PROSPECTUS
FRANKLIN LARGE CAP VALUE FUND
FRANKLIN VALUE INVESTORS TRUST
CLASS A, B & C
INVESTMENT STRATEGY
GROWTH & INCOME
JUNE 1, 2000
[Insert Franklin Templeton Ben Head]
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
CONTENTS
THE FUND
[Begin Callout]
INFORMATION ABOUT THE
FUND YOU SHOULD KNOW
BEFORE INVESTING
[End Callout]
2 Goal and Strategies
4 Main Risks
6 Performance
6 Fees and Expenses
8 Management
10 Distributions and Taxes
YOUR ACCOUNT
[Begin Callout]
INFORMATION ABOUT
SALES CHARGES, ACCOUNT
TRANSACTIONS AND
SERVICES
[End Callout]
11 Choosing a Share Class
16 Buying Shares
19 Investor Services
22 Selling Shares
24 Account Policies
27 Questions
FOR MORE INFORMATION
[Begin Callout]
Where to learn more
about the Fund
[End Callout]
Back Cover
THE FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The Fund's investment goal is long-term capital appreciation.
MAIN INVESTMENT STRATEGIES Under normal market conditions, the Fund will invest
at least 80% of its total assets in undervalued equity securities of large
capitalization (share price times the number of common stock shares outstanding)
companies that are similar in size to those in the Russell 1000 Index, at the
time of purchase. That index is designed to measure the 1,000 largest companies
in the investable U.S. equity market. The Fund generally expects that its
portfolio median market cap will significantly exceed the Index's median market
cap.
The Fund will invest in equity securities the Fund's manager believes are
selling substantially below the underlying value of their assets or their
private market value (what a sophisticated investor would pay for the entire
company). Following this strategy, the Fund will invest in companies with, for
example:
o Stock prices that are low relative to current or historical earnings, book
value, cash flow, or sales -- all relative to the market, a company's
industry or a company's earnings growth.
o Recent sharp price declines (fallen angels) but still have significant growth
potential in the manager's opinion.
o Valuable intangibles not reflected in the stock price such as franchises,
distribution networks or market share for particular products or services,
underused or understated assets or cash, tax loss carry forwards, or patents
and trademarks.
[Begin Callout]
The Fund invests primarily in large-cap companies that the manager believes are
selling substantially below the underlying value of their assets.
[End Callout]
An equity security represents a proportionate share of the ownership of a
company; its value is based on the success of the company's business, any income
paid to stockholders, the value of its assets, and general market conditions.
Common and preferred stocks, and securities convertible into common stock, are
examples of equity securities.
The Fund may invest up to 10% of its total assets in foreign securities,
predominantly in developed markets.
PORTFOLIO SELECTION The manager is a research driven, fundamental investment
adviser, pursuing a disciplined value-oriented strategy for this Fund. As a
bottom-up adviser focusing primarily on individual securities, the manager will
focus on the market price of a company's securities relative to its evaluation
of the company's long-term earnings, asset value and cash flow. The manager
seeks bargains among the under researched and unloved - out of favor companies
that offer, in the managers opinion, excellent long-term potential that might
include current growth companies that are being ignored by the market, former
growth companies that have stumbled recently, dropping sharply in price but that
still have significant growth potential in the manager's opinion, or companies
that are a potential turnaround or takeover target.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the Fund's assets in short-term investments, including cash
or cash equivalents. Under these circumstances, the Fund may be unable to
achieve its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
STOCKS While stocks historically have outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the short term.
These price movements may result from factors affecting individual companies,
industries or the securities market as a whole.
[Begin Callout]
Because the securities the Fund holds fluctuate in price, the value of your
investment in the Fund will go up and down. This means you could lose money over
short or even extended periods.
[End Callout]
VALUE STYLE STOCK INVESTING Value stock prices are considered cheap relative to
the company's perceived value and are often out of favor with other investors.
The manager may invest in such stocks if it believes the market may have
overreacted to adverse developments or failed to appreciate positive changes.
However, if other investors fail to recognize the company's value (and do not
become buyers, or become sellers), or favor investing in faster-growing
companies, value stocks may not increase in value as anticipated by the manager
and may even decline further.
The Fund's bargain-driven focus may result in the Fund choosing securities that
are not widely followed by other investors. Cheaply priced securities may also
include companies reporting poor earnings, companies whose share prices have
declined sharply (sometimes growth companies that have recently stumbled but
have fundamentals the manager believes are good), turnarounds, cyclical
companies, or companies emerging from bankruptcy, all of which may have a higher
risk of being ignored or rejected, and therefore, undervalued by the market.
FOREIGN SECURITIES Securities of companies located outside the U.S. involve
risks that can increase losses in the Fund. These include CURRENCY RISKS
(fluctuations in currency exchange rates; devaluations by governments; and the
new euro currency) and COUNTRY AND COMPANY RISKS (political, economic, and
social instability; less liquid securities or markets; restrictions on removal
of currency and other assets; punitive taxes; custody and settlement risks; less
government supervision and regulation of foreign markets and their participants;
and less stringent disclosure, financial accounting or reporting standards).
[Begin Callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not insured by the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other agency of the U.S. government. Mutual
fund shares involve investment risks, including the possible loss of principal.
[End Callout]
ILLIQUID SECURITIES The Fund may invest up to 15% of its net assets in illiquid
securities, which are securities with a limited trading market. There is a
possible risk that the securities cannot be readily sold or can only be resold
at a price significantly lower than their value.
More detailed information about the Fund, its policies and risks can be found in
the Fund's Statement of Additional Information (SAI).
