PROSPECTUS & APPLICATION
FRANKLIN
MICROCAP
VALUE FUND
INVESTMENT STRATEGY
GROWTH & INCOME
O VALUE
MARCH 1, 1998 AS AMENDED AUGUST 3, 1998
FRANKLIN VALUE INVESTORS TRUST
Please read this prospectus before investing, and keep it for future
reference. It contains important information, including how the fund invests
and the services available to shareholders.
As of July 5, 1996, the fund is closed to new investors, except retirement
plan accounts. If you were a shareholder of record as of July 5, 1996, you
may continue to add to your existing open account through new purchases and
reinvestment of income dividends and capital gain distributions.
To learn more about the fund and its policies, you may request a copy of the
fund's Statement of Additional Information ("SAI"), dated March 1, 1998, which
we may amend from time to time. We have filed the SAI with the SEC and have
incorporated it by reference into this prospectus.
For a free copy of the SAI or a larger print version of this prospectus,
contact your investment representative or call 1-800/DIAL BEN.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
FRANKLIN MICROCAP VALUE FUND
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO
SALES REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
FRANKLIN MICROCAP VALUE FUND
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary .................................................. 2
Financial Highlights ............................................. 3
How Does the Fund Invest Its Assets? ............................. 4
What Are the Risks of Investing in the Fund? ..................... 11
Who Manages the Fund? ............................................ 16
How Taxation Affects the Fund and Its Shareholders ............... 18
How Is the Trust Organized? ...................................... 21
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ............................................. 22
May I Exchange Shares for Shares of Another Fund? ................ 28
How Do I Sell Shares? ............................................ 29
What Distributions Might I Receive From the Fund? ................ 33
Transaction Procedures and Special Requirements .................. 34
Services to Help You Manage Your Account ......................... 38
What If I Have Questions About My Account? ....................... 40
GLOSSARY
Useful Terms and Definitions ..................................... 41
APPENDIX
Description of Ratings ........................................... 43
FRANKLIN
MICROCAP
VALUE FUND
March 1, 1998
as amended August 3, 1998
When reading this prospectus, you will see certain terms beginning with
capital letters. This means the term is explained in our glossary section.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN(R)
FRANKLIN MICROCAP VALUE FUND
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
fund. It is based on the fund's historical expenses for the fiscal year ended
October 31, 1997. The fund's actual expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge Imposed on Purchases
(as a percentage of Offering Price) ......................... 5.75%++
Deferred Sales Charge ....................................... None+++
B. ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
Management Fees ............................................. 0.75%
Rule 12b-1 Fees ............................................. 0.23%*
Other Expenses .............................................. 0.24%
-----
Total Fund Operating Expenses ............................... 1.22%
=====
C. EXAMPLE
Assume the fund's annual return is 5%, operating expenses are as
described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest
in the fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------
$69** $94 $121 $197
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES
OR RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE
SHOWN. The fund pays its operating expenses. The effects of these
expenses are reflected in its Net Asset Value or dividends and are not
directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more.
+++A Contingent Deferred Sales Charge of 1% may apply to purchases of $1
million or more if you sell the shares within one year. A Contingent Deferred
Sales Charge may also apply to purchases by certain retirement plans that
qualify to buy shares without a front-end sales charge. See "How Do I Sell
Shares? - Contingent Deferred Sales Charge" for details.
*These fees may not exceed 0.25%. The combination of front-end sales charges
and Rule 12b-1 fees could cause long-term shareholders to pay more than the
economic equivalent of the maximum front-end sales charge permitted under the
NASD's rules.
**Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the fund's independent auditors. Their
audit report covering the periods shown below appears in the Trust's Annual
Report to Shareholders for the fiscal year ended October 31, 1997. The Annual
Report to Shareholders also includes more information about the fund's
performance. For a free copy, please call Fund Information.
YEAR ENDED OCTOBER 31,
1997 19961
- -----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $18.44 $15.00
-----------------------
Income from investment operations:
Net investment income (loss) ................... (.01) .14
Net realized and unrealized gains .............. 6.33 3.41
-----------------------
Total from investment operations ................ 6.32 3.55
-----------------------
Less distributions from:
Net investment income .......................... (.07) (.11)
Net realized gains ............................. (.40) -
-----------------------
Total distributions ............................. (.47) (.11)
-----------------------
Net asset value, end of year .................... $24.29 $18.44
=======================
Total return* ................................... 35.05% 23.72%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's) .............. $191,638 $119,664
Ratios to average net assets:
Expenses ....................................... 1.22% 1.24%**
Net investment income (loss) ................... (.05%) 1.28%**
Portfolio turnover rate ......................... 21.33% 14.15%
Average commission rate paid*** ................. $.0437 $.0476
1For the period December 12, 1995 (effective date) to October 31, 1996.
*Total return does not reflect sales commissions or the Contingent Deferred
Sales Charge, and is not annualized.
**Annualized.
***Relates to purchases and sales equity securities.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The fund's investment objective is to seek high total return, of which
capital appreciation and income are components. The objective is a
fundamental policy of the fund and may not be changed without shareholder
approval. Of course, there is no assurance that the fund will achieve its
objective.
The fund will seek capital appreciation primarily by investing in the
securities of companies with market capitalization under $100 million at the
time of purchase and that Advisory Services believes are undervalued in the
marketplace relative to underlying asset values. Accordingly, a focus on
balance sheet items will be an important element in Advisory Services'
analysis. The fund will also seek income when consistent with its objective.
The policies used to seek to achieve the fund's objective are not
fundamental, unless otherwise noted, and are subject to change without
shareholder approval.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
Under normal market conditions, the fund will invest at least 65% of its
total assets in securities of companies with market capitalization under $100
million at the time of purchase and which, in the opinion of Advisory
Services, possess an opportunity for significant capital appreciation due to
intrinsic values in excess of the current market price of such securities.
The securities of these companies will typically be purchased at prices below
the book value of the company. Advisory Services, however, will take into
account a variety of other factors in order to determine whether to purchase,
and once purchased, whether to hold or sell the securities. In addition to
book value, Advisory Services may consider the following factors among
others: valuable franchises or other intangibles; ownership of valuable
trademarks or trade names; control of distribution networks or of market
share for particular products; ownership of real estate the value of which is
understated; and underutilized liquidity and other factors that would
identify the issuer as a potential takeover target or turnaround candidate.
Investments in the securities of companies with market capitalization under
$100 million may involve special risks. See "What Are the Risks of Investing
in the Fund? - Small Companies." The fund may invest the remainder of its
assets, up to 35%, in securities of companies with similar characteristics
but that have market capitalization over $100 million.
The fund will generally invest in common stocks, although it has no limit on
the percentage of its assets that may be invested in preferred stock or debt
obligations, including securities convertible into common stocks, secured or
unsecured bonds, commercial paper and notes. The mixture of common stocks,
preferred stocks and debt obligations will vary from time to time based upon
Advisory Services' assessment as to whether investments in each category will
contribute to meeting the fund's investment objective.
In anticipation of and during temporary defensive periods or when investments
of the type in which the fund intends to invest are not available at prices
which Advisory Services believes are attractive, the fund may invest up to
100% of its total assets in: (1) securities of the U.S. government or its
agencies or instrumentalities that mature in one year or less from the date
of purchase, including U.S. Treasury bills, notes and bonds, as well as
certain agency securities issued by the Government National Mortgage
Association, the Federal Housing Administration and other agencies which may
carry guarantees backed by the full faith and credit of the U.S. government;
(2) securities of other U.S. government agencies or instrumentalities, such
as certain securities issued by the Federal Home Loan Banks and the Student
Loan Marketing Association, which may not be backed by the full faith and
credit of the U.S. government but which are supported by the right of the
issuer to borrow from the U.S. government or by the credit of the issuer; (3)
bank obligations, including negotiable or non-negotiable CDs (subject to the
fund's 10% limitation on illiquid securities discussed under "Illiquid
Investments" below), letters of credit and bankers' acceptances, or
instruments secured by such obligations, issued by banks and savings
institutions that are subject to regulation by the U.S. government, its
agencies or instrumentalities and that have assets of over $1 billion, unless
such obligations are guaranteed by a parent bank that has total assets in
excess of $5 billion; (4) commercial paper considered by Advisory Services to
be of high quality and rated within the two highest rating categories of S&P
or Moody's or, if unrated, issued by a company having an outstanding debt
issue rated at least AA by S&P or Aa by Moody's; and (5) corporate
obligations including, but not limited to, corporate notes, bonds and
debentures considered by Advisory Services to be of high quality and rated
within the two highest rating categories by S&P or Moody's. Please see
"Appendix" for a discussion of ratings.
HIGH 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 S&P or Ba or lower by Moody's) and unrated securities of comparable
quality that Advisory Services believes possess intrinsic values in excess of
the current market prices of those securities. Lower 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 generally involve more credit risk than securities in the
higher quality categories. Lower quality 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 securities rated D are in
default and the payment of interest and/or repayment of principal is in
arrears. Please see "What Are the Risks of Investing in the Fund?" below for
more information.
CONVERTIBLE SECURITIES. The fund may invest in convertible securities; these
investments will be less than 25% of its total assets. A convertible security
is generally a debt obligation or preferred stock that may be converted
within a specified period of time into a certain amount of common stock of
the same or a different issuer. A convertible security provides a
fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance
in its underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Like a common stock,
the value of a convertible security also tends to increase as the market
value of the underlying stock rises, and it tends to decrease as the market
value of the underlying stock declines. Because its value can be influenced
by both interest rate and market movements, a convertible security is not as
sensitive to interest rates as a similar fixed-income security, nor is it as
sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by
an investment bank. When issued by an operating company, a convertible
security tends to be senior to common stock, but subordinate to other types
of fixed-income securities issued by that company. When a convertible
security issued by an operating company is "converted," the operating company
often issues new stock to the holder of the convertible security but, if the
parity price of the convertible security is less than the call price, the
operating company may pay out cash instead of common stock. If the
convertible security is issued by an investment bank, the security is an
obligation of and is convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security
will have recourse only to the issuer. In addition, a convertible security
may be subject to redemption by the issuer, but only after a specified date
and under circumstances established at the time the security is issued.
While the fund uses the same criteria to rate a convertible debt security
that it uses to rate a more conventional debt security, a convertible
preferred stock is treated like a preferred stock for the fund's financial
reporting, credit rating, and investment limitation purposes. A preferred
stock is subordinated to all debt obligations in the event of insolvency, and
an issuer's failure to make a dividend payment is generally not an event of
default entitling the preferred shareholder to take action. A preferred stock
generally has no maturity date, so that its market value is dependent on the
issuer's business prospects for an indefinite period of time. In addition,
distributions from preferred stock are dividends, rather than interest
payments, and are usually treated as such for corporate tax purposes.
The fund may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stocks ("PERCS"),
which provide an investor, such as the fund, with the opportunity to earn
higher dividend income than is available on a company's common stock. PERCS
are preferred stocks that generally feature a mandatory conversion date, as
well as a capital appreciation limit which is usually expressed in terms of a
stated price. Most PERCS expire three years from the date of issue, at which
time they are convertible into common stock of the issuer. PERCS are
generally not convertible into cash at maturity. Under a typical arrangement,
after three years PERCS convert into one share of the issuer's common stock
if the issuer's common stock is trading at a price below that set by the
capital appreciation limit, and into less than one full share if the issuer's
common stock is trading at a price above that set by the capital appreciation
limit. The amount of that fractional share of common stock is determined by
dividing the price set by the capital appreciation limit by the market price
of the issuer's common stock. PERCS can be called at any time prior to
maturity, and hence do not provide call protection. If called early, however,
the issuer must pay a call premium over the market price to the investor.
This call premium declines at a preset rate daily, up to the maturity date.
The fund may also invest in other enhanced convertible securities. These
include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities), and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all have the
following features: they are issued by the company, the common stock of which
will be received in the event the convertible preferred stock is converted,
unlike PERCS they do not have a capital appreciation limit, they seek to
provide the investor with high current income with some prospect of future
capital appreciation, they are typically issued with three to four-year
maturities, they typically have some built-in call protection for the first
two to three years, investors have the right to convert them into shares of
common stock at a preset conversion ratio or hold them until maturity, and
upon maturity they will automatically convert to either cash or a specified
number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked
as senior or subordinated debt in the issuer's corporate structure according
to the terms of the debt indenture. There may be additional types of
convertible securities not specifically referred to herein which may be
similar to those described above in which a fund may invest, consistent with
its objectives and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the fund. The fund may have difficulty disposing
of such securities because there may be a thin trading market for a
particular security at any given time. Reduced liquidity may have an adverse
impact on market price and the fund's ability to dispose of particular
securities, when necessary, to meet the fund's liquidity needs or in response
to a specific economic event, such as the deterioration in the
creditworthiness of an issuer. Reduced liquidity in the secondary market for
certain securities may also make it more difficult for the fund to obtain
market quotations based on actual trades for purposes of valuing the fund's
portfolio. The fund, however, intends to acquire liquid securities, though
there can be no assurances that this will be achieved.
SYNTHETIC CONVERTIBLES. The fund may invest a portion of its assets in
"synthetic convertible" securities. A synthetic convertible is created by
combining distinct securities which together possess the two principal
characteristics of a true convertible security, i.e., fixed income and the
right to acquire the underlying equity security. This combination is achieved
by investing in nonconvertible fixed-income securities and in warrants or
stock or stock index call options which grant the holder the right to
purchase a specified quantity of securities within a specified period of time
at a specified price or to receive cash in the case of stock index options.
Synthetic convertible securities are generally not considered to be "Equity
Securities" for purposes of the fund's investment policy regarding those
securities.
Synthetic convertible securities differ from the true convertible security in
several respects. The value of a synthetic convertible is the sum of the
values of its fixed-income component and its convertibility component. Thus,
the values of a synthetic convertible and a true convertible security will
respond differently to market fluctuations. Further, although Advisory
Services expects normally to create synthetic convertibles whose two
components represent one issuer, the character of a synthetic convertible
allows the fund to combine components representing distinct issuers, or to
combine a fixed income security with a call option on a stock index, when
Advisory Services determine that such a combination would better promote the
fund's investment objectives. In addition, the component parts of a synthetic
convertible security may be purchased simultaneously or separately; and the
holder of a synthetic convertible faces the risk that the price of the stock,
or the level of the market index underlying the convertibility component will
decline.
FOREIGN SECURITIES. The fund may invest in foreign securities, without
restriction, if these investments are consistent with the fund's investment
objective and policies. 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 buy the securities of foreign issuers directly in foreign markets,
and may buy the securities of issuers in developing nations. The fund intends
to limit its investment in foreign securities to no more than 25% of its
total assets. Please see "What Are the Risks of Investing in the Fund? -
Foreign Securities" in this prospectus and "How Does the Fund Invest Its
Assets? - Depositary Receipts" in the SAI.
OPTIONS. The fund may write (sell) call options on securities, which are
listed on a national securities exchange, and buy listed call and put options
on securities and securities indices. The fund may write a call option only
if the option is "covered," which means so long as the fund is obligated as
the writer of a call option, it will own the underlying security subject to
the call or a call on the same security where the exercise price of the call
held is equal to or less than the exercise price of the call written. The
fund will not invest in any stock options or stock index options, other than
hedging or covered positions, if the option premiums paid on its open
positions exceed 5% of the value of the fund's total assets.
An option on a security is a contract that allows the buyer of the option, in
return for the premium paid, the right to buy a specified security (in the
case of a call option) or to sell a specified security (in the case of a put
option) from or to the writer of the option at a designated price during the
term of the option. Options on securities indices are similar to options on
securities except, rather than the right to buy or sell particular securities
at a specified price, options on a securities index give the holder the right
to receive, upon exercise of the option, an amount of cash if the closing
level of the underlying stock index is greater than (or less than, in the
case of a put) the exercise price of the option. The cash received is equal
to the difference between the closing price of the index and the exercise
price of the option, expressed in dollars, multiplied by a specified number.
Thus, unlike options on individual securities, all settlements are in cash,
and gain or loss depends on price movements in the stock market generally (or
in a particular industry or segment of the market) rather than on price
movements in individual securities. Options are generally considered
"derivative securities." The fund's investment in options will be for
portfolio hedging purposes in an effort to stabilize principal fluctuations
to achieve the fund's investment objective and not for speculation. For more
information about the fund's investments in options, please see "What Are the
Risks of Investing in the Fund? - Options" below and "How Does the Fund
Invest Its Assets?" in the SAI.
