slowed or reversed by unanticipated political or
social events.
In addition, many countries in which the fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency, and balance of payments
position.
CURRENCY RISK Some of the fund's investments may be denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
EURO RISK On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. The transition and the
elimination of currency risk among EMU countries may change the economic
environment and behavior of investors, particularly in European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect
on the fund, the fund's manager and its affiliated services providers are
taking steps they believe are reasonably designed to address the euro issue.
DEPOSITARY RECEIPT RISK Depositary Receipts reduce but do not eliminate all
the risk inherent in investing in the securities of foreign issuers. To the
extent that the fund acquires Depositary Receipts through banks that do not
have a contractual relationship with the foreign issuer of the security
underlying the Depositary Receipt to issue and service such Depositary
Receipts, there may be an increased possibility that the fund would not
become aware of and be able to respond to corporate actions such as stock
splits or rights offerings involving the foreign issuer in a timely manner.
HIGH YIELD SECURITIES RISK 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, the manager may find it necessary
to replace the securities with lower-yielding securities, which could result
in less net investment income for the fund.
The premature disposition of a high yield security due to a call or buy-back
feature, the deterioration of an issuer's creditworthiness, or a default by
an issuer may make it more difficult for the fund to manage the timing of its
income. Under the Code and U.S. Treasury regulations, the fund may have to
accrue income on defaulted securities and distribute the income to
shareholders for tax purposes, even though the fund is not currently
receiving interest or principal payments on the defaulted securities. To
generate cash to satisfy these distribution requirements, the fund may have
to sell portfolio securities that it otherwise may have continued to hold or
use cash flows from other sources, such as the sale of fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse
impact on market price of a security and on the fund's ability to sell a
security in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer, or if necessary to meet the fund's
liquidity needs. Reduced liquidity may also make it more difficult to obtain
market quotations based on actual trades for purposes of valuing the fund's
portfolio.
The fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry
restrictions on resale. While many high yielding securities have been sold
with registration rights, covenants and penalty provisions for delayed
registration, if the fund is required to sell restricted securities before
the securities have been registered, it may be deemed an underwriter of the
securities under the Securities Act of 1933, which entails special
responsibilities and liabilities. The fund may also incur special costs in
disposing of restricted securities, although the fund will generally not
incur any costs when the issuer is responsible for registering the securities.
The fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. The manager will carefully review their credit and other
characteristics. The fund has no arrangement with its underwriter or any
other person concerning the acquisition of these securities.
The high yield securities market is relatively new and much of its growth
before 1990 paralleled a long economic expansion. The recession that began in
1990 disrupted the market for high yield securities and adversely affected
the value of outstanding securities, as well as the ability of issuers of
high yield securities to make timely principal and interest payments.
Although the economy has improved and high yield securities have performed
more consistently since that time, the adverse effects previously experienced
may reoccur. For example, the highly publicized defaults on some high yield
securities during 1989 and 1990 and concerns about a sluggish economy that
continued into 1993 depressed the prices of many of these securities. While
market prices may be temporarily depressed due to these factors, the ultimate
price of any security generally reflects the true operating results of the
issuer. Factors adversely impacting the market value of high yield securities
may lower the fund's Net Asset Value.
The fund relies on the manager's judgment, analysis and experience in
evaluating the creditworthiness of an issuer. In this evaluation, the manager
takes into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters.
INTEREST RATE 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. Of
course, interest rates throughout the world have increased and decreased,
sometimes very dramatically, in the past. These changes are likely to occur
again in the future at unpredictable times.
REPURCHASE AGREEMENT RISK The use of repurchase agreements involves certain
risks. For example, if the other party to the agreement defaults on its
obligation to repurchase the underlying security at a time when the value of
the security has declined, the fund may incur a loss upon disposition of the
security. If the other party to the agreement becomes insolvent and subject
to liquidation or reorganization under the bankruptcy code or other laws, a
court may determine that the underlying security is collateral for a loan by
the fund not within the control of the fund, and therefore the realization by
the fund on the collateral may be automatically stayed. Finally, it is
possible that the fund may not be able to substantiate its interest in the
underlying security and may be deemed an unsecured creditor of the other
party to the agreement. While the manager acknowledges these risks, it is
expected that if repurchase agreements are otherwise deemed useful to the
fund, these risks can be controlled through careful monitoring procedures.
NON-DIVERSIFICATION RISK As a non-diversified investment company under the
1940 Act, the fund may concentrate its investments in the securities of a
smaller number of issuers than if it were a diversified company. An
investment in the fund therefore will entail greater risk than an investment
in a diversified investment company because a higher percentage of
investments among fewer issuers may result in greater fluctuation in the
total market value of the fund's portfolio, and economic, political or
regulatory developments may have a greater impact on the value of the fund's
portfolio than would be the case if the portfolio were diversified among more
issuers. All securities in which the fund may invest are inherently subject
to market risk, and the market value of the fund's investments will fluctuate.
OPTIONS RISK When the fund writes (sells) covered call options, it will
receive a cash premium that can be used in whatever way the manager 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.
The fund's ability to hedge effectively all or a portion of its securities
through transactions in options on securities and securities indices depends
on the degree to which price movements in the underlying indices or
securities correlate with price movements in the relevant portion of the
fund's portfolio. Inasmuch as such securities will not duplicate the
components of any index or underlying securities, the correlation will not be
perfect. Consequently, the fund bears the risk that the prices of the
securities being hedged will not move in the same amount as the hedging
instrument. It is also possible that there may be a negative correlation
between the index or other securities underlying the hedging instrument and
the hedged securities which would result in a loss on both the securities and
the hedging instrument. Accordingly, successful use by the fund of options on
securities and securities indices will be subject to the manager's ability to
correctly predict movements in the direction of the securities markets
generally or of a particular segment. This requires different skills and
techniques than predicting changes in the price of individual stocks.
Positions in stock index options and options on securities may be closed out
only on an exchange which provides a secondary market. There can be no
assurance that a liquid secondary market will exist for any particular option
at any specific time. Thus, it may not be possible to close such an option.
The inability to close an option position could also have an adverse impact
on the fund's ability to effectively hedge its securities. The fund will
enter into an option position only if there appears to be a liquid secondary
market for such option.
OFFICERS AND TRUSTEES
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The trust has a board of trustees. The board is responsible for the overall
management of the fund, including general supervision and review of the
fund's investment activities. The board, in turn, elects the officers of the
trust who are responsible for administering the fund's day-to-day operations.
The affiliations of the officers and board members and their principal
occupations for the past five years are shown below.
POSITION(S)
HELD WITH PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS THE TRUST DURING THE PAST FIVE YEARS
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Frank T. Crohn (74)
P.O. Box 810516
Boca Raton, FL 33481
Trustee
Chairman, Eastport Lobster & Fish Company; Director, Unity Mutual Life
Insurance Company; trustee of two of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman, Financial Benefit Life
Insurance Company and Director, AmVestors Financial Corporation.
*William J. Lippman (72)
One Parker Plaza, 16th Floor
Fort Lee, NJ 07024
President, Chief Executive Officer and Trustee
Senior Vice President, Franklin Resources, Inc. and Franklin Management,
Inc.; President and Director, Franklin Advisory Services, Inc.; and officer
and/or director or trustee, as the case may be, of six of the investment
companies in the Franklin Templeton Group of Funds.
Charles Rubens II (68)
18 Park Road
Scarsdale, NY 10583
Trustee
Private investor; and trustee of three of the investment companies in the
Franklin Templeton Group of Funds.
Leonard Rubin (73)
2 Executive Drive
Suite 560
Fort Lee, NJ 07024
Trustee
Partner in LDR Equities, LLC (manages various personal investments); Vice
President, Trimtex Co., Inc. (manufactures and markets specialty fabrics);
trustee or director, as the case may be, of three of the investment companies
in the Franklin Templeton Group of Funds; and FORMERLY, Chairman of the
Board, Carolace Embroidery Co., Inc. and President, F.N.C. Textiles, Inc.
Harmon E. Burns (54)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating Officer and Director, Templeton Investment
Counsel, Inc.; Executive Vice President and Chief Financial Officer, Franklin
Advisers, Inc.; Chief Financial Officer, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; President and Director, Franklin
Templeton Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin/Templeton Investor Services, Inc.; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 53 of the investment companies in
the Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.; Vice President, Chief Legal
Officer and Chief Operating Officer, Franklin Investment Advisory Services,
Inc.; and officer of 53 of the investment companies in the Franklin Templeton
Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers,
Inc.; Senior Vice President and Director, Franklin Advisory Services, Inc.
and Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (61)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
R. Martin Wiskemann (72)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President, Portfolio Manager and Director, Franklin Advisers,
Inc.; Senior Vice President, Franklin Management, Inc.; Vice President and
Director, ILA Financial Services, Inc.; and officer and/or director or
trustee, as the case may be, of 15 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal
securities laws.
The trust pays noninterested board members $1,800 per quarter plus $600 per
meeting attended. Noninterested board members may also serve as directors or
trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The following table
provides the total fees paid to noninterested board members by the trust and
by the Franklin Templeton Group of Funds.
NUMBER OF BOARDS IN
TOTAL FEES RECEIVED THE FRANKLIN
TOTAL FEES FROM THE FRANKLIN TEMPLETON GROUP OF
RECEIVED TEMPLETON GROUP OF FUNDS ON WHICH EACH
NAME FROM THE TRUST1 FUNDS2 SERVES3
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Frank T. Crohn $ 9,600 2
Charles Rubens II 10,200 3
Leonard Rubin 10,200 3
1. For the fiscal year ended October 31, 1998.
2. For the calendar year ended December 31, 1998.
3. We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the board members are responsible. The Franklin Templeton Group of
Funds currently includes 54 registered investment companies, with
approximately 168 U.S. based funds or series.
Noninterested board members are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or board members who are shareholders of Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisory
Services, Inc. The manager is wholly owned by Franklin Resources, Inc.
(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.
The manager provides investment research and portfolio management services,
and selects the securities for the fund to buy, hold or sell. The manager
also selects the brokers who execute the fund's portfolio transactions. The
manager provides periodic reports to the board, which reviews and supervises
the manager's investment activities. To protect the fund, the manager and its
officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of
the other funds it manages, or for its own account, that may differ from
action taken by the manager on behalf of the fund. Similarly, with respect to
the fund, the manager is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that the manager
and access persons, as defined by applicable federal securities laws, may buy
or sell for its or their own account or for the accounts of any other fund.
The manager is not obligated to refrain from investing in securities held by
the fund or other funds it manages. Of course, any transactions for the
accounts of the manager and other access persons will be made in compliance
with the fund's code of ethics.
Under the fund's code of ethics, employees of the Franklin Templeton Group
who are access persons may engage in personal securities transactions subject
to the following general restrictions and procedures: (i) the trade must
receive advance clearance from a compliance officer and must be completed by
the close of the business day following the day clearance is granted; (ii)
copies of all brokerage confirmations and statements must be sent to a
compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) above, file
annual reports of their securities holdings each January and inform the
compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they
are recommending a security in which they have an ownership interest for
purchase or sale by a fund or other client.
MANAGEMENT FEES The fund pays the manager a fee equal to an annual rate of:
o .625 of 1% of the value of net assets up to and including $100 million;
o .50 of 1% of the value of net assets over $100 million and not over $250
million;
o .45 of 1% of the value of net assets over $250 million and not over $10
billion;
o .44 of 1% of the value of net assets over $10 billion and not over $12.5
billion;
o .42 of 1% of the value of net assets over $12.5 billion and not over $15
billion; and
o .40 of 1% of the value of net assets in excess of $15 billion.
The fee is computed daily according to the terms of the management agreement.
For the last three fiscal years ended October 31, the fund paid the following
management fees:
Management Fees Paid ($)
- -------------------------------------------------
1998 6,868,491
1997 4,247,685
1996 2,785,163
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by
Resources and is an affiliate of the fund's manager and principal
underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
During the last two fiscal years ended October 31, the manager paid FT
Services the following administration fees:
Administration Fees Paid ($)
------------------------------------------------
1998 1,678,083
1997 1,238,407
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is the fund's shareholder servicing agent
and acts as the fund's transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo,
CA 94403-7777.
For its services, Investor Services receives a fixed fee per account. The
fund may also reimburse Investor Services for certain out-of-pocket expenses,
which may include payments by Investor Services to entities, including
affiliated entities, that provide sub-shareholder services, recordkeeping
and/or transfer agency services to beneficial owners of the fund. The amount
of reimbursements for these services per benefit plan participant fund
account per year may not exceed the per account fee payable by the fund to
Investor Services in connection with maintaining shareholder accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the fund's independent auditor. The auditor gives an opinion on the
financial statements included in the trust's Annual Report to Shareholders
and reviews the trust's registration statement filed with the U.S. Securities
and Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
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The manager selects brokers and dealers to execute the fund's portfolio
transactions in accordance with criteria set forth in the management
agreement and any directions that the board may give.
When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid is
negotiated between the manager and the broker executing the transaction. The
determination and evaluation of the reasonableness of the brokerage
commissions paid are based to a large degree on the professional opinions of
the persons responsible for placement and review of the transactions. These
opinions are based on the experience of these individuals in the securities
industry and information available to them about the level of commissions
being paid by other institutional investors of comparable size. The manager
will ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in
the opinion of the manager, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or the manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the manager include, among others, supplying
information about particular companies, markets, countries, or local,
regional, national or transnational economies, statistical data, quotations
and other securities pricing information, and other information that provides
lawful and appropriate assistance to the manager in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the fund. They must, however, be of value to the manager in carrying
out its overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on
the research services the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order
to obtain additional research services allows the manager to supplement its
own research and analysis activities and to receive the views and information
of individuals and research staffs of other securities firms. As long as it
is lawful and appropriate to do so, the manager and its affiliates may use
this research and data in their investment advisory capacities with other
clients. If the fund's officers are satisfied that the best execution is
obtained, the sale of fund shares, as well as shares of other funds in the
Franklin Templeton Group of Funds, may also be considered a factor in the
selection of broker-dealers to execute the fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of
the National Association of Securities Dealers, Inc., it may sometimes
receive certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the
fund, any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next
management fee payable to the manager will be reduced by the amount of any
fees received by Distributors in cash, less any costs and expenses incurred
in connection with the tender.
If purchases or sales of securities of the fund and one or more other
investment companies or clients supervised by the manager are considered at
or about the same time, transactions in these securities will be allocated
among the several investment companies and clients in a manner deemed
equitable to all by the manager, taking into account the respective sizes of
the funds and the amount of securities to be purchased or sold. In some cases
this procedure could have a detrimental effect on the price or volume of the
security so far as the fund is concerned. In other cases it is possible that
the ability to participate in volume transactions may improve execution and
reduce transaction costs to the fund.
During the last three fiscal years ended October 31, the fund paid the
following brokerage commissions:
Brokerage Commissions ($)
------------------------------------------------
1998 1,116,613
1997 1,789,140
1996 968,118
As of October 31, 1998, the fund owned securities issued by Lehman Brothers,
Inc. valued in the aggregate at $3,225,000. Except as noted, the fund did not
own any securities issued by its regular broker-dealers as of the end of the
fiscal year."
DISTRIBUTIONS AND TAXES
- ------------------------------------------------------------------------------
The fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in
the form of dividends and interest on its investments. This income, less
expenses incurred in the operation of the fund, constitutes the fund's net
investment income from which dividends may be paid to you. Any distributions
by the fund from such income will be taxable to you as ordinary income,
whether you take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net capital gains realized by the fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, in order to reduce or eliminate excise or income
taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the fund's
ordinary income distributions to you, and may cause some or all of the fund's
previously distributed income to be classified as a return of capital.
The fund may be subject to foreign withholding taxes on income from certain
of its foreign securities. If more than 50% of the fund's total assets at the
end of the fiscal year are invested in securities of foreign corporations,
the fund may elect to pass-through to you your pro rata share of foreign
taxes paid by the fund. If this election is made, the year-end statement you
receive from the fund 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. The fund will provide
you with the information necessary to complete your individual income tax
return if it makes this election.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you
of the amount of your ordinary income dividends and capital gains
distributions at the time they are paid, and will advise you of their tax
status for federal income tax purposes shortly after the close of each
calendar year. If you have not held fund shares for a full year, you may have
designated and distributed to you as ordinary income or capital gain a
percentage of income that is not equal to the actual amount of such income
earned during the period of your investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The fund has elected
to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. As a regulated
investment company, the fund generally pays no federal income tax on the
income and gains it distributes to you. The board reserves the right not to
maintain the qualification of the fund as a regulated investment company if
it determines such course of action to be beneficial to shareholders. In such
case, the fund will be subject to federal, and possibly state, corporate
taxes on its taxable income and gains, and distributions to you will be taxed
as ordinary dividend income to the extent of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires the fund to distribute to you by December 31
of each year, at a minimum, the following amounts: 98% of its taxable
ordinary income earned during the calendar year; 98% of its capital gain net
income earned during the twelve month period ending October 31; and 100% of
any undistributed amounts from the prior year. The fund intends to declare
and pay these amounts in December (or in January that are treated by you as
received in December) to avoid these excise taxes, but can give no assurances
that its distributions will be sufficient to eliminate all such taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. If you redeem
your fund shares, or exchange your fund shares for shares of a different
Franklin Templeton Fund, the IRS will require that you report a gain or loss
on your redemption or exchange. If you hold your shares as a capital asset,
the gain or loss that you realize will be capital gain or loss. Any loss
incurred on the redemption or exchange of shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by the fund on those shares.
All or a portion of any loss that you realize upon the redemption of your
fund shares will be disallowed to the extent that you buy other shares in the
fund (through reinvestment of dividends or otherwise) within 30 days before
or after your share redemption. Any loss disallowed under these rules will
be added to your tax basis in the new shares you buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in the fund, and
then reinvest the sales proceeds in the fund or in another Franklin Templeton
Fund within 90 days of buying the original shares, the sales charge that
would otherwise apply to your reinvestment may be reduced or eliminated. The
IRS will require you to report gain or loss on the redemption of your
original shares in the fund. In doing so, all or a portion of the sales
charge that you paid for your original shares in the fund will be excluded
from your tax basis in the shares sold (for the purpose of determining gain
or loss upon the sale of such shares). The portion of the sales charge
excluded will equal the amount that the sales charge is reduced on your
reinvestment. Any portion of the sales charge excluded from your tax basis in
the shares sold will be added to the tax basis of the shares you acquire from
your reinvestment.
U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that
must be met by the fund. Investments in Government National Mortgage
Association or Federal National Mortgage Association securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
The rules on exclusion of this income are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that 34.19% of the dividends paid by the fund
for the most recent fiscal year qualified for the dividends-received
deduction. In some circumstances, you will be allowed to deduct these
qualified dividends, thereby reducing the tax that you would otherwise be
required to pay on these dividends. The dividends-received deduction will be
available only with respect to dividends designated by the fund as eligible
for such treatment. All dividends (including the deducted portion) must be
included in your alternative minimum taxable income calculation.
INVESTMENT IN COMPLEX SECURITIES The fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the fund are
treated as ordinary income or capital gain and/or accelerate the recognition
of income to the fund or defer the fund's ability to recognize losses. In
turn, these rules may affect the amount, timing or character of the income
distributed to you by the fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- ------------------------------------------------------------------------------
The fund is a non-diversified series of Franklin Value Investors Trust, an
open-end management investment company, commonly called a mutual fund. The
trust was organized as a Massachusetts business trust on September 11, 1989,
and is registered with the SEC.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations.
The Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the fund's assets if you are held personally liable for
obligations of the fund. The Declaration of Trust provides that the fund
shall, upon request, assume the defense of any claim made against you for any
act or obligation of the fund and satisfy any judgment thereon. All such
rights are limited to the assets of the fund. The Declaration of Trust
further provides that the fund may maintain appropriate insurance (for
example, fidelity bonding and errors and omissions insurance) for the
protection of the fund, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. Furthermore, the
activities of the fund as an investment company, as distinguished from an
operating company, would not likely give rise to liabilities in excess of the
fund's total assets. Thus, the risk that you would incur financial loss on
account of shareholder liability is limited to the unlikely circumstance in
which both inadequate insurance exists and the fund itself is unable to meet
its obligations.
The fund currently offers one class of shares. The fund may offer additional
classes of shares in the future. The full title of the fund is:
o Franklin Balance Sheet Investment Fund
The trust has noncumulative voting rights. For board member elections, 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 be called by the board to consider the
removal of a board member if requested in writing 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. A special meeting may also be called by the board in its
discretion.
As of December 7, 1998, the principal shareholders of the fund, beneficial or
of record, were:
Name and Address Percentage (%)
- ----------------------------------------------------------------
The Manufacturers Life Insurance Co. 8.95
Attn. Rosie Chuck Sts Acct.
250 Bloor St. E. 7E FL
Toronto ON M4W 1E5
Canada 231
From time to time, the number of fund shares held in the "street name"
accounts of various securities dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding.
As of December 7, 1998, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of the fund.
The board members may own shares in other funds in the Franklin Templeton
Group of Funds.
BUYING AND SELLING SHARES
- ------------------------------------------------------------------------------
The fund continuously offers its shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial
institutions that sell shares of the fund may be required by state law to
register as securities dealers.
For investors outside the U.S., 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.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the fund we may impose a $10 charge against your account for each returned
item.
If you buy shares through the reinvestment of dividends, the shares will be
purchased at the net asset value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The
processing date for the reinvestment of dividends may vary and does not
affect the amount or value of the shares acquired.
INITIAL SALES CHARGES The maximum initial sales charge is 1.5%.
The initial sales charge may be reduced for certain large purchases, as
described in the prospectus. We offer several ways for you to combine your
purchases in the Franklin Templeton Funds to take advantage of the lower
sales charges for large purchases. The Franklin Templeton Funds include 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.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge,
you may combine the amount of your current purchase with the cost or current
value, whichever is higher, of your existing shares in the Franklin Templeton
Funds. You may also combine the shares of your spouse, children under the age
of 21 or 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 (LOI). You may buy shares at a reduced sales charge by
completing the letter of intent section of your account 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 application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase
in shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
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 LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy shares at the sales charge
applicable to the amount specified in your LOI. Sales charge reductions based
on purchases in more than one Franklin Templeton Fund will be effective only
after notification to Distributors that the investment qualifies for a
discount. Any purchases you made within 90 days before you filed your LOI may
also qualify for a retroactive reduction in the sales charge. If you file
your LOI with the fund before a change in the fund's sales charge, you may
complete the LOI at the lower of the new sales charge or the sales charge in
effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days
before you filed your LOI will be counted towards the completion of the LOI,
but they will not be entitled to a retroactive reduction in the sales charge.
Any redemptions you make during the 13 month period , except in the case of
certain retirement plans, will be subtracted from the amount of the purchases
for purposes of determining whether the terms of the LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of
your total purchases, less redemptions, is more than the amount specified in
your LOI and is an amount that would qualify for a further sales charge
reduction, a retroactive price adjustment will be made by Distributors and
the securities dealer through whom purchases were made. The price adjustment
will be made on purchases made within 90 days before and on those made after
you filed your LOI and will be applied towards the purchase of additional
shares at the offering price applicable to a single purchase or the dollar
amount of the total purchases.
If the amount of your total purchases, less redemptions, is less than the
amount specified in your LOI, the sales charge will be adjusted upward,
depending on the actual amount purchased (less redemptions) during the
period. You will need to send Distributors an amount equal to the difference
in the actual dollar amount of sales charge paid and the amount of sales
charge that would have applied to the total purchases if the total of the
purchases had been made at one time. Upon payment of this amount, the
reserved shares held for your account will be deposited to an account in your
name or delivered to you or as you direct. If within 20 days after written
request the difference in sales charge is not paid, we will redeem an
appropriate number of reserved shares to realize the difference. If you
redeem the total amount in your account before you fulfill your LOI, we will
deduct the additional sales charge due from the sale proceeds and forward the
balance to you.
For LOIs filed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the LOI. These plans are not subject to the requirement to reserve 5%
of the total intended purchase or to the policy on upward adjustments in
sales charges described above, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy 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, although any such plan that purchased the fund's
shares at a reduced sales charge under the group purchase privilege before
February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Shares may be purchased
without an initial sales charge or contingent deferred sales charge (CDSC) by
investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same share class.
Certain exceptions apply, however, to Class C shareholders who chose to
reinvest their distributions in shares of 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's shares.
o Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, 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.
o 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.
o 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 CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund
shares and the CDSC holding period will begin again. We will, however,
credit your fund account with additional shares based on the CDSC you
previously 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.
o Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Shares may also be purchased without an
initial sales charge or CDSC by various individuals and institutions due to
anticipated economies in sales efforts and expenses, including:
o 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.
o 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 fund shares without paying
sales charges. 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.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o 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
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting
distributions from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under
"Retirement plans" below
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy shares without an initial sales charge.
Retirement plans that are not qualified retirement plans (employer sponsored
pension or profit-sharing plans that qualify under section 401 of the
Internal Revenue Code, including 401(k), money purchase pension, profit
sharing and defined benefit plans), SIMPLEs (savings incentive match plans
for employees) or SEPs (employer sponsored simplified employee pension plans
established under section 408(k) of the Internal Revenue Code) must also meet
the group purchase requirements described above to be able to buy shares
without an initial 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 CDSC 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.
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, the fund's shares are available to these banks' trust accounts without
a sales charge. The banks may charge service fees to their customers who
participate in the trusts. A portion of these service fees may be paid to
Distributors or one of its affiliates to help defray expenses of maintaining
a service office in Taiwan, including expenses related to local literature
fulfillment and communication facilities.
The fund's shares may be offered to investors in Taiwan through securities
advisory firms known locally as Securities Investment Consulting Enterprises.
DEALER COMPENSATION Securities dealers may at times receive the entire sales
charge. A securities dealer who receives 90% or more of the sales charge may
be deemed an underwriter under the Securities Act of 1933, as amended.
Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated in the dealer compensation table
in the fund's prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of shares
of $1 million or more: 1% on sales of $1 million to $2 million, plus 0.80% on
sales over $2 million to $3 million, plus 0.50% on sales over $3 million to
$50 million, plus 0.25% on sales over $50 million to $100 million, plus 0.15%
on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts,
out of its own resources, to securities dealers who initiate and are
responsible for purchases by certain retirement plans without an initial
sales charge: 1% on sales of $500,000 to $2 million, plus 0.80% on sales over
$2 million to $3 million, plus 0.50% on sales over $3 million to $50 million,
plus 0.25% on sales over $50 million to $100 million, plus 0.15% on sales
over $100 million. Distributors may make these payments in the form of
contingent advance payments, which may be recovered from the securities
dealer or set off against other payments due to the dealer if shares are sold
within 12 months of the calendar month of purchase. Other conditions may
apply. All terms and conditions may be imposed by an agreement between
Distributors, or one of its affiliates, and the securities dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
securities dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a securities dealer's sales and marketing
efforts in the Franklin Templeton Group of Funds; a securities dealer's
support of, and participation in, Distributors' marketing programs; a
securities dealer's compensation programs for its registered representatives;
and the extent of a securities dealer's marketing programs relating to the
Franklin Templeton Group of Funds. Financial support to securities dealers
may be made by payments from Distributors' resources, from Distributors'
retention of underwriting concessions and, in the case of funds that have
Rule 12b-1 plans, from payments to Distributors under such plans. In
addition, certain securities dealers may receive brokerage commissions
generated by fund portfolio transactions in accordance with the rules of the
National Association of Securities Dealers, Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more,
either as a lump sum or through our cumulative quantity discount or letter of
intent programs, a CDSC may apply on any shares you sell within 12 months of
purchase. The CDSC 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 an initial sales charge may also be subject to
a CDSC 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.
CDSC WAIVERS. The CDSC will generally be waived for:
o Account fees
o Sales of shares purchased without an initial 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, up to 1% monthly, 3% quarterly, 6% semiannually or 12%
annually of your account's net asset value depending on the frequency of
your plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans or
employee benefit plans serviced by ValuSelect(R)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money. If this
occurs, it is the fund's general policy to initially invest this money in
short-term, interest-bearing money market instruments, unless it is believed
that attractive investment opportunities consistent with the fund's
investment goal exist immediately. This money will then be withdrawn from the
short-term, interest-bearing money market instruments and invested in
portfolio securities in as orderly a manner as is possible when attractive
investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally
not available until the seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh day. The sale of fund shares to complete an exchange will
be effected at net asset value at the close of business on the day the
request for exchange is received in proper form.
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. There are no service charges
for establishing or maintaining a systematic withdrawal plan. Once your plan
is established, any distributions paid by the fund will be automatically
reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday, we
will process the redemption on the next business day. 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 CDSC.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. The fund may discontinue a systematic
withdrawal plan by notifying you in writing and will automatically
discontinue a systematic withdrawal plan if all shares in your account are
withdrawn or if the fund receives notification of the shareholder's death or
incapacity.
REDEMPTIONS IN KIND The fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the U.S. Securities
and Exchange Commission (SEC). In the case of redemption requests in excess
of these amounts, the board reserves the right to make payments in whole or
in part in securities or other assets of the fund, in case of an emergency,
or if the payment of such a redemption in cash would be detrimental to the
existing shareholders of the fund. In these circumstances, the securities
distributed would be valued at the price used to compute the fund's net
assets and you may incur brokerage fees in converting the securities to cash.
The fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
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.
GENERAL INFORMATION If dividend checks are returned to the fund marked
"unable to forward" by the postal service, we will consider this a request by
you to change your dividend option to reinvest all distributions. The
proceeds will be reinvested in additional shares at net asset value until we
receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the fund nor
its affiliates will be liable for any loss caused by your failure to cash
such checks. The fund is not responsible for tracking down uncashed checks,
unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to
find you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.
The wiring of redemption proceeds is a special service that we make available
whenever possible. 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 the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay
certain financial institutions that maintain omnibus accounts with the fund
on behalf of numerous beneficial owners for recordkeeping operations
performed with respect to such owners. For each beneficial owner in the
omnibus account, the fund may reimburse Investor Services an amount not to
exceed the per account fee that the fund normally pays Investor Services.
These financial institutions may also charge a fee for their services
directly to their clients.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. If you sell shares
through your securities dealer, it is your dealer's responsibility to
transmit the order to the fund in a timely fashion. 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. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
notice of levy.
PRICING SHARES
- ------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the
net asset value (NAV) per share plus any applicable sales charge, calculated
to two decimal places using standard rounding criteria. When you sell shares,
you receive the NAV minus any applicable CDSC.
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.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The fund does not calculate the NAV on days the New York Stock
Exchange (NYSE) is closed for trading, which include New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent
quoted bid and ask prices. The fund values over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, the fund values them according to the broadest and most
representative market as determined by the manager.
The fund values portfolio securities underlying actively traded call options
at their market price as determined above. The current market value of any
option the fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last
sale price is outside the bid and ask prices, the fund values options within
the range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.
The fund determines the value of a foreign security as of the close of
trading on the foreign exchange on which the security is traded or as of the
close of trading on the NYSE, if that is earlier. The value is then converted
into its U.S. dollar equivalent at the foreign exchange rate in effect at
noon, New York time, on the day the value of the foreign security is
determined. If no sale is reported at that time, the foreign security is
valued within the range of the most recent quoted bid and ask prices.
Occasionally events that affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and
the close of the exchange and will, therefore, not be reflected in the
computation of the NAV. If events materially affecting the values of these
foreign securities occur during this period, the securities will be valued in
accordance with procedures established by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the NAV is determined as of such times. Occasionally, events affecting the
values of these securities may occur between the times at which they are
determined and the close of the NYSE that will not be reflected in the
computation of the NAV. If events materially affecting the values of these
securities occur during this period, the securities will be valued at their
fair value as determined in good faith by the board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the board. With the approval of
the board, the fund may use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
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Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the fund's shares, the net
underwriting discounts and commissions Distributors retained after allowances
to dealers, and the amounts Distributors received in connection with
redemptions or repurchases of shares for the last three fiscal years ended
October 31:
Amount Received in
Total Commissions Connection with
Received ($) Amount Retained by Redemptions and
Distributors ($) Repurchases ($)
------------------------------------------------------------------------------
1998 1,597,354 528 2,019
1997 1,587,115 114 0
1996 1,640,279 346 15,125
Distributors may be entitled to reimbursement under the Rule 12b-1 plan, as
discussed below. Except as noted, Distributors received no other compensation
from the fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Under the fund's Rule 12b-1 plan, the
fund shall pay or may reimburse Distributors or others for the expenses of
activities that are primarily intended to sell shares of the fund. 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.
THE PLAN. Payments by the fund under the plan may not exceed 0.50% per year
of the fund's average daily net assets, payable quarterly. All distribution
expenses over this amount will be borne by those who have incurred them.
In addition to the payments that Distributors or others are entitled to under
the plan, the plan also provides that to the extent the fund, the manager or
Distributors or other parties on behalf of the fund, the manager or
Distributors make payments that are deemed to be for the financing of any
activity primarily intended to result in the sale of fund shares within the
context of Rule 12b-1 under the Investment Company Act of 1940, as amended,
then such payments shall be deemed to have been made pursuant to the plan.
The terms and provisions of the plan relating to required reports, term, and
approval are consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under the plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the National Association of Securities Dealers, Inc.
To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks will not be entitled to participate in the plan as a result of
applicable federal law prohibiting certain banks from engaging in the
distribution of mutual fund shares. These banking institutions, however, are
permitted to receive fees under the plan for administrative servicing or for
agency transactions. If you are a customer of a bank that is prohibited from
providing these services, you would be permitted to remain a shareholder of
the fund, and alternate means for continuing the servicing would be sought.
In this event, changes in the services provided might occur and you might no
longer be able to avail yourself of any automatic investment or other
services then being provided by the bank. It is not expected that you would
suffer any adverse financial consequences as a result of any of these changes.
The plan has been approved in accordance with the provisions of Rule 12b-1.
The plan is renewable annually by a vote of the board, including a majority
vote of the board members who are not interested persons of the fund and who
have no direct or indirect financial interest in the operation of the plan,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such board members be done by the
noninterested members of the fund's board. The plan and any related agreement
may be terminated at any time, without penalty, by vote of a majority of the
noninterested board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with the manager or by
vote of a majority of the outstanding shares of the class. The plan may also
be terminated by any act that constitutes an assignment of the underwriting
agreement with Distributors. Distributors or any dealer or other firm may
also terminate their respective distribution or service agreement at any time
upon written notice.
The plan and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a
majority of the outstanding shares of the class, and all material amendments
to the plan or any related agreements shall be approved by a vote of the
noninterested board members, cast in person at a meeting called for the
purpose of voting on any such amendment.
Distributors is required to report in writing to the board at least quarterly
on the amounts and purpose of any payment made under the plan and any related
agreements, as well as to furnish the board with such other information as
may reasonably be requested in order to enable the board to make an informed
determination of whether the plan should be continued.
For the fiscal year ended October 31, 1998, Distributors eligible
expenditures for advertising, printing, and payments to underwriters and
broker-dealers pursuant to the plan and the amounts the fund paid
Distributors under the plan was:
Distributors' Eligible Amount Paid
Expenses ($) by the Fund ($)
- ------------------------------------------------------
6,046,639 4,304,379
PERFORMANCE
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Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return quotations used by the fund are based on the
standardized methods of computing performance mandated by the SEC. If a Rule
12b-1 plan is adopted, performance figures reflect fees from the date of the
plan's implementation. An explanation of these and other methods used by the
fund to compute or express performance follows. Regardless of the method
used, past performance does not guarantee future results, and is an
indication of the return to shareholders only for the limited historical
period used.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum initial sales charge is
deducted from the initial $1,000 purchase, and income dividends and capital
gain distributions are reinvested at net asset value. The quotation assumes
the account was completely redeemed at the end of each period and the
deduction of all applicable charges and fees. If a change is made to the
sales charge structure, historical performance information will be restated
to reflect the maximum initial sales charge currently in effect.