[Insert graphic of bull and bear] PERFORMANCE
Because the Fund is new, it has no performance history.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS B CLASS C
--------------------------------------------------------------------------------
Maximum sales charge (load) as a 5.75% 4.00% 1.99%
percentage of offering price
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge (load) None1 4.00%2 0.99%3
Exchange fee None None None
Please see Choosing a Share Class on page 11 for an explanation of how and when
these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A CLASS B CLASS C
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Management fees4 0.55% 0.55% 0.55%
Distribution and service(12b-1) fees 0.35% 1.00% 1.00%
Other expenses 0.54% 0.54% 0.54%
----------------------------------------
Total annual Fund operating expenses4 1.44% 2.09% 2.09%
========================================
1. Except for investments of $1 million or more (see page 11) and purchases by
certain retirement plans without an initial sales charge.
2. Declines to zero after six years.
3. This is equivalent to a charge of 1% based on net asset value. 4. The manager
and administrator have agreed in advance to limit their respective fees and to
assume as their own expense certain expenses otherwise payable by the Fund so
that total annual Fund operating expenses do not exceed 1.25% for Class A, 1.90%
for Class B and 1.90% for Class C for the current fiscal year. After October 31,
2001, the manager and administrator may end this arrangement at any time.
EXAMPLE
This example can help you compare the cost of investing in the Fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o The Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS
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If you sell your shares at the end of the period:
CLASS A $713 1 $1,004
CLASS B $612 $955
CLASS C $409 $748
If you do not sell your shares:
CLASS B $212 $655
CLASS C $310 $748
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisory Services, LLC (Advisory Services), One Parker Plaza, Ninth
Floor, Fort Lee, New Jersey 07024, is the Fund's investment manager. Together,
Advisory Services and its affiliates manage over $233 billion in assets.
The team responsible for the Fund's management is:
WILLIAM J. LIPPMAN, PRESIDENT OF ADVISORY SERVICES
Mr. Lippman has been a manager of the Fund since inception and has more than 30
years' experience in the securities industry. He joined the Franklin Templeton
Group in 1988.
BRUCE C. BAUGHMAN, SENIOR VICE PRESIDENT OF ADVISORY SERVICES
Mr. Baughman has been a manager of the Fund since inception. He joined the
Franklin Templeton Group in 1988.
DONALD G. TAYLOR, SENIOR VICE PRESIDENT OF ADVISORY SERVICES
Mr. Taylor has been a manager of the Fund since inception. He joined the
Franklin Templeton Group in 1996. Previously, he was a portfolio manager for
Fidelity Management & Research Co.
MARGARET MCGEE, VICE PRESIDENT OF ADVISORY SERVICES
Ms. McGee has been a manager of the Fund since inception. She joined the
Franklin Templeton Group in 1988.
STEPHEN T. MADONNA, PORTFOLIO MANAGER OF ADVISORY SERVICES
Mr. Madonna has been a manager of the Fund since its inception. He joined the
Franklin Templeton Group in 2000. Previously, he was an analyst at Palisade
Capital Management and Standard & Poor's Equity Group.
The Fund pays the manager a fee for managing the Fund's assets. The fee is equal
to an annual rate of:
o 0.550% of the value of net assets up to and including $500 million;
o 0.450% of the value of net assets over $500 million, up to and including $1
billion;
o 0.400% of the value of net assets over $1 billion, up to and including $1.5
billion;
o 0.350% of the value of net assets over $1.5 billion, up to and including $6.5
billion;
o 0.325% of the value of net assets over $6.5 billion, up to and including
$11.5 billion;
o 0.300% of the value of net assets over $11.5 billion, up to and including
$16.5 billion;
o 0.290% of the value of net assets over $16.5 billion, up to and including $19
billion;
o 0.280% of the value of net assets over $19 billion, up to and including $21.5
billion; and
o 0.270% of the value of net assets over $21.5 billion.
[Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS The Fund intends to pay a dividend at least annually
representing substantially all of its net investment income and any net realized
capital gains. The amount of this distribution will vary and there is no
guarantee the Fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record date for the Fund's distributions will vary. Please keep in mind that if
you invest in the Fund shortly before the record date of a distribution, any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will receive some of your investment back in the form of a
taxable distribution. If you would like information on upcoming record dates for
the Fund's distributions, please call 1-800/DIAL BEN(R).
TAX CONSIDERATIONS In general, Fund distributions are taxable to you as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional Fund shares or receive them in cash. Any capital
gains the Fund distributes are taxable to you as long-term capital gains no
matter how long you have owned your shares.
BACKUP WITHHOLDING
[Begin callout]
By law, the Fund must withhold 31% of your taxable distributions and redemption
proceeds if you do not provide your correct social security or taxpayer
identification number and certify that you are not subject to backup
withholding, or if the IRS instructs the Fund to do so. [End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of the Fund, you may have a capital gain or loss. For
tax purposes, an exchange of your Fund shares for shares of a different Franklin
Templeton Fund is the same as a sale.
Distributions of ordinary income and capital gains, and gains from the sale or
exchange of your Fund shares generally will be subject to state and local taxes.
Non-U.S. investors may be subject to U.S. withholding and estate tax. You should
consult your tax advisor about the federal, state, local or foreign tax
consequences of your investment in the Fund.
YOUR ACCOUNT
[Insert graphic of pencil marking an X] CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. Your investment representative
can help you decide.