OTHER INVESTMENT POLICIES OF THE FUND
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the
Board and subject to the following conditions, the fund may lend its
portfolio securities to qualified securities dealers or other institutional
investors, if such loans do not exceed 25% of the value of the fund's total
assets at the time of the most recent loan. The borrower must deposit with
the fund's custodian bank collateral with an initial market value of at least
102% of the initial market value of the securities loaned, including any
accrued interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 100%. This
collateral shall consist of cash, securities issued by the U.S. government,
its agencies or instrumentalities, or irrevocable letters of credit. The
lending of securities is a common practice in the securities industry. The
fund may engage in security loan arrangements with the primary objective of
increasing the fund's income either through investing cash collateral in
short-term interest bearing obligations or by receiving a loan premium from
the borrower. Under the securities loan agreement, the fund continues to be
entitled to all dividends or interest on any loaned securities. As with any
extension of credit, there are risks of delay in recovery and loss of rights
in the collateral should the borrower of the security fail financially.
REPURCHASE AGREEMENTS. In a repurchase agreement, the fund buys U.S.
government securities from a bank or broker-dealer at one price and agrees to
sell them back to the bank or broker-dealer at a higher price on a specified
date. The securities subject to resale are held on behalf of the fund by a
custodian bank approved by the Board. The bank or broker-dealer must transfer
to the custodian securities with an initial market value of at least 102% of
the repurchase price to help secure the obligation to repurchase the
securities at a later date. The securities are then marked-to-market daily to
maintain coverage of at least 100%. If the bank or broker-dealer does not
repurchase the securities as agreed, the fund may experience a loss or delay
in the liquidation of the securities underlying the repurchase agreement and
may also incur liquidation costs. The fund, however, intends to enter into
repurchase agreements only with banks or broker-dealers that are considered
creditworthy by Advisory Services.
BORROWING. As a fundamental policy, the fund may not borrow money, except in
the form of reverse repurchase agreements or from banks in order to meet
redemption requests or for other temporary or emergency purposes in an amount
up to 15% of its total assets (including the amount borrowed). The fund will
not make any additional investments while any borrowings exceed 5% of its
total assets. The fund also may not mortgage or pledge any of its assets,
except to secure borrowings for temporary or emergency purposes and
permissible options, short selling or other hedging transactions.
SHORT-SELLING. The fund may make short sales, which are transactions in which
the fund sells a security it does not own in anticipation of a decline in the
market value of that security.
ILLIQUID INVESTMENTS. The fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally
securities that cannot be sold within seven days in the normal course of
business at approximately the amount at which the fund has valued them.
OTHER POLICIES AND RESTRICTIONS. The fund has a number of additional
investment policies and restrictions that govern its activities. Those that
are identified as "fundamental" may only be changed with shareholder
approval. The others may be changed by the Board alone. For a list of these
restrictions and more information about the fund's investment policies,
including those described above, please see "How Does the Fund Invest Its
Assets?" and "Investment Restrictions" in the SAI.
Generally, the policies and restrictions discussed in this prospectus and in
the SAI apply when the fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security
no longer meets one or more of the fund's policies or restrictions.
TAX CONSIDERATIONS. The fund's investment in options, foreign securities and
other complex securities are subject to special tax rules that may affect the
amount, timing or character of the income earned by the fund and distributed
to you. The fund may also be subject to withholding taxes on earnings from
certain of its foreign securities. These special tax rules are discussed in
the "Additional Information on Distributions and Taxes" section of the SAI.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
The value of your shares will increase as the value of the securities owned
by the fund increases and will decrease as the value of the fund's
investments decrease. In this way, you participate in any change in the value
of the securities owned by the fund. In addition to the factors that affect
the value of any particular security that the fund owns, the value of fund
shares may also change with movements in the stock and bond markets as a
whole.
An investment in the fund involves certain speculative considerations and may
involve a higher degree of risk than an investment in shares of more
traditional open-end, diversified investment companies. The fund is designed
for long-term investors, not as a trading vehicle, and is not intended to
present a complete investment program. You should consider your individual
investment objectives, as well as your other investments, when deciding
whether to buy shares of the fund.
THE FUND'S APPROACH TO VALUE INVESTING. The fund will invest principally in
the securities of companies believed by Advisory Services to be undervalued.
Securities of a company may be undervalued as a result of overreaction by
investors to unfavorable news about a company, industry, or the stock market
in general, or as a result of a market decline, poor economic conditions,
tax-loss selling or actual or anticipated unfavorable developments affecting
a company. Often these companies are attempting to recover from business
setbacks or adverse events (turnarounds), cyclical downturns, or, in certain
cases, bankruptcy.
Cyclical stocks in which the fund may invest tend to increase in value more
quickly during economic upturns than noncyclical stocks, but they also tend
to lose value more quickly in economic downturns. As with all investments,
there is always the possibility when investing in these securities that
Advisory Services may be incorrect in its assessment of a particular industry
or company or that Advisory Services may not buy these securities at their
lowest possible prices or sell them at their highest.
When the fund buys securities of companies emerging from bankruptcy it may
encounter risks that do not exist with other investments. Companies emerging
from bankruptcy may have some difficulty retaining customers and suppliers
who prefer transacting with solvent organizations. If new management is
installed in a company emerging from bankruptcy, the management may be
considered untested; if the existing management is retained, the management
may be considered incompetent. Further, even when a company has emerged from
bankruptcy with a lower level of debt, it may still retain a relatively weak
balance sheet. During economic downturns these companies may not have
sufficient cash flow to pay their debt obligations and may also have
difficulty finding additional financing. In addition, reduced liquidity in
the secondary market may make it difficult for the fund to sell the
securities or to value them based on actual trades.
The fund's policy of investing in securities that may be out of favor,
including turnarounds, cyclicals and companies emerging from bankruptcy,
companies reporting poor earnings, and companies whose share prices have
declined sharply or that are not widely followed, differs from the approach
followed by many other mutual funds. Advisory Services believes, however,
that these securities may provide a greater total investment return than
securities whose prices appear to reflect anticipated favorable developments.
NON-DIVERSIFICATION. As a non-diversified investment company under the
Investment Company Act of 1940, the fund may concentrate its investments in
the securities of a smaller number of issuers than if it were a diversified
company under the Act. An investment in the fund therefore will entail
greater risk than an investment in a diversified investment company because a
higher percentage of investments among fewer issuers may result in greater
fluctuation in the total market value of the fund's portfolio, and economic,
political or regulatory developments may have a greater impact on the value
of the fund's portfolio than would be the case if the portfolio were
diversified among more issuers. All securities in which the fund may invest
are inherently subject to market risk, and the market value of the fund's
investments will fluctuate.
SMALL COMPANIES. The fund may invest in companies that have relatively small
revenues, limited product lines, and a small share of the market for their
products or services. Small companies may lack depth of management, they may
be unable to generate internally funds necessary for growth or potential
development or to generate such funds through external financing on favorable
terms, and they may be developing or marketing new products or services for
which markets are not yet established and may never become established. Due
to these and other factors, small companies may suffer significant losses, as
well as realize substantial growth.
Historically, small capitalization stocks have been more volatile than larger
capitalization stocks and are therefore more speculative than investments in
larger companies. Among the reasons for the greater price volatility are the
less certain growth prospects of smaller firms, the lower degree of liquidity
in the markets for such stocks, and the greater sensitivity of small
companies to changing economic conditions. Besides exhibiting greater
volatility, small company stocks may, to a degree, fluctuate independently of
larger company stocks. Small company stocks may decline in price as large
company stocks rise, or rise in price as large company stocks decline. You
should therefore expect that the value of the fund's shares may be more
volatile than the shares of a fund that invests in larger capitalization
stocks. The fund should not be considered suitable if you are unable or
unwilling to assume the risks of loss inherent in investments in small
companies.
FOREIGN SECURITIES. Investments in the securities of companies organized
outside the U.S. or whose securities are principally traded outside the U.S.
("foreign issuers") may offer potential benefits not available from
investments solely in securities of U.S. issuers. These benefits may include
the opportunity to invest in foreign issuers that appear, in the opinion of
Advisory Services, to offer more potential for long-term capital appreciation
or current earnings than investments in U.S. issuers, the opportunity to
invest in foreign countries with economic policies or business cycles
different from those of the U.S. and the opportunity to reduce fluctuations
in portfolio value by taking advantage of foreign securities markets that do
not necessarily move in a manner parallel to U.S. markets.
Investments in securities of foreign issuers involve significant risks,
including possible losses, that are not typically associated with investments
in securities of U.S. issuers. These risks include political, social or
economic instability in the country of the issuer, the difficulty of
predicting international trade patterns, the possibility of the imposition of
exchange controls, expropriation, limits on removal of currency or other
assets, nationalization of assets, foreign withholding and income taxation
and foreign trading practices (including higher trading commissions,
custodial charges and delayed settlements). Changes in government
administrations and economic or monetary policies in the U.S. or abroad,
changes in circumstances surrounding dealings between nations, and changes in
currency convertibility or exchange rates could result in investment losses
for the fund. In addition, public information may not be as readily available
for a foreign company as it is for a U.S. domiciled company, foreign
companies are generally not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to U.S.
companies, and there is usually less government regulation of securities
exchanges, brokers and listed companies. Confiscatory taxation or diplomatic
developments could also affect these investments.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with applicable U.S. and foreign currency
restrictions and other laws limiting the amount and type of foreign
investments. The fund may buy securities in any foreign country, developed or
developing, but investments will not be made in any securities issued without
stock certificates or comparable stock documents.
Foreign securities may be subject to greater fluctuations in price than U.S.
securities. The markets on which foreign securities trade may also have less
volume and liquidity. Securities acquired by the fund outside the U.S. and
that are publicly traded in the U.S. or on a foreign securities exchange or
in a foreign securities market will not be considered illiquid so long as the
fund acquires and holds the security with the intention of reselling the
security in the foreign trading market, the fund reasonably believes it can
readily dispose of the security for cash in the U.S. or foreign market, and
current market quotations are readily available.
You should carefully consider the substantial risks involved in investing in
securities of foreign issuers, risks that are often heightened for
investments in developing markets. For example, the small size, inexperience
and limited volume of trading on securities markets in certain developing
countries may make the fund's investments in developing countries illiquid
and more volatile than investments in more developed countries, and the fund
may be required to establish special custody or other arrangements before
making certain investments in such countries. The laws of some foreign
countries may also limit the ability of the fund to invest in securities of
certain issuers located in those countries.
OPTIONS. The purchase and sale of stock options and stock index options,
including the writing of covered call options, involve risks different from
those involved with direct investments in securities. A liquid secondary
market for any particular option may not be available when a position is
sought to be closed, and the inability to close a position may have an
adverse impact on the fund's ability to effectively hedge securities. In
addition, there may be an imperfect correlation between movements in the
securities on which an option contract is based and movements in the
securities in the fund's portfolio. Successful use of option contracts is
further dependent on Advisory Services' ability to predict correctly
movements in the securities markets, and no assurance can be given that
Advisory Services' judgment will be correct. In addition, by writing covered
call options, the fund gives up the opportunity to profit from any price
increase in the underlying security above the option exercise price while the
option is in effect.
HIGH YIELD SECURITIES. Because the fund may invest in securities below
investment grade, an investment in the fund is subject to a higher degree of
risk than an investment in a fund that invests primarily in higher-quality
securities. You should consider the increased risk of loss to principal that
is present with an investment in higher risk securities, such as those in
which the fund invests. Accordingly, an investment in the fund should not be
considered a complete investment program and should be carefully evaluated
for its appropriateness in light of your overall investment needs and goals.
The market value of high yield, lower-quality fixed-income securities,
commonly known as junk bonds, tends to reflect individual developments
affecting the issuer to a greater degree than the market value of
higher-quality securities, which react primarily to fluctuations in the
general level of interest rates. Lower-quality securities also tend to be
more sensitive to economic conditions than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them.
Therefore, the risk associated with buying the securities of these issuers is
generally greater than the risk associated with higher-quality securities.
For example, during an economic downturn or a sustained period of rising
interest rates, issuers of lower-quality securities may experience financial
stress and may not have sufficient cash flow to make interest payments. The
issuer's ability to make timely interest and principal payments may also be
adversely affected by specific developments affecting the issuer, including
the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the fund's portfolio defaults, the fund may have unrealized losses on the
security, which may lower the fund's Net Asset Value. Defaulted securities
tend to lose much of their value before they default. Thus, the fund's Net
Asset Value may be adversely affected before an issuer defaults. In addition,
the fund may incur additional expenses if it must try to recover principal or
interest payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the fund. Although these
securities are typically not callable for a period of time, usually for three
to five years from the date of issue, if an issuer calls its securities
during periods of declining interest rates, Advisory Services may find it
necessary to replace the securities with lower-yielding securities, which
could result in less net investment income for the fund.
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.
INTEREST RATE, CURRENCY AND MARKET RISK. To the extent the fund invests in
debt securities, changes in interest rates in any country where the fund is
invested will affect the value of the fund's portfolio and its share price.
Rising interest rates, which often occur during times of inflation or a
growing economy, are likely to have a negative effect on the value of the
fund's shares. To the extent the fund invests in common stocks, a general
market decline in any country where the fund is invested may cause the value
of what the fund owns, and thus the fund's share price, to decline. Changes
in currency valuations may also affect the price of fund shares. The value of
stock markets, currency valuations and interest rates throughout the world
have increased and decreased in the past. These changes are unpredictable.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the fund and elects its
officers. The officers are responsible for the fund's day-to-day operations.
INVESTMENT MANAGER. Advisory Services manages the fund's assets and makes its
investment decisions. Advisory Services also performs similar services for
other funds. It is wholly owned by Resources, a publicly owned company
engaged in the financial services industry through its subsidiaries. Charles
B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources. Together, Advisory Services and its affiliates manage over $239
billion in assets. Please see "Investment Management and Other Services" and
"Miscellaneous Information" in the SAI for information on securities
transactions and a summary of the fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
fund's portfolio is: Bruce C. Baughman, William J. Lippman and Margaret McGee
since the fund's inception and Gerard P. Sullivan since March 1998.
Bruce C. Baughman
Senior Vice President of Advisory Services
Mr. Baughman holds a Master of Science degree in Accounting from New York
University and a Bachelor of Arts degree from Stanford University. He has
been with the Franklin Templeton Group since 1988.
William J. Lippman
President of Advisory Services
Mr. Lippman holds a Master of Business Administration degree from New York
University and a Bachelor of Business Administration degree from City College
New York. Mr. Lippman has been in the securities industry for over 30 years
and with the Franklin Templeton Group since 1988.
Gerard P. Sullivan
Senior Vice President of Advisory Services
Mr. Sullivan holds a Master of Business Administration degree in Finance and
Accounting from the Columbia Graduate School of Business and a Bachelor of
Arts degree in Political Science from Columbia University. He has been with
the Franklin Templeton Group since March 1998. Previously, he was a Portfolio
Manager for SunAmerica Asset Management from February 1995 to February 1998
and a Portfolio Manager for Texas Commerce Investment Management & Co. from
July 1993 to February 1995.
Margaret McGee
Vice President of Advisory Services
Ms. McGee holds a Bachelor of Arts degree in Business Administration from
William Paterson University. She has been in the securities industry since
1985 and with the Franklin Templeton Group since 1988.
MANAGEMENT FEES. During the fiscal year ended October 31, 1997, management
fees totaling 0.75% of the average daily net assets of the fund were paid to
Advisory Services. Total expenses of the fund, including fees paid to
Advisory Services, were 1.22%.
PORTFOLIO TRANSACTIONS. Advisory Services tries to obtain the best execution
on all transactions. If Advisory Services believes more than one broker or
dealer can provide the best execution, it may consider research and related
services and the sale of fund shares, as well as shares of other funds in the
Franklin Templeton Group of Funds, when selecting a broker or dealer. Please
see "How Does the Fund Buy Securities for Its Portfolio?" in the SAI for more
information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisory Services, FT
Services provides certain administrative services and facilities for the
fund. Please see "Investment Management and Other Services" in the SAI for
more information.
THE RULE 12B-1 PLAN
The fund has a distribution plan or "Rule 12b-1 Plan" under which it may
reimburse Distributors or others for the expenses of activities that are
primarily intended to sell shares of the fund. 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.
Payments by the fund under the plan may not exceed 0.25% per year of the
fund's average daily net assets. All distribution expenses over this amount
will be borne by those who have incurred them. During the first year after
certain purchases made without a sales charge, Securities Dealers may not be
eligible to receive the Rule 12b-1 fees associated with the purchase. For
more information, please see "The Fund's Underwriter" in the SAI.
<TABLE>
<CAPTION>
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
ON AUGUST 5, 1997, PRESIDENT CLINTON SIGNED INTO LAW THE TAXPAYER RELIEF ACT OF 1997
(THE "1997 ACT"). THIS NEW LAW MAKES SWEEPING CHANGES IN THE CODE. BECAUSE MANY OF
THESE CHANGES ARE COMPLEX THEY ARE DISCUSSED IN THE SAI.