When considering the average annual total return quotations, you should keep
in mind that the maximum initial sales charge reflected in each quotation is
a one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the fund.
The average annual total returns for the indicated periods ended October 31,
1998, were:
1 Year 5 Years Since Inception
(4/2/90)
- -------------------------------------------------------------
- -4.60% 12.83% 14.65%
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of each period at the end
of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at net asset value. Cumulative total return, however, is based on
the actual return for a specified period rather than on the average return
over the periods indicated above. The cumulative total returns for the
indicated periods ended October 31, 1998, were:
1 Year 5 Years Since Inception
(4/2/90)
- -------------------------------------------------------------
- -4.60% 82.89% 223.29%
VOLATILITY Occasionally statistics may be used to show the fund's volatility
or risk. Measures of volatility or risk are generally used to compare the
fund's net asset value or performance to a market index. One measure of
volatility is beta. Beta is the volatility of a fund relative to the total
market, as represented by an index considered representative of the types of
securities in which the fund invests. A beta of more than 1.00 indicates
volatility greater than the market and a beta of less than 1.00 indicates
volatility less than the market. Another measure of volatility or risk is
standard deviation. Standard deviation is used to measure variability of net
asset value or total return around an average over a specified period of
time. The idea is that greater volatility means greater risk undertaken in
achieving performance.
OTHER PERFORMANCE QUOTATIONS The fund may also quote the performance of
shares without a sales charge. Sales literature and advertising may quote a
cumulative total return, average annual total return and other measures of
performance with the substitution of net asset value for the public offering
price.
Sales literature referring to the use of the fund as a potential investment
for IRAs, business retirement plans, and other tax-advantaged retirement
plans may quote a total return based upon compounding of dividends on which
it is presumed no federal income tax applies.
The fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. is the parent
company of the advisors and underwriter of the Franklin Templeton Group of
Funds.
COMPARISONS To help you better evaluate how an investment in the fund may
satisfy your investment goal, advertisements and other materials about the
fund may discuss certain measures of fund performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and
averages. These comparisons may include, but are not limited to, the
following examples:
o Dow Jones(R) Composite Average and its component averages - a
price-weighted average of 65 stocks that trade on the New York Stock
Exchange. The average is a combination of the Dow Jones Industrial Average
(30 blue-chip stocks that are generally leaders in their industry), the
Dow Jones Transportation Average (20 transportation stocks), and the Dow
Jones Utilities Average (15 utility stocks involved in the production of
electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries.
o The New York Stock Exchange composite or component indices - an
unmanaged index of all industrial, utilities, transportation, and finance
stocks listed on the NYSE.
o Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes
price, yield, risk, and total return for mutual funds.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK,
CHANGING TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines -
provide performance statistics over specified time periods.
o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its
category.
o Valueline Index - an unmanaged index which follows the stocks of
approximately 1,700 companies.
o Morgan Stanley Capital International World Indices, including, among
others, the Morgan Stanley Capital International Europe, Australia,
Far East Index ("EAFE Index"). The EAFE index is an unmanaged index of
more than 1,000 companies of Europe, Australia and the Far East.
o Financial Times Actuaries Indices - including the FTA-World Index (and
components thereof), which are based on stocks in major world equity
markets.
o The Russell 1000 Value Index - a total return index that comprises
stocks from the Russell 1000 Index with a less than average growth
orientation.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment
in the fund. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or information may also compare the fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of
fluctuation of principal value, a risk generally not present in an investment
in a CD issued by a bank. For example, as the general level of interest rates
rise, the value of the fund's fixed-income investments, if any, as well as
the value of its shares that are based upon the value of such portfolio
investments, can be expected to decrease. Conversely, when interest rates
decrease, the value of the fund's shares can be expected to increase. CDs are
frequently insured by an agency of the U.S. government. An investment in the
fund is not insured by any federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the fund to calculate its figures. In
addition, there can be no assurance that the fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
- ------------------------------------------------------------------------------
The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to
have a projected amount available in the future to fund a child's college
education. (Projected college cost estimates are based upon current costs
published by the College Board.) The Franklin Retirement Planning Guide leads
you through the steps to start a retirement savings program. Of course, an
investment in the fund cannot guarantee that these goals will be met.
The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of
the oldest mutual fund organizations and now services more than 3 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined
forces with Templeton, a pioneer in international investing. The Mutual
Series team, known for its value-driven approach to domestic equity
investing, became part of the organization four years later. Together, the
Franklin Templeton Group has over $216 billion in assets under management for
more than 6 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 117 U.S. based open-end
investment companies to the public. The fund may identify itself by its
NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the fund are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has
already begun making necessary software changes to help the computer systems
that service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues
to seek reasonable assurances from all major hardware, software or
data-services suppliers that they will be Year 2000 compliant on a timely
basis. Resources is also beginning to develop a contingency plan, including
identification of those mission critical systems for which it is practical to
develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use of
normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
DESCRIPTION OF BOND RATINGS
- ------------------------------------------------------------------------------
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (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.
STANDARD & POOR'S CORPORATION (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.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually their promissory obligations not having an original maturity
in excess of nine months. Moody's employs the following designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
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.
FRANKLIN MICROCAP VALUE FUND
FRANKLIN VALUE INVESTORS TRUST
STATEMENT OF
ADDITIONAL INFORMATION
MARCH 1, 1999
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the fund's prospectus.
The fund's prospectus, dated March 1, 1999, which we may amend from time to
time, contains the basic information you should know before investing in the
fund. You should read this SAI together with the fund's prospectus.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended October 31, 1998, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goal and Strategies
Risks
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Appendix - Description of Bond Ratings
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- ------------------------------------------------------------------------------
GOAL AND STRATEGIES
- ------------------------------------------------------------------------------
The fund's principal investment goal is high total return, of which capital
appreciation and income are components. This goal is fundamental, which
means it may not be changed without shareholder approval. The fund will also
seek income when consistent with the fund's goal. The fund will normally
invest at least 65% of total assets in securities of companies with market
capitalization under $100 million that the fund's manager believes are
undervalued in the marketplace relative to underlying asset values and
possess the potential for significant capital appreciation. The fund may
invest up to 35% of its assets in securities of companies with similar
characteristics but that have market capitalization over $100 million.
Under normal market conditions, the fund will invest at least 65% of its
total assets in securities of companies with market capitalization under $100
million at the time of purchase and which, in the opinion of the manager,
possess an opportunity for significant capital appreciation due to intrinsic
values in excess of the current market price of such securities. The
securities of these companies will typically be purchased at prices below the
book value of the company. The manager, 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 the securities. In addition to book value,
the manager may consider the following factors among others: valuable
franchises or other intangibles; ownership of valuable trademarks or trade
names; control of distribution networks or of market share for particular
products; ownership of real estate the value of which is understated;
underutilized liquidity and other factors that would identify the issuer as a
potential takeover target or turnaround candidate. Investments in the
securities of companies with market capitalization under $100 million may
involve special risks, as described in the Prospectus. The fund may invest
the remainder of its assets, up to 35%, in securities of companies with
similar characteristics but that have market capitalization over $100 million.
The fund will generally invest in common stocks, although it has no limit on
the percentage of its assets that may be invested in preferred stock or debt
obligations, including securities convertible into common stocks, secured or
unsecured bonds, commercial paper and notes. The mixture of common stocks,
preferred stocks and debt obligations will vary from time to time based upon
the manager's assessment as to whether investments in each category will
contribute to meeting the fund's investment goal.
The fund's emphasis on securities believed to be undervalued by the market
uses a technique followed by certain very wealthy investors highlighted by
the media and a number of private partnerships with very high minimum
investments. It requires not only the resources to undertake exhaustive
research of little followed, out-of-favor securities, but also the patience
and discipline to hold these investments until their intrinsic values are
ultimately recognized by others in the marketplace. There can be no assurance
that this technique will be successful for the fund or that the fund will
achieve its investment objective.
The policies used to seek to achieve the fund's objective are not
fundamental, unless otherwise noted, and are subject to change without
shareholder approval. Generally, the policies and restrictions discussed in
the Prospectus and in this 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.
The following is a description of the various types of securities the fund
may buy.
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. The purchaser of an equity security typically
receives an ownership interest in the company as well as certain voting
rights. The owner of an equity security may participate in a company's
success through the receipt of dividends, which are distributions of earnings
by the company to its owners. Equity security owners may also participate in
a company's success or lack of success through increases or decreases in the
value of the company's shares as traded in the public trading market for such
shares. Equity securities generally take the form of common stock or
preferred stock, as well as securities convertible into common stocks.
Preferred stockholders typically receive greater dividends but may receive
less appreciation than common stockholders and may have greater voting rights
as well. Equity securities may also include convertible securities, warrants,
or rights. Warrants or rights give the holder the right to buy a common stock
at a given time for a specified price.
WARRANTS A warrant is typically a long-term option issued by a corporation
which gives the holder the privilege of buying a specified number of shares
of the underlying common stock at a specified exercise price at any time on
or before an expiration date. Stock index warrants entitle the holder to
receive, upon exercise, an amount in cash determined by reference to
fluctuations in the level of a specified stock index. If the fund does not
exercise or dispose of a warrant prior to its expiration, it will expire
worthless. Further, the fund does not intend to invest directly in warrants
(valued at the lower of cost or market) in excess of 5% of the value of the
fund's net assets. No more than 2% of the value of the fund's net assets may
be invested in warrants (valued at the lower of cost or market) which are not
listed on the New York or American Stock Exchange.
FOREIGN SECURITIES The fund may invest in foreign securities without
restriction 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 "Risks - Foreign securities risk" for more information.
DEPOSITARY RECEIPTS Many securities of foreign issuers are represented by
ADRs, EDRs, and GDRs (collectively "Depositary Receipts"). ADRs evidence
ownership of, and represent the right to receive, securities of foreign
issuers deposited in a domestic bank or trust company or a foreign
correspondent bank. EDRs and GDRs are typically issued by foreign banks or
trust companies, although they also may be issued by U.S. banks or trust
companies, and evidence ownership of underlying securities issued by either a
foreign or a U.S. corporation. Generally, Depositary Receipts in registered
form are designed for use in the U.S. securities market and Depositary
Receipts in bearer form are designed for use in securities markets outside
the U.S. Please see "Risks - Depositary receipt risk" for more information.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on
exchanges or over-the-counter. While ADRs do not eliminate all the risk
associated with foreign investments, by investing in ADRs rather than
directly in the stock of foreign issuers, the fund will avoid currency risks
during the settlement period for either purchases or sales. In general, there
is a large, liquid market in the U.S. for ADRs quoted on a national
securities exchange or on NASDAQ. The information available for ADRs is
subject to the accounting, auditing and financial reporting standards of the
U.S. market or exchange on which they are traded, which standards are more
uniform and more exacting than those to which many foreign issuers may be
subject. EDRs and GDRs may not necessarily be denominated in the same
currency as the underlying securities into which they may be converted.
Depositary Receipts may be issued under sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of Depositary Receipts. In unsponsored programs, the
issuer may not be directly involved in the creation of the program. Although
regulatory requirements with respect to sponsored and unsponsored programs
are generally similar, in some cases it may be easier to obtain financial
information from an issuer that has participated in the creation of a
sponsored program. Accordingly, there may be less information available
regarding issuers of securities underlying unsponsored programs and there may
not be a correlation between this information and the market value of the
Depositary Receipts.
DEBT SECURITIES A debt security typically has a fixed payment schedule that
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it
declares and pays any dividend to holders of its equity securities. Bonds,
notes, debentures, and commercial paper differ in the length of the issuer's
payment schedule, with bonds carrying the longest repayment schedule and
commercial paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the fund's net asset value per share.
HIGH YIELD 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 Standard & Poor's Corporation ("S&P") or Ba or lower by Moody's Investors
Services, Inc. ("Moody's") and unrated securities of comparable quality that
the manager 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 "Risks - High yield securities risk" and the appendix 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.
ENHANCED CONVERTIBLES. 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 non-convertible 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 the manager
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 the manager
determines that such a combination would better promote the fund's investment
objectives. In addition, the component parts of a synthetic convertible
security may be purchased simultaneously or separately; and the holder of a
synthetic convertible faces the risk that the price of the stock, or the
level of the market index underlying the convertibility component will
decline.
SHORT-SELLING The fund may make short sales. In a short sale, the fund sells
a security it does not own in anticipation of a decline in the market value
of that security. To complete this transaction, the fund must borrow the
security to make delivery to the buyer. The fund then is obligated to replace
the security borrowed by purchasing it at the market price at the time of
replacement. The price at this time may be more or less than the price at
which the security was sold by the fund. Until the security is replaced, the
fund is required to pay to the lender any dividends or interest which accrue
during the period of the loan. To borrow the security, the fund also may be
required to pay a premium, which would increase the cost of the security
sold. The proceeds of the short sale will be retained by the broker, to the
extent necessary to meet margin requirements, until the short position is
closed out.
The fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which
the fund replaces the borrowed security. The fund will realize a gain if the
security declines in price between those dates. The amount of any gain will
be decreased, and the amount of any loss increased, by the amount of any
premium, dividends or interest the fund may be required to pay in connection
with a short sale.
No securities will be sold short if, after effect is given to any such short
sale, the total market value of all securities sold short would exceed 25% of
the value of the fund's net assets. In addition, short sales of the
securities of any single issuer, which must be listed on a national exchange,
may not exceed 5% of the fund's net assets or 5% of any class of such
issuer's securities.
The fund will place in a segregated account with its custodian bank an amount
of cash or U.S. government securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short
and (b) any cash or U.S. government securities required to be deposited as
collateral with the broker in connection with the short sale (not including
the proceeds from the short sale). This segregated account will be
marked-to-market daily, provided that at no time will the amount deposited in
it plus the amount deposited with the broker as collateral be less than the
market value of the securities at the time they were sold short.
In addition to the short sales discussed above, the fund also may make short
sales "against the box," i.e., when a security identical to one owned by the
fund is borrowed and sold short. The fund at no time will have more than 15%
of the value of its net assets in deposits on short sales against the box.
OPTIONS The fund may write (sell) call options on securities, which are
listed on a national securities exchange, and buy listed call and put options
on securities and securities indices. The fund may write a call option only
if the option is "covered," which means so long as the fund is obligated as
the writer of a call option, it will own the underlying security subject to
the call or a call on the same security where the exercise price of the call
held is equal to or less than the exercise price of the call written. The
fund will not invest in any stock options or stock index options, other than
hedging or covered positions, if the option premiums paid on its open
positions exceed 5% of the value of the fund's total assets.
An option on a security is a contract that allows the buyer of the option, in
return for the premium paid, the right to buy a specified security (in the
case of a call option) or to sell a specified security (in the case of a put
option) from or to the writer of the option at a designated price during the
term of the option. Options on securities indices are similar to options on
securities except, rather than the right to buy or sell particular securities
at a specified price, options on a securities index give the holder the right
to receive, upon exercise of the option, an amount of cash if the closing
level of the underlying stock index is greater than (or less than, in the
case of a put) the exercise price of the option. The cash received is equal
to the difference between the closing price of the index and the exercise
price of the option, expressed in dollars, multiplied by a specified number.
Thus, unlike options on individual securities, all settlements are in cash,
and gain or loss depends on price movements in the stock market generally (or
in a particular industry or segment of the market) rather than on price
movements in individual securities. Options are generally considered
"derivative securities." The fund's investment in options will be for
portfolio hedging purposes in an effort to stabilize principal fluctuations
to achieve the fund's investment objective and not for speculation.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, since the writer may
be assigned an exercise notice at any time prior to the termination of the
obligation. Whether or not an option expires unexercised, the writer retains
the amount of the premium paid by the purchaser of the option, an amount
reflects, among other things, the relationship of the exercise price to the
market price and volatility of the underlying security, the remaining term of
the option, supply and demand and interest rates. This amount may, in the
case of a covered call option, be offset by a decline in the market value of
the underlying security during the option period. If a call option is
exercised, the writer experiences a profit or loss from the sale of the
underlying security.
The writer of an option that wants to terminate its obligation may effect a
"closing purchase transaction." This is done by buying an option of the same
series as the option previously written which will cancel the writer's
position by the clearing corporation. A writer may not effect a closing
purchase transaction, however, after being notified of the exercise of an
option. Likewise, an investor who is the holder of an option may liquidate
its position by effecting a "closing sale transaction." This is done by
selling an option of the same series as the option previously purchased.
There is no guarantee that either a closing purchase or a closing sale
transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit the fund to write another call option on the underlying security with
either a different exercise price or expiration date or both. In addition,
effecting a closing transaction will permit the cash or proceeds from the
sale of any securities subject to the option to be used for other fund
investments. If the fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or at the same time as the sale of the security.
The fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option. The fund will realize a
loss from a closing transaction if the price of the transaction is more than
the premium received from writing the option or is less than the premium paid
to purchase the option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option is likely
to be offset in whole or in part by appreciation of the underlying security
owned by the fund.
The fund may purchase call options on securities it intends to purchase to
limit the risk of a substantial increase in the market price of the security
or on securities indices. The fund may also purchase call options on
securities held in its portfolio and on which it has written call options.
Prior to its expiration, a call option may be sold in a closing sale
transaction. Profit or loss from such a sale will depend on whether the
amount received is more or less than the premium paid for the call option
plus any related transaction costs.
The fund may also purchase put options on securities and securities indices
and enter into closing sale transactions with respect to such options,
exercise them or permit them to expire. The fund may purchase a put option on
an underlying security (a "protective put") owned by the fund as a hedging
technique in order to protect against an anticipated decline in the value of
the security. Such hedge protection is provided only during the life of the
put option when the fund, as the holder of the put option, is able to sell
the underlying security at the put exercise price, regardless of any decline
in the underlying security's market price. For example, a put option may be
purchased in order to protect unrealized appreciation of a security when the
investment manager deems it desirable to continue to hold the security
because of tax considerations. The premium paid for the put option and any
transaction costs would reduce any capital gain otherwise available for
distribution when the security is eventually sold.
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. A custodian bank approved by the fund's Board of Directors holds the
securities subject to resale on behalf of the fund. 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 (I.E., banks or
broker-dealers that have been determined by the fund's manager to present no
serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction). Please see "Risks -
Repurchase agreement risk" for more information.
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. Such loans must be secured by
collateral (consisting of any combination of cash, U.S. government securities
or irrevocable letters of credit) in an amount equal (on a daily
marked-to-market basis) to the current market value of the securities loaned.
The fund retains all or a portion of the interest received on the investment
of the cash collateral or receive a fee from the borrower. The fund will
continue to receive any interest or dividends paid on any loaned securities
and will continue to have voting rights with respect to the securities.
However, as with other extensions of credit, there are risks of delay in
recovery or even loss of rights in the collateral should the borrower fail.
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.
NON-DIVERSIFICATION The fund intends to comply with the diversification and
other requirements applicable to regulated investment companies under the
Internal Revenue Code ("Code"). As a non-diversified investment company under
the 1940 Act, the fund may invest more than 5% and up to 25% of its assets in
the securities of any one issuer at the time of purchase. For purposes of the
Code, however, as of the last day of any fiscal quarter, the fund may not
have more than 25% of its total assets invested in any one issuer, and, with
respect to 50% of its total assets, the fund may not have more than 5% of its
total assets invested in any one issuer, nor may it own more than 10% of the
outstanding voting securities of any one issuer. These limitations do not
apply to investments in securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities or to securities of
investment companies that qualify as regulated investment companies under the
Code.
BORROWING As a fundamental policy, the fund may not borrow money, except in
the form of reverse repurchase agreements or from banks in order to meet
redemption requests or for other temporary or emergency purposes in an amount
up to 15% of its total assets (including the amount borrowed). The fund will
not make any additional investments while any borrowings exceed 5% of its
total assets. The fund also may not mortgage or pledge any of its assets,
except to secure borrowings for temporary or emergency purposes and
permissible options, short selling or other hedging transactions.
TEMPORARY INVESTMENTS In anticipation of and during temporary defensive
periods or when investments of the type in which the fund intends to invest
are not available at prices that the manager believes are attractive, the
fund may invest up to 100% of its total assets in: (1) securities of the U.S.
government and certain of its agencies and instrumentalities 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 the manager 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 the
manager to be high grade or that are rated within the two highest rating
categories by S&P and Moody's. Please see the appendix for a discussion of
ratings.
CONVERSION TO A MASTER/FEEDER STRUCTURE The fund currently invests directly
in securities. Certain Franklin Templeton Funds, however, are "feeder funds"
in a master/feeder fund structure. This means they invest their assets in a
"master fund" that, in turn, invests its assets directly in securities. The
fund's investment objective and other fundamental policies allow it to invest
either directly in securities or indirectly in securities through a master
fund. In the future, the Board may decide to convert the fund to a
master/feeder structure. If this occurs, your purchase of fund shares will be
considered your consent to a conversion and we will not seek further
shareholder approval. We will, however, notify you in advance of the
conversion. If the fund converts to a master/feeder structure, its fees and
total operating expenses are not expected to increase.
INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50%
of the fund's outstanding shares are represented at the meeting in person or
by proxy, whichever is less.
The fund may not:
1. Invest in securities for purposes of exercising management or control of
the issuer, except that all or substantially all of the assets of the fund
may be invested in another registered investment company having the same
investment objective and policies as the fund.
2. Borrow money, except in the form of reverse repurchase agreements or from
banks in order to meet redemption requests or for other temporary or
emergency purposes in an amount up to 15% of the value of the fund's total
assets (including the amount borrowed) based on the lesser of cost or market,
less liabilities (not including the amount borrowed) at the time the
borrowing is made. While borrowings exceed 5% of the fund's total assets, the
fund will not make any additional investments.
3. Pledge, hypothecate, mortgage or otherwise encumber its assets, except to
secure borrowings to meet redemption requests or for temporary or emergency
purposes and permissible options, short selling or other hedging transactions.
4. Purchase securities on margin or underwrite securities of other issuers,
except insofar as the fund may be technically deemed an underwriter under the
federal securities laws in connection with the disposition of portfolio
securities. (This does not preclude the fund from obtaining such short-term
credit as may be necessary for the clearance of purchases and sales of its
portfolio securities.)
5. Invest directly in interests in real estate, oil, gas or other mineral
leases, exploration or development programs, including limited partnership
interests. (This restriction does not preclude investments in marketable
securities of issuers engaged in such activities.)
6. Make loans to other persons, except by the purchase of debt obligations,
or through loans of the fund's portfolio securities, or to the extent the
entry into a repurchase agreement or similar transaction may be deemed a loan.
7. Purchase or sell commodities or commodity futures contracts or financial
futures contracts; or invest in put, call, straddle or spread options on
financial or other futures contracts or stock index futures contracts.
8. Invest directly in warrants (valued at the lower of cost or market) in
excess of 5% of the value of the fund's net assets. No more than 2% of the
value of the fund's net assets may be invested in warrants (valued at the
lower of cost or market) which are not listed on the New York or American
Stock Exchanges.
9. Purchase from or sell to its officers and trustees, or any firm of which
any officer or trustee is a member, as principal, any securities, but the
fund may deal with such persons or firms as brokers and pay a customary
brokerage commission; nor invest in securities of any issuer if any officer,
director or trustee of the fund or the investment advisor owns beneficially
more than one-half of 1% of the outstanding securities of such issuer and all
such officers, directors and trustees together own beneficially more than 5%
of such securities.
10. Invest in the securities of other investment companies, except where
there is no commission other than the customary brokerage commission or sales
charge, or except that securities of another investment company may be
acquired pursuant to a plan of reorganization, merger, consolidation or
acquisition; or except further that all or substantially all of the assets of
the fund may be invested in another registered investment company having the
same investment objective and policies as the fund. Pursuant to available
exemptions from the 1940 Act, the fund may invest in shares of one or more
money market funds managed by Advisory Services or its affiliates.
The fund presently has the following additional restrictions, which are not
fundamental and may be changed without shareholder approval.
1) The fund does not intend to invest more than 5% of its assets in
securities of issuers with less than three years continuous operation,
including the operations of any predecessor companies or to purchase or hold
securities of any issuer if, as a result, in the aggregate, more than 10% of
the value of the fund's total assets would be invested in securities that are
subject to legal or contractual restrictions on resale, in securities that
are not readily marketable (including over-the-counter options) or in
repurchase agreements maturing in more than seven days.
2) The fund may not issue senior securities, as defined in the 1940 Act,
except that this restriction shall not be deemed to prohibit the fund from
(i) making any permitted borrowings, mortgages or pledges or (ii) entering
into repurchase transactions or engage in the short sales of securities,
except short sales "against the box," if the cash or securities deposited in
the segregated account with the fund's custodian to collateralize its short
positions in the aggregate exceed 25% of the fund's net assets.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities or the amount of assets will not be
considered a violation of any of the foregoing restrictions.
RISKS
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VALUE INVESTING RISK The fund will invest principally in the securities of
companies believed by the manager to be undervalued. Securities of a company
may be undervalued as a result of overreaction by investors to unfavorable
news about a company, industry 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 non-cyclical stocks, but they also tend
to lose value more quickly in economic downturns. As with all investments,
there is always the possibility when investing in these securities that the
manager may be incorrect in its assessment of a particular industry or
company or that the manager may not 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, cyclical stocks 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. The manager believes,
however, that these securities may provide a greater total investment return
than securities whose prices appear to reflect anticipated favorable
developments.
FOREIGN SECURITIES RISK The value of foreign (and U.S.) securities is
affected by general economic conditions and individual company and industry
earnings prospects. While foreign securities may offer significant
opportunities for gain, they also involve additional risks that can increase
the potential for losses in the fund. These risks can be significantly
greater for investments in emerging markets. Investments in depositary
receipts also involve some or all of the risks described below.
There is the possibility of cessation of trading on national exchanges,
expropriation, nationalization of assets, confiscatory or punitive taxation,
withholding and other foreign taxes on income or other amounts, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), restrictions on removal of assets, political
or social instability, or diplomatic developments that could affect
investments in securities of issuers in foreign nations.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or
financial reporting standards, and auditing practices and requirements may
not be comparable to those applicable to U.S. companies. The fund, therefore,
may encounter difficulty in obtaining market quotations for purposes of
valuing its portfolio and calculating its net asset value.
Certain countries' financial markets and services are less developed than
those in the U.S. or other major economies. In many foreign countries there
is less government supervision and regulation of stock exchanges, brokers,
and listed companies than in the U.S. Foreign markets have substantially less
volume than the New York Stock Exchange and securities of some foreign
companies are less liquid and more volatile than securities of comparable
U.S. companies. Commission rates in foreign countries, which are generally
fixed rather than subject to negotiation as in the U.S., are likely to be
higher. Settlement practices may be cumbersome and result in delays that may
affect portfolio liquidity. The fund may have greater difficulty voting
proxies, exercising shareholder rights, pursuing legal remedies, and
obtaining judgments with respect to foreign investments in foreign courts
than with respect to domestic issuers in U.S. courts.
The fund's investments in foreign securities may increase the risks with
respect to the liquidity of the fund's portfolio. This could inhibit the
fund's ability to meet a large number of shareholder redemption requests in
the event of economic or political turmoil in a country in which the fund has
a substantial portion of its assets invested or deterioration in relations
between the U.S. and the foreign country.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less economic stability; (ii) political and social uncertainty
(for example, regional conflicts and risk of war); (iii) pervasiveness of
corruption and crime; (iv) the small current size of the markets for such
securities and the currently low or nonexistent volume of trading, which
result in a lack of liquidity and in greater price volatility; (v) delays in
settling portfolio transactions; (vi) risk of loss arising out of the system
of share registration and custody; (vii) certain national policies that may
restrict the fund's investment opportunities, including restrictions on
investment in issuers or industries deemed sensitive to national interests;
(viii) foreign taxation; (ix) the absence of developed legal structures
governing private or foreign investment or allowing for judicial redress for
injury to private property; (x) the absence of a capital market structure or
market-oriented economy; and (xi) the possibility that recent favorable
economic developments may be slowed or reversed by unanticipated political or
social events.
In addition, many countries in which the fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency, and balance of payments
position.
CURRENCY RISK Some of the fund's investments may be denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
EURO RISK On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. The transition and the
elimination of currency risk among EMU countries may change the economic
environment and behavior of investors, particularly in European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect
on the fund, the fund's manager and its affiliated services providers are
taking steps they believe are reasonably designed to address the euro issue.
DEPOSITARY RECEIPT RISK Depositary Receipts reduce but do not eliminate all
the risk inherent in investing in the securities of foreign issuers. To the
extent that the fund acquires Depositary Receipts through banks that do not
have a contractual relationship with the foreign issuer of the security
underlying the Depositary Receipt to issue and service such Depositary
Receipts, there may be an increased possibility that the fund would not
become aware of and be able to respond to corporate actions such as stock
splits or rights offerings involving the foreign issuer in a timely manner.
HIGH YIELD SECURITIES RISK 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, the manager may find it necessary
to replace the securities with lower-yielding securities, which could result
in less net investment income for the fund.
The premature disposition of a high yield security due to a call or buy-back
feature, the deterioration of an issuer's creditworthiness, or a default by
an issuer may make it more difficult for the fund to manage the timing of its
income. Under the Code and U.S. Treasury regulations, the fund may have to
accrue income on defaulted securities and distribute the income to
shareholders for tax purposes, even though the fund is not currently
receiving interest or principal payments on the defaulted securities. To
generate cash to satisfy these distribution requirements, the fund may have
to sell portfolio securities that it otherwise may have continued to hold or
use cash flows from other sources, such as the sale of fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse
impact on market price of a security and on the fund's ability to sell a
security in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer, or if necessary to meet the fund's
liquidity needs. Reduced liquidity may also make it more difficult to obtain
market quotations based on actual trades for purposes of valuing the fund's
portfolio.
The fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry
restrictions on resale. While many high yielding securities have been sold
with registration rights, covenants and penalty provisions for delayed
registration, if the fund is required to sell restricted securities before
the securities have been registered, it may be deemed an underwriter of the
securities under the Securities Act of 1933, which entails special
responsibilities and liabilities. The fund may also incur special costs in
disposing of restricted securities, although the fund will generally not
incur any costs when the issuer is responsible for registering the securities.
The fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. The manager will carefully review their credit and other
characteristics. The fund has no arrangement with its underwriter or any
other person concerning the acquisition of these securities.
The high yield securities market is relatively new and much of its growth
before 1990 paralleled a long economic expansion. The recession that began in
1990 disrupted the market for high yield securities and adversely affected
the value of outstanding securities, as well as the ability of issuers of
high yield securities to make timely principal and interest payments.
Although the economy has improved and high yield securities have performed
more consistently since that time, the adverse effects previously experienced
may reoccur. For example, the highly publicized defaults on some high yield
securities during 1989 and 1990 and concerns about a sluggish economy that
continued into 1993 depressed the prices of many of these securities. While
market prices may be temporarily depressed due to these factors, the ultimate
price of any security generally reflects the true operating results of the
issuer. Factors adversely impacting the market value of high yield securities
may lower the fund's Net Asset Value.
The fund relies on the manager's judgment, analysis and experience in
evaluating the creditworthiness of an issuer. In this evaluation, the manager
takes into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters.
INTEREST RATE 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. Of
course, interest rates throughout the world have increased and decreased,
sometimes very dramatically, in the past. These changes are likely to occur
again in the future at unpredictable times.
REPURCHASE AGREEMENT RISK The use of repurchase agreements involves certain
risks. For example, if the other party to the agreement defaults on its
obligation to repurchase the underlying security at a time when the value of
the security has declined, the fund may incur a loss upon disposition of the
security. If the other party to the agreement becomes insolvent and subject
to liquidation or reorganization under the bankruptcy code or other laws, a
court may determine that the underlying security is collateral for a loan by
the fund not within the control of the fund, and therefore the realization by
the fund on the collateral may be automatically stayed. Finally, it is
possible that the fund may not be able to substantiate its interest in the
underlying security and may be deemed an unsecured creditor of the other
party to the agreement. While the manager acknowledges these risks, it is
expected that if repurchase agreements are otherwise deemed useful to the
fund, these risks can be controlled through careful monitoring procedures.
NON-DIVERSIFICATION RISK As a non-diversified investment company under the
1940 Act, the fund may concentrate its investments in the securities of a
smaller number of issuers than if it were a diversified company. An
investment in the fund therefore will entail greater risk than an investment
in a diversified investment company because a higher percentage of
investments among fewer issuers may result in greater fluctuation in the
total market value of the fund's portfolio, and economic, political or
regulatory developments may have a greater impact on the value of the fund's
portfolio than would be the case if the portfolio were diversified among more
issuers. All securities in which the fund may invest are inherently subject
to market risk, and the market value of the fund's investments will fluctuate.
OPTIONS RISK The purchase and sale of stock options and stock index options,
including the writing of covered call options, involve risks different from
those involved with direct investments in securities. A liquid secondary
market for any particular option may not be available when a position is
sought to be closed, and the inability to close a position may have an
adverse impact on the fund's ability to effectively hedge securities. In
addition, there may be an imperfect correlation between movements in the
securities on which an option contract is based and movements in the
securities in the fund's portfolio. Successful use of option contracts is
further dependent on the manager's ability to predict correctly movements in
the securities markets, and no assurance can be given that the manager's
judgment will be correct. In addition, by writing covered call options, the
fund gives up the opportunity to profit from any price increase in the
underlying security above the option exercise price while the option is in
effect.
The fund's ability to hedge effectively all or a portion of its securities
through transactions in options on securities and securities indices depends
on the degree to which price movements in the underlying indices or
securities correlate with price movements in the relevant portion of the
fund's portfolio. Inasmuch as such securities will not duplicate the
components of any index or underlying securities, the correlation will not be
perfect. Consequently, the fund bears the risk that the prices of the
securities being hedged will not move in the same amount as the hedging
instrument. It is also possible that there may be a negative correlation
between the index or other securities underlying the hedging instrument and
the hedged securities which would result in a loss on both the securities and
the hedging instrument. Accordingly, successful use by the fund of options on
securities and securities indices will be subject to the manager's ability to
correctly predict movements in the direction of the securities markets
generally or of a particular segment. This requires different skills and
techniques than predicting changes in the price of individual stocks.
Positions in stock index options and options on securities may be closed out
only on an exchange which provides a secondary market. There can be no
assurance that a liquid secondary market will exist for any particular option
at any specific time. Thus, it may not be possible to close such an option.
The inability to close an option position could also have an adverse impact
on the fund's ability to effectively hedge its securities. The fund will
enter into an option position only if there appears to be a liquid secondary
market for such option.
OFFICERS AND TRUSTEES
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The trust has a board of trustees. The board is responsible for the overall
management of the fund, including general supervision and review of the
fund's investment activities. The board, in turn, elects the officers of the
trust who are responsible for administering the fund's day-to-day operations.
The affiliations of the officers and board members and their principal
occupations for the past five years are shown below.
POSITION(S)
HELD WITH PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS THE TRUST DURING THE PAST FIVE YEARS
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Frank T. Crohn (74)
P.O. Box 810516
Boca Raton, FL 33481
Trustee
Chairman, Eastport Lobster & Fish Company; Director, Unity Mutual Life
Insurance Company; trustee of two of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman, Financial Benefit Life
Insurance Company and Director, AmVestors Financial Corporation.
*William J. Lippman (72)
One Parker Plaza, 16th Floor
Fort Lee, NJ 07024
President, Chief Executive Officer and Trustee
Senior Vice President, Franklin Resources, Inc. and Franklin Management,
Inc.; President and Director, Franklin Advisory Services, Inc.; and officer
and/or director or trustee, as the case may be, of six of the investment
companies in the Franklin Templeton Group of Funds.