<TABLE>
<CAPTION>
<S> <C> <C>
Class A Class B Class C
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o Initial sales charge of o No initial sales charge o Initial sales charge of
5.75% or less 1%
o Deferred sales charge o Deferred sales charge of o Deferred sales charge
on purchases of $1 4% on shares you sell of 1% on shares you sell
million or more sold within the first year, within 18 months
within 12 months declining to 1% within
six years and eliminated
after that
o Lower annual expenses o Higher annual expenses o Higher annual expenses
than Class B or C due to than Class A (same as than Class A (same as
lower distribution fees Class C) due to higher Class B) due to higher
distribution fees. distribution fees. No
Automatic conversion to conversion to Class A
Class A shares after shares, so annual
eight years, reducing expenses do not
future annual expenses. decrease.
</TABLE>
SALES CHARGES - CLASS A
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING PRICE OF YOUR NET INVESTMENT
-------------------------------------------------------------------------------
Under $50,000 5.75 6.10
$50,000 but under $100,000 4.50 4.71
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either as a
lump sum or through our cumulative quantity discount or letter of intent
programs (see page 14), you can buy Class A shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC is
the same for each class (please see page 13).
DISTRIBUTION AND SERVICE (12B-1) FEES Class A has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows the Fund to pay distribution fees of up
to 0.35% per year to those who sell and distribute Class A shares and provide
other services to shareholders. Because these fees are paid out of Class A's
assets on an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
SALES CHARGES - CLASS B
IF YOU SELL YOUR SHARES WITHIN THIS THIS % IS DEDUCTED FROM
MANY YEARS AFTER BUYING THEM YOUR PROCEEDS AS A CDSC
---------------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
With Class B shares, there is no initial sales charge. However, there is a CDSC
if you sell your shares within six years, as described in the table above. The
way we calculate the CDSC is the same for each class (please see page 13). After
8 years, your Class B shares automatically convert to Class A shares, lowering
your annual expenses from that time on.
MAXIMUM PURCHASE AMOUNT The maximum amount you may invest in Class B shares at
one time is $249,999. We place any investment of $250,000 or more in Class A
shares, since a reduced initial sales charge is available and Class A's annual
expenses are lower.
RETIREMENT PLANS Class B shares are available to certain retirement plans,
including IRAs (of any type), Franklin Templeton Bank & Trust 403(b) plans, and
Franklin Templeton Bank & Trust qualified plans with participant or earmarked
accounts.
DISTRIBUTION AND SERVICE (12B-1) FEES Class B has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows the Fund to pay distribution and other
fees of up to 1% per year for the sale of Class B shares and for services
provided to shareholders. Because these fees are paid out of Class B's assets on
an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
SALES CHARGES - CLASS C
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING PRICE OF YOUR NET INVESTMENT
-------------------------------------------------------------------------------
Under $1 million 1.00 1.01
WE PLACE ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS A SHARES,
SINCE THERE IS NO INITIAL SALES CHARGE AND CLASS A'S ANNUAL EXPENSES ARE LOWER.
CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C shares
you sell within 18 months of purchase. The way we calculate the CDSC is the same
for each class (please see below).
DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows the Fund to pay distribution and other
fees of up to 1% per year for the sale of Class C shares and for services
provided to shareholders. Because these fees are paid out of Class C's assets on
an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one month
on the 18th day of the next month and each following month.
[End callout]
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A, B & C
The CDSC for each class is based on the current value of the shares being sold
or their net asset value when purchased, whichever is less. There is no CDSC on
shares you acquire by reinvesting your dividends or capital gains distributions.
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to a
CDSC. If there are not enough of these to meet your request, we will sell the
shares in the order they were purchased. We will use this same method if you
exchange your shares into another Franklin Templeton Fund (please see page 20
for exchange information).
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below, please
let us know at the time you make your investment to help ensure you receive the
lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases in
the Franklin Templeton Funds to take advantage of the lower sales charges for
large purchases of Class A shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Templeton Variable Insurance Products
Trust and Templeton Capital Accumulator Fund, Inc.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
also may combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts also may be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar amount
of shares over a 13-month period and lets you receive the same sales charge
as if all shares had been purchased at one time. We will reserve a portion of
your shares to cover any additional sales charge that may apply if you do not
buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE
SECTION OF YOUR ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you may
reinvest some or all of the proceeds within 365 days without an initial sales
charge. The proceeds must be reinvested within the same share class, except
proceeds from the sale of Class B shares will be reinvested in Class A shares.
If you paid a CDSC when you sold your Class A or C shares, we will credit your
account with the amount of the CDSC paid but a new CDSC will apply. For Class B
shares reinvested in Class A, a new CDSC will not apply, although your account
will not be credited with the amount of any CDSC paid when you sold your Class B
shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD) also
may be reinvested without an initial sales charge if you reinvest them within
365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject to
a sales charge.
SALES CHARGE WAIVERS Class A shares may be purchased without an initial sales
charge or CDSC by various individuals, institutions and retirement plans or by
investors who reinvest certain distributions and proceeds within 365 days.
Certain investors also may buy Class C shares without an initial sales charge.
The CDSC for each class may be waived for certain redemptions and distributions.
If you would like information about available sales charge waivers, call your
investment representative or call Shareholder Services at 1-800/632-2301. For
information about retirement plans, you may call Retirement Services at
1-800/527-2020. A list of available sales charge waivers also may be found in
the Statement of Additional Information (SAI).
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors to
invest as a group. For sales charge purposes, the group's investments are added
together. There are certain other requirements and the group must have a purpose
other than buying Fund shares at a discount.