TAXATION OF THE FUND'S INVESTMENTS
-------------------------------------------
<S> <C>
The fund invests your money in the stocks, HOW DOES THE FUND EARN INCOME AND GAINS?
bonds and other securities that are
described in the section "How Does the The fund earns dividends and interest
Fund Invest Its Assets?" Special tax rules (the fund's "income") on its investments.
may apply in determining the income and When the fund sells a security for a
gains that the fund earns on its price that is higher than it paid, it has
investments. These rules may, in turn, a gain. When the fund sells a security
affect the amount of distributions that for a price that is lower than it paid,
the fund pays to you. These special tax it has a loss. If the fund has held the
rules are discussed in the SAI. security for more than one year, the gain
or loss will be a long-term capital gain
TAXATION OF THE FUND. As a regulated or loss. If the fund has held the
investment company, the fund generally security for one year or less, the gain
pays no federal income tax on the income or loss will be a short-term capital gain
and gains that it distributes to you. or loss. The fund's gains and losses are
netted together, and, if the fund has a
net gain (the fund's "gains"), that gain
will generally be distributed to you.
-------------------------------------------
FOREIGN TAXES. Foreign governments may impose taxes on the income and gains from the
fund's investments in foreign stocks and bonds. These taxes will reduce the amount of
the fund's distributions to you.
TAXATION OF SHAREHOLDERS
-------------------------------------------
DISTRIBUTIONS. Distributions from the WHAT IS A DISTRIBUTION?
fund, whether you receive them in cash or
in additional shares, are generally As a shareholder, you will receive your
subject to income tax. The fund will send share of the fund's income and gains on
you a statement in January of the current its investments in stocks, bonds and
year that reflects the amount of ordinary other securities. The fund's income and
dividends, capital gain distributions and short-term capital gains are paid to you
non-taxable distributions you received as ordinary dividends. The fund's
from the fund in the prior year. This long-term capital gains are paid to you
statement will include distributions as capital gain distributions. If the
declared in December and paid to you in fund pays you an amount in excess of its
January of the current year, but which are income and gains, this excess will
taxable as if paid on December 31 of the generally be treated as a non-taxable
prior year. The IRS requires you to report distribution. These amounts, taken
these amounts on your income tax return together, are what we call the fund's
for the prior year. The fund's statement distributions to you.
for the prior year will tell you how much
of your capital gain distribution
represents 28% rate gain property. The
remainder of the capital gain distribution
represents 20% rate gain.
-------------------------------------------
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your qualified
retirement plan, such as a section 401(k) plan or IRA, are generally tax-deferred;
this means that you are not required to report fund distributions on your income tax
return when paid to your plan, but, rather, when your plan makes payments to you. Be
aware, however, that special rules apply to payments from Roth and Education IRAs.
DIVIDENDS-RECEIVED DEDUCTION. Corporate investors may be entitled to a
dividends-received deduction on a portion of the ordinary dividends they receive from
the fund.
-------------------------------------------
REDEMPTIONS AND EXCHANGES. If you redeem WHAT IS A REDEMPTION?
your shares or if you exchange your shares
in the fund for shares in another Franklin A redemption is a sale by you to the fund
Templeton Fund, you will generally have a of some or all of your shares in the
gain or loss that the IRS requires you to fund. The price per share you receive
report on your income tax return. If you when you redeem fund shares may be more
exchange fund shares held for 90 days or or less than the price at which you
less and pay no sales charge, or a reduced purchased those shares. An exchange of
sales charge, for the new shares, all or a shares in the fund for shares of another
portion of the sales charge you paid on Franklin Templeton Fund is treated as a
the purchase of the shares you exchanged redemption of fund shares and then a
is not included in their cost for purposes purchase of shares of the other fund.
of computing gain or loss on the exchange. When you redeem or exchange your shares,
If you hold your shares for six months or you will generally have a gain or loss,
less, any loss you have will be treated as depending upon whether the basis in your
a long-term capital loss to the extent of shares is more or less than your cost or
any capital gain distributions received by other basis in the shares. Call Fund
you from the fund. All or a portion of any Information for a free shareholder Tax
loss on the redemption or exchange of your Information Handbook if you need more
shares will be disallowed by the IRS if information in calculating the gain or
you purchase other shares in the fund loss on the redemption or exchange of
within 30 days before or after your your shares.
redemption or exchange.
-------------------------------------------
-------------------------------------------
FOREIGN TAXES. If more than 50% of the WHAT IS A
value of the fund's assets consist of FOREIGN TAX CREDIT?
foreign securities, the fund may elect to
pass-through to you the amount of foreign A foreign tax credit is a tax credit for
taxes it paid. If the fund makes this the amount of taxes imposed by a foreign
election, your year-end statement will country on earnings of the fund. When a
show more taxable income than was actually foreign company in which the fund invests
distributed to you. However, you will be pays a dividend to the fund, the dividend
entitled to either deduct your share of will generally be subject to a
such taxes in computing your taxable withholding tax. The taxes withheld in
income or claim a foreign tax credit for foreign countries create credits that you
such taxes against your U.S. federal may use to offset your U.S. federal
income tax. Your year-end statement, income tax.
showing the amount of deduction or credit
available to you, will be distributed to
you in January along with other
shareholder information records including
your Fund Form 1099-DIV.
-------------------------------------------
The 1997 Act includes a provision that allows you to claim these credits directly on
your income tax return (Form 1040) and eliminates the previous requirement that you
complete a detailed supporting form. To qualify, you must have $600 or less in joint
return foreign taxes ($300 or less on a single return), all of which are reported to
you on IRS Form 1099-DIV. THIS SIMPLIFIED PROCEDURE APPLIES ONLY FOR CALENDAR YEARS
1998 AND BEYOND, AND IS NOT AVAILABLE IN 1997.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income tax
withholding. Your home country may also tax ordinary dividends, capital gain
distributions and gains arising from redemptions or exchanges of your fund shares.
Fund shares held by the estate of a non-U.S. investor may be subject to U.S. estate
tax. You may wish to contact your tax advisor to determine the U.S. and non-U.S. tax
consequences of your investment in the fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you receive from
the fund, and gains arising from redemptions or exchanges of your fund shares will
generally be subject to state and local income tax. The holding of fund shares may
also be subject to state and local intangibles taxes. You may wish to contact your
tax advisor to determine the state and local tax consequences of your investment in
the fund.
-------------------------------------------
BACKUP WITHHOLDING. When you open an WHAT IS BACKUP WITHHOLDING?
account, IRS regulations require that you
provide your taxpayer identification Backup withholding occurs when the fund
number ("TIN"), certify that it is is required to withhold and pay over to
correct, and certify that you are not the IRS 31% of your distributions and
subject to backup withholding under IRS redemption proceeds. You can avoid backup
rules. If you fail to provide a correct withholding by providing the fund with
TIN or the proper tax certifications, the your TIN, and by completing the tax
fund is required to withhold 31% of all certifications on your shareholder
the distributions (including ordinary application that you were asked to sign
dividends and capital gain distributions), when you opened your account. However, if
and redemption proceeds paid to you. The the IRS instructs the fund to begin
fund is also required to begin backup backup withholding, it is required to do
withholding on your account if the IRS so even if you provided the fund with
instructs the fund to do so. The fund your TIN and these tax certifications,
reserves the right not to open your and backup withholding will remain in
account, or, alternatively, to redeem your place until the fund is instructed by the
shares at the current Net Asset Value, IRS that it is no longer required.
less any taxes withheld, if you fail to
provide a correct TIN, fail to provide the
proper tax certifications, or the IRS
instructs the fund to begin backup
withholding on your account.
-------------------------------------------
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND. A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS IS CONTAINED IN THE SECTION
ENTITLED "ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES" IN THE SAI. THE
TAX TREATMENT TO YOU OF DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS, FOREIGN TAXES
PAID AND INCOME TAXES WITHHELD IS ALSO DISCUSSED IN A FREE FRANKLIN TEMPLETON
TAX INFORMATION HANDBOOK WHICH IS AVAILABLE BY CONTACTING FUND INFORMATION.
</TABLE>
HOW IS THE TRUST ORGANIZED?
The fund is a non-diversified series of Franklin Value Investors Trust (the
"Trust"), an open-end management investment company, commonly called a mutual
fund. It was organized as a Massachusetts business trust on September 11,
1989, and is registered with the SEC. Shares of each series of the Trust have
equal and exclusive rights to dividends and distributions declared by that
series and the net assets of the series in the event of liquidation or
dissolution. Shares of the fund are considered Class I shares for redemption,
exchange and other purposes. Additional series and classes of shares may be
offered in the future.
The Trust has noncumulative voting rights. This gives holders of more than
50% of the shares voting the ability to elect all of the members of the
Board. If this happens, holders of the remaining shares voting will not be
able to elect anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares.
In certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
The fund is closed to new investors, except retirement plan accounts. If you
were a shareholder of record as of 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. We may also refuse any order to buy
shares. CURRENTLY, THE FUND DOES NOT ALLOW INVESTMENTS BY MARKET TIMERS.
Make your investment using the table below:
- --------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL Send a check made payable to the fund. Please
include your account number on the check.
- --------------------------------------------------------------------------------
BY WIRE Call Shareholder Services or, if that number is
busy, call 1-650/312-2000 collect, to receive a wire
control number and wire instructions. You need a new
wire control number every time you wire money into
your account. If you do not have a currently effective
wire control number, we will return the money to the
bank, and we will not credit the purchase to your
account.
IMPORTANT DEADLINES: If we receive your call before
1:00 p.m. Pacific time and the bank receives the
wired funds and reports the receipt of wired funds
to the fund by 3:00 p.m. Pacific time, we will
credit the purchase to your account that day. If we
receive your call after 1:00 p.m. or the bank
receives the wire after 3:00 p.m., we will credit
the purchase to your account the following business
day.
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
SALES CHARGE REDUCTIONS AND WAIVERS
- - If you qualify to buy shares under one of the sales charge reduction or
waiver categories described below, please include a written statement
with each purchase order explaining which privilege applies. If you
don't include this statement, we cannot guarantee that you will receive
the sales charge reduction or waiver.
QUANTITY DISCOUNTS. The sales charge you pay depends on the dollar amount you
invest, as shown in the table below.
<TABLE>
<CAPTION>
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
--------------------------
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Under $50,000 .......................... 5.75% 6.10% 5.00%
$50,000 but less than $100,000 ......... 4.50% 4.71% 3.75%
$100,000 but less than $250,000 ........ 3.50% 3.63% 2.80%
$250,000 but less than $500,000 ........ 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000 ...... 2.00% 2.04% 1.60%
$1,000,000 or more* .................... None None None
</TABLE>
*If you invest $1 million or more, a Contingent Deferred Sales Charge may be
imposed on an early redemption. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to
Securities Dealers" below for a discussion of payments Distributors may make
out of its own resources to Securities Dealers for certain purchases.
CUMULATIVE QUANTITY DISCOUNTS. To determine if you may pay a reduced sales
charge, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your existing shares in the Franklin Templeton
Funds, as well as those of your spouse, children under the age of 21 and
grandchildren under the age of 21. If you are the sole owner of a company,
you may also add any company accounts, including retirement plan accounts.
Companies with one or more retirement plans may add together the total plan
assets invested in the Franklin Templeton Funds to determine the sales charge
that applies.
LETTER OF INTENT. You may buy shares at a reduced sales charge by completing
the Letter of Intent section of the shareholder application. A Letter of
Intent is a commitment by you to invest a specified dollar amount during a 13
month period. The amount you agree to invest determines the sales charge you
pay.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION,
YOU ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase
in fund shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on
the reserved shares as you direct. Our policy of reserving shares does not
apply to certain retirement plans.
If you would like more information about the Letter of Intent privilege,
please see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in
the SAI or call Shareholder Services.
GROUP PURCHASES. If you are a member of a qualified group, you may buy fund
shares at a reduced sales charge that applies to the group as a whole. The
sales charge is based on the combined dollar value of the group members'
existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions. 403(b) plans that only allow salary deferral
contributions and that purchased shares of the fund at a reduced sales charge
under the group purchase privilege before February 1, 1998, however, may
continue to do so.
SALES CHARGE WAIVERS. If one of the following sales charge waivers applies to
you or your purchase of fund shares, you may buy shares of the fund without a
front-end sales charge or a Contingent Deferred Sales Charge.
Certain distributions, payments or redemption proceeds that you receive may
be used to buy shares of the fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton
Fund. The distributions generally must be reinvested in the same class
of shares. Certain exceptions apply, however, to Class II shareholders
of another Franklin Templeton Fund who chose to reinvest their
distributions in the fund before November 17, 1997, and to Advisor Class
or Class Z shareholders of a Franklin Templeton Fund who may reinvest
their distributions in the fund.
2. Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any
tax consequences that may apply.
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.
Various individuals and institutions also may buy shares of the fund without
a front-end sales charge or Contingent Deferred Sales Charge, including:
1. Trust companies and bank trust departments agreeing to invest in
Franklin Templeton Funds over a 13 month period at least $1 million of
assets held in a fiduciary, agency, advisory, custodial or similar
capacity and over which the trust companies and bank trust departments
or other plan fiduciaries or participants, in the case of certain
retirement plans, have full or shared investment discretion. We will
accept orders for these accounts by mail accompanied by a check or by
telephone or other means of electronic data transfer directly from the
bank or trust company, with payment by federal funds received by the
close of business on the next business day following the order.
2. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the fund is
permissible and suitable for you and the effect, if any, of payments by
the fund on arbitrage rebate calculations.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for
clients participating in comprehensive fee programs.
4. Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
5. Registered Securities Dealers and their affiliates, for their investment
accounts only
6. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
7. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family
members, consistent with our then-current policies.
8. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
9. Accounts managed by the Franklin Templeton Group
10. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
11. Group annuity separate accounts offered to retirement plans
12. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with
at least 100 employees, or (ii) have plan assets of $1 million or more, or
(iii) agree to invest at least $500,000 in the Franklin Templeton Funds over
a 13 month period may buy shares without a front-end sales charge. Retirement
plans that are not Qualified Retirement Plans, SIMPLEs or SEPs must also meet
the requirements described under "Group Purchases" above to be able to buy
shares without a front-end sales charge. We may enter into a special
arrangement with a Securities Dealer, based on criteria established by the
fund, to add together certain small Qualified Retirement Plan accounts for
the purpose of meeting these requirements.
For retirement plan accounts opened on or after May 1, 1997, a Contingent
Deferred Sales Charge may apply if the retirement plan is transferred out of
the Franklin Templeton Funds or terminated within 365 days of the retirement
plan account's initial purchase in the Franklin Templeton Funds. Please see
"How Do I Sell Shares? - Contingent Deferred Sales Charge" for details.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the fund.
Plan documents are required for all retirement plans. Trust Company can
provide the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need
an application other than the one included in this prospectus. For a
retirement plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing
a retirement plan. Your investment representative or advisor can help you
make investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate
and are responsible for certain purchases made without a sales charge. The
payments are subject to the sole discretion of Distributors, and are paid by
Distributors or one of its affiliates and not by the fund or its shareholders.
1. Purchases of $1 million or more - up to 1% of the amount invested.
2. Purchases made without a front-end sales charge by certain retirement
plans described under "Sales Charge Reductions and Waivers - Retirement
Plans" above - up to 1% of the amount invested.
3. Purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of
clients participating in comprehensive fee programs - up to 0.25% of the
amount invested.
4. Purchases by Chilean retirement plans - up to 1% of the amount invested.
A Securities Dealer may receive only one of these payments for each
qualifying purchase. Securities Dealers who receive payments in connection
with investments described in paragraphs 1 or 4 above or a payment of up to
1% for investments described in paragraph 2 will be eligible to receive the
Rule 12b-1 fee associated with the purchase starting in the thirteenth
calendar month after the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES,
PLEASE SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO
SECURITIES DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and
a purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment
objective and policies, and its rules and requirements for exchanges. For
example, some Franklin Templeton Funds do not accept exchanges and others may
have different investment minimums.
NO EXCHANGES INTO THE FUND FROM OTHER FRANKLIN TEMPLETON FUNDS WILL BE
ACCEPTED.
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METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates for
the shares you want to exchange
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
~ If you do not want the ability to exchange by
phone to apply to your account, please let us
know.