Charles Rubens II (68)
18 Park Road
Scarsdale, NY 10583
Trustee
Private investor; and trustee of three of the investment companies in the
Franklin Templeton Group of Funds.
Leonard Rubin (73)
2 Executive Drive
Suite 560
Fort Lee, NJ 07024
Trustee
Partner in LDR Equities, LLC (manages various personal investments); Vice
President, Trimtex Co., Inc. (manufactures and markets specialty fabrics);
trustee or director, as the case may be, of three of the investment companies
in the Franklin Templeton Group of Funds; and FORMERLY, Chairman of the
Board, Carolace Embroidery Co., Inc. and President, F.N.C. Textiles, Inc.
Harmon E. Burns (54)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating Officer and Director, Templeton Investment
Counsel, Inc.; Executive Vice President and Chief Financial Officer, Franklin
Advisers, Inc.; Chief Financial Officer, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; President and Director, Franklin
Templeton Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin/Templeton Investor Services, Inc.; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 53 of the investment companies in
the Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.; Vice President, Chief Legal
Officer and Chief Operating Officer, Franklin Investment Advisory Services,
Inc.; and officer of 53 of the investment companies in the Franklin Templeton
Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers,
Inc.; Senior Vice President and Director, Franklin Advisory Services, Inc.
and Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (61)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
R. Martin Wiskemann (72)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President, Portfolio Manager and Director, Franklin Advisers,
Inc.; Senior Vice President, Franklin Management, Inc.; Vice President and
Director, ILA Financial Services, Inc.; and officer and/or director or
trustee, as the case may be, of 15 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal
securities laws.
The trust pays noninterested board members $1,800 per quarter plus $600 per
meeting attended. Noninterested board members may also serve as directors or
trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The following table
provides the total fees paid to noninterested board members by the trust and
by other funds in the Franklin Templeton Group of Funds.
NUMBER OF BOARDS IN
TOTAL FEES RECEIVED THE FRANKLIN
TOTAL FEES FROM THE FRANKLIN TEMPLETON GROUP OF
RECEIVED TEMPLETON GROUP OF FUNDS ON WHICH EACH
NAME FROM THE TRUST1 FUNDS2 SERVES3
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Frank T. Crohn $ 9,600 2
Charles Rubens II 10,200 3
Leonard Rubin 10,200 3
1. For the fiscal year ended October 31, 1998.
2. For the calendar year ended December 31, 1998.
3. We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the board members are responsible. The Franklin Templeton Group of
Funds currently includes 54 registered investment companies, with
approximately 168 U.S. based funds or series.
Noninterested board members are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or board members who are shareholders of Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisory
Services, Inc. The manager is wholly owned by Franklin Resources, Inc.
(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.
The manager provides investment research and portfolio management services,
and selects the securities for the fund to buy, hold or sell. The manager
also selects the brokers who execute the fund's portfolio transactions. The
manager provides periodic reports to the board, which reviews and supervises
the manager's investment activities. To protect the fund, the manager and its
officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of
the other funds it manages, or for its own account, that may differ from
action taken by the manager on behalf of the fund. Similarly, with respect to
the fund, the manager is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that the manager
and access persons, as defined by applicable federal securities laws, may buy
or sell for its or their own account or for the accounts of any other fund.
The manager is not obligated to refrain from investing in securities held by
the fund or other funds it manages. Of course, any transactions for the
accounts of the manager and other access persons will be made in compliance
with the fund's code of ethics.
Under the fund's code of ethics, employees of the Franklin Templeton Group
who are access persons may engage in personal securities transactions subject
to the following general restrictions and procedures: (i) the trade must
receive advance clearance from a compliance officer and must be completed by
the close of the business day following the day clearance is granted; (ii)
copies of all brokerage confirmations and statements must be sent to a
compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) above, file
annual reports of their securities holdings each January and inform the
compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they
are recommending a security in which they have an ownership interest for
purchase or sale by a fund or other client.
MANAGEMENT FEES The fund pays the manager a fee equal to a daily rate of
.75% of the fund's average daily net assets.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement.
For the last three fiscal years ended October 31, the fund paid the following
management fees:
Management Fees Paid ($)
- -------------------------------------------------
1998 1,528,066
1997 1,104,784
1996 1 425,197
1. For the period from December 12, 1995, through October 31, 1996.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by
Resources and is an affiliate of the fund's manager and principal
underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
During the last two fiscal years ended October 31, the manager paid FT
Services the following administration fees:
Administration Fees Paid ($)
------------------------------------------------
1998 304,056
1997 235,560
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is the fund's shareholder servicing agent
and acts as the fund's transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo,
CA 94403-7777.
For its services, Investor Services receives a fixed fee per account. The
fund may also reimburse Investor Services for certain out-of-pocket expenses,
which may include payments by Investor Services to entities, including
affiliated entities, that provide sub-shareholder services, recordkeeping
and/or transfer agency services to beneficial owners of the fund. The amount
of reimbursements for these services per benefit plan participant fund
account per year may not exceed the per account fee payable by the fund to
Investor Services in connection with maintaining shareholder accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the fund's independent auditor. The auditor gives an opinion on the
financial statements included in the trust's Annual Report to Shareholders
and reviews the trust's registration statement filed with the U.S. Securities
and Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
- ------------------------------------------------------------------------------
The manager selects brokers and dealers to execute the fund's portfolio
transactions in accordance with criteria set forth in the management
agreement and any directions that the board may give.
When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid is
negotiated between the manager and the broker executing the transaction. The
determination and evaluation of the reasonableness of the brokerage
commissions paid are based to a large degree on the professional opinions of
the persons responsible for placement and review of the transactions. These
opinions are based on the experience of these individuals in the securities
industry and information available to them about the level of commissions
being paid by other institutional investors of comparable size. The manager
will ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in
the opinion of the manager, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or the manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the manager include, among others, supplying
information about particular companies, markets, countries, or local,
regional, national or transnational economies, statistical data, quotations
and other securities pricing information, and other information that provides
lawful and appropriate assistance to the manager in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the fund. They must, however, be of value to the manager in carrying
out its overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on
the research services the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order
to obtain additional research services allows the manager to supplement its
own research and analysis activities and to receive the views and information
of individuals and research staffs of other securities firms. As long as it
is lawful and appropriate to do so, the manager and its affiliates may use
this research and data in their investment advisory capacities with other
clients. If the fund's officers are satisfied that the best execution is
obtained, the sale of fund shares, as well as shares of other funds in the
Franklin Templeton Group of Funds, may also be considered a factor in the
selection of broker-dealers to execute the fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of
the National Association of Securities Dealers, Inc., it may sometimes
receive certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the
fund, any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next
management fee payable to the manager will be reduced by the amount of any
fees received by Distributors in cash, less any costs and expenses incurred
in connection with the tender.
If purchases or sales of securities of the fund and one or more other
investment companies or clients supervised by the manager are considered at
or about the same time, transactions in these securities will be allocated
among the several investment companies and clients in a manner deemed
equitable to all by the manager, taking into account the respective sizes of
the funds and the amount of securities to be purchased or sold. In some cases
this procedure could have a detrimental effect on the price or volume of the
security so far as the fund is concerned. In other cases it is possible that
the ability to participate in volume transactions may improve execution and
reduce transaction costs to the fund.
During the last three fiscal years ended October 31, the fund paid the
following brokerage commissions:
Brokerage Commissions ($)
------------------------------------------------
1998 370,264
1997 340,200
1996 1 340,629
1. For the period from December 12, 1995, through October 31, 1996.
As of October 31, 1998, the fund did not own securities of its regular
broker-dealers.
DISTRIBUTIONS AND TAXES
- ------------------------------------------------------------------------------
The fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in
the form of dividends and interest on its investments. This income, less
expenses incurred in the operation of the fund, constitutes the fund's net
investment income from which dividends may be paid to you. Any distributions
by the fund from such income will be taxable to you as ordinary income,
whether you take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net capital gains realized by the fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, in order to reduce or eliminate excise or income
taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the fund's
ordinary income distributions to you, and may cause some or all of the fund's
previously distributed income to be classified as a return of capital.
The fund may be subject to foreign withholding taxes on income from certain
of its foreign securities. If more than 50% of the fund's total assets at the
end of the fiscal year are invested in securities of foreign corporations,
the fund may elect to pass-through to you your pro rata share of foreign
taxes paid by the fund. If this election is made, the year-end statement you
receive from the fund 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. The fund will provide
you with the information necessary to complete your individual income tax
return if it makes this election.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you
of the amount of your ordinary income dividends and capital gains
distributions at the time they are paid, and will advise you of their tax
status for federal income tax purposes shortly after the close of each
calendar year. If you have not held fund shares for a full year, you may have
designated and distributed to you as ordinary income or capital gain a
percentage of income that is not equal to the actual amount of such income
earned during the period of your investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The fund has elected
to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. As a regulated
investment company, the fund generally pays no federal income tax on the
income and gains it distributes to you. The board reserves the right not to
maintain the qualification of the fund as a regulated investment company if
it determines such course of action to be beneficial to shareholders. In such
case, the fund will be subject to federal, and possibly state, corporate
taxes on its taxable income and gains, and distributions to you will be taxed
as ordinary dividend income to the extent of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires the fund to distribute to you by December 31
of each year, at a minimum, the following amounts: 98% of its taxable
ordinary income earned during the calendar year; 98% of its capital gain net
income earned during the twelve month period ending October 31; and 100% of
any undistributed amounts from the prior year. The fund intends to declare
and pay these amounts in December (or in January that are treated by you as
received in December) to avoid these excise taxes, but can give no assurances
that its distributions will be sufficient to eliminate all such taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. If you redeem
your fund shares, or exchange your fund shares for shares of a different
Franklin Templeton Fund, the IRS will require that you report a gain or loss
on your redemption or exchange. If you hold your shares as a capital asset,
the gain or loss that you realize will be capital gain or loss. Any loss
incurred on the redemption or exchange of shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by the fund on those shares.
All or a portion of any loss that you realize upon the redemption of your
fund shares will be disallowed to the extent that you buy other shares in the
fund (through reinvestment of dividends or otherwise) within 30 days before
or after your share redemption. Any loss disallowed under these rules will
be added to your tax basis in the new shares you buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in the fund, and
then reinvest the sales proceeds in the fund or in another Franklin Templeton
Fund within 90 days of buying the original shares, the sales charge that
would otherwise apply to your reinvestment may be reduced or eliminated. The
IRS will require you to report gain or loss on the redemption of your
original shares in the fund. In doing so, all or a portion of the sales
charge that you paid for your original shares in the fund will be excluded
from your tax basis in the shares sold (for the purpose of determining gain
or loss upon the sale of such shares). The portion of the sales charge
excluded will equal the amount that the sales charge is reduced on your
reinvestment. Any portion of the sales charge excluded from your tax basis in
the shares sold will be added to the tax basis of the shares you acquire from
your reinvestment.
U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that
must be met by the fund. Investments in Government National Mortgage
Association or Federal National Mortgage Association securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
The rules on exclusion of this income are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that 29.36% of the dividends paid by the fund
for the most recent fiscal year qualified for the dividends-received
deduction. In some circumstances, you will be allowed to deduct these
qualified dividends, thereby reducing the tax that you would otherwise be
required to pay on these dividends. The dividends-received deduction will be
available only with respect to dividends designated by the fund as eligible
for such treatment. All dividends (including the deducted portion) must be
included in your alternative minimum taxable income calculation.
INVESTMENT IN COMPLEX SECURITIES The fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the fund are
treated as ordinary income or capital gain, accelerate the recognition of
income to the fund and/or defer the fund's ability to recognize losses. In
turn, these rules may affect the amount, timing or character of the income
distributed to you by the fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- ------------------------------------------------------------------------------
The fund is a non-diversified series of Franklin Value Investors Trust, an
open-end management investment company, commonly called a mutual fund. The
trust was organized as a Massachusetts business trust on September 11, 1989,
and is registered with the SEC.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations.
The Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the fund's assets if you are held personally liable for
obligations of the fund. The Declaration of Trust provides that the fund
shall, upon request, assume the defense of any claim made against you for any
act or obligation of the fund and satisfy any judgment thereon. All such
rights are limited to the assets of the fund. The Declaration of Trust
further provides that the fund may maintain appropriate insurance (for
example, fidelity bonding and errors and omissions insurance) for the
protection of the fund, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. Furthermore, the
activities of the fund as an investment company, as distinguished from an
operating company, would not likely give rise to liabilities in excess of the
fund's total assets. Thus, the risk that you would incur financial loss on
account of shareholder liability is limited to the unlikely circumstance in
which both inadequate insurance exists and the fund itself is unable to meet
its obligations.
The fund currently offers one class of shares. The fund may offer additional
classes of shares in the future. The full title of the fund is Franklin
MicroCap Value Fund - Class A.
The trust has noncumulative voting rights. For board member elections, 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 be called by the board to consider the
removal of a board member if requested in writing 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. A special meeting may also be called by the board in its
discretion.
From time to time, the number of fund shares held in the "street name"
accounts of various securities dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding. To the best knowledge of the fund, no other person holds
beneficially or of record more than 5% of the outstanding shares of the fund.
As of December 7, 1998, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of the fund.
The board members may own shares in other funds in the Franklin Templeton
Group of Funds.
BUYING AND SELLING SHARES
- ------------------------------------------------------------------------------
The fund continuously offers its shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial
institutions that sell shares of the fund may be required by state law to
register as securities dealers.
For investors outside the U.S., 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.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the fund we may impose a $10 charge against your account for each returned
item.
If you buy shares through the reinvestment of dividends, the shares will be
purchased at the net asset value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The
processing date for the reinvestment of dividends may vary and does not
affect the amount or value of the shares acquired.
INITIAL SALES CHARGES The maximum initial sales charge is 5.75%.
The initial sales charge may be reduced for certain large purchases, as
described in the prospectus. We offer several ways for you to combine your
purchases in the Franklin Templeton Funds to take advantage of the lower
sales charges for large purchases. The Franklin Templeton Funds include 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.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge,
you may combine the amount of your current purchase with the cost or current
value, whichever is higher, of your existing shares in the Franklin Templeton
Funds. You may also combine the shares of your spouse, children under the age
of 21 or 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 (LOI). You may buy shares at a reduced sales charge by
completing the letter of intent section of your account 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 application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase
in shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
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 LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy shares at the sales charge
applicable to the amount specified in your LOI. Sales charge reductions based
on purchases in more than one Franklin Templeton Fund will be effective only
after notification to Distributors that the investment qualifies for a
discount. Any purchases you made within 90 days before you filed your LOI may
also qualify for a retroactive reduction in the sales charge. If you file
your LOI with the fund before a change in the fund's sales charge, you may
complete the LOI at the lower of the new sales charge or the sales charge in
effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days
before you filed your LOI will be counted towards the completion of the LOI,
but they will not be entitled to a retroactive reduction in the sales charge.
Any redemptions you make during the 13 month period, except in the case of
certain retirement plans, will be subtracted from the amount of the purchases
for purposes of determining whether the terms of the LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of
your total purchases, less redemptions, is more than the amount specified in
your LOI and is an amount that would qualify for a further sales charge
reduction, a retroactive price adjustment will be made by Distributors and
the securities dealer through whom purchases were made. The price adjustment
will be made on purchases made within 90 days before and on those made after
you filed your LOI and will be applied towards the purchase of additional
shares at the offering price applicable to a single purchase or the dollar
amount of the total purchases.
If the amount of your total purchases, less redemptions, is less than the
amount specified in your LOI, the sales charge will be adjusted upward,
depending on the actual amount purchased (less redemptions) during the
period. You will need to send Distributors an amount equal to the difference
in the actual dollar amount of sales charge paid and the amount of sales
charge that would have applied to the total purchases if the total of the
purchases had been made at one time. Upon payment of this amount, the
reserved shares held for your account will be deposited to an account in your
name or delivered to you or as you direct. If within 20 days after written
request the difference in sales charge is not paid, we will redeem an
appropriate number of reserved shares to realize the difference. If you
redeem the total amount in your account before you fulfill your LOI, we will
deduct the additional sales charge due from the sale proceeds and forward the
balance to you.
For LOIs filed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the LOI. These plans are not subject to the requirement to reserve 5%
of the total intended purchase or to the policy on upward adjustments in
sales charges described above, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy 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, although any such plan that purchased the fund's
shares at a reduced sales charge under the group purchase privilege before
February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Shares may be purchased
without an initial sales charge or contingent deferred sales charge (CDSC) by
investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same share class.
Certain exceptions apply, however, to Class C shareholders 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's shares.
o Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, 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.
WAIVERS FOR CERTAIN INVESTORS. Shares may also be purchased without an
initial sales charge or CDSC by various individuals and institutions due to
anticipated economies in sales efforts and expenses, including:
o 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.
o 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 fund shares without paying
sales charges. 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.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o 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
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting
distributions from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under
"Retirement plans" below
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy shares without an initial sales charge.
Retirement plans that are not qualified retirement plans (employer sponsored
pension or profit-sharing plans that qualify under section 401 of the
Internal Revenue Code, including 401(k), money purchase pension, profit
sharing and defined benefit plans), SIMPLEs (savings incentive match plans
for employees) or SEPs (employer sponsored simplified employee pension plans
established under section 408(k) of the Internal Revenue Code) must also meet
the group purchase requirements described above to be able to buy shares
without an initial 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 CDSC 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.
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, the fund's shares are available to these banks' trust accounts without
a sales charge. The banks may charge service fees to their customers who
participate in the trusts. A portion of these service fees may be paid to
Distributors or one of its affiliates to help defray expenses of maintaining
a service office in Taiwan, including expenses related to local literature
fulfillment and communication facilities.
The fund's shares may be offered to investors in Taiwan through securities
advisory firms known locally as Securities Investment Consulting Enterprises.
In conformity with local business practices in Taiwan, shares may be offered
with the following schedule of sales charges:
Size of Purchase - U.S. Dollars Sales Charge (%)
- ---------------------------------------------------------------------
Under $30,000 3.0
$30,000 but less than $50,000 2.5
$50,000 but less than $100,000 2.0
$100,000 but less than $200,000 1.5
$200,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION Securities dealers may at times receive the entire sales
charge. A securities dealer who receives 90% or more of the sales charge may
be deemed an underwriter under the Securities Act of 1933, as amended.
Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated in the dealer compensation table
in the fund's prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of $1
million or more: 1% on sales of $1 million to $2 million, plus 0.80% on sales
over $2 million to $3 million, plus 0.50% on sales over $3 million to $50
million, plus 0.25% on sales over $50 million to $100 million, plus 0.15% on
sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts,
out of its own resources, to securities dealers who initiate and are
responsible for purchases of by certain retirement plans without an initial
sales charge: 1% on sales of $500,000 to $2 million, plus 0.80% on sales over
$2 million to $3 million, plus 0.50% on sales over $3 million to $50 million,
plus 0.25% on sales over $50 million to $100 million, plus 0.15% on sales
over $100 million. Distributors may make these payments in the form of
contingent advance payments, which may be recovered from the securities
dealer or set off against other payments due to the dealer if shares are sold
within 12 months of the calendar month of purchase. Other conditions may
apply. All terms and conditions may be imposed by an agreement between
Distributors, or one of its affiliates, and the securities dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
securities dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a securities dealer's sales and marketing
efforts in the Franklin Templeton Group of Funds; a securities dealer's
support of, and participation in, Distributors' marketing programs; a
securities dealer's compensation programs for its registered representatives;
and the extent of a securities dealer's marketing programs relating to the
Franklin Templeton Group of Funds. Financial support to securities dealers
may be made by payments from Distributors' resources, from Distributors'
retention of underwriting concessions and, in the case of funds that have
Rule 12b-1 plans, from payments to Distributors under such plans. In
addition, certain securities dealers may receive brokerage commissions
generated by fund portfolio transactions in accordance with the rules of the
National Association of Securities Dealers, Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more,
either as a lump sum or through our cumulative quantity discount or letter of
intent programs, a CDSC may apply on any shares you sell within 12 months of
purchase. The CDSC 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 an initial sales charge may also be subject to
a CDSC 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.
CDSC WAIVERS. The CDSC will generally be waived for:
o Account fees
o Sales of shares purchased without an initial 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, up to 1% monthly, 3%
quarterly, 6% semiannually or 12% annually of your account's net asset
value depending on the frequency of your plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans or
employee benefit plans serviced by ValuSelect(R)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money. If this
occurs, it is the fund's general policy to initially invest this money in
short-term, interest-bearing money market instruments, unless it is believed
that attractive investment opportunities consistent with the fund's
investment goal exist immediately. This money will then be withdrawn from the
short-term, interest-bearing money market instruments and invested in
portfolio securities in as orderly a manner as is possible when attractive
investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally
not available until the seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh day. The sale of fund shares to complete an exchange will
be effected at net asset value at the close of business on the day the
request for exchange is received in proper form.
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. There are no service charges
for establishing or maintaining a systematic withdrawal plan. Once your plan
is established, any distributions paid by the fund will be automatically
reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday, we
will process the redemption on the next business day. 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 CDSC.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. The fund may discontinue a systematic
withdrawal plan by notifying you in writing and will automatically
discontinue a systematic withdrawal plan if all shares in your account are
withdrawn or if the fund receives notification of the shareholder's death or
incapacity.
REDEMPTIONS IN KIND The fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the U.S. Securities
and Exchange Commission (SEC). In the case of redemption requests [in excess
of these amounts], the board reserves the right to make payments in whole or
in part in securities or other assets of the fund, in case of an emergency,
or if the payment of such a redemption in cash would be detrimental to the
existing shareholders of the fund. In these circumstances, the securities
distributed would be valued at the price used to compute the fund's net
assets and you may incur brokerage fees in converting the securities to cash.
The fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
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.
GENERAL INFORMATION If dividend checks are returned to the fund marked
"unable to forward" by the postal service, we will consider this a request by
you to change your dividend option to reinvest all distributions. The
proceeds will be reinvested in additional shares at net asset value until we
receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the fund nor
its affiliates will be liable for any loss caused by your failure to cash
such checks. The fund is not responsible for tracking down uncashed checks,
unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to
find you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.
The wiring of redemption proceeds is a special service that we make available
whenever possible. 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 the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay
certain financial institutions that maintain omnibus accounts with the fund
on behalf of numerous beneficial owners for recordkeeping operations
performed with respect to such owners. For each beneficial owner in the
omnibus account, the fund may reimburse Investor Services an amount not to
exceed the per account fee that the fund normally pays Investor Services.
These financial institutions may also charge a fee for their services
directly to their clients.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. If you sell shares
through your securities dealer, it is your dealer's responsibility to
transmit the order to the fund in a timely fashion. 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. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
notice of levy.
PRICING SHARES
- ------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the
net asset value (NAV) per share plus any applicable sales charge, calculated
to two decimal places using standard rounding criteria. When you sell shares,
you receive the NAV minus any applicable CDSC.
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.
The fund calculates the NAV per share each business day at the close of
trading on the New York Stock Exchange (normally 1:00 p.m. pacific time). The
fund does not calculate the NAV on days the New York Stock Exchange (NYSE) is
closed for trading, which include New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent
quoted bid and ask prices. The fund values over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, the fund values them according to the broadest and most
representative market as determined by the manager.
The fund values portfolio securities underlying actively traded call options
at their market price as determined above. The current market value of any
option the fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last
sale price is outside the bid and ask prices, the fund values options within
the range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.
The fund determines the value of a foreign security as of the close of
trading on the foreign exchange on which the security is traded or as of the
close of trading on the NYSE, if that is earlier. The value is then converted
into its U.S. dollar equivalent at the foreign exchange rate in effect at
noon, New York time, on the day the value of the foreign security is
determined. If no sale is reported at that time, the foreign security is
valued within the range of the most recent quoted bid and ask prices.
Occasionally events that affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and
the close of the exchange and will, therefore, not be reflected in the
computation of the NAV. If events materially affecting the values of these
foreign securities occur during this period, the securities will be valued in
accordance with procedures established by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the NAV is determined as of such times. Occasionally, events affecting the
values of these securities may occur between the times at which they are
determined and the close of the NYSE that will not be reflected in the
computation of the NAV. If events materially affecting the values of these
securities occur during this period, the securities will be valued at their
fair value as determined in good faith by the board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the board. With the approval of
the board, the fund may use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
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Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the fund's shares, the net
underwriting discounts and commissions Distributors retained after allowances
to dealers, and the amounts Distributors received in connection with
redemptions or repurchases of shares for the last three fiscal years ended
October 31:
Amount Received in
Total Commissions Connection with
Received ($) Amount Retained by Redemptions and
Distributors ($) Repurchases ($)
------------------------------------------------------------------------------
1998 1,041,981 122,419 0
1997 1,140,735 128.844 0
1996 3,785,060 425,966 0
Distributors may be entitled to reimbursement under the Rule 12b-1 plan, as
discussed below. Except as noted, Distributors received no other compensation
from the fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Under the "Rule 12b-1" plan, the fund
shall pay or may reimburse Distributors or others for the expenses of
activities that are primarily intended to sell shares of the fund. 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.
THE PLAN. Payments by the fund under the plan may not exceed r year of the
fund's average daily net assets, payable quarterly. All distribution expenses
over this amount will be borne by those who have incurred them.
In addition to the payments that Distributors or others are entitled to under
the plan, the plan also provides that to the extent the fund, the manager or
Distributors or other parties on behalf of the fund, the manager or
Distributors make payments that are deemed to be for the financing of any
activity primarily intended to result in the sale of fund shares within the
context of Rule 12b-1 under the Investment Company Act of 1940, as amended,
then such payments shall be deemed to have been made pursuant to the plan.
The terms and provisions of the plan relating to required reports, term, and
approval are consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under the plan, plus any other payments deemed to be made
pursuant to the plan, exceed the amount permitted to be paid under the rules
of the National Association of Securities Dealers, Inc.
To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks will not be entitled to participate in the plan as a result of
applicable federal law prohibiting certain banks from engaging in the
distribution of mutual fund shares. These banking institutions, however, are
permitted to receive fees under the plan for administrative servicing or for
agency transactions. If you are a customer of a bank that is prohibited from
providing these services, you would be permitted to remain a shareholder of
the fund, and alternate means for continuing the servicing would be sought.
In this event, changes in the services provided might occur and you might no
longer be able to avail yourself of any automatic investment or other
services then being provided by the bank. It is not expected that you would
suffer any adverse financial consequences as a result of any of these changes.
The plan has been approved in accordance with the provisions of Rule 12b-1.
The plan is renewable annually by a vote of the board, including a majority
vote of the board members who are not interested persons of the fund and who
have no direct or indirect financial interest in the operation of the plan,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such board members be done by the
noninterested members of the fund's board. The plan and any related agreement
may be terminated at any time, without penalty, by vote of a majority of the
noninterested board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with the manager or by
vote of a majority of the outstanding shares of the fund. The Class A plan
may also be terminated by any act that constitutes an assignment of the
underwriting agreement with Distributors. Distributors or any dealer or other
firm may also terminate their respective distribution or service agreement at
any time upon written notice.
The plan and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a
majority of the outstanding shares of the fund, and all material amendments
to the plan or any related agreements shall be approved by a vote of the
noninterested board members, cast in person at a meeting called for the
purpose of voting on any such amendment.
Distributors is required to report in writing to the board at least quarterly
on the amounts and purpose of any payment made under the plan and any related
agreements, as well as to furnish the board with such other information as
may reasonably be requested in order to enable the board to make an informed
determination of whether the plan should be continued.
For the fiscal year ended October 31, 1998, Distributors eligible
expenditures for advertising, printing, and payments to underwriters and
broker-dealers pursuant to the plan and the amounts the fund paid
Distributors under the plan was:
Distributors' Eligible Amount Paid
Expenses ($) by the Fund ($)
- ------------------------------------------------------
899,051 509,341
PERFORMANCE
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Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return quotations used by the fund are based on the
standardized methods of computing performance mandated by the SEC. If a Rule
12b-1 plan is adopted, performance figures reflect fees from the date of the
plan's implementation. An explanation of these and other methods used by the
fund to compute or express performance follows. Regardless of the method
used, past performance does not guarantee future results, and is an
indication of the return to shareholders only for the limited historical
period used.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum initial sales charge is
deducted from the initial $1,000 purchase, and income dividends and capital
gain distributions are reinvested at net asset value. The quotation assumes
the account was completely redeemed at the end of each period and the
deduction of all applicable charges and fees. If a change is made to the
sales charge structure, historical performance information will be restated
to reflect the maximum initial sales charge currently in effect.
When considering the average annual total return quotations, you should keep
in mind that the maximum initial sales charge reflected in each quotation is
a one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the fund.
The average annual total returns for the indicated periods ended October 31,
1998, were:
1 Year Since Inception (12/12/95)
- --------------------------------------------
- -16.06 12.41
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of each period at the end
of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at net asset value. Cumulative total return, however, is based on
the actual return for a specified period rather than on the average return
over the periods indicated above. The cumulative total returns for the
indicated periods ended October 31, 1998, were:
1 Year Since Inception (12/12/95)
- --------------------------------------------
- -16.06 40.19
VOLATILITY Occasionally statistics may be used to show the fund's volatility
or risk. Measures of volatility or risk are generally used to compare the
fund's net asset value or performance to a market index. One measure of
volatility is beta. Beta is the volatility of a fund relative to the total
market, as represented by an index considered representative of the types of
securities in which the fund invests. A beta of more than 1.00 indicates
volatility greater than the market and a beta of less than 1.00 indicates
volatility less than the market. Another measure of volatility or risk is
standard deviation. Standard deviation is used to measure variability of net
asset value or total return around an average over a specified period of
time. The idea is that greater volatility means greater risk undertaken in
achieving performance.
OTHER PERFORMANCE QUOTATIONS The fund may also quote the performance of
shares without a sales charge. Sales literature and advertising may quote a
cumulative total return, average annual total return and other measures of
performance with the substitution of net asset value for the public offering
price.
Sales literature referring to the use of the fund as a potential investment
for IRAs, business retirement plans, and other tax-advantaged retirement
plans may quote a total return based upon compounding of dividends on which
it is presumed no federal income tax applies.
The fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. is the parent
company of the advisors and underwriter of the Franklin Templeton Group of
Funds.
COMPARISONS To help you better evaluate how an investment in the fund may
satisfy your investment goal, advertisements and other materials about the
fund may discuss certain measures of fund performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and
averages. These comparisons may include, but are not limited to, the
following examples:
o Dow Jones(R) Composite Average and its component averages - a
price-weighted average of 65 stocks that trade on the New York Stock
Exchange. The average is a combination of the Dow Jones Industrial Average
(30 blue-chip stocks that are generally leaders in their industry), the
Dow Jones Transportation Average (20 transportation stocks), and the Dow
Jones Utilities Average (15 utility stocks involved in the production of
electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries.
o The New York Stock Exchange composite or component indices - an
unmanaged index of all industrial, utilities, transportation, and finance
stocks listed on the NYSE.
o Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes
price, yield, risk, and total return for mutual funds.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK,
CHANGING TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines -
provide performance statistics over specified time periods.
o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its
category.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment
in the fund. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or information may also compare the fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of
fluctuation of principal value, a risk generally not present in an investment
in a CD issued by a bank. For example, as the general level of interest rates
rise, the value of the fund's fixed-income investments, if any, as well as
the value of its shares that are based upon the value of such portfolio
investments, can be expected to decrease. Conversely, when interest rates
decrease, the value of the fund's shares can be expected to increase. CDs are
frequently insured by an agency of the U.S. government. An investment in the
fund is not insured by any federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the fund to calculate its figures. In
addition, there can be no assurance that the fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
- ------------------------------------------------------------------------------
The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to
have a projected amount available in the future to fund a child's college
education. (Projected college cost estimates are based upon current costs
published by the College Board.) The Franklin Retirement Planning Guide leads
you through the steps to start a retirement savings program. Of course, an
investment in the fund cannot guarantee that these goals will be met.
The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of
the oldest mutual fund organizations and now services more than 3 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined
forces with Templeton, a pioneer in international investing. The Mutual
Series team, known for its value-driven approach to domestic equity
investing, became part of the organization four years later. Together, the
Franklin Templeton Group has over $216 billion in assets under management for
more than 6 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 117 U.S. based open-end
investment companies to the public. The fund may identify itself by its
NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the fund are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has
already begun making necessary software changes to help the computer systems
that service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues
to seek reasonable assurances from all major hardware, software or
data-services suppliers that they will be Year 2000 compliant on a timely
basis. Resources is also beginning to develop a contingency plan, including
identification of those mission critical systems for which it is practical to
develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use of
normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
DESCRIPTION OF BOND RATINGS
- ------------------------------------------------------------------------------
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (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.
STANDARD & POOR'S CORPORATION (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.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually their promissory obligations not having an original maturity
in excess of nine months. Moody's employs the following designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
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.
FRANKLIN VALUE FUND
FRANKLIN VALUE INVESTORS TRUST
CLASS A, B & C
STATEMENT OF
ADDITIONAL INFORMATION
MARCH 1, 1999
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the fund's prospectus.
The fund's prospectus, dated March 1, 1999, which we may amend from time to
time, contains the basic information you should know before investing in the
fund. You should read this SAI together with the fund's prospectus.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended October 31, 1998, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goal and Strategies
Risks
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Bond Ratings
- ------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- ------------------------------------------------------------------------------
GOAL AND STRATEGIES
- ------------------------------------------------------------------------------
The fund's investment goal is long-term total return. This goal is
fundamental, which means it may not be changed without shareholder approval.
Income is a secondary consideration of the fund, although it is not part of
the fund's goal.
The fund tries to achieve its objective by investing at least 65% of its
assets in securities of companies that the fund's manager believes are
undervalued. The securities the fund may invest in include common and
preferred stocks, warrants, secured and unsecured bonds, and notes.
The fund's manager may take into account a variety of factors in order to
determine whether to buy or hold securities, including: low price to earnings
ratio relative to the market, industry group or earnings growth; low price
relative to book value or cash flow; valuable franchises, patents,
trademarks, trade names, distribution channels or market share for particular
products or services, tax loss carryforwards, or other intangibles that may
not be reflected in stock prices; ownership of understated or underutilized
tangible assets such as land, timber or minerals; underutilized cash or
investment assets; and unusually high current income. These criteria and
others, alone and in combination, may identify companies that are attractive
to financial or strategic acquirers (i.e. takeover candidates) or companies
that have suffered sharp price declines but in the manager's opinion, still
have significant potential ("fallen angels"). Purchases may include companies
in cyclical businesses, turnarounds and companies emerging from bankruptcy.
Purchase decisions may also be influenced by company stock buy-backs and
insider purchases and sales.
Below is a description of various types of securities that the fund may buy.
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. The purchaser of an equity security typically
receives an ownership interest in the company as well as certain voting
rights. The owner of an equity security may participate in a company's
success through the receipt of dividends which are distributions of earnings
by the company to its owners. Equity security owners may also participate in
a company's success or lack of success through increases or decreases in the
value of the company's shares as traded in the public trading market for such
shares. Equity securities generally take the form of common stock or
preferred stock. Preferred stockholders typically receive greater dividends
but may receive less appreciation than common stockholders and may have
greater voting rights as well.
DEBT SECURITIES represent an obligation of the issuer to repay a loan of
money to it, and generally, provide for the payment of interest. These
include bonds, notes and debentures; commercial paper; time deposits; and
bankers' acceptances. A debt security typically has a fixed payment schedule
that obligates the issuer to pay interest to the lender and to return the
lender's money over a certain time period. A company typically meets its
payment obligations associated with its outstanding debt securities before it
declares and pays any dividend to holders of its equity securities. Bonds,
notes, debentures and commercial paper differ in the length of the issuer's
payment schedule, with bonds carrying the longest repayment schedule and
commercial paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the fund's net asset value.