[Insert graphic of paper with lines and someone writing] BUYING SHARES
MINIMUM INVESTMENTS
<TABLE>
<CAPTION>
<S> <C> <C>
Initial Additional
Regular accounts $1,000 $50
Automatic investment plans $50 ($25 for an $50 ($25 for an
Education IRA) Education IRA)
UGMA/UTMA accounts $100 $50
Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers, Education
IRAs or Roth IRAs)
IRAs, IRA rollovers, Education IRAs or Roth $250 $50
IRAs
Broker-dealer sponsored wrap account programs $250 $50
Full-time employees, officers, trustees and $100 $50
directors of Franklin Templeton entities, and
their immediate family members
</TABLE>
PLEASE NOTE THAT YOU MAY ONLY BUY SHARES OF A FUND ELIGIBLE FOR
SALE IN YOUR STATE OR JURISDICTION.
ACCOUNT APPLICATION If you are opening a new account, please complete and sign
the enclosed account application. Make sure you indicate the share class you
have chosen. If you do not indicate a class, we will place your purchase in
Class A shares. To save time, you can sign up now for services you may want on
your account by completing the appropriate sections of the application (see
Investor Services on page 19). For example, if you would like to link one of
your bank accounts to your Fund account so that you may use electronic fund
transfers to and from your bank account to buy and sell shares, please complete
the bank information section of the application. We will keep your bank
information on file for future purchases and redemptions.
<TABLE>
<CAPTION>
BUYING SHARES
-------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
-------------------------------------------------------------------------------
<S> <C> <C>
[Insert graphic of hands Contact your investment Contact your investment
shaking] Through your representative representative
investment representative
--------------------------------------------------------------------------------
[Insert graphic of Make your check payable to Make your check payable to
envelope] By Mail Franklin Large Cap Value Franklin Large Cap Value
Fund. Fund. Include your account
number on the check.
Mail the check and your
signed application to Fill out the deposit slip
Investor Services. from your account
statement. If you do not
have a slip, include a
note with your name, the
Fund name, and your
account number.
Mail the check and
deposit slip or note
to Investor Services.
--------------------------------------------------------------------------------
[Insert graphic of three Call to receive a wire Call to receive a wire
lightning bolts] By Wire control number and wire control number and wire
1-800/632-2301(or instructions. instructions.
1-650/312-2000 collect)
Wire the funds and mail To make a same day wire
your signed application to investment, please call
Investor Services. Please us by 1:00 p.m. Pacific time
include the wire control and make sure your wire
number or your new account arrives by 3:00 p.m.
number on the application.
To make a same day wire
investment, please call us
by 1:00 p.m. Pacific time
and make sure your wire
arrives by 3:00 p.m.
--------------------------------------------------------------------------------
Buying shares (cont.)
--------------------------------------------------------------------------------
Opening an account Adding to an account
--------------------------------------------------------------------------------
[Insert graphic of two Call Shareholder Services Call Shareholder Services
arrows pointing in opposite at the number below, or at the number below or our
directions] By Exchange send signed written automated TeleFACTS
TeleFACTS(R)1-800/247-1753 instructions. The TeleFACTS system, or send signed
(around-the-clock system cannot be used to written instructions.
access) open a new account.
(Please see page 20 for
(Please see page 20 for information on exchanges.)
information on exchanges.)
--------------------------------------------------------------------------------
Effective July 3, 2000, you may buy shares of the Fund by phone as follows:
--------------------------------------------------------------------------------
[Insert graphic of phone] If you have another Before requesting a
By Phone Franklin Templeton account telephone purchase, please
with your bank account make sure we have your
(Up to $100,000 per day) information on file, you bank account information
1-800/632-2301 may open a new account by on file. If we do not have
phone. The accounts must be this information, you will
identically registered. need to send written
instructions with your
To make a same day bank's name and address, a
investment, please call us voided check or savings
by 1:00 p.m. Pacific time account deposit slip, and
or the close of the New a signature guarantee if
York Stock Exchange, the ownership of the bank
whichever is earlier. and fund accounts is
different.
To make a same day
investment, please
call us by 1:00 p.m.
Pacific time or the
close of the New York
Stock Exchange,
whichever is earlier.
--------------------------------------------------------------------------------
</TABLE>
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in
the Fund by automatically transferring money from your checking or savings
account each month to buy shares. To sign up, complete the appropriate section
of your account application and mail it to Investor Services. If you are opening
a new account, please include the minimum investment of $50 ($25 for an
Education IRA) with your application.
AUTOMATIC PAYROLL DEDUCTION You may invest in the Fund automatically by
transferring money from your paycheck to the Fund by electronic funds transfer.
If you are interested, indicate on your application that you would like to
receive an Automatic Payroll Deduction Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the Fund in
an existing account in the same share class* of the Fund or another Franklin
Templeton Fund. Initial sales charges and CDSCs will not apply if you reinvest
your distributions within 365 days. You can also have your distributions
deposited in a bank account, or mailed by check. Deposits to a bank account may
be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Bank & Trust retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
Fund.
*Class B and C shareholders may reinvest their distributions in Class A shares
of any Franklin Templeton money fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and their
policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure or
application, please call Retirement Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to buy,
sell or exchange your shares and make certain other changes to your account by
phone.
For accounts with more than one registered owner, telephone privileges also
allow the Fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions. In addition, our telephone exchange privilege allows you to
exchange shares by phone from a fund account requiring two or more signatures
into an identically registered money fund account requiring only one signature
for all transactions. This type of telephone exchange is available as long as
you have telephone exchange privileges on your account.
As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests. Of course,
you can decline telephone purchase, exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton Funds
within the same class* generally without paying any additional sales charges. If
you exchange shares held for less than six months, however, you may be charged
the difference between the initial sales charge of the two funds if the
difference is more than 0.25%. If you exchange shares from a money fund, a sales
charge may apply no matter how long you have held the shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges, including minimum investment amounts. Exchanges also have the same
tax consequences as ordinary sales and purchases.