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable
sales charge of the new fund, if the difference is more than 0.25%. These
charges may not apply if you qualify to buy shares without a sales charge.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred
Sales Charge when you exchange shares. Any shares subject to a Contingent
Deferred Sales Charge at the time of exchange, however, will remain so in the
new fund. For accounts with shares subject to a Contingent Deferred Sales
Charge, we will first exchange any shares in your account that are not
subject to the charge. If there are not enough of these to meet your exchange
request, we will exchange shares subject to the charge in the order they were
purchased. If you exchange shares into one of our money funds, the time your
shares are held in that fund will not count towards the completion of any
Contingency Period. For more information about the Contingent Deferred Sales
Charge, please see "How Do I Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You must meet the applicable minimum investment amount of the fund you
are exchanging into, or exchange 100% of your fund shares.
o You may only exchange shares within the SAME CLASS, except as noted
below.
o The accounts must be identically registered. You may, however, exchange
shares from a fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature
for all transactions. Please notify us in writing if you do not want
this option to be available on your account. Additional procedures may
apply. Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares
as described above. Restrictions may apply to other types of retirement
plans. Please contact Retirement Plan Services for information on
exchanges within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the fund does not allow investments by Market Timers.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time. If you sell all the shares in
your account, your account will be closed and you will not be allowed to buy
additional shares of the fund or to reopen your account. This policy does not
apply to retirement plans.
- --------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions. If you
would like your redemption proceeds wired to a
bank account, your instructions should include:
o The name, address and telephone number of
the bank where you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or
credit union, the name of the corresponding
bank and the account number
2. Include any outstanding share certificates for
the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may
need to send additional documents. Accounts
under court jurisdiction may have other
requirements.
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other
than an escrow account, you must first sign up for
the wire feature. To sign up, send us written
instructions, with a signature guarantee. To avoid
any delay in processing, the instructions should
include the items listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less.
Institutional accounts may exceed $50,000 by
completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for
the shares you want to sell or you have already
returned them to the fund
o Unless you are selling shares in a Trust
Company retirement plan account
o Unless the address on your account was changed
by phone within the last 15 days
- If you do not want the ability to redeem by
phone to apply to your account, please let us
know.
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the
registered owners on the account, send us written instructions signed by all
account owners, with a signature guarantee. We are not able to receive or pay
out cash in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive
your request in proper form before 1:00 p.m. Pacific time, your wire payment
will be sent the next business day. For requests received in proper form
after 1:00 p.m. Pacific time, the payment will be sent the second business
day. By offering this service to you, the fund is not bound to meet any
redemption request in less than the seven day period prescribed by law.
Neither the fund nor its agents shall be liable to you or any other person
if, for any reason, a redemption request by wire is not processed as
described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds until your check or draft has cleared, which may
take seven business days or more. A certified or cashier's check may clear in
less time.
Under unusual circumstances, we may suspend redemptions or postpone payment
for more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under
age 591/2, unless the distribution meets an exception stated in the Code. To
obtain the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
If you did not pay a front-end sales charge because you invested $1 million
or more or agreed to invest $1 million or more under a Letter of Intent, a
Contingent Deferred Sales Charge may apply if you sell all or a part of your
investment within the Contingency Period. Once you have invested $1 million
or more, any additional investments you make without a sales charge may also
be subject to a Contingent Deferred Sales Charge if they are sold within the
Contingency Period. The charge is 1% of the value of the shares sold or the
Net Asset Value at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy shares without a front-end sales charge may also be subject to
a Contingent Deferred Sales Charge if the retirement plan is transferred out
of the Franklin Templeton Funds or terminated within 365 days of the
account's initial purchase in the Franklin Templeton Funds.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT,
we will redeem additional shares to cover any Contingent Deferred Sales
Charge. For requests to sell a stated NUMBER OF SHARES, we will deduct the
amount of the Contingent Deferred Sales Charge, if any, from the sale
proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Account fees
o Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997,
or (ii) the Securities Dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the Securities Dealer of
record has entered into a supplemental agreement with Distributors
o Redemptions by the fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan, at a rate of up to 1%
a month of an account's Net Asset Value. For example, if you maintain an
annual balance of $1 million, you can redeem up to $120,000 annually
through a systematic withdrawal plan free of charge.
o Distributions from IRAs due to death or disability or upon periodic
distributions based on life expectancy
o Returns of excess contributions from employee benefit plans
o Redemptions by Trust Company employee benefit plans or employee benefit
plans serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The fund declares dividends from its net investment income quarterly in
March, June, September and December to shareholders of record on the first
business day before the 15th of the month and pays them on or about the last
day of that month. Capital gains, if any, may be distributed annually,
usually in December.
Dividend payments are not guaranteed, are subject to the Board's discretion
and may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE
ANY FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will then receive a portion of the price you paid
back in the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the
fund (without a sales charge or imposition of a Contingent Deferred Sales
Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. This is a convenient way to accumulate additional
shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a Contingent Deferred Sales
Charge). Many shareholders find this a convenient way to diversify their
investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both
dividend and capital gain distributions in cash. If you have the money sent
to another person or to a checking account, you may need a signature
guarantee. If you send the money to a checking account, please see
"Electronic Fund Transfers" under "Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE
WILL AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE
FUND. You may change your distribution option at any time by notifying us by
mail or phone. Please allow at least seven days before the record date for us
to process the new option. For Trust Company retirement plans, special forms
are required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value
per share, plus any applicable sales charges. When you sell shares, you
receive the Net Asset Value per share.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you
buy or sell shares through your Securities Dealer, however, we will use the
Net Asset Value next calculated after your Securities Dealer receives your
request, which is promptly transmitted to the fund. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents.
HOW AND WHEN SHARES ARE PRICED
The fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the close of the NYSE, normally 1:00 p.m. Pacific
time. You can find the prior day's closing Net Asset Value and Offering Price
of the fund in many newspapers.
To calculate Net Asset Value per share, the fund's assets are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares outstanding. The fund's assets are valued as
described under "How Are Fund Shares Valued?" in the SAI.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any
delay in processing your transaction, they should include:
o Your name,
o The fund's name,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the
evening if preferred.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of
transactions or account changes. These include transactions or account
changes that you could also make by phone, such as certain redemptions of
$50,000 or less, exchanges between identically registered accounts, and
changes to the address of record. For most other types of transactions or
changes, written instructions must be signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed
by all registered owners on the account.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential
claims based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should
be able to obtain a signature guarantee from a bank, broker, credit union,
savings association, clearing agency, or securities exchange or association.
A NOTARIZED SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate
is lost, stolen or destroyed, you may have to pay an insurance premium of up
to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account by phone.
Please refer to the sections of this prospectus that discuss the transaction
you would like to make or call Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to
ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we
are not reasonably satisfied that the instructions are genuine. If this
occurs, we will not be liable for any loss. We also will not be liable for
any loss if we follow instructions by phone that we reasonably believe are
genuine or if you are unable to execute a transaction by phone.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b)
retirement accounts by phone, certain restrictions may be imposed on other
retirement plans.
To obtain any required forms or more information about distribution or
transfer procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights
and ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register
the account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of
survivorship" is shown as "Jt Ten" on your account statement. For any account
with two or more owners, we cannot accept instructions to change owners on
the account unless all owners agree in writing, even if the law in your state
says otherwise. If you would like another person or owner to sign for you,
please send us a current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this
form of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please
send us the following documents when you open your account. This will help
avoid delays in processing your transactions while we verify who may sign on
the account.
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TYPE OF ACCOUNT DOCUMENTS REQUIRED
- --------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- --------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify
the trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the
shares to the street or nominee name account of another Securities Dealer.
Both dealers must have an agreement with Distributors or we cannot process
the transfer. Contact your Securities Dealer to initiate the transfer. We
will process the transfer after we receive authorization in proper form from
your delivering Securities Dealer. Accounts may be transferred electronically
through the NSCC. For accounts registered in street or nominee name, we may
take instructions directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements
and other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions
directly from your dealer or representative, including instructions to
exchange or redeem your shares. Electronic instructions may be processed
through established electronic trading systems and programs used by the fund.
Telephone instructions directly from your representative will be accepted
unless you have told us that you do not want telephone privileges to apply to
your account.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $1,250. We will only do
this if the value of your account fell below this amount because you
voluntarily sold your shares and your account has been inactive (except for
the reinvestment of distributions) for at least six months. Before we close
your account, we will notify you and give you 30 days to increase the value
of your account to $2,500. These minimums may not apply to retirement plan
accounts or to accounts managed by the Franklin Templeton Group.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the fund.
Under the plan, you can have money transferred automatically from your
checking account to the fund each month to buy additional shares. If you are
interested in this program, please refer to the automatic investment plan
application included with this prospectus or contact your investment
representative. The market value of the fund's shares may fluctuate and a
systematic investment plan such as this will not assure a profit or protect
against a loss. You may discontinue the program at any time by notifying
Investor Services by mail or phone.
AUTOMATIC PAYROLL DEDUCTION
You may have money transferred from your paycheck to the fund to buy
additional shares. Your investments will continue automatically until you
instruct the fund and your employer to discontinue the plan. To process your
investment, we must receive both the check and payroll deduction information
in required form. Due to different procedures used by employers to handle
payroll deductions, there may be a delay between the time of the payroll
deduction and the time we receive the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or
annual basis. The value of your account must be at least $5,000 and the
minimum payment amount for each withdrawal must be at least $50. For
retirement plans subject to mandatory distribution requirements, the $50
minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete
the systematic withdrawal plan section of the shareholder application
included with this prospectus and indicate how you would like to receive your
payments. You may choose to direct your payments to buy the same class of
shares of another Franklin Templeton Fund or have the money sent directly to
you, to another person, or to a checking account. If you choose to have the
money sent to a checking account, please see "Electronic Fund Transfers"
below. Once your plan is established, any distributions paid by the fund will
be automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold under the plan may
also be subject to a Contingent Deferred Sales Charge. Please see "Contingent
Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. Please see "How Do I Buy, Sell and Exchange
Shares? - Systematic Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions from the fund
or payments under a systematic withdrawal plan sent directly to a checking
account. If the checking account is with a bank that is a member of the
Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If you choose this option, please allow at least
fifteen days for initial processing. We will send any payments made during
that time to the address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton
Fund;
o exchange shares (within the same class) between identically registered
Franklin Templeton Class I and Class II accounts; and
o request duplicate statements and deposit slips for Franklin Templeton
accounts.
You will need the fund's code number to use TeleFACTS(R). The fund's code
number is 189.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments.
PLEASE VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the fund will be sent every six months. To reduce
fund expenses, we attempt to identify related shareholders within a
household and send only one copy of a report. Call Fund Information if
you would like an additional free copy of the fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more
information, call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your
shares are held by a financial institution, in a street name account, or
networked through the NSCC, the fund may not be able to offer these services
directly to you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor
Services at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California
94403-7777. The fund and Distributors are also located at this address.
Advisory Services is located at One Parker Plaza, Sixteenth Floor, Fort Lee,
New Jersey 07024. You may also contact us by phone at one of the numbers
listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- --------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with
high quality service. You will hear a regular beeping tone if your call is
being recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
ADVISORY SERVICES - Franklin Advisory Services, Inc., the fund's investment
manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - Certain funds in the Franklin Templeton Funds offer
multiple classes of shares. The different classes have proportionate
interests in the same portfolio of investment securities. They differ,
however, primarily in their sales charge structures and Rule 12b-1 plans.
Because the fund's sales charge structure and Rule 12b-1 plan are similar to
those of Class I shares, shares of the fund are considered Class I shares for
redemption, exchange and other purposes.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - The 12 month period during which a Contingent Deferred
Sales Charge may apply. The holding period begins on the first day of the
month in which you buy shares. Regardless of when during the month you buy
shares, they will age one month on the last day of that month and each
following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply
if you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined
the fund is a legally permissible investment and that can only buy shares of
the fund without paying sales charges.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable
Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the fund's
shareholder servicing and transfer agent
IRA - Individual retirement account or annuity qualified under section 408 of
the Code
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange
shares based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value
per share and includes the front-end sales charge. The maximum front-end
sales charge is 5.75%. We calculate the offering price to two decimal places
using standard rounding criteria.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established
under section 408(k) of the Code
SIMPLE (SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES) - An employer sponsored
salary deferral plan established under section 408(p) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an
affiliate of Distributors and both are wholly owned subsidiaries of Resources.
WE/OUR/US - Unless the context indicates a different meaning, these terms
refer to the fund and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present that make the long-term
risks appear somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium-grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. These bonds lack outstanding investment characteristics and, in fact,
have speculative characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and, thereby, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations that are speculative to a high
degree. These issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
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.
PROSPECTUS & APPLICATION
FRANKLIN
VALUE FUND
INVESTMENT STRATEGY
GROWTH & INCOME
o VALUE
MARCH 1, 1998 AS AMENDED AUGUST 3, 1998
FRANKLIN VALUE INVESTORS TRUST
Please read this prospectus before investing, and keep it for future
reference. It contains important information, including how the fund invests
and the services available to shareholders.
This prospectus describes the fund's Class I and Class II shares. The fund
currently offers another share class with a different sales charge and
expense structure, which affects performance.
To learn more about the fund and its policies, you may request a copy of the
fund's Statement of Additional Information ("SAI"), dated March 1, 1998, which
we may amend from time to time. We have filed the SAI with the SEC and have
incorporated it by reference into this prospectus.
For a free copy of the SAI or a larger print version of this prospectus, or
to receive a free copy of the prospectus for the fund's other share class,
contact your investment representative or call 1-800/DIAL BEN.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE
U.S. GOVERNMENT. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
FRANKLIN VALUE FUND
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO
SALES REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
FRANKLIN VALUE FUND
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary .................................................. 2
Financial Highlights.............................................. 4
How Does the Fund Invest Its Assets? ............................. 6
What Are the Risks of Investing in the Fund? ..................... 15
Who Manages the Fund? ............................................ 21
How Taxation Affects the Fund and Its Shareholders ............... 24
How Is the Trust Organized? ...................................... 26
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ............................................. 27
May I Exchange Shares for Shares of Another Fund? ................ 35
How Do I Sell Shares? ............................................ 38
What Distributions Might I Receive From the Fund?................. 41
Transaction Procedures and Special Requirements .................. 42
Services to Help You Manage Your Account ......................... 46
What If I Have Questions About My Account? ....................... 48
GLOSSARY
Useful Terms and Definitions ..................................... 49
APPENDIX
Description of Ratings ........................................... 51
FRANKLIN
VALUE FUND
March 1, 1998
as amended August 3, 1998
When reading this prospectus, you will see certain terms beginning with
capital letters. This means the term is explained in our glossary section.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN(R)
FRANKLIN VALUE FUND
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
fund. It is based on the historical expenses of each class for the fiscal
year ended October 31, 1997. The fund's actual expenses may vary.
CLASS I CLASS II
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge
(as a percentage of Offering Price)......... 5.75% 1.99%
Paid at time of purchase.................... 5.75%++ 1.00%+++
Paid at redemption++++...................... None 0.99%
B. ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
Management Fees............................. 0.74%* 0.74%*
Rule 12b-1 Fees............................. 0.34%** 0.89%**
Other Expenses.............................. 0.33% 0.33%
Total Fund Operating Expenses............... 1.41%* 1.96%*
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the
fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
CLASS I $71*** $100 $130 $217
CLASS II $39 $71 $115 $236
For the same Class II investment, you would pay projected expenses of $30
if you did not sell your shares at the end of the first year. Your
projected expenses for the remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each class and are not
directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more in
Class I shares.
+++Although Class II has a lower front-end sales charge than Class I, its
Rule 12b-1 fees are higher. Over time you may pay more for Class II shares.
Please see "How Do I Buy Shares? - Choosing a Share Class."
++++A Contingent Deferred Sales Charge may apply to any Class II purchase if
you sell the shares within 18 months and to Class I purchases of $1 million
or more if you sell the shares within one year. A Contingent Deferred Sales
Charge may also apply to purchases by certain retirement plans that qualify
to buy Class I shares without a front-end sales charge. The charge is 1% of
the value of the shares sold or the Net Asset Value at the time of purchase,
whichever is less. The number in the table shows the charge as a percentage
of Offering Price. While the percentage is different depending on whether the
charge is shown based on the Net Asset Value or the Offering Price, the
dollar amount you would pay is the same. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*For the period shown, Advisory Services had agreed in advance to limit its
management fees and to assume as its own expense certain expenses otherwise
payable by the fund. With this reduction, management fees were 0.66% and
total operating expenses were 1.32% for Class I and 1.87% for Class II.
**These fees may not exceed 0.35% for Class I and 1.00% for Class II. The
combination of front-end sales charges and Rule 12b-1 fees could cause
long-term shareholders to pay more than the economic equivalent of the
maximum front-end sales charge permitted under the NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the fund's independent auditors. Their
audit report covering the periods shown below appears in the Trust's Annual
Report to Shareholders for the fiscal year ended October 31, 1997. The Annual
Report to Shareholders also includes more information about the fund's
performance. For a free copy, please call Fund Information.