HIGH YIELD SECURITIES The fund may invest up to 25% of its net assets in
lower quality, fixed-income and convertible securities (those rated BB or
lower by Standard & Poor's Corporation (S&P) or Ba or lower by Moody's
Investors Services, Inc. (Moody's) and unrated securities of comparable
quality, that the manager believes possess intrinsic values in excess of the
current market prices of those securities. Lower quality securities are
commonly called "junk bonds." Lower quality 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 quality 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.
ZERO COUPON SECURITIES AND PAY-IN-KIND BONDS Zero coupon or deferred interest
securities are debt obligations that do not entitle the holder to any
periodic payments of interest before maturity or a specified date when the
securities begin paying current interest (the "cash payment date") and
therefore are generally issued and traded at a discount from their face
amounts or par value. The discount varies depending on the time remaining
until maturity or cash payment date, prevailing interest rates, liquidity of
the security and the perceived credit quality of the issuer. The discount, in
the absence of financial difficulties of the issuer, typically decreases as
the final maturity or cash payment date of the security approaches. The
market prices of zero coupon securities are generally more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do non-zero
coupon or deferred interest securities having similar maturities and credit
quality. Current federal income tax law requires that a holder of a zero
coupon security report as income each year the portion of the original issue
discount on the security that accrues that year, even though the holder
receives no cash payments of interest during the year.
Pay-in-kind bonds are securities that pay interest through the issuance of
additional bonds. The fund will be deemed to receive interest over the life
of the bonds and be treated as if interest were paid on a current basis for
federal income tax purposes, although no cash interest payments are received
by the fund until the cash payment date or until the bonds mature.
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.
ENHANCED CONVERTIBLES. The fund may invest in convertible preferred stocks
that offer enhanced yield features, such as Preferred Equity Redemption
Cumulative Stocks ("PERCS"), which provide an investor, such as the fund,
with the opportunity to earn higher dividend income than is available on a
company's common stock. PERCS are preferred stocks that generally feature a
mandatory conversion date, as well as a capital appreciation limit which is
usually expressed in terms of a stated price. Most PERCS expire three years
from the date of issue, at which time they are convertible into common stock
of the issuer. PERCS are generally not convertible into cash at maturity.
Under a typical arrangement, after three years PERCS convert into one share
of the issuer's common stock if the issuer's common stock is trading at a
price below that set by the capital appreciation limit, and into less than
one full share if the issuer's common stock is trading at a price above that
set by the capital appreciation limit. The amount of that fractional share of
common stock is determined by dividing the price set by the capital
appreciation limit by the market price of the issuer's common stock. PERCS
can be called at any time prior to maturity, and hence do not provide call
protection. If called early, however, the issuer must pay a call premium over
the market price to the investor. This call premium declines at a preset rate
daily, up to the maturity date.
The fund may also invest in other enhanced convertible securities. These
include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities), and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all have the
following features: they are issued by the company, the common stock of which
will be received in the event the convertible preferred stock is converted,
unlike PERCS they do not have a capital appreciation limit, they seek to
provide the investor with high current income with some prospect of future
capital appreciation, they are typically issued with three to four-year
maturities, they typically have some built-in call protection for the first
two to three years, investors have the right to convert them into shares of
common stock at a preset conversion ratio or hold them until maturity, and
upon maturity they will automatically convert to either cash or a specified
number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked
as senior or subordinated debt in the issuer's corporate structure according
to the terms of the debt indenture. There may be additional types of
convertible securities not specifically referred to herein which may be
similar to those described above in which the fund may invest, consistent
with its objectives and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the fund. The fund may have difficulty disposing
of such securities because there may be a thin trading market for a
particular security at any given time. Reduced liquidity may have an adverse
impact on market price and the fund's ability to dispose of particular
securities, when necessary, to meet the fund's liquidity needs or in response
to a specific economic event, such as the deterioration in the
creditworthiness of an issuer. Reduced liquidity in the secondary market for
certain securities may also make it more difficult for the fund to obtain
market quotations based on actual trades for purposes of valuing the fund's
portfolio. The fund, however, intends to acquire liquid securities, though
there can be no assurances that this will be achieved.
SYNTHETIC CONVERTIBLES. The fund may invest a portion of its assets in
"synthetic convertible" securities. A synthetic convertible is created by
combining distinct securities which together possess the two principal
characteristics of a true convertible security, i.e., fixed income and the
right to acquire the underlying equity security. This combination is achieved
by investing in nonconvertible fixed-income securities and in warrants or
stock or stock index call options which grant the holder the right to
purchase a specified quantity of securities within a specified period of time
at a specified price or to receive cash in the case of stock index options.
Synthetic convertible securities are generally not considered to be "Equity
Securities" for purposes of the fund's investment policy regarding those
securities.
Synthetic convertible securities differ from the true convertible security in
several respects. The value of a synthetic convertible is the sum of the
values of its fixed-income component and its convertibility component. Thus,
the values of a synthetic convertible and a true convertible security will
respond differently to market fluctuations. Further, although the manager
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 the manager
determines that such a combination would better promote the fund's investment
objectives. In addition, the component parts of a synthetic convertible
security may be purchased simultaneously or separately; and the holder of a
synthetic convertible faces the risk that the price of the stock, or the
level of the market index underlying the convertibility component will
decline.
FOREIGN SECURITIES The fund may invest in foreign securities, generally by
purchasing sponsored or unsponsored American Depositary Receipts (ADRs),
Global Depositary Receipts (GDRs), and European Depositary Receipts (EDRs).
The fund may also purchase the securities of foreign issuers directly in
foreign markets if, in the manager's judgment, an established public trading
market exists.
DEPOSITARY RECEIPTS Many securities of foreign issuers are represented by
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
and Global Depositary Receipts ("GDRs") (collectively "Depositary Receipts").
ADRs evidence ownership of, and represent the right to receive, securities of
foreign issuers deposited in a domestic bank or trust company or a foreign
correspondent bank. EDRs and GDRs are typically issued by foreign banks or
trust companies, although they also may be issued by U.S. banks or trust
companies, and evidence ownership of underlying securities issued by either a
foreign or a U.S. corporation. Generally, Depositary Receipts in registered
form are designed for use in the U.S. securities market and Depositary
Receipts in bearer form are designed for use in securities markets outside
the U.S.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on
exchanges or over-the-counter. While ADRs do not eliminate all the risk
associated with foreign investments, by investing in ADRs rather than
directly in the stock of foreign issuers, the Fund will avoid currency risks
during the settlement period for either purchases or sales. In general, there
is a large, liquid market in the U.S. for ADRs quoted on a national
securities exchange or on NASDAQ. The information available for ADRs is
subject to the accounting, auditing and financial reporting standards of the
U.S. market or exchange on which they are traded, which standards are more
uniform and more exacting than those to which many foreign issuers may be
subject. EDRs and GDRs may not necessarily be denominated in the same
currency as the underlying securities into which they may be converted.
Depositary Receipts may be issued under sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of Depositary Receipts. In unsponsored programs, the
issuer may not be directly involved in the creation of the program. Although
regulatory requirements with respect to sponsored and unsponsored programs
are generally similar, in some cases it may be easier to obtain financial
information from an issuer that has participated in the creation of a
sponsored program. Accordingly, there may be less information available
regarding issuers of securities underlying unsponsored programs and there may
not be a correlation between such information and the market value of the
Depositary Receipts.
TRADE CLAIMS Trade claims are bought from creditors of companies in financial
difficulty who seek to reduce the number of debt obligations they are owed.
Such trade creditors generally sell their claims in an attempt to improve
their balance sheets and reduce uncertainty regarding payments. For buyers,
trade claims offer the potential for profits since they are often purchased
at a significantly discounted value and, consequently, have the potential for
higher income and capital appreciation should the debt issuer's financial
position improve. Trade claims are generally liquid, as there is a secondary
market, but the board of trustees will monitor their liquidity. An investment
in trade claims is speculative and there can be no guarantee that the debt
issuer will ever be able to satisfy the obligation. Further, trading in trade
claims is not regulated by federal securities laws but primarily by
bankruptcy and commercial laws. Because trade claims are unsecured
obligations, holders may have a lower priority than secured or preferred
creditors. At the present time, however, the fund intends to limit these
investments to no more than 5% of its net assets.
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the fund's
portfolio in a temporary defensive manner. Under such circumstances, the fund
may invest up to 100% of its assets in: (1) securities of the U.S. government
and certain of its agencies or instrumentalities that mature in one year or
less from the date of purchase, including U.S. Treasury bills, notes and
bonds, and securities of the Government National Mortgage Association, the
Federal Housing Administration and other agency or instrumentality issues or
guarantees that are supported by the full faith and credit of the U.S.
government; (2) obligations issued or guaranteed by other U.S. government
agencies or instrumentalities, some of which are supported by the right of
the issuer to borrow from the U.S. government (e.g., obligations of the
Federal Home Loan Banks) and some of which are backed by the credit of the
issuer itself (e.g., obligations of the Student Loan Marketing Association);
(3) bank obligations, including negotiable and non-negotiable CDs (subject to
the 10% aggregate limit on the fund's investment in illiquid securities),
letters of credit and bankers' acceptances, or instruments secured by these
types of obligations, issued by banks and savings institutions that are
subject to regulation by the U.S. government, its agencies or
instrumentalities and that have assets of over $1 billion, unless these types
of obligations are guaranteed by a parent bank that has total assets in
excess of $5 billion; (4) commercial paper considered by the manager to be of
high quality, which must be rated within the two highest rating categories by
S&P or Moody's or, if unrated, issued by a company having an outstanding debt
issue rated at least AA by S&P or Aa by Moody's; and (5) corporate
obligations including, but not limited to, corporate notes, bonds and
debentures considered by the manager to be high grade or that are rated
within the two highest rating categories by S&P or Moody's.
DERIVATIVE SECURITIES Although the fund has no present intention of investing
in the following, it has the authority to enter into options, futures and
options on futures, which are generally considered "derivative securities."
OPTIONS. The Fund may write covered call options that are listed on a
national securities exchange and buy listed options on securities and
securities indices. The Fund may also write covered call options and buy put
options that are traded over-the-counter ("OTC"). In addition, the fund may
enter into closing transactions with respect to its open option positions.
The fund will not invest in any stock options or stock index options if the
option premiums paid on its open positions exceed 5% of the value of the
fund's total assets. The fund may enter into closing purchase transactions
with respect to its open option positions.
CALL OPTIONS. The fund may buy call options on securities which it intends to
buy. By buying these options, the fund limits the risk of a substantial
increase in the market price of these securities. The fund may also buy call
options on securities held in its portfolio and on which it has written call
options as described below.
A writer of a call option retains the amount of the premium paid by the buyer
of the option regardless of whether it is exercised. The premium amount
reflects, among other things, the relationship of the exercise price to the
market price, the volatility of the underlying security, the remaining term
of the option, supply and demand, and interest rates. A premium received by
the writer of a covered call option may be offset by a decline in the market
value of the underlying security during the option period. Because the writer
of a call option may be assigned an exercise notice at any time before the
termination of the call, the writer may have no control over when the
underlying securities must be sold. If a call option is exercised, the writer
experiences a profit or loss from the sale of the underlying security. Also,
by writing a covered call option, the fund gives up the opportunity to profit
from any price increase in the underlying security above the option exercise
price while the option is in effect.
Unless a writer of an option has already been notified of the exercise of an
option, the writer may terminate its obligation by buying an option of the
same series as the option previously written. This is known as a "closing
purchase transaction," and it allows the writer's position to be canceled by
the clearing corporation. A holder of an option liquidates its position by
selling an option of the same series as the option previously purchased,
which is known as a "closing sale transaction." There is no guarantee that
either a closing purchase or a closing sale transaction can be completed.
The fund may conduct a closing transaction on a written call option to permit
the fund to (i) write another call option on the underlying security with
either a different exercise price, expiration date or both or (ii) use the
cash or proceeds from the sale of the underlying security for other fund
investments. If the fund wants to sell a security from its portfolio on which
it has written a call option, it may conduct a closing transaction before or
at the same time as it sells the security. Profit or loss from such a sale
will depend on whether the amount received is more or less than the premium
paid for the call option plus any related transaction costs.
If the price of a closing transaction is less than the premium received from
writing the option or the premium paid to buy the option, the fund makes a
profit on the transaction; if the price is more, the fund realizes a loss.
Because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the purchase of a call option is likely to be offset by appreciation of
the underlying security owned by the fund.
PUT OPTIONS. The fund may also buy put options. The fund may enter into
closing sale transactions with respect to such options, exercise them, or
permit them to expire. The fund may buy a put option on an underlying
security (a "protective put") owned by the fund. This allows the fund to sell
the underlying security at the put exercise price, regardless of any decline
in the underlying security's market price, until the put expires. If the
investment manger decides to hold the underlying security for tax
considerations, for example, a put option may be purchased in order to
protect any unrealized appreciation. Of course any capital gain realized when
the security is sold would be reduced by the premium paid for the put option
and any transaction costs.
OPTIONS ON INDICES. Options on indices, which are described in the
prospectus, give the holder the right to receive cash equal to the difference
between the closing price of the index and the exercise price of the option,
expressed in dollars, multiplied by a specified number. Options on indices
differ from options on individual securities in that all settlements are in
cash, and gain or loss depends on price movements in the stock market
generally (or in a particular industry or segment of the market) rather than
on price movements in individual securities.
FORWARD CONVERSIONS. In a forward conversion, the fund buys securities and
writes call options and buys put options on such securities. By purchasing
puts, the fund protects the underlying security from depreciation in value.
By selling or writing calls on the same security, the fund receives premiums
which may offset part or all of the cost of purchasing the puts while
foregoing the opportunity for appreciation in the value of the underlying
security. The fund will not exercise a put it has purchased while a call
option on the same security is outstanding.
Although it is generally intended that the exercise price of put and call
options would be identical, situations might occur in which some option
positions are acquired with different exercise prices. Therefore, the fund's
return may depend in part on movements in the price of the underlying
security.
SPREAD AND STRADDLE OPTIONS TRANSACTIONS. In "spread" transactions, the fund
buys and writes a put or buys and writes a call on the same underlying
security with the options having different exercise prices and/or expiration
dates. In "straddles," the fund purchases or writes combinations of put and
call options on the same security. When the fund engages in spread and
straddle transactions, it seeks to profit from differentials in the option
premiums paid and received and in the market prices of the related options
positions when they are closed out or sold. Because these transactions
require the fund to buy and/or write more than one option simultaneously, the
fund's ability to enter into such transactions and to liquidate its positions
when necessary or deemed advisable may be more limited than if the fund was
to buy or sell a single option. Similarly, costs incurred by the fund in
connection with these transactions will in many cases be greater than if the
fund was to buy or sell a single option. The fund intends to limit these
transactions to no more than 5% of the fund's net assets.
FUTURES. The fund may enter into contracts for the purchase or sale for
future delivery of securities, contracts based upon financial indices, and
the fund may buy options on such contracts ("financial futures"). Financial
futures contracts are contracts that obligate the long or short holder to
take or make delivery of a specified quantity of a financial instrument, such
as a security, or the cash value of a securities index during a specified
future period at a specified price. A "sale" of a futures contract means the
seller has a contractual obligation to deliver the securities described in
the contract at a specified price on a specified date. A "purchase" of a
futures contract means the buyer has a contractual obligation to acquire the
securities described in the contract at a specified price on a specified
date. Futures contracts have been designed by exchanges that have been
designated "contracts markets" by the Commodity Futures Trading Commission
("CFTC") and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market. At the
present time, the fund intends to limit these investments to no more than 5%
of its net assets.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same
month. Such a transaction, which is effected through a member of an exchange,
cancels the obligation to take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded,
the fund will incur brokerage fees when it purchases or sells futures
contracts.
The fund will not engage in transactions in futures contracts or related
options for speculation. The fund will not enter into any stock index future
or related option if, immediately thereafter, more than one-third of the
fund's net assets would be represented by futures contracts or related
options. In addition, the fund may not buy or sell futures contracts or buy
or sell related options if, immediately thereafter, the sum of the amount of
margin deposits on its existing futures and related options positions, and
premiums paid for related options, would exceed 5% of the market value of the
fund's total assets.
The purpose of the acquisition or sale of a futures contract is to attempt to
protect the fund from fluctuations in price of portfolio securities without
actually buying or selling the underlying security. To the extent the fund
enters into futures contracts or related options, it will deposit in a
segregated account with its custodian bank cash or other U.S. Treasury
obligations equal to a specified percentage of the value of the futures
contract (the "initial margin"), as required by the relevant contract market
and futures commission merchant. The futures contract will be
marked-to-market daily. If the value of the futures contract declines
relative to the fund's position, the fund will be required to pay the futures
commission merchant an amount equal to the change in value.
STOCK INDEX FUTURES CONTRACTS. The fund may purchase and sell stock index
futures contracts traded on domestic exchanges and, to the extent such
contracts have been approved by the CFTC for sale to customers in the U.S.,
on foreign exchanges. A stock index futures contract obligates the seller to
deliver (and the purchaser to take) an amount of cash equal to a specific
dollar amount times the difference between the value of a specific stock
index at the close of the last trading day of the contract and the price at
which the agreement is made. Open futures contracts are valued on a daily
basis and the fund may be obligated to provide or receive cash reflecting any
decline or increase in the contract's value. No physical delivery of the
underlying stocks in the index is made in the future.
The fund may sell stock index futures contracts in anticipation of or during
a market decline in an attempt to offset the decrease in market value of its
securities that might otherwise result. When the fund is not fully invested
in stocks and anticipates a significant market advance, it may purchase stock
index futures in order to gain rapid market exposure that may offset
increases in the cost of common stocks that it intends to purchase.
FUTURE DEVELOPMENTS. The fund may take advantage of opportunities in the area
of options and futures contracts and any other derivative investments that
are not presently contemplated for use by the fund or that are not currently
available but which may be developed, to the extent such opportunities are
both consistent with the fund's investment objective and legally permissible
for the fund. Prior to investing in any such investment vehicle, the fund
will supplement its prospectus, if appropriate.
STRUCTURED NOTES The fund may invest up to 5% of its total assets in
structured notes. Structured notes entitle their holders to receive some
portion of the principal or interest payments that would be due on
traditional debt obligations. A zero coupon bond, which is the right to
receive only the principal portion of a debt security, is a simple form of
structured note. A structured note's performance or value may be linked to a
change in return, interest rate, or value at maturity of the change in an
identified or "linked" equity security, currency, interest rate, index or
other financial indicator. The holder's right to receive principal or
interest payments on a structured note may also vary in timing or amount,
depending on changes in certain rates of interest or other external events.
LOAN PARTICIPATIONS Through a loan participation, the fund can buy from a
lender a portion of a larger loan that it has made to a borrower. By buying
loan participations, the fund may be able to acquire interests in loans from
financially strong borrowers that the fund could not otherwise acquire. These
instruments are typically interests in floating or variable rate senior loans
to U.S. corporations, partnerships, and other entities. Generally, loan
participations are sold without guarantee or recourse to the lending
institution and are subject to the credit risks of both the borrower and the
lending institution. While loan participations generally trade at par value,
if the borrowers have credit problems, some may sell at discounts. To the
extent the borrower's credit problems are resolved, the loan participations
may then appreciate in value. These loan participations, however, carry
substantially the same risk as that for defaulted debt obligations and may
cause loss of the entire investment. Most loan participations are illiquid
and therefore will be included in the fund's limitation on illiquid
investments.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES The fund may invest in
mortgage-backed securities, including collateralized mortgage obligations,
which represent direct or indirect participation in, or are collateralized by
and payable from, mortgage loans secured by real property. In addition, the
fund may buy asset-backed securities, which represent participation in, or
are secured by and payable from, assets such as motor vehicle installment
sale contracts, installment loan contracts, leases of various types of real
and personal property, receivables from revolving credit (credit card)
agreements and other categories of receivables. These securities are
generally issued by trusts and special purpose corporations.
RESTRICTED SECURITIES Some of the securities the fund buys are considered
"restricted securities." The fund's investment in restricted securities may
not exceed 15% of its net assets. Restricted securities are securities with
legal or contractual restrictions on resale, including securities that are
not registered under the 1933 Act. Securities not registered under the 1933
Act may not be sold without first being registered, unless there is an
available exemption under the 1933 Act. Normally the costs of registering
these securities is borne by the issuer. Restricted securities involve
certain risks, including the risk that a secondary market may not exist when
a holder wants to sell them. In addition, the price and valuation of these
securities may reflect a discount because they are perceived as having less
liquidity than similar securities that are not restricted.
As with other securities in the fund's portfolio, if no readily available
market quotations exist for restricted securities, they will be valued at
fair value in accordance with procedures adopted by the board of trustees. If
the fund suddenly has to sell restricted securities, time constraints or a
lack of interested, qualified buyers may prevent the fund from receiving the
carrying value of the securities at the time of the sale. Alternatively, the
manager may sell unrestricted securities it might have retained if the fund
had only held unrestricted securities.
WARRANTS A warrant is typically a long-term option issued by a corporation
which gives the holder the privilege of buying a specified number of shares
of the underlying common stock at a specified exercise price at any time on
or before an expiration date. Stock index warrants entitle the holder to
receive, upon exercise, an amount in cash determined by reference to
fluctuations in the level of a specified stock index. If the fund does not
exercise or dispose of a warrant prior to its expiration, it will expire
worthless. Further, the fund does not intend to invest directly in warrants
(valued at the lower of cost or market) in excess of 5% of the value of the
fund's net assets. No more than 2% of the value of the fund's net assets may
be invested in warrants (valued at the lower of cost or market) which are not
listed on the New York or American Stock Exchange.
SHORT-SELLING In a short sale, the fund sells a security it does not own in
anticipation of a decline in the market value of that security. The security
sold must be listed on a national exchange. To complete the transaction, the
fund must borrow the security to make delivery to the buyer. The fund is then
obligated to replace the security borrowed by purchasing it at the market
price at the time of replacement. Until the security is replaced, the fund
must pay the lender any dividends or interest that accrue during the period
of the loan. To borrow the security, the fund may also be required to pay a
premium, which would increase the cost of the security sold. The proceeds of
the short sale will be retained by the broker, to the extent necessary to
meet margin requirements, until the short position is closed out.
The fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which
the fund replaces the borrowed security, and the fund will realize a gain if
the security declines in price between those same dates. The amount of any
gain will be decreased, and the amount of any loss increased, by the amount
of any premium, dividends or interest the fund is required to pay in
connection with the short sale.
In addition to the short sales discussed above, the fund may also make short
sales "against the box." A short sale is "against the box" to the extent that
the fund contemporaneously owns or has the right to obtain at no added cost
securities identical to those sold short. The fund at no time will have more
than 15% of the value of its net assets in deposits on short sales against
the box.
No securities will be sold short if, after the sale, the total market value
of all the fund's open short positions, including short sales against the
box, would exceed 25% of the value of the fund's net assets. In addition,
short sales of the securities of any one issuer may not exceed the lesser of
2% of the fund's net assets or 2% of the securities of any class of the
issuer.
The fund will place in a segregated account with its custodian bank an amount
of cash or U.S. government securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short
and (b) any cash or U.S. government securities required to be deposited as
collateral with the broker in connection with the short sale (not including
the proceeds from the short sale). The segregated account will be
marked-to-market daily and at no time will the amount deposited in the
segregated account and with the broker as collateral be less than the market
value of the securities at the time they were sold short.
NON-DIVERSIFICATION As a non-diversified investment company under the 1940
Act, the fund may invest more than 5% and up to 25% of its assets in the
securities of any one issuer at the time of purchase. For purposes of the
Code, however, as of the last day of any fiscal quarter, the fund may not
have more than 25% of its total assets invested in any one issuer, and, with
respect to 50% of its total assets, the fund may not have more than 5% of its
total assets invested in any one issuer, nor may it own more than 10% of the
outstanding voting securities of any one issuer. These limitations do not
apply to investments in securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities or to securities of
investment companies that qualify as regulated investment companies under the
Code.
SECURITIES LENDING The fund may lend to broker-dealers portfolio securities
with an aggregate market value up to 25% of its total assets. Such loans must
be secured by collateral (consisting of any combination of cash, U.S.
government securities or irrevocable letters of credit) in an amount at least
equal (on a daily marked-to-market basis) to the current market value of the
securities loaned. The fund may terminate the loans at any time and obtain
the return of the securities. The fund will continue to receive any interest
or dividends paid on the loaned securities and will continue to have voting
rights with respect to the securities.
REPURCHASE AGREEMENTS The fund will generally have a portion of its assets in
cash or cash equivalents for a variety of reasons including waiting for a
special investment opportunity or taking a defensive position. To earn income
on this portion of its assets, the fund may enter into repurchase agreements
with certain banks and broker-dealers. Under a repurchase agreement, the fund
agrees to buy a U.S. government security from one of these issuers and then
to sell the security back to the issuer after a short period of time
(generally, less than seven days) at a higher price. The bank or
broker-dealer must transfer to the fund's custodian, securities with an
initial value of at least 102% of the dollar amount invested by the fund in
each repurchase agreement. Repurchase agreements may involve risks in the
event of default or insolvency of the seller, including possible delays or
restrictions upon the fund's ability to dispose of the underlying securities.
The fund will enter into repurchase agreements only with parties who meet
creditworthiness standards approved by the fund's board of trustees, i.e.,
banks or broker-dealers which have been determined by the manager to present
no serious risk of becoming involved in bankruptcy proceedings within the
time frame contemplated by the repurchase transaction.
ILLIQUID INVESTMENTS The fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally
securities that cannot be sold within seven days in the normal course of
business at approximately the amount at which the fund has valued them.
BORROWING The fund does not borrow money or mortgage or pledge any of its
assets, except that it may borrow up to 331/3% of its total assets (including
the amount borrowed) in order to meet redemption requests that might
otherwise require the untimely disposition of portfolio securities or for
other temporary or emergency purposes and may pledge its assets in connection
therewith. The fund will not make any additional investments while any
borrowings exceed 5% of its total assets.
RISKS
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There is no assurance that the fund will meet its investment goal.
Investments in securities that have potential to increase in value may be
subject to a greater degree of risk and may be more volatile than other types
of investments.
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 market as a whole.
VALUE INVESTING RISK 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.
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.
FOREIGN SECURITIES You should consider carefully the substantial risks
involved in securities of companies of foreign nations, which are in addition
to the usual risks inherent in domestic investments.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or
financial reporting standards, and auditing practices and requirements may
not be comparable to those applicable to U.S. companies. A fund, therefore,
may encounter difficulty in obtaining market quotations for purposes of
valuing its portfolio and calculating its net asset value. Foreign markets
have substantially less volume than the New York Stock Exchange ("NYSE"), and
securities of some foreign companies are less liquid and more volatile than
securities of comparable U.S. companies. Commission rates in foreign
countries, which are generally fixed rather than subject to negotiation as in
the U.S., are likely to be higher. In many foreign countries there is less
government supervision and regulation of stock exchanges, brokers, and listed
companies than in the U.S.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less social, political, and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict
the fund's investment opportunities, including restrictions on investment in
issuers or industries deemed sensitive to national interests; (iv) foreign
taxation; (v) the absence of developed legal structures governing private or
foreign investment or allowing for judicial redress for injury to private
property; (vi) the absence, until recently in certain Eastern European
countries, of a capital market structure or market-oriented economy; and
(vii) the possibility that recent favorable economic developments in Eastern
Europe may be slowed or reversed by unanticipated political or social events
in such countries.
In addition, many countries in which the fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency, and balance of payments
position.
DEPOSITARY RECEIPTS RISK Depositary receipts, such as American Depositary
Receipts and Global Depositary Receipts, reduce but do not eliminate all the
risk inherent in investing in the securities of foreign issuers. To the
extent that the fund acquires Depositary Receipts through banks which do not
have a contractual relationship with the foreign issuer of the security
underlying the Depositary Receipt to issue and service such Depositary
Receipts, there may be an increased possibility that the fund would not
become aware of and be able to respond to corporate actions such as stock
splits or rights offerings involving the foreign issuer in a timely manner.
CURRENCY RISK The fund's management endeavors to buy and sell foreign
currencies on as favorable a basis as practicable. Some price spread on
currency exchange (to cover service charges) may be incurred, particularly
when the fund changes investments from one country to another or when
proceeds of the sale of shares in U.S. dollars are used for the purchase of
securities in foreign countries. Also, some countries may adopt policies that
would prevent the fund from transferring cash out of the country or withhold
portions of interest and dividends at the source. There is the possibility of
cessation of trading on national exchanges, expropriation, nationalization,
or confiscatory taxation, withholding, and other foreign taxes on income or
other amounts, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country), default in foreign
government securities, political or social instability, or diplomatic
developments that could affect investments in securities of issuers in
foreign nations.
The fund may be affected either favorably or unfavorably by fluctuations in
the relative rates of exchange between the currencies of different nations,
by exchange control regulations, and by indigenous economic and political
developments. Some countries in which the fund may invest may also have fixed
or managed currencies that are not free-floating against the U.S. dollar.
Further, certain currencies may not be internationally traded.
Certain of these currencies have experienced a steady devaluation relative to
the U.S. dollar. Any devaluations in the currencies in which the fund's
portfolio securities are denominated may have a detrimental impact on the
fund. Through the fund's flexible policy, management endeavors to avoid
unfavorable consequences and to take advantage of favorable developments in
particular nations where, from time to time, it places the fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove
profitable and others may not. No assurance can be given that profits, if
any, will exceed losses.
The board of trustees considers at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions which
would affect the liquidity of the fund's assets maintained with custodians in
foreign countries, as well as the degree of risk from political acts of
foreign governments to which such assets may be exposed. The board of
trustees also considers the degree of risk involved through the holding of
portfolio securities in domestic and foreign securities depositories.
However, in the absence of willful misfeasance, bad faith, or gross
negligence on the part of the manager, any losses resulting from the holding
of the fund's portfolio securities in foreign countries and/or with
securities depositories will be at the risk of the shareholders. No
assurance can be given that the board of trustees' appraisal of the risks
will always be correct or that such exchange control restrictions or
political acts of foreign governments might not occur.
EURO RISK On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. The transition and the
elimination of currency risk among EMU countries may change the economic
environment and behavior of investors, particularly in European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect
on the fund, the fund's manager and its affiliated services providers are
taking steps they believe are reasonably designed to address the euro issue.
INTEREST RATE 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, consequently, its share price. Rising
interest rates, which often occur during time of inflation of a growing
economy, are likely to cause the face value of a debt security to decrease,
having a negative effect on the value of the fund's shares. Of course,
interest rtes have increased and decreased, sometimes very dramatically, in
the past. These changes are likely to occur again in the future at
unpredictable times.
LOWER-RATED SECURITIES Although they may offer higher yields than do higher
rated securities, low rated and unrated debt securities generally involve
greater volatility of price and risk to principal and income, including the
possibility of default by, or bankruptcy or, the issuers of the securities.
In addition, the markets in which low rated and unrated debt securities are
traded are more limited than those in which higher rated securities are
traded. The existence of limited markets for particular securities may
diminish a fund's ability to sell the securities at fair value either to meet
redemption requests or to respond to a specific economic event such as a
deterioration in the creditworthiness of the issuer. Reduced secondary market
liquidity for certain low rated or unrated debt securities may also make it
more difficult for a fund to obtain accurate market quotations for the
purposes of valuing the fund's portfolio. Market quotations are generally
available on many low rated or unrated securities only from a limited number
of dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated dent
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated debt securities may be more complex
than for issuers of higher rated securities. The ability of a fund to achieve
its investment goal may, to the extent of investment in low rated debt
securities, be more dependent upon such creditworthiness analysis than would
be the case if the fund were invested in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low rated debt securities have been found to be
less sensitive to interest rate changes than higher rated investments, but
more sensitive to adverse economic downturns or individual corporate
developments. A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a decline in low rated debt
securities prices because the advent of a recession could lessen the ability
of a highly leveraged company to make principal and interest payments on its
debt securities. If the issuer of low rated debt securities defaults, a fund
may incur additional expenses to seek recovery.
The risk factors above also apply to lower-quality zero-coupon, deferred
interest and pay-in-kind securities. These securities have an additional
risk, however, because unlike securities that pay interest throughout the
time until maturity, the fund will not receive any cash until the cash
payment date. If the issuer defaults, the fund may not obtain any return on
its investment.
Zero-coupon or deferred interest securities are debt obligations that make no
periodic interest payments before maturity or a specified date when the
securities begin paying current interest (the "cash payment date"), and
therefore are generally issued and traded at a discount from their face
amount or par value. The discount varies depending on the time remaining
until maturity or the cash payment date, as well as prevailing interest
rates, liquidity of the security, and the perceived credit quality of the
issuer. The discount, in the absence of financial difficulties of the issuer,
typically decreases as the final maturity or cash payment date approaches.
The value of zero-coupon securities is generally more volatile than the value
of other fixed-income securities that pay interest periodically. Zero-coupon
securities are also likely to respond to changes in interest rates to a
greater degree than other fixed-income securities having similar maturities
and credit quality.
Current federal income tax law requires a holder of a zero-coupon security to
report as income each year the portion of original issue discount on the
security that accrues that year, even though the holder receives no cash
payments of interest during the year. Pay-in-kind securities pay interest by
issuing more bonds. The fund is deemed to receive interest over the life of
these bonds and is treated as if the interest were paid on a current basis
for federal income tax purposes, although the fund does not receive any cash
interest payments until maturity or the cash payment date. Accordingly,
during times when the fund does not receive any cash interest payments on its
zero-coupon, deferred interest or pay-in-kind securities, it may have to sell
portfolio securities to meet distribution requirements and these sales may be
subject to the risk factors discussed above. The fund is not limited in the
amount of its assets that may be invested in these types of securities.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES RISK Mortgage-backed and
asset-backed securities are often subject to more rapid repayment than their
stated maturity dates would indicate because of the pass-through of
prepayments of principal on the underlying loans. During periods of declining
interest rates, prepayment of loans underlying mortgage-backed and
asset-backed securities can be expected to accelerate, and thus impair the
fund's ability to reinvest the returns of principal at comparable yields.
Accordingly, the market value of these securities will vary with changes in
market interest rates generally and in yield differentials among various
kinds of U.S. government securities and other mortgage-backed and
asset-backed securities. Asset-backed securities present certain additional
risks that are not presented by mortgage-backed securities because
asset-backed securities generally do not have the benefit of a security
interest in collateral that is comparable to mortgage assets. There is the
possibility that, in some cases, recoveries on repossessed collateral may not
be available to support payments on these securities.
OPTIONS, FUTURES AND OPTIONS ON FUTURES The fund's ability to hedge
effectively all or a portion of its securities through transactions in
options on stock indices, financial futures and related options depends on
the degree to which price movements in the underlying index or underlying
securities correlate with price movements in the relevant portion of the
fund's portfolio. Inasmuch as these securities will not duplicate the
components of the index or such underlying securities, the correlation will
not be perfect. Consequently, the fund bears the risk that the prices of the
securities being hedged will not move in the same amount as the hedging
instrument. It is also possible that there may be a negative correlation
between the index or other securities underlying the hedging instrument and
the hedged securities that would result in a loss on both such securities and
the hedging instrument. Accordingly, successful use by the fund of options on
stock indices, financial futures and other options will be subject to the
manager's ability to correctly predict movements in the direction of the
securities markets generally or in a particular segment. This requires
different skills and techniques than predicting changes in the price of
individual stocks.
Positions in stock index options and financial futures and related options
may be closed out only on an exchange which provides a secondary market.
There can be no assurance that a liquid secondary market will exist for any
particular stock index option or futures contract or related option at any
specific time. Thus, it may not be possible to close such an option or
futures position. The inability to close options or futures positions also
could have an adverse impact on the fund's ability to effectively hedge its
securities. Of course, the fund will enter into an option or futures position
only if there appears to be a liquid secondary market for such options or
futures.