[End callout]
*Class Z shareholders of Franklin Mutual Series Fund Inc. may exchange into
Class A without any sales charge. Advisor Class shareholders of another Franklin
Templeton Fund also may exchange into Class A without any sales charge. Advisor
Class shareholders who exchange their shares for Class A shares and later decide
they would like to exchange into another fund that offers Advisor Class may do
so.
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC will
continue to be calculated from the date of your initial investment and will not
be charged at the time of the exchange. The purchase price for determining a
CDSC on exchanged shares will be the price you paid for the original shares. If
you exchange shares subject to a CDSC into a Class A money fund, the time your
shares are held in the money fund will not count towards the CDSC holding
period.
If you exchange your Class B shares for the same class of shares of another
Franklin Templeton Fund, the time your shares are held in that fund will count
towards the eight year period for automatic conversion to Class A shares.
Frequent exchanges can interfere with Fund management or operations and drive up
costs for all shareholders. To protect shareholders, there are limits on the
number and amount of exchanges you may make (please see Market Timers on page
25).
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of certificate] SELLING SHARES
You can sell your shares at any time. Please keep in mind that a contingent
deferred sales charge (CDSC) may apply.
SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can be
made over the phone or with a simple letter. Sometimes, however, to protect you
and the Fund we will need written instructions signed by all registered owners,
with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a
signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of record, or
preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the Fund
against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with a
check or draft, we may delay sending you the proceeds until your check or draft
has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days after
we receive your request in proper form. We are not able to receive or pay out
cash in the form of currency. Redemption proceeds may be delayed if we have not
yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in a
Franklin Templeton Bank & Trust retirement plan. For participants under age
591/2, tax penalties may apply. Call Retirement Services at 1-800/527-2020 for
details.
<TABLE>
<CAPTION>
Selling shares
--------------------------------------------------------------------------------
To sell some or all of your shares
--------------------------------------------------------------------------------
<S> <C>
[Insert graphic of hands Contact your investment representative
shaking] Through your
investment representative
--------------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] By Mail certificates (if you hold share certificates) to
Investor Services. Corporate, partnership or trust
accounts may need to send additional documents.
Specify the fund, the account number and the dollar
value or number of shares you wish to sell. If you
own both Class A and B shares, also specify the
class of shares, otherwise we will sell your Class A
shares first. Be sure to include all necessary
signatures and any additional documents, as well as
signature guarantees if required.
A check will be mailed to the name(s) and address on
the account, or otherwise according to your written
instructions.
--------------------------------------------------------------------------------
[Insert graphic of phone] As long as your transaction is for $100,000 or less, you
By Phone do not hold share certificates and you have not changed
your address by phone within the last 15 days, you can
1-800/632-2301 sell your shares by phone.
A check will be mailed to the name(s) and address on
the account. Written instructions, with a signature
guarantee, are required to send the check to another
address or to make it payable to another person.
--------------------------------------------------------------------------------
[Insert graphic of three You can call or write to have redemption proceeds sent
lightning bolts] By to a bank account. See the policies above for selling
Electronic Funds Transfer shares by mail or phone.
(ACH)
Before requesting to have redemption proceeds sent
to a bank account, please make sure we have your
bank account information on file. If we do not have
this information, you will need to send written
instructions with your bank's name and address, a
voided check or savings account deposit slip, and a
signature guarantee if the ownership of the bank and
fund accounts is different.
If we receive your request in proper form by 1:00
p.m. Pacific time, proceeds sent by ACH generally
will be available within two to three business days.
--------------------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund you are
arrows pointing in considering.
opposite directions] By
Exchange Call Shareholder Services at the number below or our
automated TeleFACTS system, or send signed written
TeleFACTS(R) instructions. See the policies above for selling shares
1-800/247-1753(around-the- by mail or phone.
clock access)
If you hold share certificates, you will need to
return them to the fund before your exchange can be
processed.
--------------------------------------------------------------------------------
</TABLE>
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE The Fund calculates the net asset value per share (NAV)
each business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. Pacific time). Each class's NAV is calculated by dividing
its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the NAV
plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
The Fund's assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value. If
the Fund holds securities listed primarily on a foreign exchange that trades on
days when the Fund is not open for business, the value of your shares may change
on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated after
we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250 ($50
for employee and UGMA/UTMA accounts) because you sell some of your shares, we
may mail you a notice asking you to bring the account back up to its applicable
minimum investment amount. If you choose not to do so within 30 days, we may
close your account and mail the proceeds to the address of record. You will not
be charged a CDSC if your account is closed for this reason.
STATEMENTS AND REPORTS You will receive quarterly account statements that show
all your account transactions during the quarter. You also will receive written
notification after each transaction affecting your account (except for
distributions and transactions made through automatic investment or withdrawal
programs, which will be reported on your quarterly statement). You also will
receive the Fund's financial reports every six months. To reduce Fund expenses,
we try to identify related shareholders in a household and send only one copy of
the financial reports. If you need additional copies, please call 1-800/DIAL
BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive copies of all notifications and statements
and other information about your account directly from the Fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have an
agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with two or
more owners are registered as joint tenants with rights of survivorship (shown
as Jt Ten on your account statement). To make any ownership changes to a joint
account, all owners must agree in writing, regardless of the law in your state.
MARKET TIMERS The Fund does not allow investments by market timers. You will be
considered a market timer if you have (i) requested an exchange out of the Fund
within two weeks of an earlier exchange request, or (ii) exchanged shares out of
the Fund more than twice in a calendar quarter, or (iii) exchanged shares equal
to at least $5 million, or more than 1% of the Fund's net assets, or (iv)
otherwise seem to follow a timing pattern. Shares under common ownership or
control are combined for these limits.