CLASS I
--------------------
YEAR ENDED OCTOBER 31, 1997 19961
- ----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year.............. $17.15 $15.00
-------------------
Income from investment operations
Net investment income.......................... .08 .05
Net realized & unrealized gains................ 7.90 2.15
-------------------
Total from investment operations................ 7.98 2.20
-------------------
Less distributions from:
Net investment income.......................... (.08) (.05)
Net realized gains............................. (.37) -
-------------------
Total distributions............................. (.45) (.05)
-------------------
Net asset value, end of year.................... $24.68 $17.15
===================
Total return*................................... 47.43% 14.69%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's).............. $78,897 $7,828
Ratios to average net assets:
Expenses....................................... 1.32% 1.35%**
Expenses excluding waiver and payments
by affiliate.................................. 1.41% 2.87%**
Net investment income ......................... .27% .57%**
Portfolio turnover rate......................... 13.92% 32.52%
Average commission rate paid***................. $.0474 $.0464
CLASS II
--------------------
YEAR ENDED OCTOBER 31, 1997 19962
- ----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year.............. $17.14 $16.38
-------------------
Income from investment operations
Net investment income (loss)................... (.02) .01
Net realized & unrealized gains................ 7.84 .76
-------------------
Total from investment operations................ 7.82 .77
-------------------
Less distributions from:
Net investment income.......................... - (.01)
Net realized gains............................. (.37) -
-------------------
Total distributions............................. (.37) (.01)
-------------------
Net asset value, end of year.................... $24.59 $17.14
===================
Total return*................................... 46.40% 4.68%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's).............. $21,554 $434
Ratios to average net assets:
Expenses....................................... 1.87% 2.00%**
Expenses excluding waiver and payments
by affiliate ................................. 1.96% 3.52%**
Net investment income ......................... (.30%) (.08%)**
Portfolio turnover rate......................... 13.92% 32.52%
Average commission rate paid***................. $.0474 $.0464
1For the period March 11, 1996 (effective date) to October 31, 1996.
2For the period September 1, 1996 (effective date) to October 31, 1996
*Total return does not reflect sales commissions or the Contingent Deferred
Sales Charge, and is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The fund's investment objective is to seek long-term total return. The
objective is a fundamental policy of the fund and may not be changed without
shareholder approval. Of course, there is no assurance that the fund will
achieve its objective.
The fund seeks to achieve its objective by investing at least 65% of its
assets in the securities of companies that Advisory Services believes are
undervalued. The securities the fund may invest in include common and
preferred stocks, warrants, secured and unsecured bonds, and notes. Income is
a secondary consideration of the fund, although it is not part of the fund's
investment objective. The policies used to seek to achieve the fund's
objective are not fundamental, unless otherwise noted, and are subject to
change without shareholder approval.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
The fund invests at least 65% of its assets in companies of various sizes,
including investments in small capitalization companies, that Advisory
Services believes are selling substantially below the underlying value of
their assets or their private market value. Private market value is what a
sophisticated investor would pay for the entire company. Advisory Services
may take into account a variety of factors in order to determine whether to
buy or hold securities, including: low price to earnings ratio relative to
the market, industry group or earnings growth; low price relative to book
value or cash flow; valuable franchises, patents, trademarks, trade names,
distribution channels or market share for particular products or services,
tax loss carryforwards, or other intangibles that may not be reflected in
stock prices; ownership of understated or underutilized tangible assets such
as land, timber or minerals; underutilized cash or investment assets; and
unusually high current income. These criteria and others, alone and in
combination, may identify companies that are attractive to financial or
strategic acquirers (i.e. takeover candidates) or companies that have
suffered sharp price declines but in Advisory Services' 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.
In anticipation of and during temporary defensive periods or when the type of
investments in which the fund intends to invest are not available at prices
that Advisory Services believes are attractive, the fund may invest up to
100% of its total assets in: (1) securities of the U.S. government and
certain of its agencies or instrumentalities that mature in one year or less
from the date of purchase, including U.S. Treasury bills, notes and bonds,
and securities of the Government National Mortgage Association, the Federal
Housing Administration and other agency or instrumentality issues or
guarantees that are supported by the full faith and credit of the U.S.
government; (2) obligations issued or guaranteed by other U.S. government
agencies or instrumentalities, some of which are supported by the right of
the issuer to borrow from the U.S. government (e.g., obligations of the
Federal Home Loan Banks) and some of which are backed by the credit of the
issuer itself (e.g., obligations of the Student Loan Marketing Association);
(3) bank obligations, including negotiable and non-negotiable CDs (subject to
the 10% aggregate limit on the fund's investment in illiquid securities),
letters of credit and bankers' acceptances, or instruments secured by these
types of obligations, issued by banks and savings institutions that are
subject to regulation by the U.S. government, its agencies or
instrumentalities and that have assets of over $1 billion, unless these types
of obligations are guaranteed by a parent bank that has total assets in
excess of $5 billion; (4) commercial paper considered by Advisory Services to
be of high quality, which must be rated within the two highest rating
categories by S&P or Moody's or, if unrated, issued by a company having an
outstanding debt issue rated at least AA by S&P or Aa by Moody's; and (5)
corporate obligations including, but not limited to, corporate notes, bonds
and debentures considered by Advisory Services to be high grade or that are
rated within the two highest rating categories by S&P or Moody's. Please see
"Appendix" for a discussion of ratings.
Whether investing for value or for other reasons, Advisory Services may buy
any of the types of securities described below and in the SAI. The fund
currently intends to invest primarily in domestic securities, but it may also
invest its assets in foreign securities.
HIGH 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 S&P or Ba or lower by Moody's) and unrated securities of comparable
quality, that Advisory Services believes possess intrinsic values in excess
of the current market prices of those securities. Lower 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. Please see "What Are the Risks of Investing in the Fund?" below for
more information.
ZERO COUPON SECURITIES AND PAY-IN-KIND BONDS. Zero coupon or deferred
interest securities are debt obligations that do not entitle the holder to
any periodic payments of interest before maturity or a specified date when
the securities begin paying current interest (the "cash payment date") and
therefore are generally issued and traded at a discount from their face
amounts or par value. The discount varies depending on the time remaining
until maturity or cash payment date, prevailing interest rates, liquidity of
the security and the perceived credit quality of the issuer. The discount, in
the absence of financial difficulties of the issuer, typically decreases as
the final maturity or cash payment date of the security approaches. The
market prices of zero coupon securities are generally more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do non-zero
coupon or deferred interest securities having similar maturities and credit
quality. Current federal income tax law requires that a holder of a zero
coupon security report as income each year the portion of the original issue
discount on the security that accrues that year, even though the holder
receives no cash payments of interest during the year.
Pay-in-kind bonds are securities that pay interest through the issuance of
additional bonds. The fund will be deemed to receive interest over the life
of the bonds and be treated as if interest were paid on a current basis for
federal income tax purposes, although no cash interest payments are received
by the fund until the cash payment date or until the bonds mature. More
information is included under "What Are the Risks of Investing in the Fund?"
and in the tax section of the SAI.
CONVERTIBLE SECURITIES. The fund may invest in convertible securities; these
investments will be less than 25% of its total assets. A convertible security
is generally a debt obligation or preferred stock that may be converted
within a specified period of time into a certain amount of common stock of
the same or a different issuer. A convertible security provides a
fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance
in its underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Like a common stock,
the value of a convertible security also tends to increase as the market
value of the underlying stock rises, and it tends to decrease as the market
value of the underlying stock declines. Because its value can be influenced
by both interest rate and market movements, a convertible security is not as
sensitive to interest rates as a similar fixed-income security, nor is it as
sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by
an investment bank. When issued by an operating company, a convertible
security tends to be senior to common stock, but subordinate to other types
of fixed-income securities issued by that company. When a convertible
security issued by an operating company is "converted," the operating company
often issues new stock to the holder of the convertible security but, if the
parity price of the convertible security is less than the call price, the
operating company may pay out cash instead of common stock. If the
convertible security is issued by an investment bank, the security is an
obligation of and is convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security
will have recourse only to the issuer. In addition, a convertible security
may be subject to redemption by the issuer, but only after a specified date
and under circumstances established at the time the security is issued.
While the fund uses the same criteria to rate a convertible debt security
that it uses to rate a more conventional debt security, a convertible
preferred stock is treated like a preferred stock for the fund's financial
reporting, credit rating, and investment limitation purposes. A preferred
stock is subordinated to all debt obligations in the event of insolvency, and
an issuer's failure to make a dividend payment is generally not an event of
default entitling the preferred shareholder to take action. A preferred stock
generally has no maturity date, so that its market value is dependent on the
issuer's business prospects for an indefinite period of time. In addition,
distributions from preferred stock are dividends, rather than interest
payments, and are usually treated as such for corporate tax purposes.
The fund may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stocks ("PERCS"),
which provide an investor, such as the fund, with the opportunity to earn
higher dividend income than is available on a company's common stock. PERCS
are preferred stocks that generally feature a mandatory conversion date, as
well as a capital appreciation limit which is usually expressed in terms of a
stated price. Most PERCS expire three years from the date of issue, at which
time they are convertible into common stock of the issuer. PERCS are
generally not convertible into cash at maturity. Under a typical arrangement,
after three years PERCS convert into one share of the issuer's common stock
if the issuer's common stock is trading at a price below that set by the
capital appreciation limit, and into less than one full share if the issuer's
common stock is trading at a price above that set by the capital appreciation
limit. The amount of that fractional share of common stock is determined by
dividing the price set by the capital appreciation limit by the market price
of the issuer's common stock. PERCS can be called at any time prior to
maturity, and hence do not provide call protection. If called early, however,
the issuer must pay a call premium over the market price to the investor.
This call premium declines at a preset rate daily, up to the maturity date.
The fund may also invest in other enhanced convertible securities. These
include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities), and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all have the
following features: they are issued by the company, the common stock of which
will be received in the event the convertible preferred stock is converted,
unlike PERCS they do not have a capital appreciation limit, they seek to
provide the investor with high current income with some prospect of future
capital appreciation, they are typically issued with three to four-year
maturities, they typically have some built-in call protection for the first
two to three years, investors have the right to convert them into shares of
common stock at a preset conversion ratio or hold them until maturity, and
upon maturity they will automatically convert to either cash or a specified
number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked
as senior or subordinated debt in the issuer's corporate structure according
to the terms of the debt indenture. There may be additional types of
convertible securities not specifically referred to herein which may be
similar to those described above in which the fund may invest, consistent
with its objectives and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the fund. The fund may have difficulty disposing
of such securities because there may be a thin trading market for a
particular security at any given time. Reduced liquidity may have an adverse
impact on market price and the fund's ability to dispose of particular
securities, when necessary, to meet the fund's liquidity needs or in response
to a specific economic event, such as the deterioration in the
creditworthiness of an issuer. Reduced liquidity in the secondary market for
certain securities may also make it more difficult for the fund to obtain
market quotations based on actual trades for purposes of valuing the fund's
portfolio. The fund, however, intends to acquire liquid securities, though
there can be no assurances that this will be achieved.
SYNTHETIC CONVERTIBLES. The fund may invest a portion of its assets in
"synthetic convertible" securities. A synthetic convertible is created by
combining distinct securities which together possess the two principal
characteristics of a true convertible security, i.e., fixed income and the
right to acquire the underlying equity security. This combination is achieved
by investing in nonconvertible fixed-income securities and in warrants or
stock or stock index call options which grant the holder the right to
purchase a specified quantity of securities within a specified period of time
at a specified price or to receive cash in the case of stock index options.
Synthetic convertible securities are generally not considered to be "Equity
Securities" for purposes of the fund's investment policy regarding those
securities.
Synthetic convertible securities differ from the true convertible security in
several respects. The value of a synthetic convertible is the sum of the
values of its fixed-income component and its convertibility component. Thus,
the values of a synthetic convertible and a true convertible security will
respond differently to market fluctuations. Further, although Advisory
Services expects normally to create synthetic convertibles whose two
components represent one issuer, the character of a synthetic convertible
allows the fund to combine components representing distinct issuers, or to
combine a fixed income security with a call option on a stock index, when
Advisory Services determines that such a combination would better promote the
fund's investment objectives. In addition, the component parts of a synthetic
convertible security may be purchased simultaneously or separately; and the
holder of a synthetic convertible faces the risk that the price of the stock,
or the level of the market index underlying the convertibility component will
decline.
FOREIGN SECURITIES. The fund may invest in foreign securities if these
investments are consistent with the fund's investment objective. The fund may
buy sponsored or unsponsored American Depositary Receipts ("ADRs"), Global
Depositary Receipts ("GDRs"), and European Depositary Receipts ("EDRs"). ADRs
are certificates issued by U.S. banks representing the right to receive
securities of a foreign issuer deposited with that bank or a correspondent
bank. GDRs and EDRs are typically issued by foreign banks or trust companies
and evidence ownership of underlying securities issued by either a foreign or
a U.S. corporation. The fund may also buy the securities of foreign issuers
directly in foreign markets, and may buy the securities of issuers in
developing nations. The fund intends to limit its investment in foreign
securities to no more than 25% of its total assets. Please see "What Are the
Risks of Investing in the Fund? - Foreign Securities" below for more
information.
OPTIONS. The fund may write (sell) call options on securities that are listed
on a national securities exchange or traded over-the-counter ("OTC") and buy
listed and OTC call and put options on securities and securities indices. The
fund may write a call option only if the option is "covered," which means so
long as the fund is obligated as the writer of a call option, it will either
own (i) the underlying security subject to the call or (ii) a call on the
same security where the exercise price of the call held is equal to or less
than the exercise price of the call written. The fund will not invest in any
stock options or stock index options, other than for hedging or in covered
positions, if the option premiums paid on its open positions exceed 5% of the
value of the fund's total assets. The fund may enter into closing purchase
transactions with respect to its open option positions.
An option on a security is a contract that allows the buyer of the option, in
return for the premium paid, the right to buy a specified security (call
option) or to sell a specified security (put option) from or to the writer of
the option at a designated price during the term of the option. Options on
securities indices are similar to options on securities except that, rather
than the right to buy or sell particular securities at a specified price,
options on a securities index give the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of the
underlying stock index is greater than (for calls, or less than, for puts)
the exercise price of the option. The fund may also engage in spread and
straddle transactions, although it intends to limit these transactions to no
more than 5% of the fund's net assets. Please see "What Are the Risks of
Investing in the Fund?" below for more information about options.
FUTURES. The fund may enter into (i) contracts for the purchase or sale for
future delivery of securities, (ii) contracts based on securities indices and
(iii) options on these contracts. At the present time, the fund intends to
limit these investments to no more than 5% of its net assets.
Options, futures and options on futures are generally considered "derivative
securities." The fund's investment in options, futures and options on futures
will be for portfolio hedging or other appropriate risk management purposes
in an effort to stabilize principal fluctuations to achieve the fund's
investment objective and not for speculation.
STRUCTURED NOTES. The fund may invest 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. Please see "What
Are the Risks of Investing in the Fund? - Mortgage-Backed and Asset-Backed
Securities" below for more information.
TRADE CLAIMS. The fund may invest in trade claims, which are purchased from
creditors of companies in financial difficulty who seek to reduce the number
of debt obligations they are owed. At the present time, however, the fund
intends to limit these investments to no more than 5% of its net assets.
RESTRICTED SECURITIES. Some of the securities the fund buys are considered
"restricted securities." The fund's investment in restricted securities may
not exceed 15% of its net assets. Restricted securities are securities with
legal or contractual restrictions on resale, including securities that are
not registered under the 1933 Act. Securities not registered under the 1933
Act may not be sold without first being registered, unless there is an
available exemption under the 1933 Act. Normally the costs of registering
these securities is borne by the issuer. Restricted securities involve
certain risks, including the risk that a secondary market may not exist when
a holder wants to sell them. In addition, the price and valuation of these
securities may reflect a discount because they are perceived as having less
liquidity than similar securities that are not restricted.
As with other securities in the fund's portfolio, if no readily available
market quotations exist for restricted securities, they will be valued at
fair value in accordance with procedures adopted by the Board. If the fund
suddenly has to sell restricted securities, time constraints or a lack of
interested, qualified buyers may prevent the fund from receiving the carrying
value of the securities at the time of the sale. Alternatively, Advisory
Services may sell unrestricted securities it might have retained if the fund
had only held unrestricted securities.
OTHER INVESTMENT POLICIES OF THE FUND
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the
Board and subject to the following conditions, the fund may lend its
portfolio securities to qualified securities dealers or other institutional
investors, if such loans do not exceed 25% of the value of the fund's total
assets at the time of the most recent loan. The borrower must deposit with
the fund's custodian bank collateral with an initial market value of at least
102% of the market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 100%. This
collateral shall consist of cash, securities issued by the U.S. government,
its agencies or instrumentalities, or irrevocable letters of credit. The
lending of securities is a common practice in the securities industry. The
fund may engage in security loan arrangements with the primary objective of
increasing the fund's income either through investing cash collateral in
short-term interest-bearing obligations or by receiving a loan premium from
the borrower. Under the securities loan agreement, the fund continues to be
entitled to all dividends or interest on any loaned securities. As with any
extension of credit, there are risks of delay in recovery and loss of rights
in the collateral should the borrower of the security fail financially.