OTC options may be subject to more risks than exchange-traded options because
OTC options are arranged with dealers, not with a clearing corporation, and
because pricing of OTC options is typically done by reference to information
from market makers. There can be no assurance that a continuous liquid
secondary market will exist for any particular OTC option at any specific
time. Consequently, the fund may be able to realize the value of an OTC
option it has purchased only by exercising it or entering into a closing sale
transaction with the dealer that issued it. Similarly, when the fund writes
an OTC option, it generally can close out that option prior to its expiration
only by entering into a closing purchase transaction with the dealer to which
the fund originally wrote it. If a covered call option writer cannot effect a
closing transaction, it cannot sell the underlying security until the option
expires or the option is exercised. Therefore, a covered call option writer
of an OTC option may not be able to sell an underlying security even though
it might otherwise be advantageous to do so. Likewise, a secured put writer
of an OTC option may be unable to sell the securities pledged to secure the
put for other investment purposes while it is obligated as a put writer.
Similarly, a purchaser of such put or call option might also find it
difficult to terminate its position on a timely basis in the absence of a
secondary market.
The CFTC and the various exchanges have established limits, referred to as
"speculative position limits," on the maximum net long or net short position
which any person may hold or control in a particular futures contract.
Trading limits are imposed on the maximum number of contracts which any
person may trade on a particular trading day. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The fund does not believe that these
trading and positions limits will have an adverse impact on the fund's
strategies for hedging its securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced, thus producing distortion.
Third, from the point of view of speculators, the margin deposit requirements
in the futures market are less onerous than margin requirements in the
securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility
of distortion, a correct forecast of general interest rate trends by the
manager may still not result in a successful transaction.
In addition, futures contracts entail risks. Although the fund believes that
use of such contracts will benefit the fund, if the manager's judgment about
the general direction of interest rates is incorrect, the fund's overall
performance would be poorer than if it had not entered into any such
contract. For example, if the fund has hedged against the possibility of an
increase in interest rates that would adversely affect the price of bonds
held in its portfolio and interest rates decrease instead, the fund will lose
part or all of the benefit of the increased value of its bonds which it has
hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if the fund has insufficient cash, it may have
to sell securities from its portfolio to meet daily variation margin
requirements. Such sales may be, but will not necessarily be, at increased
prices which reflect the rising market. The fund may have to sell securities
at a time when it may be disadvantageous to do so.
The fund's sale of futures contracts and purchase of put options on futures
contracts will be solely to protect its investments against declines in
value. The fund expects that in the normal course it will purchase securities
upon termination of long futures contracts and long call options on future
contracts, but under unusual market conditions it may terminate any of such
positions without a corresponding purchase of securities.
RESTRICTED SECURITIES The board of trustees has authorized the fund to invest
in restricted securities and to consider them liquid (and thus not subject to
the 10% limitation on illiquid securities) to the extent the manager
determines that there is a liquid institutional or other market for these
securities. For example, restricted securities may be freely transferred
among qualified institutional buyers under Rule 144A of the 1933 Act, and in
some cases a liquid institutional market has developed.
On an ongoing basis, the board of trustees will review the manager's
decisions to treat restricted securities as liquid - including the manager's
assessment of current trading activity and the availability of reliable price
information. In determining whether a restricted security can be considered
liquid, the manager and the board of trustees will take into account the
following factors: (i) the frequency of trades and quotes for the security,
(ii) the number of dealers willing to buy or sell the security and the number
of potential buyers, (iii) dealer undertakings to make a market in the
security, and (iv) the nature of the security and nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). To the extent the fund
invests in restricted securities that are deemed to be liquid, the general
level of illiquidity in the fund may be increased if qualified institutional
buyers become uninterested in buying these securities or the market for these
securities contracts.
INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50%
of the fund's outstanding shares are represented at the meeting in person or
by proxy, whichever is less.
The fund may not:
1. Borrow money, except that the fund may borrow money in a manner consistent
with the fund's investment objective and policies in an amount not exceeding
33 1/3% of the value of the fund's total assets (including the amount
borrowed). The fund may borrow in connection with short-sales and short-sales
"against the box," and the fund may borrow from banks, other Franklin
Templeton Funds or other persons to the extent permitted by applicable law.
2. Underwrite securities of other issuers, except insofar as the fund may be
technically deemed an underwriter under the federal securities laws in
connection with the disposition of portfolio securities. (This does not
preclude the fund from obtaining such short-term credit as may be necessary
for the clearance of purchases and sales of its portfolio securities.)
3. Invest directly in interests in real estate, oil, gas or other mineral
leases, exploration or development programs, including limited partnership
interests. This restriction does not preclude investments in marketable
securities of issuers engaged in such activities.
4. Loan money, except as consistent with the fund's investment objectives,
and except that the fund may (a) purchase a portion of an issue of publicly
distributed bonds, debentures, notes and other evidences of indebtedness, (b)
enter into repurchase agreements, (c) lend its portfolio securities, and (d)
participate in an interfund lending program with other Franklin Templeton
Funds to the extent permitted by the 1940 Act and any rules or orders
thereunder.
5. Purchase or sell commodities or commodity contracts; except that the fund
may enter into interest rate and financial futures contracts, options
thereon, and forward contracts.
6. Issue securities senior to the fund's presently authorized shares of
beneficial interest.
7. Invest more than 25% of the fund's assets (at the time of the most recent
investment) in any single industry.
The fund presently has the following additional restrictions, which are not
fundamental and may be changed without shareholder approval.
The fund may not:
1. Invest in any company for the purpose of exercising control or management,
except that all or substantially all of the assets of the fund may be
invested in another registered investment company having the same investment
objective and policies as the fund.
2. Purchase securities on margin, except that the fund may make margin
payments in connection with futures, options and currency transactions.
3. Purchase or retain securities of any company in which officers or
directors of the fund, or of its investment manager, individually owning more
than 1/2 of 1% of the securities of such company, in the aggregate own more
than 5% of the securities of such company.
4. Purchase securities of open-end or closed-end investment companies, except
in compliance with the 1940 Act, and except that the fund may invest in
another registered investment company as described in Restriction 1, above.
5. Invest more than 5% of its assets in securities of issuers with less than
three years continuous operation, including the operations of any predecessor
companies.
6. Hold or purchase the securities of any issuer if, as a result, in the
aggregate, more than 10% of the value of the fund's net assets would be
invested in (i) securities that are not readily marketable or (ii) repurchase
agreements maturing in more than seven days. The fund may, however, invest in
registered investment companies as described in Restriction 1, above.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities or the amount of assets will not be
considered a violation of any of the foregoing restrictions.
RISKS
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EURO RISK On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. The transition and the
elimination of currency risk among EMU countries may change the economic
environment and behavior of investors, particularly in European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect
on the fund, the fund's manager and its affiliated services providers are
taking steps they believe are reasonably designed to address the euro issue.
OFFICERS AND TRUSTEES
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The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of the
fund's investment activities. The board, in turn, elects the officers of the
trust who are responsible for administering the fund's day-to-day operations.
The board also monitors the fund to ensure no material conflicts exist among
share classes. While none is expected, the board will act appropriately to
resolve any material conflict that may arise.
The affiliations of the officers and board members and their principal
occupations for the past five years are shown below.
POSITION(S)
HELD WITH PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS THE TRUST DURING THE PAST FIVE YEARS
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Frank T. Crohn (74)
P.O. Box 810516
Boca Raton, FL 33481
Trustee
Chairman, Eastport Lobster & Fish Company; Director, Unity Mutual Life
Insurance Company; trustee of two of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman, Financial Benefit Life
Insurance Company and Director, AmVestors Financial Corporation.
*William J. Lippman (72)
One Parker Plaza, 16th Floor
Fort Lee, NJ 07024
President, Chief Executive Officer and Trustee
Senior Vice President, Franklin Resources, Inc. and Franklin Management,
Inc.; President and Director, Franklin Advisory Services, Inc.; and officer
and/or director or trustee, as the case may be, of six of the investment
companies in the Franklin Templeton Group of Funds.
Charles Rubens II (68)
18 Park Road
Scarsdale, NY 10583
Trustee
Private investor; and trustee of three of the investment companies in the
Franklin Templeton Group of Funds.
Leonard Rubin (73)
2 Executive Drive
Suite 560
Fort Lee, NJ 07024
Trustee
Partner in LDR Equities, LLC (manages various personal investments); Vice
President, Trimtex Co., Inc. (manufactures and markets specialty fabrics);
trustee or director, as the case may be, of three of the investment companies
in the Franklin Templeton Group of Funds; and FORMERLY, Chairman of the
Board, Carolace Embroidery Co., Inc. and President, F.N.C. Textiles, Inc.
Harmon E. Burns (54)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating Officer and Director, Templeton Investment
Counsel, Inc.; Executive Vice President and Chief Financial Officer, Franklin
Advisers, Inc.; Chief Financial Officer, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; President and Director, Franklin
Templeton Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin/Templeton Investor Services, Inc.; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 53 of the investment companies in
the Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.; Vice President, Chief Legal
Officer and Chief Operating Officer, Franklin Investment Advisory Services,
Inc.; and officer of 53 of the investment companies in the Franklin Templeton
Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers,
Inc.; Senior Vice President and Director, Franklin Advisory Services, Inc.
and Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (61)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
R. Martin Wiskemann (72)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President, Portfolio Manager and Director, Franklin Advisers,
Inc.; Senior Vice President, Franklin Management, Inc.; Vice President and
Director, ILA Financial Services, Inc.; and officer and/or director or
trustee, as the case may be, of 15 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal
securities laws.
The trust pays noninterested board members $1,800 per quarter plus $600 per
meeting attended. Noninterested board members may also serve as directors or
trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The following table
provides the total fees paid to noninterested board members by the trust and
by the Franklin Templeton Group of Funds.
NUMBER OF BOARDS IN
TOTAL FEES RECEIVED THE FRANKLIN
TOTAL FEES FROM THE FRANKLIN TEMPLETON GROUP OF
RECEIVED TEMPLETON GROUP OF FUNDS ON WHICH EACH
NAME FROM THE TRUST1 FUNDS2 SERVES3
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Frank T. Crohn $9,600 2
Charles Rubens II $10,200 3
Leonard Rubin $10,200 3
1. For the fiscal year ended October 31, 1998.
2. For the calendar year ended December 31, 1998.
3. We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the board members are responsible. The Franklin Templeton Group of
Funds currently includes 54 registered investment companies, with
approximately 168 U.S. based funds or series.
Noninterested board members are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or board members who are shareholders of Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisory
Services, Inc. The manager is wholly owned by Franklin Resources, Inc.
(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.
The manager provides investment research and portfolio management services,
and selects the securities for the fund to buy, hold or sell. The manager
also selects the brokers who execute the fund's portfolio transactions. The
manager provides periodic reports to the board, which reviews and supervises
the manager's investment activities. To protect the fund, the manager and its
officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of
the other funds it manages, or for its own account, that may differ from
action taken by the manager on behalf of the fund. Similarly, with respect to
the fund, the manager is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that the manager
and access persons, as defined by applicable federal securities laws, may buy
or sell for its or their own account or for the accounts of any other fund.
The manager is not obligated to refrain from investing in securities held by
the fund or other funds it manages. Of course, any transactions for the
accounts of the manager and other access persons will be made in compliance
with the fund's code of ethics.
Under the fund's code of ethics, employees of the Franklin Templeton Group
who are access persons may engage in personal securities transactions subject
to the following general restrictions and procedures: (i) the trade must
receive advance clearance from a compliance officer and must be completed by
the close of the business day following the day clearance is granted; (ii)
copies of all brokerage confirmations and statements must be sent to a
compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) above, file
annual reports of their securities holdings each January and inform the
compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they
are recommending a security in which they have an ownership interest for
purchase or sale by a fund or other client.
MANAGEMENT FEES The fund pays the manager a fee equal to an annual rate of:
o 0.75% on the first $500 million of the average daily net assets of the
fund;
o 0.625% on the next $500 million of the average daily net assets of the
fund;
o 0.50% on the average daily net assets of the fund in excess of $1 billion.
The fee is computed daily according to the terms of the management agreement.
Each class of the fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended October 31, the fund paid the following
management fees:
Management Fees Paid ($)1
- -------------------------------------------------
1998 1,105,394
1997 236,315
1996 0
1. For the fiscal years ended October 31, 1998, 1997 and 1996, management
fees, before any advance waiver, totaled $1,200,877, $267,392 and $19,727,
respectively. Under an agreement by the manager to limit its fees, the fund
paid the management fees shown.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by
Resources and is an affiliate of the fund's manager and principal
underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
During the last two fiscal years ended October 31, the manager paid FT
Services the following administration fees:
Administration Fees Paid ($)
------------------------------------------------
1998 240,184
1997 54,225
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is the fund's shareholder servicing agent
and acts as the fund's transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo,
CA 94403-7777.
For its services, Investor Services receives a fixed fee per account. The
fund may also reimburse Investor Services for certain out-of-pocket expenses,
which may include payments by Investor Services to entities, including
affiliated entities, that provide sub-shareholder services, recordkeeping
and/or transfer agency services to beneficial owners of the fund. The amount
of reimbursements for these services per benefit plan participant fund
account per year may not exceed the per account fee payable by the fund to
Investor Services in connection with maintaining shareholder accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the fund's independent auditor. The auditor gives an opinion on the
financial statements included in the trust's Annual Report to Shareholders
and reviews the trust's registration statement filed with the U.S. Securities
and Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
- ------------------------------------------------------------------------------
The manager selects brokers and dealers to execute the fund's portfolio
transactions in accordance with criteria set forth in the management
agreement and any directions that the board may give.
When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid is
negotiated between the manager and the broker executing the transaction. The
determination and evaluation of the reasonableness of the brokerage
commissions paid are based to a large degree on the professional opinions of
the persons responsible for placement and review of the transactions. These
opinions are based on the experience of these individuals in the securities
industry and information available to them about the level of commissions
being paid by other institutional investors of comparable size. The manager
will ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in
the opinion of the manager, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or the manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the manager include, among others, supplying
information about particular companies, markets, countries, or local,
regional, national or transnational economies, statistical data, quotations
and other securities pricing information, and other information that provides
lawful and appropriate assistance to the manager in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the fund. They must, however, be of value to the manager in carrying
out its overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on
the research services the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order
to obtain additional research services allows the manager to supplement its
own research and analysis activities and to receive the views and information
of individuals and research staffs of other securities firms. As long as it
is lawful and appropriate to do so, the manager and its affiliates may use
this research and data in their investment advisory capacities with other
clients. If the fund's officers are satisfied that the best execution is
obtained, the sale of fund shares, as well as shares of other funds in the
Franklin Templeton Group of Funds, may also be considered a factor in the
selection of broker-dealers to execute the fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of
the National Association of Securities Dealers, Inc., it may sometimes
receive certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the
fund, any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next
management fee payable to the manager will be reduced by the amount of any
fees received by Distributors in cash, less any costs and expenses incurred
in connection with the tender.
If purchases or sales of securities of the fund and one or more other
investment companies or clients supervised by the manager are considered at
or about the same time, transactions in these securities will be allocated
among the several investment companies and clients in a manner deemed
equitable to all by the manager, taking into account the respective sizes of
the funds and the amount of securities to be purchased or sold. In some cases
this procedure could have a detrimental effect on the price or volume of the
security so far as the fund is concerned. In other cases it is possible that
the ability to participate in volume transactions may improve execution and
reduce transaction costs to the fund.
During the last three fiscal years ended October 31, the fund paid the
following brokerage commissions:
Brokerage Commissions ($)
------------------------------------------------
1998 356,245
1997 179,663
1996 28,078
As of October 31, 1998, the fund did not own securities of its regular
broker-dealers.
DISTRIBUTIONS AND TAXES
- ------------------------------------------------------------------------------
The fund calculates dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally
due to the difference in the distribution and service (Rule 12b-1) fees of
each class. The fund does not pay "interest" or guarantee any fixed rate of
return on an investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in
the form of dividends and interest on its investments. This income, less
expenses incurred in the operation of the fund, constitutes the fund's net
investment income from which dividends may be paid to you. Any distributions
by the fund from such income will be taxable to you as ordinary income,
whether you take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net capital gains realized by the fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, in order to reduce or eliminate excise or income
taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the fund's
ordinary income distributions to you, and may cause some or all of the fund's
previously distributed income to be classified as a return of capital.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you
of the amount of your ordinary income dividends and capital gains
distributions at the time they are paid, and will advise you of their tax
status for federal income tax purposes shortly after the close of each
calendar year. If you have not held fund shares for a full year, the fund may
designate and distribute to you as ordinary income or capital gain a
percentage of income that is not equal to the actual amount of such income
earned during the period of your investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The fund has elected
to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. As a regulated
investment company, the fund generally pays no federal income tax on the
income and gains it distributes to you. The board reserves the right not to
maintain the qualification of the fund as a regulated investment company if
it determines such course of action to be beneficial to shareholders. In such
case, the fund will be subject to federal, and possibly state, corporate
taxes on its taxable income and gains, and distributions to you will be taxed
as ordinary dividend income to the extent of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires the fund to distribute to you by December 31
of each year, at a minimum, the following amounts: 98% of its taxable
ordinary income earned during the calendar year; 98% of its capital gain net
income earned during the twelve month period ending October 31; and 100% of
any undistributed amounts from the prior year. The fund intends to declare
and pay these amounts in December (or in January that are treated by you as
received in December) to avoid these excise taxes, but can give no assurances
that its distributions will be sufficient to eliminate all such taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. If you redeem
your fund shares, or exchange your fund shares for shares of a different
Franklin Templeton Fund, the IRS will require that you report a gain or loss
on your redemption or exchange. If you hold your shares as a capital asset,
the gain or loss that you realize will be capital gain or loss and will be
long-term or short-term, generally depending on how long you hold your
shares. Any loss incurred on the redemption or exchange of shares held for
six months or less will be treated as a long-term capital loss to the extent
of any long-term capital gains distributed to you by the fund on those shares.
All or a portion of any loss that you realize upon the redemption of your
fund shares will be disallowed to the extent that you buy other shares in the
fund (through reinvestment of dividends or otherwise) within 30 days before
or after your share redemption. Any loss disallowed under these rules will
be added to your tax basis in the new shares you buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in the fund, and
then reinvest the sales proceeds in the fund or in another Franklin Templeton
Fund within 90 days of buying the original shares, the sales charge that
would otherwise apply to your reinvestment may be reduced or eliminated. The
IRS will require you to report gain or loss on the redemption of your
original shares in the fund. In so doing, all or a portion of the sales
charge that you paid for your original shares in the fund will be excluded
from your tax basis in the shares sold (for the purpose of determining gain
or loss upon the sale of such shares). The portion of the sales charge
excluded will equal the amount that the sales charge is reduced on your
reinvestment. Any portion of the sales charge excluded from your tax basis in
the shares sold will be added to the tax basis of the shares you acquire from
your reinvestment.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that 100% of the dividends paid by the fund for
the most recent fiscal year qualified for the dividends-received deduction.
In some circumstances, you will be allowed to deduct these qualified
dividends, thereby reducing the tax that you would otherwise be required to
pay on these dividends. The dividends-received deduction will be available
only with respect to dividends designated by the fund as eligible for such
treatment. All dividends (including the deducted portion) must be included in
your alternative minimum taxable income calculation.
INVESTMENT IN COMPLEX SECURITIES The fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the fund are
treated as ordinary income or capital gain, accelerate the recognition of
income to the fund and/or defer the fund's ability to recognize losses, and,
in limited cases, subject the fund to U.S. federal income tax on income from
certain of its foreign securities. In turn, these rules may affect the
amount, timing or character of the income distributed to you by the fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- ------------------------------------------------------------------------------
The fund is a non-diversified series of Franklin Value Investors Trust, an
open-end management investment company, commonly called a mutual fund. The
trust was organized as a Massachusetts business trust on September 11, 1989,
and is registered with the SEC.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations.
The Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the fund's assets if you are held personally liable for
obligations of the fund. The Declaration of Trust provides that the fund
shall, upon request, assume the defense of any claim made against you for any
act or obligation of the fund and satisfy any judgment thereon. All such
rights are limited to the assets of the fund. The Declaration of Trust
further provides that the fund may maintain appropriate insurance (for
example, fidelity bonding and errors and omissions insurance) for the
protection of the fund, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. Furthermore, the
activities of the fund as an investment company, as distinguished from an
operating company, would not likely give rise to liabilities in excess of the
fund's total assets. Thus, the risk that you would incur financial loss on
account of shareholder liability is limited to the unlikely circumstance in
which both inadequate insurance exists and the fund itself is unable to meet
its obligations.
The fund currently offers four classes of shares, Class A, Class B, Class C
and Advisor Class. Before January 1, 1999, Class A shares were designated
Class I and Class C shares were designated Class II. The fund began offering
Class B shares on January 1, 1999. The fund may offer additional classes of
shares in the future. The full title of each class is:
o Franklin Value Fund - Class A
o Franklin Value Fund - Class B
o Franklin Value Fund - Class C
o Franklin Value Fund - Advisor Class
Shares of each class represent proportionate interests in the fund's assets.
On matters that affect the fund as a whole, each class has the same voting
and other rights and preferences as any other class. On matters that affect
only one class, only shareholders of that class may vote. Each class votes
separately on matters affecting only that class, or expressly required to be
voted on separately by state or federal law. Shares of each class of a series
have the same voting and other rights and preferences as the other classes
and series of the trust for matters that affect the trust as a whole.
Additional series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, 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 be called by the board to consider the
removal of a board member if requested in writing 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. A special meeting may also be called by the board in its
discretion.
As of December 7, 1998, the principal shareholders of the fund, beneficial or
of record, were:
Name and Address Share Class Percentage (%)
- ----------------------------- ----------- ---------------
Franklin Templeton Trust Advisor 13.59
Company Trust Services
FBO Martin Wiskemann
P.O. Box 5086
San Mateo, CA 94402-0086
Franklin Templeton Trust Advisor 9.37
Company Trust Services
FBO Charles Rubens II
P.O. Box 5086
San Mateo, CA 94402-0086
Franklin Templeton Trust Advisor 30.87
Company 1, Trustee for
ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438
1. Franklin Templeton Trust Company is a California corporation and is
wholly owned by Franklin Resources, Inc.
From time to time, the number of fund shares held in the "street name"
accounts of various securities dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding.
As of December 7, 1998, the officers and board members, as a group, owned of
record and beneficially 10.46% of the fund's Advisor Class shares and less
than 1% of the outstanding shares of the fund's other classes. The board
members may own shares in other funds in the Franklin Templeton Group of
Funds.
BUYING AND SELLING SHARES
- ------------------------------------------------------------------------------
The fund continuously offers its shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial
institutions that sell shares of the fund may be required by state law to
register as securities dealers.
For investors outside the U.S., 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.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the fund we may impose a $10 charge against your account for each returned
item.
If you buy shares through the reinvestment of dividends, the shares will be
purchased at the net asset value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The
processing date for the reinvestment of dividends may vary and does not
affect the amount or value of the shares acquired.
INITIAL SALES CHARGES The maximum initial sales charge is 5.75% for Class A
and 1% for Class C. There is no initial sales charge for Class B.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of
the lower sales charges for large purchases. The Franklin Templeton Funds
include 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.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You may also combine the shares of your spouse,
children under the age of 21 or 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 (LOI). You may buy Class A shares at a reduced sales charge
by completing the letter of intent section of your account 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
application, you acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase
in Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
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 LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy Class A shares at the
sales charge applicable to the amount specified in your LOI. Sales charge
reductions based on purchases in more than one Franklin Templeton Fund will
be effective only after notification to Distributors that the investment
qualifies for a discount. Any Class A purchases you made within 90 days
before you filed your LOI may also qualify for a retroactive reduction in the
sales charge. If you file your LOI with the fund before a change in the
fund's sales charge, you may complete the LOI at the lower of the new sales
charge or the sales charge in effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days
before you filed your LOI will be counted towards the completion of the LOI,
but they will not be entitled to a retroactive reduction in the sales charge.
Any redemptions you make during the 13 month period , except in the case of
certain retirement plans, will be subtracted from the amount of the purchases
for purposes of determining whether the terms of the LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of
your total purchases, less redemptions, is more than the amount specified in
your LOI and is an amount that would qualify for a further sales charge
reduction, a retroactive price adjustment will be made by Distributors and
the securities dealer through whom purchases were made. The price adjustment
will be made on purchases made within 90 days before and on those made after
you filed your LOI and will be applied towards the purchase of additional
shares at the offering price applicable to a single purchase or the dollar
amount of the total purchases.
If the amount of your total purchases, less redemptions, is less than the
amount specified in your LOI, the sales charge will be adjusted upward,
depending on the actual amount purchased (less redemptions) during the
period. You will need to send Distributors an amount equal to the difference
in the actual dollar amount of sales charge paid and the amount of sales
charge that would have applied to the total purchases if the total of the
purchases had been made at one time. Upon payment of this amount, the
reserved shares held for your account will be deposited to an account in your
name or delivered to you or as you direct. If within 20 days after written
request the difference in sales charge is not paid, we will redeem an
appropriate number of reserved shares to realize the difference. If you
redeem the total amount in your account before you fulfill your LOI, we will
deduct the additional sales charge due from the sale proceeds and forward the
balance to you.
For LOIs filed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the LOI. These plans are not subject to the requirement to reserve 5%
of the total intended purchase or to the policy on upward adjustments in
sales charges described above, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class
A 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, although any such plan that purchased the fund's
Class A shares at a reduced sales charge under the group purchase privilege
before February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be
purchased without an initial sales charge or contingent deferred sales charge
(CDSC) by investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same share class.
Certain exceptions apply, however, to Class C shareholders who chose to
reinvest their distributions in Class A shares of 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's Class A
shares. This waiver category also applies to Class B and C shares.
o Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, 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.
o 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.
o Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
o If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund
shares and the CDSC holding period will begin again. We will, however,
credit your fund account with additional shares based on the CDSC you
previously paid and the amount of the redemption proceeds that you
reinvest.
o 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.
o Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Class A shares may also be purchased without
an initial sales charge or CDSC by various individuals and institutions due
to anticipated economies in sales efforts and expenses, including:
o 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.
o 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 fund shares without paying
sales charges. 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.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o 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
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting
distributions from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under
"Retirement plans" below
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without an initial sales
charge. Retirement plans that are not qualified retirement plans (employer
sponsored pension or profit-sharing plans that qualify under section 401 of
the Internal Revenue Code, including 401(k), money purchase pension, profit
sharing and defined benefit plans), SIMPLEs (savings incentive match plans
for employees) or SEPs (employer sponsored simplified employee pension plans
established under section 408(k) of the Internal Revenue Code) must also meet
the group purchase requirements described above to be able to buy Class A
shares without an initial 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 CDSC 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.
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, the fund's shares are available to these banks' trust accounts without
a sales charge. The banks may charge service fees to their customers who
participate in the trusts. A portion of these service fees may be paid to
Distributors or one of its affiliates to help defray expenses of maintaining
a service office in Taiwan, including expenses related to local literature
fulfillment and communication facilities.
The fund's Class A shares may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class A
shares may be offered with the following schedule of sales charges:
Size of Purchase - U.S. Dollars Sales Charge (%)
- ---------------------------------------------------------------------
Under $30,000 3.0
$30,000 but less than $50,000 2.5
$50,000 but less than $100,000 2.0
$100,000 but less than $200,000 1.5
$200,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION Securities dealers may at times receive the entire sales
charge. A securities dealer who receives 90% or more of the sales charge may
be deemed an underwriter under the Securities Act of 1933, as amended.
Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated in the dealer compensation table
in the fund's prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
shares of $1 million or more: 1% on sales of $1 million to $2 million, plus
0.80% on sales over $2 million to $3 million, plus 0.50% on sales over $3
million to $50 million, plus 0.25% on sales over $50 million to $100 million,
plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts,
out of its own resources, to securities dealers who initiate and are
responsible for purchases of Class A shares by certain retirement plans
without an initial sales charge: 1% on sales of $500,000 to $2 million, plus
0.80% on sales over $2 million to $3 million, plus 0.50% on sales over $3
million to $50 million, plus 0.25% on sales over $50 million to $100 million,
plus 0.15% on sales over $100 million. Distributors may make these payments
in the form of contingent advance payments, which may be recovered from the
securities dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the securities dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
securities dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a securities dealer's sales and marketing
efforts in the Franklin Templeton Group of Funds; a securities dealer's
support of, and participation in, Distributors' marketing programs; a
securities dealer's compensation programs for its registered representatives;
and the extent of a securities dealer's marketing programs relating to the
Franklin Templeton Group of Funds. Financial support to securities dealers
may be made by payments from Distributors' resources, from Distributors'
retention of underwriting concessions and, in the case of funds that have
Rule 12b-1 plans, from payments to Distributors under such plans. In
addition, certain securities dealers may receive brokerage commissions
generated by fund portfolio transactions in accordance with the rules of the
National Association of Securities Dealers, Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity
discount or letter of intent programs, a CDSC may apply on any shares you
sell within 12 months of purchase. For Class C shares, a CDSC may apply if
you sell your shares within 18 months of purchase. The CDSC 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 Class A shares without an initial sales charge may also be
subject to a CDSC 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.
For Class B shares, there is a CDSC if you sell your shares within six years,
as described in the table below. The charge is based on the value of the
shares sold or the net asset value at the time of purchase, whichever is less.
IF YOU SELL YOUR CLASS B SHARES
WITHIN THIS MANY YEARS AFTER BUYING THIS % IS DEDUCTED FROM
THEM YOUR PROCEEDS AS A CDSC
- --------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
CDSC WAIVERS. The CDSC for any share class will generally be waived for:
o Account fees
o Sales of Class A shares purchased without an initial 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 up to 1% monthly, 3%
quarterly, 6% semiannually or 12% annually of your account's net asset
value depending on the frequency of your plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans or
employee benefit plans serviced by ValuSelect(R) (not applicable to Class B)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy (for
Class B, this applies to all retirement plan accounts, not only IRAs)
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans (not applicable to Class B)
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money. If this
occurs, it is the fund's general policy to initially invest this money in
short-term, interest-bearing money market instruments unless it is believed
that attractive investment opportunities consistent with the fund's
investment goal exist immediately. This money will then be withdrawn from the
short-term, interest-bearing money market instruments and invested in
portfolio securities in as orderly a manner as is possible when attractive
investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally
not available until the seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh day. The sale of fund shares to complete an exchange will
be effected at net asset value at the close of business on the day the
request for exchange is received in proper form.
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. There are no service charges
for establishing or maintaining a systematic withdrawal plan. Once your plan
is established, any distributions paid by the fund will be automatically
reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday, we
will process the redemption on the next business day. 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 CDSC.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. The fund may discontinue a systematic
withdrawal plan by notifying you in writing and will automatically
discontinue a systematic withdrawal plan if all shares in your account are
withdrawn or if the fund receives notification of the shareholder's death or
incapacity.
REDEMPTIONS IN KIND The fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the U.S. Securities
and Exchange Commission (SEC). In the case of redemption requests in excess
of these amounts, the board reserves the right to make payments in whole or
in part in securities or other assets of the fund, in case of an emergency,
or if the payment of such a redemption in cash would be detrimental to the
existing shareholders of the fund. In these circumstances, the securities
distributed would be valued at the price used to compute the fund's net
assets and you may incur brokerage fees in converting the securities to cash.
The fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
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.
GENERAL INFORMATION If dividend checks are returned to the fund marked
"unable to forward" by the postal service, we will consider this a request by
you to change your dividend option to reinvest all distributions. The
proceeds will be reinvested in additional shares at net asset value until we
receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the fund nor
its affiliates will be liable for any loss caused by your failure to cash
such checks. The fund is not responsible for tracking down uncashed checks,
unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to
find you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.
The wiring of redemption proceeds is a special service that we make available
whenever possible. 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 the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay
certain financial institutions that maintain omnibus accounts with the fund
on behalf of numerous beneficial owners for recordkeeping operations
performed with respect to such owners. For each beneficial owner in the
omnibus account, the fund may reimburse Investor Services an amount not to
exceed the per account fee that the fund normally pays Investor Services.
These financial institutions may also charge a fee for their services
directly to their clients.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. If you sell shares
through your securities dealer, it is your dealer's responsibility to
transmit the order to the fund in a timely fashion. 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. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
notice of levy.
PRICING SHARES
- ------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the
net asset value (NAV) per share plus any applicable sales charge, calculated
to two decimal places using standard rounding criteria. When you sell shares,
you receive the NAV minus any applicable CDSC.
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.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The fund does not calculate the NAV on days the New York Stock
Exchange (NYSE) is closed for trading, which include New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent
quoted bid and ask prices. The fund values over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, the fund values them according to the broadest and most
representative market as determined by the manager.
The fund values portfolio securities underlying actively traded call options
at their market price as determined above. The current market value of any
option the fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last
sale price is outside the bid and ask prices, the fund values options within
the range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.
The fund determines the value of a foreign security as of the close of
trading on the foreign exchange on which the security is traded or as of the
close of trading on the NYSE, if that is earlier. The value is then converted
into its U.S. dollar equivalent at the foreign exchange rate in effect at
noon, New York time, on the day the value of the foreign security is
determined. If no sale is reported at that time, the foreign security is
valued within the range of the most recent quoted bid and ask prices.
Occasionally events that affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and
the close of the exchange and will, therefore, not be reflected in the
computation of the NAV. If events materially affecting the values of these
foreign securities occur during this period, the securities will be valued in
accordance with procedures established by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the NAV is determined as of such times. Occasionally, events affecting the
values of these securities may occur between the times at which they are
determined and the close of the NYSE that will not be reflected in the
computation of the NAV. If events materially affecting the values of these
securities occur during this period, the securities will be valued at their
fair value as determined in good faith by the board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the board. With the approval of
the board, the fund may use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
- ------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
DISTRIBUTORS is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the fund's shares, the net
underwriting discounts and commissions Distributors retained after allowances
to dealers, and the amounts Distributors received in connection with
redemptions or repurchases of shares for the last three fiscal years ended
October 31:
Amount Received in
Total Commissions Connection with
Received ($) Amount Retained by Redemptions and
Distributors ($) Repurchases ($)
------------------------------------------------------------------------------
1998 2,113,491 196,714 32,447
1997 1,093,247 235,879 4,616
1996 136,088 14,930 0
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Each class has a separate distribution
or "Rule 12b-1" plan. Under each plan, the fund shall pay or may reimburse
Distributors or others for the expenses of activities that are primarily
intended to sell shares of the class. These expenses may include, among
others, distribution or service fees paid to securities dealers or others who
have executed a servicing agreement with the fund, Distributors or its
affiliates; 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.
The distribution and service (12b-1) fees charged to each class are based
only on the fees attributable to that particular class.
THE CLASS A PLAN. Payments by the fund under the Class A plan may not exceed
0.35% per year of Class A's average daily net assets, payable quarterly. All
distribution expenses over this amount will be borne by those who have
incurred them.
THE CLASS B AND C PLANS. Under the Class B and C plans, the fund pays
Distributors up to 0.75% per year of the class's average daily net assets,
payable quarterly, to pay Distributors or others for providing distribution
and related services and bearing certain expenses. All distribution expenses
over this amount will be borne by those who have incurred them. The fund may
also pay a servicing fee of up to 0.25% per year of the class's average daily
net assets, payable quarterly. This fee may be used to pay securities dealers
or others for, among other things, helping to establish and maintain customer
accounts and records, helping with requests to buy and sell shares, receiving
and answering correspondence, monitoring dividend payments from the fund on
behalf of customers, and similar servicing and account maintenance
activities.