ADDITIONAL POLICIES Please note that the Fund maintains additional policies and
reserves certain rights, including:
o The Fund may refuse any order to buy shares, including any purchase under the
exchange privilege.
o At any time, the Fund may change its investment minimums or waive or lower
its minimums for certain purchases.
o The Fund may modify or discontinue the exchange privilege on 60 days' notice.
o In unusual circumstances, we may temporarily suspend redemptions, or postpone
the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the Fund reserves the right to make
payments in securities or other assets of the Fund, in the case of an
emergency or if the payment by check, wire or electronic funds transfer would
be harmful to existing shareholders.
o To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to the Fund promptly.
DEALER COMPENSATION Qualifying dealers who sell Fund shares may receive sales
commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and service
(12b-1) fees and its other resources.
CLASS A CLASS B CLASS C
--------------------------------------------------------------------------------
Commission (%) -- 4.00 2.00
Investment under $50,000 5.00 -- --
$50,000 but under $100,000 3.75 -- --
$100,000 but under $250,000 2.80 -- --
$250,000 but under $500,000 2.00 -- --
$500,000 but under $1 million 1.60 -- --
$1 million or more up to 1.00 1 -- --
12b-1 fee to dealer 0.25 2 0.25 3 1.00 4
A dealer commission of up to 1% may be paid on Class A NAV purchases by certain
retirement plans1 and on Class C NAV purchases. A dealer commission of up to
0.25% may be paid on Class A NAV purchases by certain trust companies and bank
trust departments, eligible governmental authorities, and broker-dealers or
others on behalf of clients participating in comprehensive fee programs.
1. During the first year after purchase, dealers may not be eligible to receive
the 12b-1 fee.
2. The Fund may pay up to 0.35% to Distributors or others, out of
which 0.10% generally will be retained by Distributors for its distribution
expenses.
3. Dealers may be eligible to receive up to 0.25% from the date of
purchase. After 8 years, Class B shares convert to Class A shares and dealers
may then receive the 12b-1 fee applicable to Class A.
4. Dealers may be eligible to receive up to 0.25% during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the
13th month.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the Fund or your account, you can write to us at
P.O. Box 997151, Sacramento, CA 95899-9983. You also can call us at one of the
following numbers. For your protection and to help ensure we provide you with
quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
-------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m. (Saturday)
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 Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Advisor Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Investment Company Act file #811-5878480 P 06/00
O 480 P-1
SUPPLEMENT DATED JUNE 1, 2000
TO THE PROSPECTUS OF
FRANKLIN LARGE CAP VALUE FUND
FRANKLIN VALUE INVESTORS TRUST
DATED JUNE 1, 2000
During the period June 1, 2000 through July 31, 2000, Franklin Templeton
Distributors, Inc., the principal underwriter for Franklin Value Investors
Trust, will pay to each participating securities firm that originates
shareholder investments in Class A shares of Franklin Large Cap Value Fund
the full applicable front-end sales charge paid by such investors.
Please keep this supplement for future reference.
FRANKLIN
LARGE CAP VALUE FUND
FRANKLIN VALUE INVESTORS TRUST
CLASS A, B & C
STATEMENT OF ADDITIONAL INFORMATION
JUNE 1, 2000
[Insert Franklin Templeton Ben Head]
P.O. BOX 997151, SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
-----------------------------------------------------------------------------
This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the Fund's prospectus.
The Fund's prospectus, dated June 1, 2000, which we may amend from time to
time, contains the basic information you should know before investing in the
Fund. You should read this SAI together with the Fund's prospectus.
For a free copy of the current prospectus, contact your investment
representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goal and Strategies ..................... 2
Risks ................................... 11
Officers and Trustees ................... 17
Management and Other Services ........... 19
Portfolio Transactions .................. 20
Distributions and Taxes ................. 21
Organization, Voting Rights
and Principal Holders .................. 23
Buying and Selling Shares ............... 24
Pricing Shares .......................... 30
The Underwriter ......................... 30
Performance ............................. 31
Miscellaneous Information ............... 33
Description of Ratings .................. 34
-------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
-------------------------------------------------------------------------------
GOAL AND STRATEGIES
-------------------------------------------------------------------------------
The Fund's investment goal is long-term capital appreciation. This goal is
fundamental, which means it may not be changed without shareholder approval.
The Fund tries to achieve its goal by investing at least 80% of its total
assets in undervalued equity securities of large capitalization companies
that are similar in size to those in the Russell 1000 Index, at the time of
purchase. The securities the Fund may invest in include common and preferred
stocks, convertible securities, warrants, secured and unsecured bonds, and
notes.
The Fund's manager may take into account a variety of factors in order to
determine whether to buy or hold securities, including: low price relative to
current, historical or future earnings, book value, cash flow, or sales; low
price to earnings ratio relative to the market, their industry group, or
earnings growth; 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 (fallen angels) but, in the manager's opinion,
still have significant potential. Purchases may include companies in cyclical
businesses, turnarounds and companies emerging from bankruptcy. Purchase
decisions may also be influenced by income, company stock buy-backs, and
insider purchases and sales.
The following is a description of the various types of securities the Fund
may buy.
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. The purchaser of an equity security typically
receives an ownership interest in the company as well as certain voting
rights. The owner of an equity security may participate in a company's
success through the receipt of dividends, which are distributions of earnings
by the company to its owners. Equity security owners also may participate in
a company's success or lack of success through increases or decreases in the
value of the company's shares as traded in the public trading market for such
shares. Equity securities generally take the form of common stock or
preferred stock. Preferred stockholders typically receive greater dividends
but may realize less capital appreciation than common stockholders who may
have greater voting rights as well. Equity securities also may include
convertible securities, warrants or rights. Convertible securities typically
are debt securities or preferred stocks which are convertible into common
stock after certain time periods or under certain circumstances. Warrants or
rights give the holder the right to purchase a common stock at a given time
for a specified price.