REPURCHASE AGREEMENTS. In a repurchase agreement, the fund buys U.S.
government securities from a bank or broker-dealer at one price and agrees to
sell them back to the bank or broker-dealer at a higher price on a specified
date. The securities subject to resale are held on behalf of the fund by a
custodian bank approved by the Board. The bank or broker-dealer must transfer
to the custodian securities with an initial market value of at least 102% of
the repurchase price to help secure the obligation to repurchase the
securities at a later date. The securities are then marked-to-market daily to
maintain coverage of at least 100%. If the bank or broker-dealer does not
repurchase the securities as agreed, the fund may experience a loss or delay
in the liquidation of the securities underlying the repurchase agreement and
may also incur liquidation costs. The fund, however, intends to enter into
repurchase agreements only with banks or broker-dealers that are considered
creditworthy by Advisory Services.
BORROWING. 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.
SHORT-SELLING. The fund may make short sales, which are transactions in which
the fund sells a security it does not own in anticipation of a decline in the
market value of that security.
ILLIQUID INVESTMENTS. The fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally
securities that cannot be sold within seven days in the normal course of
business at approximately the amount at which the fund has valued them.
OTHER POLICIES AND RESTRICTIONS. The fund has a number of additional
investment policies and restrictions that govern its activities. Those that
are identified as "fundamental" may only be changed with shareholder
approval. The others may be changed by the Board alone. For a list of these
restrictions and more information about the fund's investment policies,
including those described above, please see "How Does the Fund Invest Its
Assets?" and "Investment Restrictions" in the SAI.
Generally, the policies and restrictions discussed in this prospectus and in
the SAI apply when the fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security
no longer meets one or more of the fund's policies or restrictions.
TAX CONSIDERATIONS. The fund's investment in options, futures, foreign
securities and other complex securities are subject to special tax rules that
may affect the amount, timing or character of the income earned by the fund
and distributed to you. The fund may also be subject to withholding taxes on
earnings from certain of its foreign securities. These special tax rules are
discussed in the "Additional Information on Distributions and Taxes" section
of the SAI.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
The value of your shares will increase as the value of the securities owned
by the fund increases and will decrease as the value of the fund's
investments decrease. In this way, you participate in any change in the value
of the securities owned by the fund. In addition to the factors that affect
the value of any particular security that the fund owns, the value of fund
shares may also change with movements in the stock and bond markets as a
whole.
THE FUND'S APPROACH TO VALUE INVESTING. The fund will invest principally in
the securities of companies believed by Advisory Services to be undervalued.
Securities of a company may be undervalued as a result of overreaction by
investors to unfavorable news about a company, industry, or the stock market
in general, or as a result of a market decline, poor economic conditions,
tax-loss selling or actual or anticipated unfavorable developments affecting
a company. Often these companies are attempting to recover from business
setbacks or adverse events (turnarounds), cyclical downturns, or, in certain
cases, bankruptcy.
Cyclical stocks in which the fund may invest tend to increase in value more
quickly during economic upturns than noncyclical stocks, but they also tend
to lose value more quickly in economic downturns. As with all investments,
there is always the possibility when investing in these securities that
Advisory Services may be incorrect in its assessment of a particular industry
or company or that Advisory Services may not buy these securities at their
lowest possible prices or sell them at their highest.
When the fund buys securities of companies emerging from bankruptcy it may
encounter risks that do not exist with other investments. Companies emerging
from bankruptcy may have some difficulty retaining customers and suppliers
who prefer transacting with solvent organizations. If new management is
installed in a company emerging from bankruptcy, the management may be
considered untested; if the existing management is retained, the management
may be considered incompetent. Further, even when a company has emerged from
bankruptcy with a lower level of debt, it may still retain a relatively weak
balance sheet. During economic downturns these companies may not have
sufficient cash flow to pay their debt obligations and may also have
difficulty finding additional financing. In addition, reduced liquidity in
the secondary market may make it difficult for the fund to sell the
securities or to value them based on actual trades.
The fund's policy of investing in securities that may be out of favor,
including turnarounds, cyclicals and companies emerging from bankruptcy,
companies reporting poor earnings, and companies whose share prices have
declined sharply or that are not widely followed, differs from the approach
followed by many other mutual funds. Advisory Services believes, however,
that these securities may provide a greater total investment return than
securities whose prices appear to reflect anticipated favorable developments.
NON-DIVERSIFICATION. As a non-diversified investment company under the
Investment Company Act of 1940, the fund may concentrate its investments in
the securities of a smaller number of issuers than if it were a diversified
company. An investment in the fund therefore will entail greater risk than an
investment in a diversified investment company because a higher percentage of
investments among fewer issuers may result in greater fluctuation in the
total market value of the fund's portfolio, and economic, political or
regulatory developments may have a greater impact on the value of the fund's
portfolio than would be the case if the portfolio were diversified among more
issuers. All securities in which the fund may invest are inherently subject
to market risk, and the market value of the fund's investments will
fluctuate. The fund intends to comply with the diversification and other
requirements applicable to regulated investment companies under the Code. For
more information, please see "How Does the Fund Invest its Assets? -
Non-diversification" in the SAI.
FOREIGN SECURITIES. Investments in the securities of companies organized
outside the U.S. or whose securities are principally traded outside the U.S.
("foreign issuers") may offer potential benefits not available from
investments solely in securities of U.S. issuers. These benefits may include
the opportunity to invest in foreign issuers that appear, in the opinion of
Advisory Services, to offer more potential for long-term capital appreciation
or current earnings than investments in U.S. issuers, the opportunity to
invest in foreign countries with economic policies or business cycles
different from those of the U.S., and the opportunity to reduce fluctuations
in portfolio value by taking advantage of foreign securities markets that do
not necessarily move in a manner parallel to U.S. markets.
Investments in securities of foreign issuers involve significant risks,
including possible losses that are not typically associated with investments
in securities of U.S. issuers. These risks include political, social or
economic instability in the country of the issuer, the difficulty of
predicting international trade patterns, the possibility of the imposition of
exchange controls, expropriation, limits on removal of currency or other
assets, nationalization of assets, foreign withholding and income taxation
and foreign trading practices (including higher trading commissions,
custodial charges and delayed settlements). Changes in government
administrations and economic or monetary policies in the U.S. or abroad,
changes in circumstances surrounding dealings between nations, and changes in
currency convertibility or exchange rates could also result in investment
losses for the fund. Other risks include the possibility that public
information may not be as readily available for a foreign company as it is
for a U.S.-domiciled company, that foreign companies are generally not
subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to U.S. companies, and that there is usually
less government regulation of securities exchanges, brokers and listed
companies. Confiscatory taxation or diplomatic developments could also affect
these investments.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with applicable U.S. and foreign currency
restrictions and other laws limiting the amount and type of foreign
investments. The fund may buy securities in any foreign country, developed or
developing, but investments will not be made in any securities issued without
stock certificates or comparable stock documents.
Foreign securities may be subject to greater fluctuations in price than U.S.
securities. The markets on which foreign securities trade may also have less
volume and liquidity. Securities acquired by the fund outside the U.S. and
that are publicly traded in the U.S. or on a foreign securities exchange or
in a foreign securities market will not be considered illiquid so long as the
fund acquires and holds the security with the intention of reselling the
security in the foreign trading market, the fund reasonably believes it can
readily dispose of the security for cash in the U.S. or foreign market, and
current market quotations are readily available.
You should carefully consider the substantial risks involved in investing in
securities of foreign issuers - risks that are often heightened for
investments in developing markets. For example, the small size, inexperience
and limited volume of trading on securities markets in certain developing
countries may make the fund's investments in developing countries illiquid
and more volatile than investments in more developed countries, and the fund
may be required to establish special custody or other arrangements before
making certain investments in these countries. The laws of some foreign
countries may also limit the ability of the fund to invest in securities of
certain issuers located in those countries.
OPTIONS. The purchase and sale of stock options and stock index options,
including the writing of covered call options, involve risks different from
those involved with direct investments in securities. A liquid secondary
market for any particular option may not be available when a position is
sought to be closed and the inability to close a position may have an adverse
impact on the fund's ability to hedge securities effectively. In addition,
there may be an imperfect correlation between movements in the securities on
which an option contract is based and movements in the securities in the
fund's portfolio. Successful use of option contracts is further dependent on
Advisory Services' ability to predict correctly movements in the securities
markets, but no assurance can be given that Advisory Services' judgment will
be correct.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. Mortgage-backed and asset-backed
securities are often subject to more rapid repayment than their stated
maturity dates would indicate because of the pass-through of prepayments of
principal on the underlying loans. During periods of declining interest
rates, prepayment of loans underlying mortgage-backed and asset-backed
securities can be expected to accelerate, and thus impair the fund's ability
to reinvest the returns of principal at comparable yields. Accordingly, the
market value of these securities will vary with changes in market interest
rates generally and in yield differentials among various kinds of U.S.
government securities and other mortgage-backed and asset-backed securities.
Asset-backed securities present certain additional risks that are not
presented by mortgage-backed securities because asset-backed securities
generally do not have the benefit of a security interest in collateral that
is comparable to mortgage assets. There is the possibility that, in some
cases, recoveries on repossessed collateral may not be available to support
payments on these securities.
SMALL COMPANIES. The fund may invest in companies that have relatively small
revenues, limited product lines, and a small share of the market for their
products or services. Small companies may lack depth of management, the
ability to generate internally funds necessary for growth or potential
development, or the ability to generate funds through external financing on
favorable terms. They may also attempt to develop or market new products or
services for which markets are not yet established and may never become
established. Due to these and other factors, small companies may suffer
significant losses, as well as realize substantial growth.
Historically, small capitalization stocks have been more volatile in price
than larger capitalization stocks. Among the reasons for the greater price
volatility of these securities are the less certain growth prospects of
smaller firms, the lower degree of liquidity in the markets for these stocks,
and the greater sensitivity of small companies to changing economic
conditions. Besides exhibiting greater volatility, small company stocks may,
to a degree, fluctuate independently of larger company stocks. Small company
stocks may decline in price as large company stocks rise, or rise in price as
large company stocks decline. You should therefore expect that the shares of
a fund that invests a substantial portion of its net assets in small company
stocks to be more volatile than the shares of a fund that invests solely in
larger capitalization stocks.
HIGH YIELD SECURITIES. Because the fund may invest in securities below
investment grade, an investment in the fund is subject to a higher degree of
risk than an investment in a fund that invests primarily in higher-quality
securities. You should consider the increased risk of loss to principal that
is present with an investment in higher risk securities, such as those in
which the fund invests. Accordingly, an investment in the fund should not be
considered a complete investment program and should be carefully evaluated
for its appropriateness in light of your overall investment needs and goals.
The market value of high yield, lower-quality fixed-income securities,
commonly known as junk bonds, tends to reflect individual developments
affecting the issuer to a greater degree than the market value of
higher-quality securities, which react primarily to fluctuations in the
general level of interest rates. Lower-quality securities also tend to be
more sensitive to economic conditions than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them.
Therefore, the risk associated with buying the securities of these issuers is
generally greater than the risk associated with higher-quality securities.
For example, during an economic downturn or a sustained period of rising
interest rates, issuers of lower-quality securities may experience financial
stress and may not have sufficient cash flow to make interest payments. The
issuer's ability to make timely interest and principal payments may also be
adversely affected by specific developments affecting the issuer, including
the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the fund's portfolio defaults, the fund may have unrealized losses on the
security, which may lower the fund's Net Asset Value. Defaulted securities
tend to lose much of their value before they default. Thus, the fund's Net
Asset Value may be adversely affected before an issuer defaults. In addition,
the fund may incur additional expenses if it must try to recover principal or
interest payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the fund. Although these
securities are typically not callable for a period of time, usually for three
to five years from the date of issue, if an issuer calls its securities
during periods of declining interest rates, Advisory Services may find it
necessary to replace the securities with lower-yielding securities, which
could result in less net investment income for the fund.
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 relies on Advisory Services' judgment, analysis and experience in
evaluating the creditworthiness of an issuer. In this evaluation, Advisory
Services 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.
The credit 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.
INTEREST RATE, CURRENCY AND MARKET RISK. To the extent the fund invests in
debt securities, changes in interest rates in any country where the fund is
invested will affect the value of the fund's portfolio and its share price.
Rising interest rates, which often occur during times of inflation or a
growing economy, are likely to have a negative effect on the value of the
fund's shares. To the extent the fund invests in common stocks, a general
market decline in any country where the fund is invested may cause the value
of what the fund owns, and thus the fund's share price, to decline. Changes
in currency valuations may also affect the price of fund shares. The value of
stock markets, currency valuations and interest rates throughout the world
have increased and decreased in the past. These changes are unpredictable.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the fund and elects its
officers. The officers are responsible for the fund's day-to-day operations.
The Board also monitors the fund to ensure no material conflicts exist among
the fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Advisory Services manages the fund's assets and makes its
investment decisions. Advisory Services also performs similar services for
other funds. It is wholly owned by Resources, a publicly owned company
engaged in the financial services industry through its subsidiaries. Charles
B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources. Together, Advisory Services and its affiliates manage over $239
billion in assets. Please see "Investment Management and Other Services" and
"Miscellaneous Information" in the SAI for information on securities
transactions and a summary of the fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
fund's portfolio is: William J. Lippman, Bruce C. Baughman and Margaret McGee
since its inception and Gerard P. Sullivan since March 1998.
William J. Lippman
President of Advisory Services
Mr. Lippman holds a Master of Business Administration degree from New York
University and a Bachelor of Business Administration degree from City College
New York. Mr. Lippman has been in the securities industry for over 30 years
and with the Franklin Templeton Group since 1988.
Gerard P. Sullivan
Senior Vice President of Advisory Services
Mr. Sullivan holds a Master of Business Administration degree in Finance and
Accounting from the Columbia Graduate School of Business and a Bachelor of
Arts degree in Political Science from Columbia University. He has been with
the Franklin Templeton Group since March 1998. Previously, he was a Portfolio
Manager for SunAmerica Asset Management from February 1995 to February 1998
and a Portfolio Manager for Texas Commerce Investment Management & Co. from
July 1993 to February 1995.
Bruce C. Baughman
Senior Vice President of Advisory Services
Mr. Baughman holds a Master of Science degree in Accounting from New York
University and a Bachelor of Arts degree from Stanford University. He has
been with the Franklin Templeton Group since 1988.
Margaret McGee
Vice President of Advisory Services
Ms. McGee holds a Bachelor of Arts degree in Business Administration from
William Paterson University. She has been in the securities industry since
1985 and with the Franklin Templeton Group since 1988.
MANAGEMENT FEES. During the fiscal year ended October 31, 1997, management
fees, before any advance waiver, totaled 0.74% of the average daily net
assets of the fund. Total operating expenses were 1.41% for Class I and 1.96%
for Class II. Under an agreement by Advisory Services to limit its fees, the
fund paid management fees totaling 0.66% and operating expenses totaling
1.32% for Class I and 1.87% for Class II. Advisory Services may end this
arrangement at any time upon notice to the Board.
PORTFOLIO TRANSACTIONS. Advisory Services tries to obtain the best execution
on all transactions. If Advisory Services believes more than one broker or
dealer can provide the best execution, it may consider research and related
services and the sale of fund shares, as well as shares of other funds in the
Franklin Templeton Group of Funds, when selecting a broker or dealer. Please
see "How Does the Fund Buy Securities for Its Portfolio?" in the SAI for more
information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisory Services, FT
Services provides certain administrative services and facilities for the
fund. Please see "Investment Management and Other Services" in the SAI for
more information.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for 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.
Payments by the fund under the Class I plan may not exceed 0.35% per year of
Class I's average daily net assets. Of this amount, the fund may reimburse up
to 0.35% to Distributors or others, out of which 0.10% will generally be
retained by Distributors for distribution expenses. All distribution expenses
over this amount will be borne by those who have incurred them. During the
first year after certain Class I purchases made without a sales charge,
Securities Dealers may not be eligible to receive the Rule 12b-1 fees
associated with the purchase.
Under the Class II plan, the fund may pay Distributors up to 0.75% per year
of Class II's average daily net assets to pay Distributors or others for
providing distribution and related services and bearing certain Class II
expenses. All distribution expenses over this amount will be borne by those
who have incurred them. During the first year after a purchase of Class II
shares, Securities Dealers may not be eligible to receive this portion of the
Rule 12b-1 fees associated with the purchase.
The fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish
and maintain customer accounts and records, helping with requests to buy and
sell shares, receiving and answering correspondence, monitoring dividend
payments from the fund on behalf of customers, and similar servicing and
account maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
<TABLE>
<CAPTION>
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
ON AUGUST 5, 1997, PRESIDENT CLINTON SIGNED INTO LAW THE TAXPAYER RELIEF ACT OF 1997
(THE "1997 ACT"). THIS NEW LAW MAKES SWEEPING CHANGES IN THE CODE. BECAUSE MANY OF
THESE CHANGES ARE COMPLEX THEY ARE DISCUSSED IN THE SAI.
TAXATION OF THE FUND'S INVESTMENTS.
-------------------------------------------
<S> <C>
The fund invests your money in the stocks, HOW DOES THE FUND EARN INCOME AND GAINS?
bonds and other securities that are
described in the section "How Does the The fund earns dividends and interest
Fund Invest Its Assets?" Special tax rules (the fund's "income") on its investments.
may apply in determining the income and When the fund sells a security for a
gains that the fund earns on its price that is higher than it paid, it has
investments. These rules may, in turn, a gain. When the fund sells a security
affect the amount of distributions that for a price that is lower than it paid,
the fund pays to you. These special tax it has a loss. If the fund has held the
rules are discussed in the SAI. security for more than one year, the gain
or loss will be a long-term capital gain
TAXATION OF THE FUND. As a regulated or loss. If the fund has held the
investment company, the fund generally security for one year or less, the gain
pays no federal income tax on the income or loss will be a short-term capital gain
and gains that it distributes to you. or loss. The fund's gains and losses are
netted together, and, if the fund has a
net gain (the fund's "gains"), that gain
will generally be distributed to you.
-------------------------------------------
FOREIGN TAXES. Foreign governments may impose taxes on the income and gains from the
fund's investments in foreign stocks and bonds. These taxes will reduce the amount of
the fund's distributions to you.
TAXATION OF SHAREHOLDERS.
-------------------------------------------
DISTRIBUTIONS. Distributions from the WHAT IS A DISTRIBUTION?
fund, whether you receive them in cash or
in additional shares, are generally As a shareholder, you will receive your
subject to income tax. The fund will send share of the fund's income and gains on
you a statement in January of the current its investments in stocks, bonds and
year that reflects the amount of ordinary other securities. The fund's income and
dividends, capital gain distributions and short term capital gains are paid to you
non-taxable distributions you received as ordinary dividends. The fund's
from the fund in the prior year. This long-term capital gains are paid to you
statement will include distributions as capital gain distributions. If the
declared in December and paid to you in fund pays you an amount in excess of its
January of the current year, but which are income and gains, this excess will
taxable as if paid on December 31 of the generally be treated as a non-taxable
prior year. The IRS requires you to report distribution. These amounts, taken
these amounts on your income tax return together, are what we call the fund's
for the prior year. The fund's statement distributions to you.
for the prior year will tell you how much
of your capital gain distribution
represents 28% rate gain property. The
remainder of the capital gain distribution
represents 20% rate gain.
-------------------------------------------
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your qualified
retirement plan, such as a section 401(k) plan or IRA, are generally tax-deferred;
this means that you are not required to report fund distributions on your income tax
return when paid to your plan, but, rather, when your plan makes payments to you. Be
aware, however, that special rules apply to payments from Roth and education IRAs.
DIVIDENDS-RECEIVED DEDUCTION. Corporate investors may be entitled to a
dividends-received deduction on a portion of the ordinary dividends they receive from
the fund.
-------------------------------------------
REDEMPTIONS AND EXCHANGES. If you redeem WHAT IS A REDEMPTION?
your shares or if you exchange your shares
in the fund for shares in another Franklin A redemption is a sale by you to the fund
Templeton Fund, you will generally have a of some or all of your shares in the
gain or loss that the IRS requires you to fund. The price per share you receive
report on your income tax return. If you when you redeem fund shares may be more
exchange fund shares held for 90 days or or less than the price at which you
less and pay no sales charge, or a reduced purchased those shares. An exchange of
sales charge, for the new shares, all or a shares in the fund for shares of another
portion of the sales charge you paid on Franklin Templeton Fund is treated as a
the purchase of the shares you exchanged redemption of fund shares and then a
is not included in their cost for purposes purchase of shares of the other fund.
of computing gain or loss on the exchange. When you redeem or exchange your shares,
If you hold your shares for six months or you will generally have a gain or loss,
less, any loss you have will be treated as depending upon whether the basis in your
a long-term capital loss to the extent of shares is more or less than your cost or
any capital gain distributions received by other basis in the shares. Call Fund
you from the fund. All or a portion of any Information for a free shareholder Tax
loss on the redemption or exchange of your Information Handbook if you need more
shares will be disallowed by the IRS if information in calculating the gain or
you purchase other shares in the fund loss on the redemption or exchange of
within 30 days before or after your your shares.
redemption or exchange.
-------------------------------------------
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income tax
withholding. Your home country may also tax ordinary dividends, capital gain
distributions and gains arising from redemptions or exchanges of your fund shares.
Fund shares held by the estate of a non-U.S. investor may be subject to U.S. estate
tax. You may wish to contact your tax advisor to determine the U.S. and non-U.S. tax
consequences of your investment in the fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you receive from
the fund, and gains arising from redemptions or exchanges of your fund shares will
generally be subject to state and local income tax. The holding of fund shares may
also be subject to state and local intangibles taxes. You may wish to contact your
tax advisor to determine the state and local tax consequences of your investment in
the fund.
-------------------------------------------
BACKUP WITHHOLDING. When you open an WHAT IS A BACKUP WITHHOLDING?
account, IRS regulations require that you
provide your taxpayer identification Backup withholding occurs when the fund
number ("TIN"), certify that it is is required to withhold and pay over to
correct, and certify that you are not the IRS 31% of your distributions and
subject to backup withholding under IRS redemption proceeds. You can avoid backup
rules. If you fail to provide a correct withholding by providing the fund with
TIN or the proper tax certifications, the your TIN, and by completing the tax
fund is required to withhold 31% of all certifications on your shareholder
the distributions (including ordinary application that you were asked to sign
dividends and capital gain distributions), when you opened your account. However, if
and redemption proceeds paid to you. The the IRS instructs the fund to begin
fund is also required to begin backup backup withholding, it is required to do
withholding on your account if the IRS so even if you provided the fund with
instructs the fund to do so. The fund your TIN and these tax certifications,
reserves the right not to open your and backup withholding will remain in
account, or, alternatively, to redeem your place until the fund is instructed by the
shares at the current Net Asset Value, IRS that it is no longer required.
less any taxes withheld, if you fail to
provide a correct TIN, fail to provide the
proper tax certifications, or the IRS
instructs the fund to begin backup
withholding on your account.
-------------------------------------------
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND. A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS IS CONTAINED IN THE SECTION
ENTITLED "ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES" IN THE SAI. THE
TAX TREATMENT TO YOU OF DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS, FOREIGN TAXES
PAID AND INCOME TAXES WITHHELD IS ALSO DISCUSSED IN A FREE FRANKLIN TEMPLETON
TAX INFORMATION HANDBOOK WHICH IS AVAILABLE BY CONTACTING FUND INFORMATION.
</TABLE>
HOW IS THE TRUST ORGANIZED?
The fund is a non-diversified series of Franklin Value Investors Trust (the
"Trust"), an open-end management investment company, commonly called a mutual
fund. The Trust, formerly known as the Franklin Balance Sheet Investment
Fund, was organized as a Massachusetts business trust on September 11, 1989,
and is registered with the SEC. As of January 2, 1997, the fund began
offering a new class of shares designated Franklin Value Fund - Advisor
Class. All shares outstanding before the offering of Advisor Class shares
have been designated Franklin Value Fund - Class I and Franklin Value Fund -
Class II. Additional series and classes of shares may be offered in the
future.
Shares of each class represent proportionate interests in the assets of the
fund and have the same voting and other rights and preferences as any other
class of the fund for matters that affect the fund as a whole. For matters
that only affect one class, however, only shareholders of that class may
vote. Each class will vote separately on matters 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.
The Trust has noncumulative voting rights. This gives holders of more than
50% of the shares voting the ability to elect all of the members of the
Board. If this happens, holders of the remaining shares voting will not be
able to elect anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares.
In certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, please follow the steps below. This will help avoid any
delays in processing your request.
PLEASE KEEP IN MIND THAT THE FUND DOES NOT CURRENTLY ALLOW INVESTMENTS BY
MARKET TIMERS.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The fund's minimum
investments are:
o To open a regular, non-retirement account ........... $2,500
o To open an IRA, IRA Rollover, Roth IRA,
or Education IRA .................................... $ 250*
o To open a custodial account for a minor
(an UGMA/UTMA account) .............................. $ 100
o To open an account with an automatic
investment plan ..................................... $ 50**
o To add to an account ................................ $ 50***
*For all other retirement accounts, there is no minimum investment
requirement.
**$25 for an Education IRA.
***For all retirement accounts except IRAs, IRA Rollovers, Roth IRAs, or
Education IRAs, there is no minimum to add to an account.
We reserve the right to change the amount of these minimums from time to time
or to waive or lower these minimums for certain purchases. We also reserve
the right to refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application,
including the optional shareholder privileges section. By applying for
privileges now, you can avoid the delay and inconvenience of having to send
an additional application to add privileges later. PLEASE ALSO INDICATE WHICH
CLASS OF SHARES YOU WANT TO BUY. IF YOU DO NOT SPECIFY A CLASS, WE WILL
AUTOMATICALLY INVEST YOUR PURCHASE IN CLASS I SHARES. It is important that we
receive a signed application since we will not be able to process any
redemptions from your account until we receive your signed application.
4. Make your investment using the table below.
- --------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL For an initial investment:
Return the application to the fund with your
check made payable to the fund.
For additional investments:
Send a check made payable to the fund. Please
include your account number on the check.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BY WIRE 1. Call Shareholder Services or, if that number is
busy, call 1-650/312-2000 collect, to receive a
wire control number and wire instructions. You
need a new wire control number every time you
wire money into your account. If you do not
have a currently effective wire control number,
we will return the money to the bank, and we
will not credit the purchase to your account.
2. For an initial investment you must also return
your signed shareholder application to the fund.
IMPORTANT DEADLINES: If we receive your call
before 1:00 p.m. Pacific time and the bank
receives the wired funds and reports the
receipt of wired funds to the fund by 3:00 p.m.
Pacific time, we will credit the purchase to
your account that day. If we receive your call
after 1:00 p.m. or the bank receives the wire
after 3:00 p.m., we will credit the purchase to
your account the following business day.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
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. The class that may be best
for you depends on a number of factors, including the amount and length of
time you expect to invest. Generally, Class I shares may be more attractive
for long-term investors or investors who qualify to buy Class I shares at a
reduced sales charge. Your financial representative can help you decide.
CLASS I CLASS II
- --------------------------------------------------------------------------------
Higher front-end sales charges Lower front-end sales charges than
than Class II shares. There are Class I shares
several ways to reduce these
charges, as described below. There
is no front-end sales charge for
purchases of $1 million or more.*
Contingent Deferred Sales Charge Contingent Deferred Sales Charge
on purchases of $1 million or more on purchases sold within 18 months
sold within one year
Lower annual expenses than Class Higher annual expenses than Class
II shares I shares
*If you are investing $1 million or more, it is generally more beneficial for
you to buy Class I shares because there is no front-end sales charge and the
annual expenses are lower. Therefore, any purchase of $1 million or more is
automatically invested in Class I shares. You may accumulate more than $1
million in Class II shares through purchases over time. If you plan to do
this, however, you should determine if it would be better for you to buy
Class I shares through a Letter of Intent.
PURCHASE PRICE OF FUND SHARES
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is
1% and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID TO
AS A PERCENTAGE OF DEALER AS A
--------------------------
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- --------------------------------------------------------------------------------
CLASS I
Under $50,000...................... 5.75% 6.10% 5.00%
$50,000 but less than $100,000..... 4.50% 4.71% 3.75%
$100,000 but less than $250,000.... 3.50% 3.63% 2.80%
$250,000 but less than $500,000.... 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000.. 2.00% 2.04% 1.60%
$1,000,000 or more* ............... None None None
CLASS II
Under $1,000,000*.................. 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of
$1 million or more and any Class II purchase. Please see "How Do I Sell
Shares? - Contingent Deferred Sales Charge." Please also see "Other Payments
to Securities Dealers" below for a discussion of payments Distributors may
make out of its own resources to Securities Dealers for certain purchases.
Purchases of Class II shares are limited to purchases below $1 million.
Please see "Choosing a Share Class."
SALES CHARGE REDUCTIONS AND WAIVERS
- - IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT
WITH EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you
don't include this statement, we cannot guarantee that you will receive
the sales charge reduction or waiver.
CUMULATIVE QUANTITY DISCOUNTS - CLASS I ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in
the Franklin Templeton Funds, as well as those of your spouse, children under
the age of 21 and grandchildren under the age of 21. If you are the sole
owner of a company, you may also add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
LETTER OF INTENT - CLASS I ONLY. You may buy Class I shares at a reduced
sales charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION,
YOU ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase
in Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on
the reserved shares as you direct. Our policy of reserving shares does not
apply to certain retirement plans.
If you would like more information about the Letter of Intent privilege,
please see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in
the SAI or call Shareholder Services.
GROUP PURCHASES - CLASS I ONLY. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as
a whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions. 403(b) plans that only allow salary deferral
contributions and that purchased Class I shares of the fund at a reduced
sales charge under the group purchase privilege before February 1, 1998,
however, may continue to do so.
SALES CHARGE WAIVERS. If one of the following sales charge waivers applies to
you or your purchase of fund shares, you may buy shares of the fund without a
front-end sales charge or a Contingent Deferred Sales Charge. All of the
sales charge waivers listed below apply to purchases of Class I shares only,
except for items 1 and 2 which also apply to Class II purchases.
Certain distributions, payments or redemption proceeds that you receive may
be used to buy shares of the fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton
Fund. The distributions generally must be reinvested in the same class
of shares. Certain exceptions apply, however, to Class II shareholders
who chose to reinvest their distributions in Class I 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
Class I shares of the fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton
Fund if you originally paid a sales charge on the shares and you
reinvest the money in the same class of shares. This waiver does not
apply to exchanges.
If you paid a Contingent Deferred Sales Charge when you redeemed your
shares from a Franklin Templeton Fund, a Contingent Deferred Sales
Charge will apply to your purchase of fund shares and a new Contingency
Period will begin. We will, however, credit your fund account with
additional shares based on the Contingent Deferred Sales Charge you paid
and the amount of redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Bank
CD, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date the CD matures, including any
rollover.
3. Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
4. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any
tax consequences that may apply.
5. Redemption proceeds from a repurchase of shares of Franklin Floating
Rate Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD
or a Franklin Templeton money fund, you may reinvest them as described
above. The proceeds must be reinvested within 365 days from the date the
CD matures, including any rollover, or the date you redeem your money
fund shares.
6. Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a contingent deferred sales charge when you redeemed your
Class A shares from a Templeton Global Strategy Fund, a Contingent
Deferred Sales Charge will apply to your purchase of fund shares and a
new Contingency Period will begin. We will, however, credit your fund
account with additional shares based on the contingent deferred sales
charge you paid and the amount of the redemption proceeds that you
reinvest.
If you immediately placed your redemption proceeds in a Franklin
Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date they are
redeemed from the money fund.
7. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds.
Various individuals and institutions also may buy Class I shares without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets
held in a fiduciary, agency, advisory, custodial or similar capacity
and over which the trust companies and bank trust departments or other
plan fiduciaries or participants, in the case of certain retirement plans,
have full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
2. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the fund is
permissible and suitable for you and the effect, if any, of payments by
the fund on arbitrage rebate calculations.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for
clients participating in comprehensive fee programs. The minimum
initial investment is $250.
4. Registered Securities Dealers and their affiliates, for their
investment accounts only
5. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
6. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family
members, consistent with our then-current policies. The minimum initial
investment is $100.
7. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
8. Accounts managed by the Franklin Templeton Group
9. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
10. Group annuity separate accounts offered to retirement plans
11. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with
at least 100 employees, or (ii) have plan assets of $1 million or more, or
(iii) agree to invest at least $500,000 in the Franklin Templeton Funds over
a 13 month period may buy Class I shares without a front-end sales charge.
Retirement plans that are not Qualified Retirement Plans, SIMPLEs or SEPs
must also meet the requirements described under "Group Purchases - Class I
Only" above to be able to buy Class I shares without a front-end sales
charge. We may enter into a special arrangement with a Securities Dealer,
based on criteria established by the fund, to add together certain small
Qualified Retirement Plan accounts for the purpose of meeting these
requirements.