The expenses relating to each of the Class B and C plans are also used to pay
Distributors for advancing the commission costs to securities dealers with
respect to the initial sale of Class B and C shares. Further, the expenses
relating to the Class B plan may be used by Distributors to pay third party
financing entities that have provided financing to Distributors in connection
with advancing commission costs to securities dealers.
THE CLASS A , B AND C PLANS. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the fund, the manager or Distributors or other parties on behalf of
the fund, the manager or Distributors make payments that are deemed to be for
the financing of any activity primarily intended to result in the sale of
fund shares within the context of Rule 12b-1 under the Investment Company Act
of 1940, as amended, then such payments shall be deemed to have been made
pursuant to the plan. The terms and provisions of each plan relating to
required reports, term, and approval are consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the National Association of Securities Dealers, Inc.
To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks will not be entitled to participate in the plans as a result of
applicable federal law prohibiting certain banks from engaging in the
distribution of mutual fund shares. These banking institutions, however, are
permitted to receive fees under the plans for administrative servicing or for
agency transactions. If you are a customer of a bank that is prohibited from
providing these services, you would be permitted to remain a shareholder of
the fund, and alternate means for continuing the servicing would be sought.
In this event, changes in the services provided might occur and you might no
longer be able to avail yourself of any automatic investment or other
services then being provided by the bank. It is not expected that you would
suffer any adverse financial consequences as a result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1.
The plans are renewable annually by a vote of the board, including a majority
vote of the board members who are not interested persons of the fund and who
have no direct or indirect financial interest in the operation of the plans,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such board members be done by the
noninterested members of the fund's board. The plans and any related
agreement may be terminated at any time, without penalty, by vote of a
majority of the noninterested board members on not more than 60 days' written
notice, by Distributors on not more than 60 days' written notice, by any act
that constitutes an assignment of the management agreement with the manager
or by vote of a majority of the outstanding shares of the class. Distributors
or any dealer or other firm may also terminate their respective distribution
or service agreement at any time upon written notice.
The plans and any related agreements may not be amended to increase
materially the amount to be spent for distribution expenses without approval
by a majority of the outstanding shares of the class, and all material
amendments to the plans or any related agreements shall be approved by a vote
of the noninterested board members, cast in person at a meeting called for
the purpose of voting on any such amendment.
Distributors is required to report in writing to the board at least quarterly
on the amounts and purpose of any payment made under the plans and any
related agreements, as well as to furnish the board with such other
information as may reasonably be requested in order to enable the board to
make an informed determination of whether the plans should be continued.
For the fiscal year ended October 31, 1998, Distributors eligible
expenditures for advertising, printing, and payments to underwriters and
broker-dealers pursuant to the plans and the amounts the fund paid
Distributors under the plans were:
Distributors' Eligible Amount Paid
Expenses ($) by the Fund ($)
- --------------------------------------------------------------------
Class A 1,036,347 355,772
Class C 675,501 411,347
PERFORMANCE
- ------------------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return quotations used by the fund are based on the
standardized methods of computing performance mandated by the SEC. If a Rule
12b-1 plan is adopted, performance figures reflect fees from the date of the
plan's implementation. An explanation of these and other methods used by the
fund to compute or express performance follows. Regardless of the method
used, past performance does not guarantee future results, and is an
indication of the return to shareholders only for the limited historical
period used.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum initial sales charge is
deducted from the initial $1,000 purchase, and income dividends and capital
gain distributions are reinvested at net asset value. The quotation assumes
the account was completely redeemed at the end of each period and the
deduction of all applicable charges and fees. If a change is made to the
sales charge structure, historical performance information will be restated
to reflect the maximum initial sales charge currently in effect.
When considering the average annual total return quotations, you should keep
in mind that the maximum initial sales charge reflected in each quotation is
a one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the fund.
The average annual total returns for the indicated periods ended October 31,
1998, were:
1 Year Since Inception (3/11/96)
- -----------------------------------------------------------
Class A -30.71% 6.17%
1 Year Since Inception (9/3/96)
- -----------------------------------------------------------
Class C -28.38% 5.11%
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of each period at the end
of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at net asset value. Cumulative total return, however, is based on
the actual return for a specified period rather than on the average return
over the periods indicated above. The cumulative total returns for the
indicated periods ended October 31, 1998, were:
1 Year Since Inception (3/11/96)
- -------------------------------------------------------------
Class A -30.71% 17.13%
1 Year Since Inception (9/3/96)
- -------------------------------------------------------------
Class C -28.38% 11.35%
VOLATILITY Occasionally statistics may be used to show the fund's volatility
or risk. Measures of volatility or risk are generally used to compare the
fund's net asset value or performance to a market index. One measure of
volatility is beta. Beta is the volatility of a fund relative to the total
market, as represented by an index considered representative of the types of
securities in which the fund invests. A beta of more than 1.00 indicates
volatility greater than the market and a beta of less than 1.00 indicates
volatility less than the market. Another measure of volatility or risk is
standard deviation. Standard deviation is used to measure variability of net
asset value or total return around an average over a specified period of
time. The idea is that greater volatility means greater risk undertaken in
achieving performance.
OTHER PERFORMANCE QUOTATIONS The fund may also quote the performance of
shares without a sales charge. Sales literature and advertising may quote a
cumulative total return, average annual total return and other measures of
performance with the substitution of net asset value for the public offering
price.
Sales literature referring to the use of the fund as a potential investment
for IRAs, business retirement plans, and other tax-advantaged retirement
plans may quote a total return based upon compounding of dividends on which
it is presumed no federal income tax applies.
The fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. is the parent
company of the advisors and underwriter of the Franklin Templeton Group of
Funds.
COMPARISONS To help you better evaluate how an investment in the fund may
satisfy your investment goal, advertisements and other materials about the
fund may discuss certain measures of fund performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and
averages. These comparisons may include, but are not limited to, the
following examples:
o Dow Jones(R) Composite Average and its component averages - a
price-weighted average of 65 stocks that trade on the New York Stock
Exchange. The average is a combination of the Dow Jones Industrial Average
(30 blue-chip stocks that are generally leaders in their industry), the
Dow Jones Transportation Average (20 transportation stocks), and the Dow
Jones Utilities Average (15 utility stocks involved in the production of
electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries.
o The New York Stock Exchange composite or component indices - an
unmanaged index of all industrial, utilities, transportation, and finance
stocks listed on the NYSE.
o Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes
price, yield, risk, and total return for mutual funds.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK,
CHANGING TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines -
provide performance statistics over specified time periods.
o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its
category.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment
in the fund. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or information may also compare the fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of
fluctuation of principal value, a risk generally not present in an investment
in a CD issued by a bank. For example, as the general level of interest rates
rise, the value of the fund's fixed-income investments, if any, as well as
the value of its shares that are based upon the value of such portfolio
investments, can be expected to decrease. Conversely, when interest rates
decrease, the value of the fund's shares can be expected to increase. CDs are
frequently insured by an agency of the U.S. government. An investment in the
fund is not insured by any federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the fund to calculate its figures. In
addition, there can be no assurance that the fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
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The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to
have a projected amount available in the future to fund a child's college
education. (Projected college cost estimates are based upon current costs
published by the College Board.) The Franklin Retirement Planning Guide leads
you through the steps to start a retirement savings program. Of course, an
investment in the fund cannot guarantee that these goals will be met.
The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of
the oldest mutual fund organizations and now services more than 3 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined
forces with Templeton, a pioneer in international investing. The Mutual
Series team, known for its value-driven approach to domestic equity
investing, became part of the organization four years later. Together, the
Franklin Templeton Group has over $216 billion in assets under management for
more than 6 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 117 U.S. based open-end
investment companies to the public. The fund may identify itself by its
NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the fund are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has
already begun making necessary software changes to help the computer systems
that service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues
to seek reasonable assurances from all major hardware, software or
data-services suppliers that they will be Year 2000 compliant on a timely
basis. Resources is also beginning to develop a contingency plan, including
identification of those mission critical systems for which it is practical to
develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use of
normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
DESCRIPTION OF BOND RATINGS
CORPORATE BOND RATINGS
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MOODY'S INVESTORS SERVICE, INC. (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.
STANDARD & POOR'S CORPORATION (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.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually their promissory obligations not having an original maturity
in excess of nine months. Moody's employs the following designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
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.
FRANKLIN VALUE FUND
FRANKLIN VALUE INVESTORS TRUST
ADVISOR CLASS
STATEMENT OF
ADDITIONAL INFORMATION
MARCH 1, 1999
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the fund's prospectus.
The fund's prospectus, dated March 1, 1999, which we may amend from time to
time, contains the basic information you should know before investing in the
fund. You should read this SAI together with the fund's prospectus.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended October 31, 1998, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goal and Strategies
Risks
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Bond Ratings
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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GOAL AND STRATEGIES
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The fund's investment goal is long-term total return. This goal is
fundamental, which means it may not be changed without shareholder approval.
Income is a secondary consideration of the fund, although it is not part of
the fund's goal.
The fund tries to achieve its objective by investing at least 65% of its
assets in securities of companies that the fund's manager believes are
undervalued. The securities the fund may invest in include common and
preferred stocks, warrants, secured and unsecured bonds, and notes.
The fund's manager may take into account a variety of factors in order to
determine whether to buy or hold securities, including: low price to earnings
ratio relative to the market, industry group or earnings growth; low price
relative to book value or cash flow; valuable franchises, patents,
trademarks, trade names, distribution channels or market share for particular
products or services, tax loss carryforwards, or other intangibles that may
not be reflected in stock prices; ownership of understated or underutilized
tangible assets such as land, timber or minerals; underutilized cash or
investment assets; and unusually high current income. These criteria and
others, alone and in combination, may identify companies that are attractive
to financial or strategic acquirers (i.e. takeover candidates) or companies
that have suffered sharp price declines but in the manager's opinion, still
have significant potential ("fallen angels"). Purchases may include companies
in cyclical businesses, turnarounds and companies emerging from bankruptcy.
Purchase decisions may also be influenced by company stock buy-backs and
insider purchases and sales.
Below is a description of various types of securities that the fund may buy.
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. The purchaser of an equity security typically
receives an ownership interest in the company as well as certain voting
rights. The owner of an equity security may participate in a company's
success through the receipt of dividends which are distributions of earnings
by the company to its owners. Equity security owners may also participate in
a company's success or lack of success through increases or decreases in the
value of the company's shares as traded in the public trading market for such
shares. Equity securities generally take the form of common stock or
preferred stock. Preferred stockholders typically receive greater dividends
but may receive less appreciation than common stockholders and may have
greater voting rights as well.
DEBT SECURITIES represent an obligation of the issuer to repay a loan of
money to it, and generally, provide for the payment of interest. These
include bonds, notes and debentures; commercial paper; time deposits; and
bankers' acceptances. A debt security typically has a fixed payment schedule
that obligates the issuer to pay interest to the lender and to return the
lender's money over a certain time period. A company typically meets its
payment obligations associated with its outstanding debt securities before it
declares and pays any dividend to holders of its equity securities. Bonds,
notes, debentures and commercial paper differ in the length of the issuer's
payment schedule, with bonds carrying the longest repayment schedule and
commercial paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the fund's net asset value.
HIGH YIELD SECURITIES The fund may invest up to 25% of its net assets in
lower quality, fixed-income and convertible securities (those rated BB or
lower by Standard & Poor's Corporation (S&P) or Ba or lower by Moody's
Investors Services, Inc. (Moody's) and unrated securities of comparable
quality, that the manager believes possess intrinsic values in excess of the
current market prices of those securities. Lower quality securities are
commonly called "junk bonds." Lower quality 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 quality 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.
ZERO COUPON SECURITIES AND PAY-IN-KIND BONDS Zero coupon or deferred interest
securities are debt obligations that do not entitle the holder to any
periodic payments of interest before maturity or a specified date when the
securities begin paying current interest (the "cash payment date") and
therefore are generally issued and traded at a discount from their face
amounts or par value. The discount varies depending on the time remaining
until maturity or cash payment date, prevailing interest rates, liquidity of
the security and the perceived credit quality of the issuer. The discount, in
the absence of financial difficulties of the issuer, typically decreases as
the final maturity or cash payment date of the security approaches. The
market prices of zero coupon securities are generally more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do non-zero
coupon or deferred interest securities having similar maturities and credit
quality. Current federal income tax law requires that a holder of a zero
coupon security report as income each year the portion of the original issue
discount on the security that accrues that year, even though the holder
receives no cash payments of interest during the year.
Pay-in-kind bonds are securities that pay interest through the issuance of
additional bonds. The fund will be deemed to receive interest over the life
of the bonds and be treated as if interest were paid on a current basis for
federal income tax purposes, although no cash interest payments are received
by the fund until the cash payment date or until the bonds mature.
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.
ENHANCED CONVERTIBLES. The fund may invest in convertible preferred stocks
that offer enhanced yield features, such as Preferred Equity Redemption
Cumulative Stocks ("PERCS"), which provide an investor, such as the fund,
with the opportunity to earn higher dividend income than is available on a
company's common stock. PERCS are preferred stocks that generally feature a
mandatory conversion date, as well as a capital appreciation limit which is
usually expressed in terms of a stated price. Most PERCS expire three years
from the date of issue, at which time they are convertible into common stock
of the issuer. PERCS are generally not convertible into cash at maturity.
Under a typical arrangement, after three years PERCS convert into one share
of the issuer's common stock if the issuer's common stock is trading at a
price below that set by the capital appreciation limit, and into less than
one full share if the issuer's common stock is trading at a price above that
set by the capital appreciation limit. The amount of that fractional share of
common stock is determined by dividing the price set by the capital
appreciation limit by the market price of the issuer's common stock. PERCS
can be called at any time prior to maturity, and hence do not provide call
protection. If called early, however, the issuer must pay a call premium over
the market price to the investor. This call premium declines at a preset rate
daily, up to the maturity date.
The fund may also invest in other enhanced convertible securities. These
include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities), and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all have the
following features: they are issued by the company, the common stock of which
will be received in the event the convertible preferred stock is converted,
unlike PERCS they do not have a capital appreciation limit, they seek to
provide the investor with high current income with some prospect of future
capital appreciation, they are typically issued with three to four-year
maturities, they typically have some built-in call protection for the first
two to three years, investors have the right to convert them into shares of
common stock at a preset conversion ratio or hold them until maturity, and
upon maturity they will automatically convert to either cash or a specified
number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked
as senior or subordinated debt in the issuer's corporate structure according
to the terms of the debt indenture. There may be additional types of
convertible securities not specifically referred to herein which may be
similar to those described above in which the fund may invest, consistent
with its objectives and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the fund. The fund may have difficulty disposing
of such securities because there may be a thin trading market for a
particular security at any given time. Reduced liquidity may have an adverse
impact on market price and the fund's ability to dispose of particular
securities, when necessary, to meet the fund's liquidity needs or in response
to a specific economic event, such as the deterioration in the
creditworthiness of an issuer. Reduced liquidity in the secondary market for
certain securities may also make it more difficult for the fund to obtain
market quotations based on actual trades for purposes of valuing the fund's
portfolio. The fund, however, intends to acquire liquid securities, though
there can be no assurances that this will be achieved.
SYNTHETIC CONVERTIBLES. The fund may invest a portion of its assets in
"synthetic convertible" securities. A synthetic convertible is created by
combining distinct securities which together possess the two principal
characteristics of a true convertible security, i.e., fixed income and the
right to acquire the underlying equity security. This combination is achieved
by investing in nonconvertible fixed-income securities and in warrants or
stock or stock index call options which grant the holder the right to
purchase a specified quantity of securities within a specified period of time
at a specified price or to receive cash in the case of stock index options.
Synthetic convertible securities are generally not considered to be "Equity
Securities" for purposes of the fund's investment policy regarding those
securities.
Synthetic convertible securities differ from the true convertible security in
several respects. The value of a synthetic convertible is the sum of the
values of its fixed-income component and its convertibility component. Thus,
the values of a synthetic convertible and a true convertible security will
respond differently to market fluctuations. Further, although the manager
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 the manager
determines that such a combination would better promote the fund's investment
objectives. In addition, the component parts of a synthetic convertible
security may be purchased simultaneously or separately; and the holder of a
synthetic convertible faces the risk that the price of the stock, or the
level of the market index underlying the convertibility component will
decline.
FOREIGN SECURITIES The fund may invest in foreign securities, generally by
purchasing sponsored or unsponsored American Depositary Receipts (ADRs),
Global Depositary Receipts (GDRs), and European Depositary Receipts (EDRs).
The fund may also purchase the securities of foreign issuers directly in
foreign markets if, in the manager's judgment, an established public trading
market exists.
DEPOSITARY RECEIPTS Many securities of foreign issuers are represented by
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
and Global Depositary Receipts ("GDRs") (collectively "Depositary Receipts").
ADRs evidence ownership of, and represent the right to receive, securities of
foreign issuers deposited in a domestic bank or trust company or a foreign
correspondent bank. EDRs and GDRs are typically issued by foreign banks or
trust companies, although they also may be issued by U.S. banks or trust
companies, and evidence ownership of underlying securities issued by either a
foreign or a U.S. corporation. Generally, Depositary Receipts in registered
form are designed for use in the U.S. securities market and Depositary
Receipts in bearer form are designed for use in securities markets outside
the U.S.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on
exchanges or over-the-counter. While ADRs do not eliminate all the risk
associated with foreign investments, by investing in ADRs rather than
directly in the stock of foreign issuers, the Fund will avoid currency risks
during the settlement period for either purchases or sales. In general, there
is a large, liquid market in the U.S. for ADRs quoted on a national
securities exchange or on NASDAQ. The information available for ADRs is
subject to the accounting, auditing and financial reporting standards of the
U.S. market or exchange on which they are traded, which standards are more
uniform and more exacting than those to which many foreign issuers may be
subject. EDRs and GDRs may not necessarily be denominated in the same
currency as the underlying securities into which they may be converted.
Depositary Receipts may be issued under sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of Depositary Receipts. In unsponsored programs, the
issuer may not be directly involved in the creation of the program. Although
regulatory requirements with respect to sponsored and unsponsored programs
are generally similar, in some cases it may be easier to obtain financial
information from an issuer that has participated in the creation of a
sponsored program. Accordingly, there may be less information available
regarding issuers of securities underlying unsponsored programs and there may
not be a correlation between such information and the market value of the
Depositary Receipts.
TRADE CLAIMS Trade claims are bought from creditors of companies in financial
difficulty who seek to reduce the number of debt obligations they are owed.
Such trade creditors generally sell their claims in an attempt to improve
their balance sheets and reduce uncertainty regarding payments. For buyers,
trade claims offer the potential for profits since they are often purchased
at a significantly discounted value and, consequently, have the potential for
higher income and capital appreciation should the debt issuer's financial
position improve. Trade claims are generally liquid, as there is a secondary
market, but the board of trustees will monitor their liquidity. An investment
in trade claims is speculative and there can be no guarantee that the debt
issuer will ever be able to satisfy the obligation. Further, trading in trade
claims is not regulated by federal securities laws but primarily by
bankruptcy and commercial laws. Because trade claims are unsecured
obligations, holders may have a lower priority than secured or preferred
creditors. At the present time, however, the fund intends to limit these
investments to no more than 5% of its net assets.
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the fund's
portfolio in a temporary defensive manner. Under such circumstances, the fund
may invest up to 100% of its assets in: (1) securities of the U.S. government
and certain of its agencies or instrumentalities that mature in one year or
less from the date of purchase, including U.S. Treasury bills, notes and
bonds, and securities of the Government National Mortgage Association, the
Federal Housing Administration and other agency or instrumentality issues or
guarantees that are supported by the full faith and credit of the U.S.
government; (2) obligations issued or guaranteed by other U.S. government
agencies or instrumentalities, some of which are supported by the right of
the issuer to borrow from the U.S. government (e.g., obligations of the
Federal Home Loan Banks) and some of which are backed by the credit of the
issuer itself (e.g., obligations of the Student Loan Marketing Association);
(3) bank obligations, including negotiable and non-negotiable CDs (subject to
the 10% aggregate limit on the fund's investment in illiquid securities),
letters of credit and bankers' acceptances, or instruments secured by these
types of obligations, issued by banks and savings institutions that are
subject to regulation by the U.S. government, its agencies or
instrumentalities and that have assets of over $1 billion, unless these types
of obligations are guaranteed by a parent bank that has total assets in
excess of $5 billion; (4) commercial paper considered by the manager to be of
high quality, which must be rated within the two highest rating categories by
S&P or Moody's or, if unrated, issued by a company having an outstanding debt
issue rated at least AA by S&P or Aa by Moody's; and (5) corporate
obligations including, but not limited to, corporate notes, bonds and
debentures considered by the manager to be high grade or that are rated
within the two highest rating categories by S&P or Moody's.
DERIVATIVE SECURITIES Although the fund has no present intention of investing
in the following, it has the authority to enter into options, futures and
options on futures, which are generally considered "derivative securities."
OPTIONS. The Fund may write covered call options that are listed on a
national securities exchange and buy listed options on securities and
securities indices. The Fund may also write covered call options and buy put
options that are traded over-the-counter ("OTC"). In addition, the fund may
enter into closing transactions with respect to its open option positions.
The fund will not invest in any stock options or stock index options if the
option premiums paid on its open positions exceed 5% of the value of the
fund's total assets. The fund may enter into closing purchase transactions
with respect to its open option positions.
CALL OPTIONS. The fund may buy call options on securities which it intends to
buy. By buying these options, the fund limits the risk of a substantial
increase in the market price of these securities. The fund may also buy call
options on securities held in its portfolio and on which it has written call
options as described below.
A writer of a call option retains the amount of the premium paid by the buyer
of the option regardless of whether it is exercised. The premium amount
reflects, among other things, the relationship of the exercise price to the
market price, the volatility of the underlying security, the remaining term
of the option, supply and demand, and interest rates. A premium received by
the writer of a covered call option may be offset by a decline in the market
value of the underlying security during the option period. Because the writer
of a call option may be assigned an exercise notice at any time before the
termination of the call, the writer may have no control over when the
underlying securities must be sold. If a call option is exercised, the writer
experiences a profit or loss from the sale of the underlying security. Also,
by writing a covered call option, the fund gives up the opportunity to profit
from any price increase in the underlying security above the option exercise
price while the option is in effect.
Unless a writer of an option has already been notified of the exercise of an
option, the writer may terminate its obligation by buying an option of the
same series as the option previously written. This is known as a "closing
purchase transaction," and it allows the writer's position to be canceled by
the clearing corporation. A holder of an option liquidates its position by
selling an option of the same series as the option previously purchased,
which is known as a "closing sale transaction." There is no guarantee that
either a closing purchase or a closing sale transaction can be completed.
The fund may conduct a closing transaction on a written call option to permit
the fund to (i) write another call option on the underlying security with
either a different exercise price, expiration date or both or (ii) use the
cash or proceeds from the sale of the underlying security for other fund
investments. If the fund wants to sell a security from its portfolio on which
it has written a call option, it may conduct a closing transaction before or
at the same time as it sells the security. Profit or loss from such a sale
will depend on whether the amount received is more or less than the premium
paid for the call option plus any related transaction costs.
If the price of a closing transaction is less than the premium received from
writing the option or the premium paid to buy the option, the fund makes a
profit on the transaction; if the price is more, the fund realizes a loss.
Because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the purchase of a call option is likely to be offset by appreciation of
the underlying security owned by the fund.
PUT OPTIONS. The fund may also buy put options. The fund may enter into
closing sale transactions with respect to such options, exercise them, or
permit them to expire. The fund may buy a put option on an underlying
security (a "protective put") owned by the fund. This allows the fund to sell
the underlying security at the put exercise price, regardless of any decline
in the underlying security's market price, until the put expires. If the
investment manger decides to hold the underlying security for tax
considerations, for example, a put option may be purchased in order to
protect any unrealized appreciation. Of course any capital gain realized when
the security is sold would be reduced by the premium paid for the put option
and any transaction costs.
OPTIONS ON INDICES. Options on indices, which are described in the
prospectus, give the holder the right to receive cash equal to the difference
between the closing price of the index and the exercise price of the option,
expressed in dollars, multiplied by a specified number. Options on indices
differ from options on individual securities in that all settlements are in
cash, and gain or loss depends on price movements in the stock market
generally (or in a particular industry or segment of the market) rather than
on price movements in individual securities.
FORWARD CONVERSIONS. In a forward conversion, the fund buys securities and
writes call options and buys put options on such securities. By purchasing
puts, the fund protects the underlying security from depreciation in value.
By selling or writing calls on the same security, the fund receives premiums
which may offset part or all of the cost of purchasing the puts while
foregoing the opportunity for appreciation in the value of the underlying
security. The fund will not exercise a put it has purchased while a call
option on the same security is outstanding.
Although it is generally intended that the exercise price of put and call
options would be identical, situations might occur in which some option
positions are acquired with different exercise prices. Therefore, the fund's
return may depend in part on movements in the price of the underlying
security.
SPREAD AND STRADDLE OPTIONS TRANSACTIONS. In "spread" transactions, the fund
buys and writes a put or buys and writes a call on the same underlying
security with the options having different exercise prices and/or expiration
dates. In "straddles," the fund purchases or writes combinations of put and
call options on the same security. When the fund engages in spread and
straddle transactions, it seeks to profit from differentials in the option
premiums paid and received and in the market prices of the related options
positions when they are closed out or sold. Because these transactions
require the fund to buy and/or write more than one option simultaneously, the
fund's ability to enter into such transactions and to liquidate its positions
when necessary or deemed advisable may be more limited than if the fund was
to buy or sell a single option. Similarly, costs incurred by the fund in
connection with these transactions will in many cases be greater than if the
fund was to buy or sell a single option. The fund intends to limit these
transactions to no more than 5% of the fund's net assets.
FUTURES. The fund may enter into contracts for the purchase or sale for
future delivery of securities, contracts based upon financial indices, and
the fund may buy options on such contracts ("financial futures"). Financial
futures contracts are contracts that obligate the long or short holder to
take or make delivery of a specified quantity of a financial instrument, such
as a security, or the cash value of a securities index during a specified
future period at a specified price. A "sale" of a futures contract means the
seller has a contractual obligation to deliver the securities described in
the contract at a specified price on a specified date. A "purchase" of a
futures contract means the buyer has a contractual obligation to acquire the
securities described in the contract at a specified price on a specified
date. Futures contracts have been designed by exchanges that have been
designated "contracts markets" by the Commodity Futures Trading Commission
("CFTC") and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market. At the
present time, the fund intends to limit these investments to no more than 5%
of its net assets.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same
month. Such a transaction, which is effected through a member of an exchange,
cancels the obligation to take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded,
the fund will incur brokerage fees when it purchases or sells futures
contracts.
The fund will not engage in transactions in futures contracts or related
options for speculation. The fund will not enter into any stock index future
or related option if, immediately thereafter, more than one-third of the
fund's net assets would be represented by futures contracts or related
options. In addition, the fund may not buy or sell futures contracts or buy
or sell related options if, immediately thereafter, the sum of the amount of
margin deposits on its existing futures and related options positions, and
premiums paid for related options, would exceed 5% of the market value of the
fund's total assets.
The purpose of the acquisition or sale of a futures contract is to attempt to
protect the fund from fluctuations in price of portfolio securities without
actually buying or selling the underlying security. To the extent the fund
enters into futures contracts or related options, it will deposit in a
segregated account with its custodian bank cash or other U.S. Treasury
obligations equal to a specified percentage of the value of the futures
contract (the "initial margin"), as required by the relevant contract market
and futures commission merchant. The futures contract will be
marked-to-market daily. If the value of the futures contract declines
relative to the fund's position, the fund will be required to pay the futures
commission merchant an amount equal to the change in value.
STOCK INDEX FUTURES CONTRACTS. The fund may purchase and sell stock index
futures contracts traded on domestic exchanges and, to the extent such
contracts have been approved by the CFTC for sale to customers in the U.S.,
on foreign exchanges. A stock index futures contract obligates the seller to
deliver (and the purchaser to take) an amount of cash equal to a specific
dollar amount times the difference between the value of a specific stock
index at the close of the last trading day of the contract and the price at
which the agreement is made. Open futures contracts are valued on a daily
basis and the fund may be obligated to provide or receive cash reflecting any
decline or increase in the contract's value. No physical delivery of the
underlying stocks in the index is made in the future.
The fund may sell stock index futures contracts in anticipation of or during
a market decline in an attempt to offset the decrease in market value of its
securities that might otherwise result. When the fund is not fully invested
in stocks and anticipates a significant market advance, it may purchase stock
index futures in order to gain rapid market exposure that may offset
increases in the cost of common stocks that it intends to purchase.
FUTURE DEVELOPMENTS. The fund may take advantage of opportunities in the area
of options and futures contracts and any other derivative investments that
are not presently contemplated for use by the fund or that are not currently
available but which may be developed, to the extent such opportunities are
both consistent with the fund's investment objective and legally permissible
for the fund. Prior to investing in any such investment vehicle, the fund
will supplement its prospectus, if appropriate.
STRUCTURED NOTES The fund may invest up to 5% of its total assets in
structured notes. Structured notes entitle their holders to receive some
portion of the principal or interest payments that would be due on
traditional debt obligations. A zero coupon bond, which is the right to
receive only the principal portion of a debt security, is a simple form of
structured note. A structured note's performance or value may be linked to a
change in return, interest rate, or value at maturity of the change in an
identified or "linked" equity security, currency, interest rate, index or
other financial indicator. The holder's right to receive principal or
interest payments on a structured note may also vary in timing or amount,
depending on changes in certain rates of interest or other external events.
LOAN PARTICIPATIONS Through a loan participation, the fund can buy from a
lender a portion of a larger loan that it has made to a borrower. By buying
loan participations, the fund may be able to acquire interests in loans from
financially strong borrowers that the fund could not otherwise acquire. These
instruments are typically interests in floating or variable rate senior loans
to U.S. corporations, partnerships, and other entities. Generally, loan
participations are sold without guarantee or recourse to the lending
institution and are subject to the credit risks of both the borrower and the
lending institution. While loan participations generally trade at par value,
if the borrowers have credit problems, some may sell at discounts. To the
extent the borrower's credit problems are resolved, the loan participations
may then appreciate in value. These loan participations, however, carry
substantially the same risk as that for defaulted debt obligations and may
cause loss of the entire investment. Most loan participations are illiquid
and therefore will be included in the fund's limitation on illiquid
investments.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES The fund may invest in
mortgage-backed securities, including collateralized mortgage obligations,
which represent direct or indirect participation in, or are collateralized by
and payable from, mortgage loans secured by real property. In addition, the
fund may buy asset-backed securities, which represent participation in, or
are secured by and payable from, assets such as motor vehicle installment
sale contracts, installment loan contracts, leases of various types of real
and personal property, receivables from revolving credit (credit card)
agreements and other categories of receivables. These securities are
generally issued by trusts and special purpose corporations.
RESTRICTED SECURITIES Some of the securities the fund buys are considered
"restricted securities." The fund's investment in restricted securities may
not exceed 15% of its net assets. Restricted securities are securities with
legal or contractual restrictions on resale, including securities that are
not registered under the 1933 Act. Securities not registered under the 1933
Act may not be sold without first being registered, unless there is an
available exemption under the 1933 Act. Normally the costs of registering
these securities is borne by the issuer. Restricted securities involve
certain risks, including the risk that a secondary market may not exist when
a holder wants to sell them. In addition, the price and valuation of these
securities may reflect a discount because they are perceived as having less
liquidity than similar securities that are not restricted.
As with other securities in the fund's portfolio, if no readily available
market quotations exist for restricted securities, they will be valued at
fair value in accordance with procedures adopted by the board of trustees. If
the fund suddenly has to sell restricted securities, time constraints or a
lack of interested, qualified buyers may prevent the fund from receiving the
carrying value of the securities at the time of the sale. Alternatively, the
manager may sell unrestricted securities it might have retained if the fund
had only held unrestricted securities.
WARRANTS A warrant is typically a long-term option issued by a corporation
which gives the holder the privilege of buying a specified number of shares
of the underlying common stock at a specified exercise price at any time on
or before an expiration date. Stock index warrants entitle the holder to
receive, upon exercise, an amount in cash determined by reference to
fluctuations in the level of a specified stock index. If the fund does not
exercise or dispose of a warrant prior to its expiration, it will expire
worthless. Further, the fund does not intend to invest directly in warrants
(valued at the lower of cost or market) in excess of 5% of the value of the
fund's net assets. No more than 2% of the value of the fund's net assets may
be invested in warrants (valued at the lower of cost or market) which are not
listed on the New York or American Stock Exchange.
SHORT-SELLING In a short sale, the fund sells a security it does not own in
anticipation of a decline in the market value of that security. The security
sold must be listed on a national exchange. To complete the transaction, the
fund must borrow the security to make delivery to the buyer. The fund is then
obligated to replace the security borrowed by purchasing it at the market
price at the time of replacement. Until the security is replaced, the fund
must pay the lender any dividends or interest that accrue during the period
of the loan. To borrow the security, the fund may also be required to pay a
premium, which would increase the cost of the security sold. The proceeds of
the short sale will be retained by the broker, to the extent necessary to
meet margin requirements, until the short position is closed out.
The fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which
the fund replaces the borrowed security, and the fund will realize a gain if
the security declines in price between those same dates. The amount of any
gain will be decreased, and the amount of any loss increased, by the amount
of any premium, dividends or interest the fund is required to pay in
connection with the short sale.
In addition to the short sales discussed above, the fund may also make short
sales "against the box." A short sale is "against the box" to the extent that
the fund contemporaneously owns or has the right to obtain at no added cost
securities identical to those sold short. The fund at no time will have more
than 15% of the value of its net assets in deposits on short sales against
the box.
No securities will be sold short if, after the sale, the total market value
of all the fund's open short positions, including short sales against the
box, would exceed 25% of the value of the fund's net assets. In addition,
short sales of the securities of any one issuer may not exceed the lesser of
2% of the fund's net assets or 2% of the securities of any class of the
issuer.
The fund will place in a segregated account with its custodian bank an amount
of cash or U.S. government securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short
and (b) any cash or U.S. government securities required to be deposited as
collateral with the broker in connection with the short sale (not including
the proceeds from the short sale). The segregated account will be
marked-to-market daily and at no time will the amount deposited in the
segregated account and with the broker as collateral be less than the market
value of the securities at the time they were sold short.
NON-DIVERSIFICATION As a non-diversified investment company under the 1940
Act, the fund may invest more than 5% and up to 25% of its assets in the
securities of any one issuer at the time of purchase. For purposes of the
Code, however, as of the last day of any fiscal quarter, the fund may not
have more than 25% of its total assets invested in any one issuer, and, with
respect to 50% of its total assets, the fund may not have more than 5% of its
total assets invested in any one issuer, nor may it own more than 10% of the
outstanding voting securities of any one issuer. These limitations do not
apply to investments in securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities or to securities of
investment companies that qualify as regulated investment companies under the
Code.
SECURITIES LENDING The fund may lend to broker-dealers portfolio securities
with an aggregate market value up to 25% of its total assets. Such loans must
be secured by collateral (consisting of any combination of cash, U.S.
government securities or irrevocable letters of credit) in an amount at least
equal (on a daily marked-to-market basis) to the current market value of the
securities loaned. The fund may terminate the loans at any time and obtain
the return of the securities. The fund will continue to receive any interest
or dividends paid on the loaned securities and will continue to have voting
rights with respect to the securities.
REPURCHASE AGREEMENTS The fund will generally have a portion of its assets in
cash or cash equivalents for a variety of reasons including waiting for a
special investment opportunity or taking a defensive position. To earn income
on this portion of its assets, the fund may enter into repurchase agreements
with certain banks and broker-dealers. Under a repurchase agreement, the fund
agrees to buy a U.S. government security from one of these issuers and then
to sell the security back to the issuer after a short period of time
(generally, less than seven days) at a higher price. The bank or
broker-dealer must transfer to the fund's custodian, securities with an
initial value of at least 102% of the dollar amount invested by the fund in
each repurchase agreement. Repurchase agreements may involve risks in the
event of default or insolvency of the seller, including possible delays or
restrictions upon the fund's ability to dispose of the underlying securities.