WARRANTS A warrant is typically a long-term option issued by a corporation
that gives the holder the privilege of buying a specified number of shares of
the underlying common stock at a specified exercise price at any time on or
before an expiration date. Stock index warrants entitle the holder to
receive, upon exercise, an amount in cash determined by reference to
fluctuations in the level of a specified stock index. If the Fund does not
exercise or dispose of a warrant prior to its expiration, it will expire
worthless. Further, the Fund does not intend to invest directly in warrants
(valued at the lower of cost or market) in excess of 5% of the value of the
Fund's net assets. No more than 2% of the value of the Fund's net assets may
be invested in warrants (valued at the lower of cost or market) that are not
listed on the New York or American Stock Exchange.
FOREIGN SECURITIES The Fund may invest in foreign securities if these
investments are consistent with the Fund's investment goal. 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 may invest up
to 10% of total assets in foreign securities. Please see "Risks - Foreign
securities risk" for more information.
DEPOSITARY RECEIPTS Many securities of foreign issuers are represented by
American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs), and
European Depositary Receipts (EDRs) (collectively, depositary receipts). ADRs
evidence ownership of, and represent the right to receive, securities of
foreign issuers deposited in a domestic bank or trust company or a foreign
correspondent bank. EDRs and GDRs are typically issued by foreign banks or
trust companies, although they also may be issued by U.S. banks or trust
companies, and evidence ownership of underlying securities issued by either a
foreign or a U.S. corporation. Generally, depositary receipts in registered
form are designed for use in the U.S. securities market and depositary
receipts in bearer form are designed for use in securities markets outside
the U.S. Please see "Risks - Depositary receipts risk" for more information.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on
exchanges or over-the-counter. While ADRs do not eliminate all the risk
associated with foreign investments, by investing in ADRs rather than
directly in the stock of foreign issuers, the Fund will avoid currency risks
during the settlement period for either purchases or sales. In general, there
is a large, liquid market in the U.S. for ADRs quoted on a national
securities exchange or on Nasdaq. The information available for ADRs is
subject to the accounting, auditing and financial reporting standards of the
U.S. market or exchange on which they are traded, which standards are more
uniform and more exacting than those to which many foreign issuers may be
subject. EDRs and GDRs may not necessarily be denominated in the same
currency as the underlying securities into which they may be converted.
Depositary receipts may be issued under sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of depositary receipts. In unsponsored programs, the
issuer may not be directly involved in the creation of the program. Although
regulatory requirements with respect to sponsored and unsponsored programs
are generally similar, in some cases it may be easier to obtain financial
information from an issuer that has participated in the creation of a
sponsored program. Accordingly, there may be less information available
regarding issuers of securities underlying unsponsored programs and there may
not be a correlation between this information and the market value of the
depositary receipts.
CONVERTIBLE SECURITIES The Fund may invest in convertible securities; these
investments will be no more 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 both interest rate and market
movements can influence its value, 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.
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. If the parity price of the
convertible security is less than the conversion price, the operating company
may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security
will have recourse only to the issuer. In addition, a convertible security
may be subject to redemption by the issuer, but only after a specified date
and under circumstances established at the time the security is issued.
While the Fund uses the same criteria to rate a convertible debt security
that it uses to rate a more conventional debt security, a convertible
preferred stock is treated like a preferred stock for the Fund's financial
reporting, credit rating, and investment limitation purposes. A preferred
stock is subordinated to all debt obligations in the event of insolvency, and
an issuer's failure to make a dividend payment is generally not an event of
default entitling the preferred shareholder to take action. A preferred stock
generally has no maturity date, so that its market value is dependent on the
issuer's business prospects for an indefinite period of time. In addition,
distributions from preferred stock are dividends, rather than interest
payments, and are usually treated as such for corporate tax purposes.
ENHANCED CONVERTIBLE securities In addition to "plain vanilla" convertibles,
a number of different structures have been created to fit the characteristics
of specific investors and issuers. Examples of these enhanced characteristics
for investors include yield enhancement, increased equity exposure or
enhanced downside protection. From an issuer's perspective, enhanced
structures are designed to meet balance sheet criteria, interest/dividend
payment deductibility and reduced equity dilution. The following are
descriptions of common structures of enhanced convertible securities.
Mandatorily convertible securities (e.g., ACES, DECS, PRIDES, SAILS-each
issuer has a different acronym for their version of these securities) are
considered the most equity like of convertible securities. At maturity these
securities are mandatorily convertible into common stock offering investors
some form of yield enhancement in return for some of the upside potential in
the form of a conversion premium. Typical characteristics of mandatories
include: issued as preferred stock, convertible at premium, pay fixed
quarterly dividend (typically 500 to 600 basis points higher than common
stock dividend), and are non-callable for the life of the security (usually
three to five years). An important feature of mandatories is that the number
of shares received at maturity is determined by the difference between the
price of the common stock at maturity and the price of the common stock at
issuance.
Enhanced convertible preferred securities (e.g., QUIPS, TOPrS, and TECONS)
are, from an investor's viewpoint, essentially convertible preferred
securities, i.e. they are issued as preferred stock convertible into common
stock at a premium and pay quarterly dividends. Through this structure the
company establishes a wholly owned special purpose vehicle whose sole purpose
is to issue convertible preferred stock. The proceeds of the convertible
preferred stock offering pass through to the company. The company then issues
a convertible subordinated debenture to the special purpose vehicle. This
convertible subordinated debenture has identical terms to the convertible
preferred issued to investors. Benefits to the issuer include increased
equity credit from rating agencies and the deduction of coupon payments for
tax purposes.