For retirement plan accounts opened on or after May 1, 1997, a Contingent
Deferred Sales Charge may apply if the retirement plan is transferred out of
the Franklin Templeton Funds or terminated within 365 days of the retirement
plan account's initial purchase in the Franklin Templeton Funds. Please see
"How Do I Sell Shares? - Contingent Deferred Sales Charge" for details.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the fund.
Plan documents are required for all retirement plans. Trust Company can
provide the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need
an application other than the one included in this prospectus. For a
retirement plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing
a retirement plan. Your investment representative or advisor can help you
make investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate
and are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not
by the fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 1% of the amount
invested.
3. Class I purchases made without a front-end sales charge by certain
retirement plans described under "Sales Charge Reductions and Waivers -
Retirement Plans" above - up to 1% of the amount invested.
4. Class I purchases by trust companies and bank trust departments,
Eligible Governmental Authorities, and broker-dealers or others on
behalf of clients participating in comprehensive fee programs - up to
0.25% of the amount invested.
5. Class I purchases by Chilean retirement plans - up to 1% of the amount
invested
A Securities Dealer may receive only one of these payments for each
qualifying purchase. Securities Dealers who receive payments in connection
with investments described in paragraphs 1, 2 or 5 above or a payment of up
to 1% for investments described in paragraph 3 will be eligible to receive
the Rule 12b-1 fee associated with the purchase starting in the thirteenth
calendar month after the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES,
PLEASE SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO
SECURITIES DEALERS" IN THE SAI.
FOR INVESTORS OUTSIDE THE U.S.
The distribution of this prospectus and the offering of fund shares may be
limited in many jurisdictions. An investor who wishes to buy shares of the
fund should determine, or have a broker-dealer determine, the applicable laws
and regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and
a purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds
except Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is
the only money fund exchange option available to Class II shareholders.
Unlike our other money funds, shares of Money Fund II may not be purchased
directly and no drafts (checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment
objective and policies, and its rules and requirements for exchanges. For
example, some Franklin Templeton Funds do not accept exchanges and others may
have different investment minimums. Some Franklin Templeton Funds do not
offer Class II shares.
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METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates for
the shares you want to exchange
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by
phone to apply to your account, please let us
know.
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- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable
sales charge of the new fund, if the difference is more than 0.25%. If you
have never paid a sales charge on your shares because, for example, they have
always been held in a money fund, you will pay the fund's applicable sales
charge no matter how long you have held your shares. These charges may not
apply if you qualify to buy shares without a sales charge.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred
Sales Charge when you exchange shares. Any shares subject to a Contingent
Deferred Sales Charge at the time of exchange, however, will remain so in the
new fund.
For accounts with shares subject to a Contingent Deferred Sales Charge, we
will first exchange any shares in your account that are not subject to the
charge. If there are not enough of these to meet your exchange request, we
will exchange shares subject to the charge in the order they were purchased.
If you exchange Class I shares into one of our money funds, the time your
shares are held in that fund will not count towards the completion of any
Contingency Period. If you exchange your Class II shares for shares of Money
Fund II, however, the time your shares are held in that fund will count
towards the completion of any Contingency Period.
For more information about the Contingent Deferred Sales Charge, please see
"How Do I Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
You must meet the applicable minimum investment amount of the fund you are
exchanging into, or exchange 100% of your fund shares
o You may only exchange shares within the SAME CLASS, except as noted
below.
o The accounts must be identically registered. You may, however, exchange
shares from a fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature
for all transactions. PLEASE NOTIFY US IN WRITING IF YOU DO NOT WANT
THIS OPTION TO BE AVAILABLE ON YOUR ACCOUNT. Additional procedures may
apply. Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares
as described above. Restrictions may apply to other types of retirement
plans. Please contact Retirement Plan Services for information on
exchanges within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the fund does not allow investments by Market Timers.
Because excessive trading can hurt fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the fund
would be harmed or unable to invest effectively, or (ii) the fund receives or
anticipates simultaneous orders that may significantly affect the fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the fund, such as "Class Z" shares. Certain shareholders of Class
Z shares of Franklin Mutual Series Fund Inc. may exchange their Class Z
shares for Class I shares of the fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
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METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions. If you
would like your redemption proceeds wired to a
bank account, your instructions should include:
o The name, address and telephone number of
the bank where you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or
credit union, the name of the corresponding
bank and the account number
2. Include any outstanding share certificates for
the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may
need to send additional documents. Accounts
under court jurisdiction may have other
requirements.
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BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other
than an escrow account, you must first sign up for
the wire feature. To sign up, send us written
instructions, with a signature guarantee. To avoid
any delay in processing, the instructions should
include the items listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less.
Institutional accounts may exceed $50,000 by
completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued
for the shares you want to sell or you have
already returned them to the fund
o Unless you are selling shares in a Trust
Company retirement plan account
o Unless the address on your account was
changed by phone within the last 15 days
- If you do not want the ability to redeem by phone
to apply to your account, please let us know.
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THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the
registered owners on the account, send us written instructions signed by all
account owners, with a signature guarantee. We are not able to receive or pay
out cash in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive
your request in proper form before 1:00 p.m. Pacific time, your wire payment
will be sent the next business day. For requests received in proper form
after 1:00 p.m. Pacific time, the payment will be sent the second business
day. By offering this service to you, the fund is not bound to meet any
redemption request in less than the seven day period prescribed by law.
Neither the fund nor its agents shall be liable to you or any other person
if, for any reason, a redemption request by wire is not processed as
described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds until your check or draft has cleared, which may
take seven business days or more. A certified or cashier's check may clear in
less time.
Under unusual circumstances, we may suspend redemptions or postpone payment
for more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under
age 591/2, unless the distribution meets an exception stated in the Code. To
obtain the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
For Class I purchases, if you did not pay a front-end sales charge because
you invested $1 million or more or agreed to invest $1 million or more under
a Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell
all or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class I investments you make
without a sales charge may also be subject to a Contingent Deferred Sales
Charge if they are sold within the Contingency Period. For any Class II
purchase, a Contingent Deferred Sales Charge may apply if you sell the shares
within the Contingency Period. The charge is 1% of the value of the shares
sold or the Net Asset Value at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class I shares without a front-end sales charge may also be
subject to a Contingent Deferred Sales Charge if the retirement plan is
transferred out of the Franklin Templeton Funds or terminated within 365 days
of the account's initial purchase in the Franklin Templeton Funds.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT,
we will redeem additional shares to cover any Contingent Deferred Sales
Charge. For requests to sell a stated NUMBER OF SHARES, we will deduct the
amount of the Contingent Deferred Sales Charge, if any, from the sale
proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Account fees
o Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1,
1997, or (ii) the Securities Dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the Securities Dealer
of record has entered into a supplemental agreement with Distributors
o Redemptions by the fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan, at a rate of up to 1%
a month of an account's Net Asset Value. For example, if you maintain an
annual balance of $1 million in Class I shares, you can redeem up to
$120,000 annually through a systematic withdrawal plan free of charge.
Likewise, if you maintain an annual balance of $10,000 in Class II
shares, $1,200 may be redeemed annually free of charge.
o Distributions from IRAs due to death or disability or upon periodic
distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Redemptions by Trust Company employee benefit plans or employee benefit
plans serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The fund declares dividends from its net investment income quarterly in
March, June, September and December to shareholders of record on the first
business day before the 15th of the month and pays them on or about the last
day of that month. Capital gains, if any, may be distributed annually,
usually in December.
Dividends and capital gains are calculated and distributed the same way for
each class. The amount of any income dividends per share will differ,
however, generally due to the difference in the Rule 12b-1 fees of Class I
and Class II.
Dividend payments are not guaranteed, are subject to the Board's discretion
and may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE
ANY FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will then receive a portion of the price you paid
back in the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the
fund (without a sales charge or imposition of a Contingent Deferred Sales
Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. This is a convenient way to accumulate additional
shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy shares of another Franklin Templeton Fund (without a
sales charge or imposition of a Contingent Deferred Sales Charge). Many
shareholders find this a convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both
dividend and capital gain distributions in cash. If you have the money sent
to another person or to a checking account, you may need a signature
guarantee. If you send the money to a checking account, please see
"Electronic Fund Transfers - Class I Only" under "Services to Help You Manage
Your Account."
Distributions may be reinvested only in the same class of shares, except as
follows: (i) Class II shareholders who chose to reinvest their distributions
in Class I shares of the fund or another Franklin Templeton Fund before
November 17, 1997, may continue to do so; and (ii) Class II shareholders may
reinvest their distributions in shares of any Franklin Templeton money fund.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE
WILL AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE
SAME CLASS OF THE FUND. YOU MAY CHANGE YOUR DISTRIBUTION OPTION AT ANY TIME
BY NOTIFYING US BY MAIL OR PHONE. PLEASE ALLOW AT LEAST SEVEN DAYS BEFORE THE
RECORD DATE FOR US TO PROCESS THE NEW OPTION. FOR TRUST COMPANY RETIREMENT
PLANS, SPECIAL FORMS ARE REQUIRED TO RECEIVE DISTRIBUTIONS IN CASH.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value
per share of the class you wish to purchase, plus any applicable sales
charges. When you sell shares, you receive the Net Asset Value per share
minus any applicable Contingent Deferred Sales Charges.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you
buy or sell shares through your Securities Dealer, however, we will use the
Net Asset Value next calculated after your Securities Dealer receives your
request, which is promptly transmitted to the fund. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents.
HOW AND WHEN SHARES ARE PRICED
The fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the close of the NYSE, normally
1:00 p.m. Pacific time. You can find the prior day's closing Net Asset Value
and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on
a pro rata basis. It is based on each class' proportionate participation in
the fund, determined by the value of the shares of each class. Each class,
however, bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To
calculate Net Asset Value per share of each class, the assets of each class
are valued and totaled, liabilities are subtracted, and the balance, called
net assets, is divided by the number of shares of the class outstanding. The
fund's assets are valued as described under "How Are Fund Shares Valued?" in
the SAI.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any
delay in processing your transaction, they should include:
o Your name,
o The fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the
evening if preferred.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of
transactions or account changes. These include transactions or account
changes that you could also make by phone, such as certain redemptions of
$50,000 or less, exchanges between identically registered accounts, and
changes to the address of record. For most other types of transactions or
changes, written instructions must be signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed
by all registered owners on the account.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential
claims based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should
be able to obtain a signature guarantee from a bank, broker, credit union,
savings association, clearing agency, or securities exchange or association.
A NOTARIZED SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate
is lost, stolen or destroyed, you may have to pay an insurance premium of up
to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account by phone.
Please refer to the sections of this prospectus that discuss the transaction
you would like to make or call Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to
ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we
are not reasonably satisfied that the instructions are genuine. If this
occurs, we will not be liable for any loss. We also will not be liable for
any loss if we follow instructions by phone that we reasonably believe are
genuine or if you are unable to execute a transaction by phone.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b)
retirement accounts by phone, certain restrictions may be imposed on other
retirement plans.
To obtain any required forms or more information about distribution or
transfer procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights
and ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register
the account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of
survivorship" is shown as "Jt Ten" on your account statement. For any account
with two or more owners, we cannot accept instructions to change owners on
the account unless all owners agree in writing, even if the law in your state
says otherwise. If you would like another person or owner to sign for you,
please send us a current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this
form of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please
send us the following documents when you open your account. This will help
avoid delays in processing your transactions while we verify who may sign on
the account.
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TYPE OF ACCOUNT DOCUMENTS REQUIRED
- --------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- --------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
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STREET OR NOMINEE ACCOUNTS. If you have fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the
shares to the street or nominee name account of another Securities Dealer.
Both dealers must have an agreement with Distributors or we cannot process
the transfer. Contact your Securities Dealer to initiate the transfer. We
will process the transfer after we receive authorization in proper form from
your delivering Securities Dealer. Accounts may be transferred electronically
through the NSCC. For accounts registered in street or nominee name, we may
take instructions directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements
and other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions
directly from your dealer or representative, including instructions to
exchange or redeem your shares. Electronic instructions may be processed
through established electronic trading systems and programs used by the fund.
Telephone instructions directly from your representative will be accepted
unless you have told us that you do not want telephone privileges to apply to
your account.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $1,250, or less than
$50 for employee accounts and custodial accounts for minors. We will only do
this if the value of your account fell below this amount because you
voluntarily sold your shares and your account has been inactive (except for
the reinvestment of distributions) for at least six months. Before we close
your account, we will notify you and give you 30 days to increase the value
of your account to $2,500, or $100 for employee accounts and custodial
accounts for minors. These minimums may not apply to IRAs and other
retirement plan accounts or to accounts managed by the Franklin Templeton
Group.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the fund.
Under the plan, you can have money transferred automatically from your
checking account to the fund each month to buy additional shares. If you are
interested in this program, please refer to the automatic investment plan
application included with this prospectus or contact your investment
representative. The market value of the fund's shares may fluctuate and a
systematic investment plan such as this will not assure a profit or protect
against a loss. You may discontinue the program at any time by notifying
Investor Services by mail or phone.
AUTOMATIC PAYROLL DEDUCTION - CLASS I ONLY
You may have money transferred from your paycheck to the fund to buy
additional Class I shares. Your investments will continue automatically until
you instruct the fund and your employer to discontinue the plan. To process
your investment, we must receive both the check and payroll deduction
information in required form. Due to different procedures used by employers
to handle payroll deductions, there may be a delay between the time of the
payroll deduction and the time we receive the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or
annual basis. The value of your account must be at least $5,000 and the
minimum payment amount for each withdrawal must be at least $50. For
retirement plans subject to mandatory distribution requirements, the $50
minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete
the systematic withdrawal plan section of the shareholder application
included with this prospectus and indicate how you would like to receive your
payments. You may choose to direct your payments to buy the same class of
shares of another Franklin Templeton Fund or have the money sent directly to
you, to another person, or to a checking account. If you choose to have the
money sent to a checking account, please see "Electronic Fund Transfers -
Class I Only" below. Once your plan is established, any distributions paid by
the fund will be automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold under the plan may
also be subject to a Contingent Deferred Sales Charge. Please see "Contingent
Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. Please see "How Do I Buy, Sell and Exchange
Shares? - Systematic Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS - CLASS I ONLY
You may choose to have dividend and capital gain distributions from Class I
shares of the fund or payments under a systematic withdrawal plan sent
directly to a checking account. If the checking account is with a bank that
is a member of the Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If you choose this option, please
allow at least fifteen days for initial processing. We will send any payments
made during that time to the address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton
Fund;
o exchange shares (within the same class) between identically registered
Franklin Templeton Class I and Class II accounts; and
o request duplicate statements and deposit slips for Franklin Templeton
accounts.
You will need the code number for each class to use TeleFACTS(R). The code
number is 282 for Class I and 582 for Class II.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments.
PLEASE VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the fund will be sent every six months. To reduce
fund expenses, we attempt to identify related shareholders within a
household and send only one copy of a report. Call Fund Information if
you would like an additional free copy of the fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more
information, call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your
shares are held by a financial institution, in a street name account, or
networked through the NSCC, the fund may not be able to offer these services
directly to you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor
Services at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California
94403-7777. The fund and Distributors are also located at this address.
Advisory Services is located at One Parker Plaza, Sixteenth Floor, Fort Lee,
New Jersey 07024. You may also contact us by phone at one of the numbers
listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- --------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with
high quality service. You will hear a regular beeping tone if your call is
being recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
ADVISORY SERVICES - Franklin Advisory Services, Inc., the fund's investment
manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The fund offers three classes of
shares, designated "Class I," "Class II," and "Advisor Class." The three
classes have proportionate interests in the fund's portfolio. They differ,
however, primarily in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the
contingency period is 18 months. The holding period for Class I begins on the
first day of the month in which you buy shares. Regardless of when during the
month you buy Class I shares, they will age one month on the last day of that
month and each following month. The holding period for Class II begins on the
day you buy your shares. For example, if you buy Class II shares on the 18th
of the month, they will age one month on the 18th day of the next month and
each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply
if you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined
the fund is a legally permissible investment and that can only buy shares of
the fund without paying sales charges.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable
Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the fund's
shareholder servicing and transfer agent
IRA - Individual retirement account or annuity qualified under section 408 of
the Code
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange
shares based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value
per share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 5.75% for Class I and 1% for Class II.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established
under section 408(k) of the Code
SIMPLE (SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES) - An employer sponsored
salary deferral plan established under section 408(p) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an
affiliate of Distributors and both are wholly owned subsidiaries of Resources.
WE/OUR/US - Unless the context indicates a different meaning, these terms
refer to the fund and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present that make the long-term
risks appear somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium-grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. These bonds lack outstanding investment characteristics and, in fact,
have speculative characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and, thereby, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations that are speculative to a high
degree. These issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
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.