The fund will enter into repurchase agreements only with parties who meet
creditworthiness standards approved by the fund's board of trustees, i.e.,
banks or broker-dealers which have been determined by the manager to present
no serious risk of becoming involved in bankruptcy proceedings within the
time frame contemplated by the repurchase transaction.
ILLIQUID INVESTMENTS The fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally
securities that cannot be sold within seven days in the normal course of
business at approximately the amount at which the fund has valued them.
BORROWING The fund does not borrow money or mortgage or pledge any of its
assets, except that it may borrow up to 331/3% of its total assets (including
the amount borrowed) in order to meet redemption requests that might
otherwise require the untimely disposition of portfolio securities or for
other temporary or emergency purposes and may pledge its assets in connection
therewith. The fund will not make any additional investments while any
borrowings exceed 5% of its total assets.
RISKS
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There is no assurance that the fund will meet its investment goal.
Investments in securities that have potential to increase in value may be
subject to a greater degree of risk and may be more volatile than other types
of investments.
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 market as a whole.
VALUE INVESTING RISK 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.
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.
FOREIGN SECURITIES You should consider carefully the substantial risks
involved in securities of companies of foreign nations, which are in addition
to the usual risks inherent in domestic investments.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or
financial reporting standards, and auditing practices and requirements may
not be comparable to those applicable to U.S. companies. A fund, therefore,
may encounter difficulty in obtaining market quotations for purposes of
valuing its portfolio and calculating its net asset value. Foreign markets
have substantially less volume than the New York Stock Exchange ("NYSE"), and
securities of some foreign companies are less liquid and more volatile than
securities of comparable U.S. companies. Commission rates in foreign
countries, which are generally fixed rather than subject to negotiation as in
the U.S., are likely to be higher. In many foreign countries there is less
government supervision and regulation of stock exchanges, brokers, and listed
companies than in the U.S.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less social, political, and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict
the fund's investment opportunities, including restrictions on investment in
issuers or industries deemed sensitive to national interests; (iv) foreign
taxation; (v) the absence of developed legal structures governing private or
foreign investment or allowing for judicial redress for injury to private
property; (vi) the absence, until recently in certain Eastern European
countries, of a capital market structure or market-oriented economy; and
(vii) the possibility that recent favorable economic developments in Eastern
Europe may be slowed or reversed by unanticipated political or social events
in such countries.
In addition, many countries in which the fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency, and balance of payments
position.
DEPOSITARY RECEIPTS RISK Depositary receipts, such as American Depositary
Receipts and Global Depositary Receipts, reduce but do not eliminate all the
risk inherent in investing in the securities of foreign issuers. To the
extent that the fund acquires Depositary Receipts through banks which do not
have a contractual relationship with the foreign issuer of the security
underlying the Depositary Receipt to issue and service such Depositary
Receipts, there may be an increased possibility that the fund would not
become aware of and be able to respond to corporate actions such as stock
splits or rights offerings involving the foreign issuer in a timely manner.
CURRENCY RISK The fund's management endeavors to buy and sell foreign
currencies on as favorable a basis as practicable. Some price spread on
currency exchange (to cover service charges) may be incurred, particularly
when the fund changes investments from one country to another or when
proceeds of the sale of shares in U.S. dollars are used for the purchase of
securities in foreign countries. Also, some countries may adopt policies that
would prevent the fund from transferring cash out of the country or withhold
portions of interest and dividends at the source. There is the possibility of
cessation of trading on national exchanges, expropriation, nationalization,
or confiscatory taxation, withholding, and other foreign taxes on income or
other amounts, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country), default in foreign
government securities, political or social instability, or diplomatic
developments that could affect investments in securities of issuers in
foreign nations.
The fund may be affected either favorably or unfavorably by fluctuations in
the relative rates of exchange between the currencies of different nations,
by exchange control regulations, and by indigenous economic and political
developments. Some countries in which the fund may invest may also have fixed
or managed currencies that are not free-floating against the U.S. dollar.
Further, certain currencies may not be internationally traded.
Certain of these currencies have experienced a steady devaluation relative to
the U.S. dollar. Any devaluations in the currencies in which the fund's
portfolio securities are denominated may have a detrimental impact on the
fund. Through the fund's flexible policy, management endeavors to avoid
unfavorable consequences and to take advantage of favorable developments in
particular nations where, from time to time, it places the fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove
profitable and others may not. No assurance can be given that profits, if
any, will exceed losses.
The board of trustees considers at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions which
would affect the liquidity of the fund's assets maintained with custodians in
foreign countries, as well as the degree of risk from political acts of
foreign governments to which such assets may be exposed. The board of
trustees also considers the degree of risk involved through the holding of
portfolio securities in domestic and foreign securities depositories.
However, in the absence of willful misfeasance, bad faith, or gross
negligence on the part of the manager, any losses resulting from the holding
of the fund's portfolio securities in foreign countries and/or with
securities depositories will be at the risk of the shareholders. No
assurance can be given that the board of trustees' appraisal of the risks
will always be correct or that such exchange control restrictions or
political acts of foreign governments might not occur.
EURO RISK On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. The transition and the
elimination of currency risk among EMU countries may change the economic
environment and behavior of investors, particularly in European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect
on the fund, the fund's manager and its affiliated services providers are
taking steps they believe are reasonably designed to address the euro issue.
INTEREST RATE 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, consequently, its share price. Rising
interest rates, which often occur during time of inflation of a growing
economy, are likely to cause the face value of a debt security to decrease,
having a negative effect on the value of the fund's shares. Of course,
interest rtes have increased and decreased, sometimes very dramatically, in
the past. These changes are likely to occur again in the future at
unpredictable times.
LOWER-RATED SECURITIES Although they may offer higher yields than do higher
rated securities, low rated and unrated debt securities generally involve
greater volatility of price and risk to principal and income, including the
possibility of default by, or bankruptcy or, the issuers of the securities.
In addition, the markets in which low rated and unrated debt securities are
traded are more limited than those in which higher rated securities are
traded. The existence of limited markets for particular securities may
diminish a fund's ability to sell the securities at fair value either to meet
redemption requests or to respond to a specific economic event such as a
deterioration in the creditworthiness of the issuer. Reduced secondary market
liquidity for certain low rated or unrated debt securities may also make it
more difficult for a fund to obtain accurate market quotations for the
purposes of valuing the fund's portfolio. Market quotations are generally
available on many low rated or unrated securities only from a limited number
of dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated dent
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated debt securities may be more complex
than for issuers of higher rated securities. The ability of a fund to achieve
its investment goal may, to the extent of investment in low rated debt
securities, be more dependent upon such creditworthiness analysis than would
be the case if the fund were invested in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low rated debt securities have been found to be
less sensitive to interest rate changes than higher rated investments, but
more sensitive to adverse economic downturns or individual corporate
developments. A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a decline in low rated debt
securities prices because the advent of a recession could lessen the ability
of a highly leveraged company to make principal and interest payments on its
debt securities. If the issuer of low rated debt securities defaults, a fund
may incur additional expenses to seek recovery.
The risk factors above also apply to lower-quality zero-coupon, deferred
interest and pay-in-kind securities. These securities have an additional
risk, however, because unlike securities that pay interest throughout the
time until maturity, the fund will not receive any cash until the cash
payment date. If the issuer defaults, the fund may not obtain any return on
its investment.
Zero-coupon or deferred interest securities are debt obligations that make no
periodic interest payments before maturity or a specified date when the
securities begin paying current interest (the "cash payment date"), and
therefore are generally issued and traded at a discount from their face
amount or par value. The discount varies depending on the time remaining
until maturity or the cash payment date, as well as prevailing interest
rates, liquidity of the security, and the perceived credit quality of the
issuer. The discount, in the absence of financial difficulties of the issuer,
typically decreases as the final maturity or cash payment date approaches.
The value of zero-coupon securities is generally more volatile than the value
of other fixed-income securities that pay interest periodically. Zero-coupon
securities are also likely to respond to changes in interest rates to a
greater degree than other fixed-income securities having similar maturities
and credit quality.
Current federal income tax law requires a holder of a zero-coupon security to
report as income each year the portion of original issue discount on the
security that accrues that year, even though the holder receives no cash
payments of interest during the year. Pay-in-kind securities pay interest by
issuing more bonds. The fund is deemed to receive interest over the life of
these bonds and is treated as if the interest were paid on a current basis
for federal income tax purposes, although the fund does not receive any cash
interest payments until maturity or the cash payment date. Accordingly,
during times when the fund does not receive any cash interest payments on its
zero-coupon, deferred interest or pay-in-kind securities, it may have to sell
portfolio securities to meet distribution requirements and these sales may be
subject to the risk factors discussed above. The fund is not limited in the
amount of its assets that may be invested in these types of securities.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES RISK Mortgage-backed and
asset-backed securities are often subject to more rapid repayment than their
stated maturity dates would indicate because of the pass-through of
prepayments of principal on the underlying loans. During periods of declining
interest rates, prepayment of loans underlying mortgage-backed and
asset-backed securities can be expected to accelerate, and thus impair the
fund's ability to reinvest the returns of principal at comparable yields.
Accordingly, the market value of these securities will vary with changes in
market interest rates generally and in yield differentials among various
kinds of U.S. government securities and other mortgage-backed and
asset-backed securities. Asset-backed securities present certain additional
risks that are not presented by mortgage-backed securities because
asset-backed securities generally do not have the benefit of a security
interest in collateral that is comparable to mortgage assets. There is the
possibility that, in some cases, recoveries on repossessed collateral may not
be available to support payments on these securities.
OPTIONS, FUTURES AND OPTIONS ON FUTURES The fund's ability to hedge
effectively all or a portion of its securities through transactions in
options on stock indices, financial futures and related options depends on
the degree to which price movements in the underlying index or underlying
securities correlate with price movements in the relevant portion of the
fund's portfolio. Inasmuch as these securities will not duplicate the
components of the index or such underlying securities, the correlation will
not be perfect. Consequently, the fund bears the risk that the prices of the
securities being hedged will not move in the same amount as the hedging
instrument. It is also possible that there may be a negative correlation
between the index or other securities underlying the hedging instrument and
the hedged securities that would result in a loss on both such securities and
the hedging instrument. Accordingly, successful use by the fund of options on
stock indices, financial futures and other options will be subject to the
manager's ability to correctly predict movements in the direction of the
securities markets generally or in a particular segment. This requires
different skills and techniques than predicting changes in the price of
individual stocks.
Positions in stock index options and financial futures and related options
may be closed out only on an exchange which provides a secondary market.
There can be no assurance that a liquid secondary market will exist for any
particular stock index option or futures contract or related option at any
specific time. Thus, it may not be possible to close such an option or
futures position. The inability to close options or futures positions also
could have an adverse impact on the fund's ability to effectively hedge its
securities. Of course, the fund will enter into an option or futures position
only if there appears to be a liquid secondary market for such options or
futures.
OTC options may be subject to more risks than exchange-traded options because
OTC options are arranged with dealers, not with a clearing corporation, and
because pricing of OTC options is typically done by reference to information
from market makers. There can be no assurance that a continuous liquid
secondary market will exist for any particular OTC option at any specific
time. Consequently, the fund may be able to realize the value of an OTC
option it has purchased only by exercising it or entering into a closing sale
transaction with the dealer that issued it. Similarly, when the fund writes
an OTC option, it generally can close out that option prior to its expiration
only by entering into a closing purchase transaction with the dealer to which
the fund originally wrote it. If a covered call option writer cannot effect a
closing transaction, it cannot sell the underlying security until the option
expires or the option is exercised. Therefore, a covered call option writer
of an OTC option may not be able to sell an underlying security even though
it might otherwise be advantageous to do so. Likewise, a secured put writer
of an OTC option may be unable to sell the securities pledged to secure the
put for other investment purposes while it is obligated as a put writer.
Similarly, a purchaser of such put or call option might also find it
difficult to terminate its position on a timely basis in the absence of a
secondary market.
The CFTC and the various exchanges have established limits, referred to as
"speculative position limits," on the maximum net long or net short position
which any person may hold or control in a particular futures contract.
Trading limits are imposed on the maximum number of contracts which any
person may trade on a particular trading day. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The fund does not believe that these
trading and positions limits will have an adverse impact on the fund's
strategies for hedging its securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced, thus producing distortion.
Third, from the point of view of speculators, the margin deposit requirements
in the futures market are less onerous than margin requirements in the
securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility
of distortion, a correct forecast of general interest rate trends by the
manager may still not result in a successful transaction.
In addition, futures contracts entail risks. Although the fund believes that
use of such contracts will benefit the fund, if the manager's judgment about
the general direction of interest rates is incorrect, the fund's overall
performance would be poorer than if it had not entered into any such
contract. For example, if the fund has hedged against the possibility of an
increase in interest rates that would adversely affect the price of bonds
held in its portfolio and interest rates decrease instead, the fund will lose
part or all of the benefit of the increased value of its bonds which it has
hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if the fund has insufficient cash, it may have
to sell securities from its portfolio to meet daily variation margin
requirements. Such sales may be, but will not necessarily be, at increased
prices which reflect the rising market. The fund may have to sell securities
at a time when it may be disadvantageous to do so.
The fund's sale of futures contracts and purchase of put options on futures
contracts will be solely to protect its investments against declines in
value. The fund expects that in the normal course it will purchase securities
upon termination of long futures contracts and long call options on future
contracts, but under unusual market conditions it may terminate any of such
positions without a corresponding purchase of securities.
RESTRICTED SECURITIES The board of trustees has authorized the fund to invest
in restricted securities and to consider them liquid (and thus not subject to
the 10% limitation on illiquid securities) to the extent the manager
determines that there is a liquid institutional or other market for these
securities. For example, restricted securities may be freely transferred
among qualified institutional buyers under Rule 144A of the 1933 Act, and in
some cases a liquid institutional market has developed.
On an ongoing basis, the board of trustees will review the manager's
decisions to treat restricted securities as liquid - including the manager's
assessment of current trading activity and the availability of reliable price
information. In determining whether a restricted security can be considered
liquid, the manager and the board of trustees will take into account the
following factors: (i) the frequency of trades and quotes for the security,
(ii) the number of dealers willing to buy or sell the security and the number
of potential buyers, (iii) dealer undertakings to make a market in the
security, and (iv) the nature of the security and nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). To the extent the fund
invests in restricted securities that are deemed to be liquid, the general
level of illiquidity in the fund may be increased if qualified institutional
buyers become uninterested in buying these securities or the market for these
securities contracts.
INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50%
of the fund's outstanding shares are represented at the meeting in person or
by proxy, whichever is less.
The fund may not:
1. Borrow money, except that the fund may borrow money in a manner consistent
with the fund's investment objective and policies in an amount not exceeding
33 1/3% of the value of the fund's total assets (including the amount
borrowed). The fund may borrow in connection with short-sales and short-sales
"against the box," and the fund may borrow from banks, other Franklin
Templeton Funds or other persons to the extent permitted by applicable law.
2. Underwrite securities of other issuers, except insofar as the fund may be
technically deemed an underwriter under the federal securities laws in
connection with the disposition of portfolio securities. (This does not
preclude the fund from obtaining such short-term credit as may be necessary
for the clearance of purchases and sales of its portfolio securities.)
3. Invest directly in interests in real estate, oil, gas or other mineral
leases, exploration or development programs, including limited partnership
interests. This restriction does not preclude investments in marketable
securities of issuers engaged in such activities.
4. Loan money, except as consistent with the fund's investment objectives,
and except that the fund may (a) purchase a portion of an issue of publicly
distributed bonds, debentures, notes and other evidences of indebtedness, (b)
enter into repurchase agreements, (c) lend its portfolio securities, and (d)
participate in an interfund lending program with other Franklin Templeton
Funds to the extent permitted by the 1940 Act and any rules or orders
thereunder.
5. Purchase or sell commodities or commodity contracts; except that the fund
may enter into interest rate and financial futures contracts, options
thereon, and forward contracts.
6. Issue securities senior to the fund's presently authorized shares of
beneficial interest.
7. Invest more than 25% of the fund's assets (at the time of the most recent
investment) in any single industry.
The fund presently has the following additional restrictions, which are not
fundamental and may be changed without shareholder approval.
The fund may not:
1. Invest in any company for the purpose of exercising control or management,
except that all or substantially all of the assets of the fund may be
invested in another registered investment company having the same investment
objective and policies as the fund.
2. Purchase securities on margin, except that the fund may make margin
payments in connection with futures, options and currency transactions.
3. Purchase or retain securities of any company in which officers or
directors of the fund, or of its investment manager, individually owning more
than 1/2 of 1% of the securities of such company, in the aggregate own more
than 5% of the securities of such company.
4. Purchase securities of open-end or closed-end investment companies, except
in compliance with the 1940 Act, and except that the fund may invest in
another registered investment company as described in Restriction 1, above.
5. Invest more than 5% of its assets in securities of issuers with less than
three years continuous operation, including the operations of any predecessor
companies.
6. Hold or purchase the securities of any issuer if, as a result, in the
aggregate, more than 10% of the value of the fund's net assets would be
invested in (i) securities that are not readily marketable or (ii) repurchase
agreements maturing in more than seven days. The fund may, however, invest in
registered investment companies as described in Restriction 1, above.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities or the amount of assets will not be
considered a violation of any of the foregoing restrictions.
RISKS
- ------------------------------------------------------------------------------
EURO RISK On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. The transition and the
elimination of currency risk among EMU countries may change the economic
environment and behavior of investors, particularly in European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect
on the fund, the fund's manager and its affiliated services providers are
taking steps they believe are reasonably designed to address the euro issue.
OFFICERS AND TRUSTEES
- ------------------------------------------------------------------------------
The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of the
fund's investment activities. The board, in turn, elects the officers of the
trust who are responsible for administering the fund's day-to-day operations.
The board also monitors the fund to ensure no material conflicts exist among
share classes. While none is expected, the board will act appropriately to
resolve any material conflict that may arise.
The affiliations of the officers and board members and their principal
occupations for the past five years are shown below.
POSITION(S)
HELD WITH PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS THE TRUST DURING THE PAST FIVE YEARS
- -------------------------------------------------------------------------------
Frank T. Crohn (74)
P.O. Box 810516
Boca Raton, FL 33481
Trustee
Chairman, Eastport Lobster & Fish Company; Director, Unity Mutual Life
Insurance Company; trustee of two of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman, Financial Benefit Life
Insurance Company and Director, AmVestors Financial Corporation.
*William J. Lippman (72)
One Parker Plaza, 16th Floor
Fort Lee, NJ 07024
President, Chief Executive Officer and Trustee
Senior Vice President, Franklin Resources, Inc. and Franklin Management,
Inc.; President and Director, Franklin Advisory Services, Inc.; and officer
and/or director or trustee, as the case may be, of six of the investment
companies in the Franklin Templeton Group of Funds.
Charles Rubens II (68)
18 Park Road
Scarsdale, NY 10583
Trustee
Private investor; and trustee of three of the investment companies in the
Franklin Templeton Group of Funds.
Leonard Rubin (73)
2 Executive Drive
Suite 560
Fort Lee, NJ 07024
Trustee
Partner in LDR Equities, LLC (manages various personal investments); Vice
President, Trimtex Co., Inc. (manufactures and markets specialty fabrics);
trustee or director, as the case may be, of three of the investment companies
in the Franklin Templeton Group of Funds; and FORMERLY, Chairman of the
Board, Carolace Embroidery Co., Inc. and President, F.N.C. Textiles, Inc.
Harmon E. Burns (54)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating Officer and Director, Templeton Investment
Counsel, Inc.; Executive Vice President and Chief Financial Officer, Franklin
Advisers, Inc.; Chief Financial Officer, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; President and Director, Franklin
Templeton Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin/Templeton Investor Services, Inc.; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 53 of the investment companies in
the Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.; Vice President, Chief Legal
Officer and Chief Operating Officer, Franklin Investment Advisory Services,
Inc.; and officer of 53 of the investment companies in the Franklin Templeton
Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers,
Inc.; Senior Vice President and Director, Franklin Advisory Services, Inc.
and Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (61)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
R. Martin Wiskemann (72)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President, Portfolio Manager and Director, Franklin Advisers,
Inc.; Senior Vice President, Franklin Management, Inc.; Vice President and
Director, ILA Financial Services, Inc.; and officer and/or director or
trustee, as the case may be, of 15 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal
securities laws.
The trust pays noninterested board members $1,800 per quarter plus $600 per
meeting attended. Noninterested board members may also serve as directors or
trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The following table
provides the total fees paid to noninterested board members by the trust and
by the Franklin Templeton Group of Funds.
NUMBER OF BOARDS IN
TOTAL FEES RECEIVED THE FRANKLIN
TOTAL FEES FROM THE FRANKLIN TEMPLETON GROUP OF
RECEIVED TEMPLETON GROUP OF FUNDS ON WHICH EACH
NAME FROM THE TRUST1 FUNDS2 SERVES3
- -------------------------------------------------------------------------------
Frank T. Crohn $9,600 2
Charles Rubens II $10,200 3
Leonard Rubin $10,200 3
1. For the fiscal year ended October 31, 1998.
2. For the calendar year ended December 31, 1998.
3. We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the board members are responsible. The Franklin Templeton Group of
Funds currently includes 54 registered investment companies, with
approximately 168 U.S. based funds or series.
Noninterested board members are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or board members who are shareholders of Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
MANAGEMENT AND OTHER SERVICES
- ------------------------------------------------------------------------------
MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisory
Services, Inc. The manager is wholly owned by Franklin Resources, Inc.
(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.
The manager provides investment research and portfolio management services,
and selects the securities for the fund to buy, hold or sell. The manager
also selects the brokers who execute the fund's portfolio transactions. The
manager provides periodic reports to the board, which reviews and supervises
the manager's investment activities. To protect the fund, the manager and its
officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of
the other funds it manages, or for its own account, that may differ from
action taken by the manager on behalf of the fund. Similarly, with respect to
the fund, the manager is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that the manager
and access persons, as defined by applicable federal securities laws, may buy
or sell for its or their own account or for the accounts of any other fund.
The manager is not obligated to refrain from investing in securities held by
the fund or other funds it manages. Of course, any transactions for the
accounts of the manager and other access persons will be made in compliance
with the fund's code of ethics.
Under the fund's code of ethics, employees of the Franklin Templeton Group
who are access persons may engage in personal securities transactions subject
to the following general restrictions and procedures: (i) the trade must
receive advance clearance from a compliance officer and must be completed by
the close of the business day following the day clearance is granted; (ii)
copies of all brokerage confirmations and statements must be sent to a
compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) above, file
annual reports of their securities holdings each January and inform the
compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they
are recommending a security in which they have an ownership interest for
purchase or sale by a fund or other client.
MANAGEMENT FEES The fund pays the manager a fee equal to an annual rate of:
o 0.75% on the first $500 million of the average daily net assets of the
fund;
o 0.625% on the next $500 million of the average daily net assets of the
fund;
o 0.50% on the average daily net assets of the fund in excess of $1 billion.
The fee is computed daily according to the terms of the management agreement.
Each class of the fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended October 31, the fund paid the following
management fees:
Management Fees Paid ($)1
- -------------------------------------------------
1998 1,105,394
1997 236,315
1996 0
1. For the fiscal years ended October 31, 1998, 1997 and 1996, management
fees, before any advance waiver, totaled $1,200,877, $19,727 and $267,392,
respectively. Under an agreement by the manager to limit its fees, the fund
paid the management fees shown.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by
Resources and is an affiliate of the fund's manager and principal
underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
During the last two fiscal years ended October 31, the manager paid FT
Services the following administration fees:
Administration Fees Paid ($)
------------------------------------------------
1998 240,184
1997 54,225
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is the fund's shareholder servicing agent
and acts as the fund's transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo,
CA 94403-7777.
For its services, Investor Services receives a fixed fee per account. The
fund may also reimburse Investor Services for certain out-of-pocket expenses,
which may include payments by Investor Services to entities, including
affiliated entities, that provide sub-shareholder services, recordkeeping
and/or transfer agency services to beneficial owners of the fund. The amount
of reimbursements for these services per benefit plan participant fund
account per year may not exceed the per account fee payable by the fund to
Investor Services in connection with maintaining shareholder accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the fund's independent auditor. The auditor gives an opinion on the
financial statements included in the trust's Annual Report to Shareholders
and reviews the trust's registration statement filed with the U.S. Securities
and Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
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The manager selects brokers and dealers to execute the fund's portfolio
transactions in accordance with criteria set forth in the management
agreement and any directions that the board may give.
When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid is
negotiated between the manager and the broker executing the transaction. The
determination and evaluation of the reasonableness of the brokerage
commissions paid are based to a large degree on the professional opinions of
the persons responsible for placement and review of the transactions. These
opinions are based on the experience of these individuals in the securities
industry and information available to them about the level of commissions
being paid by other institutional investors of comparable size. The manager
will ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in
the opinion of the manager, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or the manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the manager include, among others, supplying
information about particular companies, markets, countries, or local,
regional, national or transnational economies, statistical data, quotations
and other securities pricing information, and other information that provides
lawful and appropriate assistance to the manager in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the fund. They must, however, be of value to the manager in carrying
out its overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on
the research services the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order
to obtain additional research services allows the manager to supplement its
own research and analysis activities and to receive the views and information
of individuals and research staffs of other securities firms. As long as it
is lawful and appropriate to do so, the manager and its affiliates may use
this research and data in their investment advisory capacities with other
clients. If the fund's officers are satisfied that the best execution is
obtained, the sale of fund shares, as well as shares of other funds in the
Franklin Templeton Group of Funds, may also be considered a factor in the
selection of broker-dealers to execute the fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of
the National Association of Securities Dealers, Inc., it may sometimes
receive certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the
fund, any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next
management fee payable to the manager will be reduced by the amount of any
fees received by Distributors in cash, less any costs and expenses incurred
in connection with the tender.
If purchases or sales of securities of the fund and one or more other
investment companies or clients supervised by the manager are considered at
or about the same time, transactions in these securities will be allocated
among the several investment companies and clients in a manner deemed
equitable to all by the manager, taking into account the respective sizes of
the funds and the amount of securities to be purchased or sold. In some cases
this procedure could have a detrimental effect on the price or volume of the
security so far as the fund is concerned. In other cases it is possible that
the ability to participate in volume transactions may improve execution and
reduce transaction costs to the fund.
During the last three fiscal years ended October 31, the fund paid the
following brokerage commissions:
Brokerage Commissions ($)
------------------------------------------------
1998 356,245
1997 179,663
1996 28,078
As of October 31, 1998, the fund did not own securities of its regular
broker-dealers.
DISTRIBUTIONS AND TAXES
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The fund calculates dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally
due to the difference in any distribution and service (Rule 12b-1) fees of
each class. The fund does not pay "interest" or guarantee any fixed rate of
return on an investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in
the form of dividends and interest on its investments. This income, less
expenses incurred in the operation of the fund, constitutes the fund's net
investment income from which dividends may be paid to you. Any distributions
by the fund from such income will be taxable to you as ordinary income,
whether you take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net capital gains realized by the fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, in order to reduce or eliminate excise or income
taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the fund's
ordinary income distributions to you, and may cause some or all of the fund's
previously distributed income to be classified as a return of capital.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you
of the amount of your ordinary income dividends and capital gains
distributions at the time they are paid, and will advise you of their tax
status for federal income tax purposes shortly after the close of each
calendar year. If you have not held fund shares for a full year, the fund may
designate and distribute to you as ordinary income or capital gain a
percentage of income that is not equal to the actual amount of such income
earned during the period of your investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The fund has elected
to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. As a regulated
investment company, the fund generally pays no federal income tax on the
income and gains it distributes to you. The board reserves the right not to
maintain the qualification of the fund as a regulated investment company if
it determines such course of action to be beneficial to shareholders. In such
case, the fund will be subject to federal, and possibly state, corporate
taxes on its taxable income and gains, and distributions to you will be taxed
as ordinary dividend income to the extent of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires the fund to distribute to you by December 31
of each year, at a minimum, the following amounts: 98% of its taxable
ordinary income earned during the calendar year; 98% of its capital gain net
income earned during the twelve month period ending October 31; and 100% of
any undistributed amounts from the prior year. The fund intends to declare
and pay these amounts in December (or in January that are treated by you as
received in December) to avoid these excise taxes, but can give no assurances
that its distributions will be sufficient to eliminate all such taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. If you redeem
your fund shares, or exchange your fund shares for shares of a different
Franklin Templeton Fund, the IRS will require that you report a gain or loss
on your redemption or exchange. If you hold your shares as a capital asset,
the gain or loss that you realize will be capital gain or loss and will be
long-term or short-term, generally depending on how long you hold your
shares. Any loss incurred on the redemption or exchange of shares held for
six months or less will be treated as a long-term capital loss to the extent
of any long-term capital gains distributed to you by the fund on those shares.
All or a portion of any loss that you realize upon the redemption of your
fund shares will be disallowed to the extent that you buy other shares in the
fund (through reinvestment of dividends or otherwise) within 30 days before
or after your share redemption. Any loss disallowed under these rules will
be added to your tax basis in the new shares you buy.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that 100% of the dividends paid by the fund for
the most recent fiscal year qualified for the dividends-received deduction.
In some circumstances, you will be allowed to deduct these qualified
dividends, thereby reducing the tax that you would otherwise be required to
pay on these dividends. The dividends-received deduction will be available
only with respect to dividends designated by the fund as eligible for such
treatment. All dividends (including the deducted portion) must be included in
your alternative minimum taxable income calculation.
INVESTMENT IN COMPLEX SECURITIES The fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the fund are
treated as ordinary income or capital gain, accelerate the recognition of
income to the fund and/or defer the fund's ability to recognize losses, and,
in limited cases, subject the fund to U.S. federal income tax on income from
certain of its foreign securities. In turn, these rules may affect the
amount, timing or character of the income distributed to you by the fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
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The fund is a non-diversified series of Franklin Value Investors Trust, an
open-end management investment company, commonly called a mutual fund. The
trust was organized as a Massachusetts business trust on September 11, 1989,
and is registered with the SEC.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations.
The Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the fund's assets if you are held personally liable for
obligations of the fund. The Declaration of Trust provides that the fund
shall, upon request, assume the defense of any claim made against you for any
act or obligation of the fund and satisfy any judgment thereon. All such
rights are limited to the assets of the fund. The Declaration of Trust
further provides that the fund may maintain appropriate insurance (for
example, fidelity bonding and errors and omissions insurance) for the
protection of the fund, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. Furthermore, the
activities of the fund as an investment company, as distinguished from an
operating company, would not likely give rise to liabilities in excess of the
fund's total assets. Thus, the risk that you would incur financial loss on
account of shareholder liability is limited to the unlikely circumstance in
which both inadequate insurance exists and the fund itself is unable to meet
its obligations.
The fund currently offers four classes of shares, Class A, Class B, Class C
and Advisor Class. Before January 1, 1999, Class A shares were designated
Class I and Class C shares were designated Class II. The fund began offering
Class B shares on January 1, 1999. The fund may offer additional classes of
shares in the future. The full title of each class is:
o Franklin Value Fund - Class A
o Franklin Value Fund - Class B
o Franklin Value Fund - Class C
o Franklin Value Fund - Advisor Class
Shares of each class represent proportionate interests in the fund's assets.
On matters that affect the fund as a whole, each class has the same voting
and other rights and preferences as any other class. On matters that affect
only one class, only shareholders of that class may vote. Each class votes
separately on matters affecting only that class, or expressly required to be
voted on separately by state or federal law. Shares of each class of a series
have the same voting and other rights and preferences as the other classes
and series of the trust for matters that affect the trust as a whole.
Additional series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, 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 be called by the board to consider the
removal of a board member if requested in writing 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. A special meeting may also be called by the board in its
discretion.
As of December 7, 1998, the principal shareholders of the fund, beneficial or
of record, were:
Name and Address Share Class Percentage (%)
- ---------------------------------------------------------------
Franklin Templeton Trust Advisor 13.59
Company Trust Services
FBO Martin Wiskemann
P.O. Box 5086
San Mateo, CA 94402-0086
Franklin Templeton Trust Advisor 9.37
Company Trust Services
FBO Charles Rubens II
P.O. Box 5086
San Mateo, CA 94402-0086
Franklin Templeton Trust Advisor 30.87
Company1, Trustee for ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA
95741-2438
1. Franklin Templeton Trust Company is a California corporation and is
wholly owned by Franklin Resources, Inc.
From time to time, the number of fund shares held in the "street name"
accounts of various securities dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding.
As of December 7, 1998, the officers and board members, as a group, owned of
record and beneficially 10.46% of the fund's Advisor Class shares and less
than 1% of the outstanding shares of the fund's other classes. The board
members may own shares in other funds in the Franklin Templeton Group of
Funds.
BUYING AND SELLING SHARES
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The fund continuously offers its shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial
institutions that sell shares of the fund may be required by state law to
register as securities dealers.
For investors outside the U.S., 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.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the fund we may impose a $10 charge against your account for each returned
item.
If you buy shares through the reinvestment of dividends, the shares will be
purchased at the net asset value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The
processing date for the reinvestment of dividends may vary and does not
affect the amount or value of the shares acquired.
GROUP PURCHASES As described in the prospectus, members of a qualified group
may add the group's investments together for minimum investment purposes.
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.
DEALER COMPENSATION Distributors and/or its affiliates provide financial
support to various securities dealers that sell shares of the Franklin
Templeton Group of Funds. This support is based primarily on the amount of
sales of fund shares. The amount of support may be affected by: total sales;
net sales; levels of redemptions; the proportion of a securities dealer's
sales and marketing efforts in the Franklin Templeton Group of Funds; a
securities dealer's support of, and participation in, Distributors' marketing
programs; a securities dealer's compensation programs for its registered
representatives; and the extent of a securities dealer's marketing programs
relating to the Franklin Templeton Group of Funds. Financial support to
securities dealers may be made by payments from Distributors' resources, from
Distributors' retention of underwriting concessions and, in the case of funds
that have Rule 12b-1 plans, from payments to Distributors under such plans.
In addition, certain securities dealers may receive brokerage commissions
generated by fund portfolio transactions in accordance with the rules of the
National Association of Securities Dealers, Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money. If this
occurs, it is the fund's general policy to initially invest this money in
short-term, interest-bearing money market instruments, unless it is believed
that attractive investment opportunities consistent with the fund's
investment goal exist immediately. This money will then be withdrawn from the
short-term, interest-bearing money market instruments and invested in
portfolio securities in as orderly a manner as is possible when attractive
investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally
not available until the seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh day. The sale of fund shares to complete an exchange will
be effected at net asset value at the close of business on the day the
request for exchange is received in proper form.
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. There are no service charges
for establishing or maintaining a systematic withdrawal plan. Once your plan
is established, any distributions paid by the fund will be automatically
reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday, we
will process the redemption on the next business day. When you sell your
shares under a systematic withdrawal plan, it is a taxable transaction.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. The fund may discontinue a systematic
withdrawal plan by notifying you in writing and will automatically
discontinue a systematic withdrawal plan if all shares in your account are
withdrawn or if the fund receives notification of the shareholder's death or
incapacity.
REDEMPTIONS IN KIND The fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the U.S. Securities
and Exchange Commission (SEC). In the case of redemption requests in excess
of these amounts, the board reserves the right to make payments in whole or
in part in securities or other assets of the fund, in case of an emergency,
or if the payment of such a redemption in cash would be detrimental to the
existing shareholders of the fund. In these circumstances, the securities
distributed would be valued at the price used to compute the fund's net
assets and you may incur brokerage fees in converting the securities to cash.
The fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
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.
GENERAL INFORMATION If dividend checks are returned to the fund marked
"unable to forward" by the postal service, we will consider this a request by
you to change your dividend option to reinvest all distributions. The
proceeds will be reinvested in additional shares at net asset value until we
receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the fund nor
its affiliates will be liable for any loss caused by your failure to cash
such checks. The fund is not responsible for tracking down uncashed checks,
unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to
find you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.
The wiring of redemption proceeds is a special service that we make available
whenever possible. 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 the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay
certain financial institutions that maintain omnibus accounts with the fund
on behalf of numerous beneficial owners for recordkeeping operations
performed with respect to such owners. For each beneficial owner in the
omnibus account, the fund may reimburse Investor Services an amount not to
exceed the per account fee that the fund normally pays Investor Services.
These financial institutions may also charge a fee for their services
directly to their clients.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. If you sell shares
through your securities dealer, it is your dealer's responsibility to
transmit the order to the fund in a timely fashion. 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. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
notice of levy.
PRICING SHARES
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When you buy and sell shares, you pay the net asset value (NAV) per share.
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.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The fund does not calculate the NAV on days the New York Stock
Exchange (NYSE) is closed for trading, which include New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent
quoted bid and ask prices. The fund values over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, the fund values them according to the broadest and most
representative market as determined by the manager.
The fund values portfolio securities underlying actively traded call options
at their market price as determined above. The current market value of any
option the fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last
sale price is outside the bid and ask prices, the fund values options within
the range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.
The fund determines the value of a foreign security as of the close of
trading on the foreign exchange on which the security is traded or as of the
close of trading on the NYSE, if that is earlier. The value is then converted
into its U.S. dollar equivalent at the foreign exchange rate in effect at
noon, New York time, on the day the value of the foreign security is
determined. If no sale is reported at that time, the foreign security is
valued within the range of the most recent quoted bid and ask prices.
Occasionally events that affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and
the close of the exchange and will, therefore, not be reflected in the
computation of the NAV. If events materially affecting the values of these
foreign securities occur during this period, the securities will be valued in
accordance with procedures established by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the NAV is determined as of such times. Occasionally, events affecting the
values of these securities may occur between the times at which they are
determined and the close of the NYSE that will not be reflected in the
computation of the NAV. If events materially affecting the values of these
securities occur during this period, the securities will be valued at their
fair value as determined in good faith by the board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the board. With the approval of
the board, the fund may use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
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Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
Distributors does not receive compensation from the fund for acting as
underwriter of the fund's Advisor Class shares.
PERFORMANCE
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Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return quotations used by the fund are based on the
standardized methods of computing performance mandated by the SEC.
For periods before January 2, 1997, Advisor Class standardized performance
quotations are calculated by substituting Class A performance for the
relevant time period, excluding the effect of Class A's maximum initial sales
charge, and including the effect of the distribution and service (Rule 12b-1)
fees applicable to the fund's Class A shares. For periods after January 2,
1997, Advisor Class standardized performance quotations are calculated as
described below.
An explanation of these and other methods used by the fund to compute or
express performance follows. Regardless of the method used, past performance
does not guarantee future results, and is an indication of the return to
shareholders only for the limited historical period used.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes income dividends and capital gain
distributions are reinvested at net asset value. The quotation assumes the
account was completely redeemed at the end of each period and the deduction
of all applicable charges and fees. If a change is made to the sales charge
structure, historical performance information will be restated to reflect the
maximum initial sales charge currently in effect.
The average annual total returns for the indicated periods ended October 31,
1998, were:
1 Year Since Inception (3/11/96)
- ----------------------------------------------------------------
Advisor Class -26.18% 8.88%
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of each period at the end
of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes income dividends and capital gain distributions are reinvested
at net asset value. Cumulative total return, however, is based on the actual
return for a specified period rather than on the average return over the
periods indicated above. The cumulative total returns for the indicated
periods ended October 31, 1998, were:
1 Year Since Inception (3/11/96)
- --------------------------------------------------------------------
Advisor Class -26.18% 25.20%
VOLATILITY Occasionally statistics may be used to show the fund's volatility
or risk. Measures of volatility or risk are generally used to compare the
fund's net asset value or performance to a market index. One measure of
volatility is beta. Beta is the volatility of a fund relative to the total
market, as represented by an index considered representative of the types of
securities in which the fund invests. A beta of more than 1.00 indicates
volatility greater than the market and a beta of less than 1.00 indicates
volatility less than the market. Another measure of volatility or risk is
standard deviation. Standard deviation is used to measure variability of net
asset value or total return around an average over a specified period of
time. The idea is that greater volatility means greater risk undertaken in
achieving performance.
OTHER PERFORMANCE QUOTATIONS Sales literature referring to the use of the
fund as a potential investment for IRAs, business retirement plans, and other
tax-advantaged retirement plans may quote a total return based upon
compounding of dividends on which it is presumed no federal income tax
applies.
The fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. is the parent
company of the advisors and underwriter of the Franklin Templeton Group of
Funds.
COMPARISONS To help you better evaluate how an investment in the fund may
satisfy your investment goal, advertisements and other materials about the
fund may discuss certain measures of fund performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and
averages. These comparisons may include, but are not limited to, the
following examples:
o Dow Jones(R) Composite Average and its component averages - a
price-weighted average of 65 stocks that trade on the New York Stock
Exchange. The average is a combination of the Dow Jones Industrial Average
(30 blue-chip stocks that are generally leaders in their industry), the
Dow Jones Transportation Average (20 transportation stocks), and the Dow
Jones Utilities Average (15 utility stocks involved in the production of
electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries.
o The New York Stock Exchange composite or component indices - an
unmanaged index of all industrial, utilities, transportation, and finance
stocks listed on the NYSE.
o Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes
price, yield, risk, and total return for mutual funds.
Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK,
CHANGING TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines -
provide performance statistics over specified time periods.
o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its
category.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment
in the fund. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or information may also compare the fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of
fluctuation of principal value, a risk generally not present in an investment
in a CD issued by a bank. For example, as the general level of interest rates
rise, the value of the fund's fixed-income investments, if any, as well as
the value of its shares that are based upon the value of such portfolio
investments, can be expected to decrease. Conversely, when interest rates
decrease, the value of the fund's shares can be expected to increase. CDs are
frequently insured by an agency of the U.S. government. An investment in the
fund is not insured by any federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the fund to calculate its figures. In
addition, there can be no assurance that the fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
- ------------------------------------------------------------------------------
The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to
have a projected amount available in the future to fund a child's college
education. (Projected college cost estimates are based upon current costs
published by the College Board.) The Franklin Retirement Planning Guide leads
you through the steps to start a retirement savings program. Of course, an
investment in the fund cannot guarantee that these goals will be met.
The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of
the oldest mutual fund organizations and now services more than 3 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined
forces with Templeton, a pioneer in international investing. The Mutual
Series team, known for its value-driven approach to domestic equity
investing, became part of the organization four years later. Together, the
Franklin Templeton Group has over $216 billion in assets under management for
more than 6 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 117 U.S. based open-end
investment companies to the public. The fund may identify itself by its
NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the fund are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has
already begun making necessary software changes to help the computer systems
that service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues
to seek reasonable assurances from all major hardware, software or
data-services suppliers that they will be Year 2000 compliant on a timely
basis. Resources is also beginning to develop a contingency plan, including
identification of those mission critical systems for which it is practical to
develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use of
normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
DESCRIPTION OF BOND RATINGS
- ------------------------------------------------------------------------------
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (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.
STANDARD & POOR'S CORPORATION (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.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually their promissory obligations not having an original maturity
in excess of nine months. Moody's employs the following designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
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.
FRANKLIN VALUE INVESTORS TRUST
File Nos. 33-31326
811-5878
FORM N-1A
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS. The following exhibits are incorporated by reference to
the previously filed document indicated below, except as noted:
(A) ARTICLES OF INCORPORATION
(i) Agreement and Declaration of Trust dated September 11, 1989
Filing: Post-Effective Amendment No. 8 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: September 21, 1995
(ii) Certificate of Amendment of Agreement and Declaration of Trust of
Franklin Balance Sheet Investment Fund dated September 21, 1995
Filing: Post-Effective Amendment No. 9 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: December 26, 1995
(B) BY-LAWS
(i) By-Laws
Filing: Post-Effective Amendment No. 8 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: September 21, 1995
(C) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS
Not Applicable
(D) INVESTMENT ADVISORY CONTRACTS
(i) Management Agreement between the Registrant on behalf of Franklin
Balance Sheet Investment Fund and Franklin Advisory Services,
Inc., dated July 1, 1996
Filing: Post-Effective Amendment No. 12 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: June 27, 1996
(ii) Management Agreement between the Registrant on behalf of Franklin
MicroCap Value Fund and Franklin Advisory Services, Inc., dated
July 1, 1996
Filing: Post-Effective Amendment No. 12 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: June 27, 1996
(iii) Management Agreement between the Registrant on behalf of Franklin
Value Fund and Franklin Advisory Services, Inc., dated July 1, 1996
Filing: Post-Effective Amendment No. 12 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: June 27, 1996
(E) UNDERWRITING CONTRACTS
(i) Amended and Restated Distribution Agreement between the Registrant
and Franklin/Templeton Distributors, Inc., dated April 23, 1995
Filing: Post-Effective Amendment No. 12 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: June 27, 1996
(ii) Forms of Dealer Agreements between Franklin/Templeton
Distributors, Inc. and securities dealers, dated March 1, 1998
Filing: Post-Effective Amendment No. 18 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: December 29, 1998
(F) BONUS OR PROFIT SHARING CONTRACTS
Not Applicable
(G) CUSTODIAN AGREEMENTS
(i) Master Custodian Agreement between the Registrant and Bank of New
York dated February 16, 1996
Filing: Post-Effective Amendment No. 11 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: March 8, 1996
(ii) Terminal Link Agreement between the Registrant and Bank of New
York dated February 16, 1996
Filing: Post-Effective Amendment No. 11 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: March 8, 1996
(iii) Amendment dated May 7, 1997 to Master Custody Agreement between
the Registrant and Bank of New York dated February 16, 1996
Filing: Post-Effective Amendment No. 18 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: December 29, 1998
(iv) Amendment dated February 27, 1998 to Exhibit A in the Master
Custody Agreement dated February 16, 1996 between the Registrant
and Bank of New York.
Filing: Post-Effective Amendment No. 18 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: December 29, 1998
(v) Foreign Custody Manager Agreement between the Registrant and Bank
of New York dated July 30, 1998.
Filing: Post-Effective Amendment No. 18 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: December 29, 1998
(H) OTHER MATERIAL CONTRACTS
(i) Subcontract for Fund Administrative Services dated July 1, 1996
between Franklin Advisory Services, Inc. and Franklin Templeton
Services, Inc.
Filing: Post-Effective Amendment No. 18 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: December 29, 1998
(I) LEGAL OPINION
(i) Opinion and Consent of counsel December 14, 1998
(J) OTHER OPINIONS
(i) Consent of Independent Auditors
(K) OMITTED FINANCIAL STATEMENTS
Not Applicable
(L) INITIAL CAPITAL AGREEMENTS
(i) Letter of Understanding relating to Initial Capital of Franklin
Balance Sheet Investment Fund dated November 17, 1989
Filing: Post-Effective Amendment No. 7 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: September 21, 1995
(ii) Letter of Understanding relating to Initial Capital of Franklin
MicroCap Value Fund dated November 29, 1995
Filing: Post-Effective Amendment No. 8 to Registration Statement
on Form N-1A
File No. 33-31326
Filing date: December 1, 1995
(iii) Letter of Understanding relating to Initial Capital of Franklin
Value Fund dated December 4, 1995
Filing: Post-Effective Amendment No. 11 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: March 8, 1996
(iv) Letter of Understanding relating to Initial Capital of Franklin
Value Fund - Class II dated August 30, 1996
Filing: Post-Effective Amendment No. 13 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: August 7, 1996
(M) RULE 12B-1 PLAN
(i) Amended and Restated Distribution Plan between Franklin Balance
Sheet Investment Fund and Franklin/Templeton Distributors, Inc.,
Pursuant to Rule 12b-1 dated July 1, 1993
Filing: Post-Effective Amendment No. 8 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: September 21, 1995
(ii) Distribution Plan pursuant to Rule 12b-1 between Franklin Value
Investors Trust on behalf of Franklin MicroCap Value Fund and
Franklin/Templeton Distributors, Inc., dated December 12, 1995
Filing: Post-Effective Amendment No. 9 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: December 26, 1995
(iii) Distribution Plan pursuant to Rule 12b-1 between Franklin Value
Investors Trust on behalf of Franklin Value Fund and
Franklin/Templeton Distributors, Inc., dated March 11, 1996
Filing: Post-Effective Amendment No. 9 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: December 26, 1995
(iv) Class II Distribution Plan pursuant to Rule 12b-1 between Franklin
Value Investors Trust on behalf of Franklin Value Fund and
Franklin/Templeton Distributors, Inc., dated September 3, 1996
Filing: Post-Effective Amendment No. 15 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: December 31, 1996
(v) Form of Class B Distribution Plan pursuant to Rule 12b-1 between
Franklin Value Investors Trust on behalf of Franklin Value Fund
and Franklin/ Templeton Distributors, Inc.
Filing: Post-Effective Amendment No. 18 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: December 29, 1998
(O) COPIES OF ANY PLAN ENTERED INTO BY REGISTRANT PURSUANT TO RULE 18F-3
UNDER THE 1940 ACT
(i) Multiple Class Plan for Franklin MicroCap Value Fund
Filing: Post-Effective Amendment No. 18 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: December 29, 1998
(ii) Form of Multiple Class Plan for Franklin Value Fund
Filing: Post-Effective Amendment No. 18 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: December 29, 1998
(P) POWER OF ATTORNEY
(i) Power of Attorney dated December 11, 1995
Filing: Post-Effective Amendment No. 9 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: December 26, 1995
(ii) Certificate of Secretary dated December 11, 1995
Filing: Post-Effective Amendment No. 9 to Registration Statement
on Form N-1A
File No. 33-31326
Filing Date: December 26, 1995
(27) FINANCIAL DATA SCHEDULES
(i) Financial Data Schedule for Franklin Balance Sheet Investment Fund
(ii) Financial Data Schedule for Franklin MicroCap Value Fund
(iii) Financial Data Schedule for Franklin Value Fund -
Class I
(iv) Financial Data Schedule for Franklin Value Fund -
Class II
(v) Financial Data Schedule for Franklin Value Fund - Advisor Class
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
WITH THE FUND
None
ITEM 25. INDEMNIFICATION
Reference is made to Article VI of the Registrant's By-Laws previously filed,
which is incorporated herein by reference.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to officers and trustees and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Notwithstanding the provisions contained in the Registrant's By-Laws, in the
absence of authorization by the appropriate court on the merits pursuant to
Sections 4 and 5 of Article VI of said By-Laws, any indemnification under said
Article shall be made by Registrant only if authorized in the manner provided in
either subsection (a) or (b) of Section 6 of Article VI.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The officers and directors of the Franklin Advisory Services, Inc. Registrant's
manager also serve as officers and/or directors for (1) ("Advisory Services")
corporate parent, Franklin Resources, Inc., and/or (2) other investment
companies in the Franklin Templeton Group of Funds. In addition, Mr. Charles B.
Johnson was formerly a director of General Host Corporation. For additional
information please see Part B and Schedules A and D of Form ADV of Advisory
Services (SEC File 801-51967), incorporated herein by reference, which sets
forth the officers and directors of Advisory Services and information as to any
business, profession, vocation or employment of a substantial nature engaged in
by those officers and directors during the past two years.
ITEM 27. PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts
as principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Institutional Fiduciary Trust
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
(b) The information required by this Item 29 with respect to each director and
officer of Distributors is incorporated by reference to Part B of this N-1A
and Schedule A of Form BD filed by Distributors with the Securities and
Exchange Commission pursuant to the Securities Act of 1934 (SEC File No.
8-5889).
(c) Not Applicable. Registrant's principal underwriter is an affiliated person
of an affiliated person of the Registrant.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section 31
(a) of the Investment Company Act of 1940 are kept by the Registrant or its
shareholder services agent, Franklin/Templeton Investor Services, Inc., both of
whose address is 777 Mariners Island Blvd., San Mateo, CA 94404.
ITEM 29. MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 30. UNDERTAKINGS
(a) The Registrant hereby undertakes to promptly call a meeting of
shareholders for the purpose of voting upon the question of removal of any
trustee or trustees when requested in writing to do so by the record holders of
not less than 10 percent of the Registrant's outstanding shares to assist its
shareholders in the communicating with other shareholders in accordance with the
requirements of Section 16(c) of the Investment Company Act of 1940.
(b) The Registrant hereby undertakes to comply with the information
requirement in Item 5 of the Form N1-A by including the required information in
the Registrant's annual report and to furnish each person to whom a prospectus
is delivered a copy of the annual report upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of San Mateo and the State of California, on the 29th day of December,
1998.
FRANKLIN VALUE INVESTORS TRUST
(Registrant)
By: WILLIAM J. LIPPMAN*
William J. Lippman
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
WILLIAM J. LIPPMAN* Trustee and Principal
William J. Lippman Executive Officer
Dated: December 29, 1998
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: December 29, 1998
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: December 29, 1998
FRANK T. CROHN* Trustee
Frank T. Crohn Dated: December 29, 1998
CHARLES RUBENS, II* Trustee
Charles Rubens, II Dated: December 29, 1998
LEONARD RUBIN* Trustee
Leonard Rubin Dated: December 29, 1998
*By /s/Larry L. Greene, Attorney-in-Fact
(Pursuant to Powers of Attorney previously filed)
FRANKLIN VALUE INVESTORS TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.(a)(i) Agreement and Declaration of Trust dated *
September 11, 1989
EX-99.(a)(ii) Certificate of Amendment of Agreement and *
Declaration of Trust of Franklin Balance Sheet
Investment Fund dated September 21, 1995
EX-99.(b)(i) By-Laws *
EX-99.(d)(i) Management Agreement on behalf of Franklin *
Balance Sheet Investment Fund and Franklin
Advisory Services, Inc., dated July 1, 1996
EX-99.(d)(ii) Management Agreement on behalf of Franklin *
MicroCap Value Fund and Franklin Advisory
Services, Inc., dated July 1, 1996
EX-99.(d)(iii) Management Agreement on behalf of Franklin *
Value Fund and Franklin Advisory Services,
Inc., dated July 1, 1996
EX-99.(e)(i) Amended and Restated Distribution Agreement *
between Registrant and Franklin/Templeton
Distributors, Inc., dated April 23, 1995
EX-99.(e)(ii) Forms of Dealer Agreements between *
Franklin/Templeton Distributors, Inc. and
Securities Dealers dated March 1, 1998
EX-99.(g)(i) Master Custodian Agreement between Registrant *
and Bank of New York dated February 16, 1996
EX-99.(g)(ii) Terminal Link Agreement between Registrant and *
Bank of New York dated February 16, 1996
EX-99.(g)(iii) Amendment dated May 7, 1997 to Master Custody *
Agreement between the Registrant and Bank of
New York dated February 16, 1996
EX-99.(g)(iv) Amendment dated October 7, 1997 to Exhibit A in *
the Master Custody Agreement between the
Registrant and Bank of New York dated February
16, 1996
EX-99.(g)(v) Foreign Custody Manager Agreement between the *
Registrant and Bank of New York dated July 30,
1998.
EX-99.(h)(i) Subcontract for Fund Administrative Services *
dated July 1, 1996 between Franklin Advisory
Services, Inc. and Franklin Templeton Services,
Inc.
EX-99.(i)(i) Opinion and Consent of counsel dated December Attached
14, 1998
EX-99.(j)(i) Consent of Independent Auditors Attached
EX-99.(l)(i) Letter of Understanding relating to Initial *
Capital of Franklin Balance Sheet Investment
Fund dated November 17, 1989
EX-99.(l)(ii) Letter of Understanding relating to Initial *
Capital of Franklin MicroCap Value Fund dated
November 29, 1995
EX-99.(l)(iii) Letter of Understanding relating to Initial *
Capital of Franklin Value Fund
EX-99.(l)(iv) Letter of Understanding relating to Initial *
Capital of Franklin Value Fund - Class II dated
August 30, 1996
EX-99.(m)(i) Amended and Restated Distribution Plan between *
Franklin Balance Sheet Investment Fund and
Franklin/Templeton Distributors, Inc., pursuant
to Rule 12b-1 dated July 1, 1993
EX-99.(m)(ii) Distribution Plan pursuant to Rule 12b-1 *
between Franklin Value Investors Trust on
behalf of Franklin MicroCap Value Fund and
Franklin/Templeton Distributors, Inc., dated
December 12, 1995
EX-99.(m)(iii) Distribution Plan Pursuant to Rule 12b-1 *
between Franklin Value Investors Trust on
behalf of Franklin Value Fund and
Franklin/Templeton Distributors, Inc., dated
March 11, 1996
EX-99.(m)(iv) Class II Distribution Plan pursuant to Rule *
12b-1 between Franklin Value Investors Trust on
behalf of Franklin Value Fund and
Franklin/Templeton Distributors, Inc., dated
September 3, 1996
EX-99.(m)(v) Form of Class B Distribution Plan pursuant to *
Rule 12b-1 between Franklin Value Investors
Trust on behalf of Franklin Value Fund and
Franklin/ Templeton Distributors, Inc.
EX-99.(o)(i) Multiple Class Plan for Franklin MicroCap Value *
Fund
EX-99.(o)(ii) Form of Multiple Class Plan for Franklin Value *
Fund
EX-99.(p)(i) Power of Attorney dated December 11, 1995 *
Ex-99.(p)(ii) Certificate of Secretary dated December 11, 1995 *
EX-27.(i) Financial Data Schedule for Franklin Balance Attached
Sheet Investment Fund
EX-27.(ii) Financial Data Schedule for Franklin MicroCap Attached
Value Fund
EX-27.(iii) Financial Data Schedule for Franklin Value Fund Attached
- Class I
EX-27.(iv) Financial Data Schedule for Franklin Value Fund Attached
- Class II
EX-27.(v) Financial Data Schedule for Franklin Value Fund Attached
- Advisor Class
*Incorporated by Reference
Law Offices
STRADLEY, RONON, STEVENS & YOUNG, LLP
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
(215) 564-8000
Direct Dial: (215) 564-8115
December 14, 1998
Franklin Value Investors Trust
777 Mariners Island Blvd.
San Mateo, CA 94403-7777
Re: LEGAL OPINION-SECURITIES ACT OF 1933
Ladies and Gentlemen:
We have examined the Agreement and Declaration of Trust, as
amended, (the "Declaration of Trust") of the Franklin Value Investors Trust
(the "Trust"), a business trust organized under the laws of the Commonwealth
of Massachusetts on September 13, 1989, the By-Laws of the Trust, and the
resolutions adopted by the Trust's Board of Trustees organizing the business
of the Trust, all as amended to date, and the various pertinent proceedings
we deem material. We have also examined the Notification of Registration and
the Registration Statements filed under the Investment Company Act of 1940
(the "Investment Company Act") and the Securities Act of 1933 (the
"Securities Act"), all as amended to date, as well as other items we deem
material to this opinion.
The Trust is authorized by its Declaration of Trust to issue an
unlimited number of shares of beneficial interest with a par value $0.01 per
share. The Trust issues shares of series designated the Franklin Balance
Sheet Investment Fund, Franklin Value Fund and the Franklin MicroCap Value
Fund. The Declaration of Trust designates, or authorizes the Trustees to
designate, one or more series or classes of shares of the Trust, and
allocates, or authorizes the Trustees to allocate, shares of beneficial
interest to each such series or class. The Declaration of Trust also
empowers the Trustees to designate any additional series or classes and
allocate shares to such series or classes.
The Trust has filed with the U.S. Securities and Exchange
Commission (the "Commission"), a Registration Statement under the Securities
Act, which Registration Statement is deemed to register an indefinite number
of shares of the Trust pursuant to the provisions of Rule 24f-2 under the
Investment Company Act. You have further advised us that the Trust has
filed, and each year hereafter will timely file, a Notice pursuant to Rule
24f-2 perfecting the registration of the shares sold by the Trust during each
fiscal year during which such registration of an indefinite number of shares
remains in effect.
You have also informed us that the shares of the Trust have been,
and will continue to be, sold in accordance with the Trust's usual method of
distributing its registered shares, under which prospectuses are made
available for delivery to offerees and purchasers of such shares in
accordance with Section 5(b) of the Securities Act.
Based upon the foregoing information and examination, so long as
the Trust remains a valid and subsisting trust under the laws of the
Commonwealth of Massachusetts, and the registration of an indefinite number
of shares of the Trust remains effective, the authorized shares of the Trust
when issued for the consideration set by the Board of Trustees pursuant to
the Declaration of Trust, and subject to compliance with Rule 24f-2, will be
legally outstanding, fully-paid, and non-assessable shares, and the holders
of such shares will have all the rights provided for with respect to such
holding by the Declaration of Trust and the laws of the Commonwealth of
Massachusetts.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement of the Trust, and any amendments thereto, covering the
registration of the shares of the Trust under the Securities Act and the
applications, registration statements or notice filings, and amendments
thereto, filed in accordance with the securities laws of the several states
in which shares of the Trust are offered, and we further consent to reference
in the registration statement of the Trust to the fact that this opinion
concerning the legality of the issue has been rendered by us.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
BY: /s/ BRUCE G. LETO
Bruce G. Leto
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No. 19
to the Registration Statement of Franklin Value Investors Trust on Form N-1A
(File No. 33-31326) of our report dated December 9, 1998 on our audit of the
financial statements and financial highlights of Franklin Value Investors Trust,
which report is included in the Annual Report to Shareholders for the year ended
October 31, 1998, which is incorporated by reference in the Registration
Statement.
PricewaterhouseCoopers LLP
/s/PricewaterhouseCoopers LLP
San Francisco, California
December 23, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN VALUE INVESTORS TRUST OCTOBER 31, 1998 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 011
<NAME> FRANKLIN BALANCE SHEET INVESTMENT FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 1,104,868,382
<INVESTMENTS-AT-VALUE> 1,172,555,606
<RECEIVABLES> 300,243,305
<ASSETS-OTHER> 766,441
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,473,565,352
<PAYABLE-FOR-SECURITIES> 3,075,471
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,282,713
<TOTAL-LIABILITIES> 6,358,184
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,342,731,470
<SHARES-COMMON-STOCK> 46,051,441
<SHARES-COMMON-PRIOR> 34,722,428
<ACCUMULATED-NII-CURRENT> 2,965,881
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 53,822,593
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 67,687,224
<NET-ASSETS> 1,467,207,168
<DIVIDEND-INCOME> 19,896,279
<INTEREST-INCOME> 15,400,170
<OTHER-INCOME> 0
<EXPENSES-NET> (13,620,721)
<NET-INVESTMENT-INCOME> 21,675,728
<REALIZED-GAINS-CURRENT> 53,773,930
<APPREC-INCREASE-CURRENT> (140,502,353)
<NET-CHANGE-FROM-OPS> (65,052,695)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (21,386,657)
<DISTRIBUTIONS-OF-GAINS> (65,036,050)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 18,222,491
<NUMBER-OF-SHARES-REDEEMED> (9,270,237)
<SHARES-REINVESTED> 2,376,759
<NET-CHANGE-IN-ASSETS> 244,254,408
<ACCUMULATED-NII-PRIOR> 2,723,942
<ACCUMULATED-GAINS-PRIOR> 65,037,581
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (6,868,491)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (13,620,721)
<AVERAGE-NET-ASSETS> 1,471,285,660
<PER-SHARE-NAV-BEGIN> 35.220
<PER-SHARE-NII> .500
<PER-SHARE-GAIN-APPREC> (1.550)
<PER-SHARE-DIVIDEND> (0.510)
<PER-SHARE-DISTRIBUTIONS> (1.800)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 31.860
<EXPENSE-RATIO> .930
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FRANKLIN VALUE INVESTORS TRUST OCTOBER 31, 1998 ANNUAL REPORT
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 021
<NAME> FRANKLIN MICROCAP VALUE FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 160,769,567
<INVESTMENTS-AT-VALUE> 161,953,539
<RECEIVABLES> 3,327,274
<ASSETS-OTHER> 11,084,587
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 176,365,400
<PAYABLE-FOR-SECURITIES> 94,351
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 635,678
<TOTAL-LIABILITIES> 730,029
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 161,134,371
<SHARES-COMMON-STOCK> 8,666,162
<SHARES-COMMON-PRIOR> 7,889,001
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 13,317,028
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,183,972
<NET-ASSETS> 175,635,371
<DIVIDEND-INCOME> 1,646,932
<INTEREST-INCOME> 600,160
<OTHER-INCOME> 0
<EXPENSES-NET> (2,462,584)
<NET-INVESTMENT-INCOME> (215,492)
<REALIZED-GAINS-CURRENT> 13,627,885
<APPREC-INCREASE-CURRENT> (36,789,537)
<NET-CHANGE-FROM-OPS> (23,377,144)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (64,132)
<DISTRIBUTIONS-OF-GAINS> (11,892,928)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,069,052
<NUMBER-OF-SHARES-REDEEMED> (1,778,377)
<SHARES-REINVESTED> 486,486
<NET-CHANGE-IN-ASSETS> (16,002,583)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 11,861,695
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,528,066)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (2,462,584)
<AVERAGE-NET-ASSETS> 203,736,528
<PER-SHARE-NAV-BEGIN> 24.290
<PER-SHARE-NII> (.020)
<PER-SHARE-GAIN-APPREC> (2.510)
<PER-SHARE-DIVIDEND> (.010)
<PER-SHARE-DISTRIBUTIONS> (1.480)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 20.270
<EXPENSE-RATIO> 1.210
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
VALUE INVESTORS TRUST OCTOBER 31, 1998 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 031
<NAME> FRANKLIN VALUE FUND - CLASS I
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 185,267,322
<INVESTMENTS-AT-VALUE> 139,074,774
<RECEIVABLES> 6,819,046
<ASSETS-OTHER> 108,422
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 146,002,242
<PAYABLE-FOR-SECURITIES> 440,800
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 840,854
<TOTAL-LIABILITIES> 1,281,654
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 190,219,353
<SHARES-COMMON-STOCK> 5,465,994
<SHARES-COMMON-PRIOR> 3,197,257
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 693,783
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (46,192,548)
<NET-ASSETS> 144,720,588
<DIVIDEND-INCOME> 1,341,954
<INTEREST-INCOME> 516,874
<OTHER-INCOME> 0
<EXPENSES-NET> (2,359,490)
<NET-INVESTMENT-INCOME> (500,662)
<REALIZED-GAINS-CURRENT> 692,870
<APPREC-INCREASE-CURRENT> (54,892,244)
<NET-CHANGE-FROM-OPS> (54,700,036)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (43,246)
<DISTRIBUTIONS-OF-GAINS> (750,851)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,324,861
<NUMBER-OF-SHARES-REDEEMED> (3,086,439)
<SHARES-REINVESTED> 30,315
<NET-CHANGE-IN-ASSETS> 39,774,232
<ACCUMULATED-NII-PRIOR> 4,129
<ACCUMULATED-GAINS-PRIOR> 1,075,252
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,200,877)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (2,454,973)
<AVERAGE-NET-ASSETS> 160,117,717
<PER-SHARE-NAV-BEGIN> 24.680
<PER-SHARE-NII> (0.030)
<PER-SHARE-GAIN-APPREC> (6.450)
<PER-SHARE-DIVIDEND> (0.010)
<PER-SHARE-DISTRIBUTIONS> (0.210)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 17.98
<EXPENSE-RATIO> 1.320<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
<FN>
<F1>ANNUALIZED; EXPENSE RATIO EXCLUDING WAIVER 1.380%
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
VALUE INVESTORS TRUST OCTOBER 31, 1998 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 032
<NAME> FRANKLIN VALUE FUND - CLASS II
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 185,267,322
<INVESTMENTS-AT-VALUE> 139,074,774
<RECEIVABLES> 6,819,046
<ASSETS-OTHER> 108,422
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 146,002,242
<PAYABLE-FOR-SECURITIES> 440,800
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 840,854
<TOTAL-LIABILITIES> 1,281,654
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 190,219,353
<SHARES-COMMON-STOCK> 2,339,992
<SHARES-COMMON-PRIOR> 876,420
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 693,783
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (46,192,548)
<NET-ASSETS> 144,720,588
<DIVIDEND-INCOME> 1,341,954
<INTEREST-INCOME> 516,874
<OTHER-INCOME> 0
<EXPENSES-NET> (2,359,490)
<NET-INVESTMENT-INCOME> (500,662)
<REALIZED-GAINS-CURRENT> 692,870
<APPREC-INCREASE-CURRENT> (54,892,244)
<NET-CHANGE-FROM-OPS> (54,700,036)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (237,831)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,011,944
<NUMBER-OF-SHARES-REDEEMED> (557,458)
<SHARES-REINVESTED> 9,086
<NET-CHANGE-IN-ASSETS> 39,774,232
<ACCUMULATED-NII-PRIOR> 4,129
<ACCUMULATED-GAINS-PRIOR> 1,075,252
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,200,877)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (2,454,973)
<AVERAGE-NET-ASSETS> 160,117,717
<PER-SHARE-NAV-BEGIN> 24.590
<PER-SHARE-NII> (0.130)
<PER-SHARE-GAIN-APPREC> (6.430)
<PER-SHARE-DIVIDEND> .000
<PER-SHARE-DISTRIBUTIONS> (0.210)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 17.82
<EXPENSE-RATIO> 1.970<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
<FN>
<F1>ANNUALIZED; EXPENSE RATIO EXCLUDING WAIVER 2.030%
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
VALUE INVESTORS TRUST OCTOBER 31, 1998 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 033
<NAME> FRANKLIN VALUE FUND - ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 185,267,322
<INVESTMENTS-AT-VALUE> 139,074,774
<RECEIVABLES> 6,819,046
<ASSETS-OTHER> 108,422
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 146,002,242
<PAYABLE-FOR-SECURITIES> 440,800
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 840,854
<TOTAL-LIABILITIES> 1,281,654
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 190,219,353
<SHARES-COMMON-STOCK> 262,233
<SHARES-COMMON-PRIOR> 181,839
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 693,783
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (46,192,548)
<NET-ASSETS> 144,720,588
<DIVIDEND-INCOME> 1,341,954
<INTEREST-INCOME> 516,874
<OTHER-INCOME> 0
<EXPENSES-NET> (2,359,490)
<NET-INVESTMENT-INCOME> (500,662)
<REALIZED-GAINS-CURRENT> 692,870
<APPREC-INCREASE-CURRENT> (54,892,244)
<NET-CHANGE-FROM-OPS> (54,700,036)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,419)
<DISTRIBUTIONS-OF-GAINS> (40,254)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 306,114
<NUMBER-OF-SHARES-REDEEMED> (227,624)
<SHARES-REINVESTED> 1,904
<NET-CHANGE-IN-ASSETS> 39,774,232
<ACCUMULATED-NII-PRIOR> 4,129
<ACCUMULATED-GAINS-PRIOR> 1,075,252
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,200,877)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (2,454,973)
<AVERAGE-NET-ASSETS> 160,117,717
<PER-SHARE-NAV-BEGIN> 24.720
<PER-SHARE-NII> 0.040
<PER-SHARE-GAIN-APPREC> (6.450)
<PER-SHARE-DIVIDEND> (0.030)
<PER-SHARE-DISTRIBUTIONS> (0.210)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 18.070
<EXPENSE-RATIO> .97<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
<FN>
<F1>ANNUALIZED; EXPENSE RATIO EXCLUDING WAIVER 1.030%
</FN>
</TABLE>