Exchangeable securities are often used by a company divesting a holding in
another company. The primary difference between exchangeables and standard
convertible structures is that the issuing company is a different company to
that of the underlying shares.
Yield enhanced stock (YES, also known as PERCS) mandatorily converts into
common stock at maturity and offers investors a higher current dividend than
the underlying common stock. The difference between these structures and
other mandatories is that the participation in stock price appreciation is
capped.
Zero-coupon and deep-discount convertible bonds (OID and LYONs) include the
following characteristics: no or low coupon payments, imbedded put options
allowing the investor to put them on select dates prior to maturity, call
protection (usually three to five years), and lower than normal conversion
premiums at issuance. A benefit to the issuer is that while no cash interest
is actually paid, the accrued interest may be deducted for tax purposes.
Because of their put options, these bonds tend to be less sensitive to
changes in interest rates than either long maturity bonds or preferred
stocks. The put options also provide enhanced downside protection while
retaining the equity participation characteristics of traditional convertible
bonds.
An investment in an enhanced convertible security or any other security may
involve additional risks. 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, may acquire liquid convertible securities, though there can be no
assurances that this will be achieved.
SYNTHETIC CONVERTIBLE SECURITIES A synthetic convertible is created by
combining distinct securities that together possess fixed income payments 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 that 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 a true convertible security in
the following respects:
o The value of a synthetic convertible is the sum of the values of its
fixed-income and convertibility components, which means that the values of
a synthetic convertible and a true convertible security will respond
differently to market fluctuations.
o Typically, the two components of a synthetic convertible represent one
issuer, but the Fund may combine components representing distinct issuers,
or combine a fixed income security with a call option on a stock index,
when the manager determines that such a combination would better promote
the Fund's investment goal.
o The component parts of a synthetic convertible security may be purchased
simultaneously or separately.
o 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.
DEBT SECURITIES represent a loan of money by the purchaser of the securities
to the issuer. A debt security typically has a fixed payment schedule that
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it
declares and pays any dividend to holders of its equity securities. Bonds,
notes, debentures, and commercial paper are types of debt securities. Each of
these differs in the length of the issuer's payment schedule, with commercial
paper having the shortest payment schedule.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the Fund's net asset value.
LOWER RATED SECURITIES The Fund may invest up to 25% of its total assets in
lower rated, fixed-income and convertible securities (those rated BB or lower
by Standard & Poor's Ratings Group (S&P(R)) or Ba or lower by Moody's Investors
Service, Inc. (Moody's)) and unrated securities of comparable quality, that
the manager believes possess intrinsic values in excess of the current market
prices of those securities. Lower rated bonds are commonly called "junk
bonds." Lower rated securities are considered by S&P(R), on balance, to be
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation,
and they generally involve more credit risk than securities in the higher
rating categories. Lower rated securities in which the Fund may invest
include securities rated D, the lowest rating category of S&P(R), or unrated
securities of comparable quality. Debt obligations rated D are in default and
the payment of interest and/or repayment of principal is in arrears.
ZERO COUPON SECURITIES AND PAY-IN-KIND BONDS Zero coupon or deferred interest
securities are debt obligations that do not entitle the holder to any
periodic payments of interest before maturity or a specified date when the
securities begin paying current interest (the cash payment date) and
therefore are generally issued and traded at a discount from their face
amounts or par value. The discount varies depending on the time remaining
until maturity or cash payment date, prevailing interest rates, liquidity of
the security and the perceived credit quality of the issuer. The discount, in
the absence of financial difficulties of the issuer, typically decreases as
the final maturity or cash payment date of the security approaches. The
market prices of zero coupon securities are generally more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do non-zero
coupon or deferred interest securities having similar maturities and credit
quality. Current federal income tax law requires that a holder of a zero
coupon security report as income each year the portion of the original issue
discount on the security that accrues that year, even though the holder
receives no cash payments of interest during the year.
Pay-in-kind bonds are securities that pay interest through the issuance of
additional bonds. The Fund will be deemed to receive interest over the life
of the bonds and be treated as if interest were paid on a current basis for
federal income tax purposes, although no cash interest payments are received
by the Fund until the cash payment date or until the bonds mature.
TRADE CLAIMS Trade claims are bought from creditors of companies in financial
difficulty who seek to reduce the number of debt obligations they are owed.
Such trade creditors generally sell their claims in an attempt to improve
their balance sheets and reduce uncertainty regarding payments. For buyers,
trade claims offer the potential for profits since they are often purchased
at a significantly discounted value and, consequently, have the potential for
higher income and capital appreciation should the debt issuer's financial
position improve. Trade claims are generally liquid, as there is a secondary
market, but the Board of Trustees will monitor their liquidity. An investment
in trade claims is speculative and there can be no guarantee that the debt
issuer will ever be able to satisfy the obligation. Further, trading in trade
claims is not regulated by federal securities laws but primarily by
bankruptcy and commercial laws. Because trade claims are unsecured
obligations, holders may have a lower priority than secured or preferred
creditors. At the present time, however, the Fund intends to limit these
investments to no more than 5% of its net assets.
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. The Fund intends
to limit these investments to 10% of its total assets.
SHORT-SELLING In a short sale, the Fund sells a security it does not own in
anticipation of a decline in the market value of that security. The security
sold must be listed on a national exchange. To complete the transaction, the
Fund must borrow the security to make delivery to the buyer. The Fund then is
obligated to replace the security borrowed by purchasing it at the market
price at the time of replacement. The price at this time may be more or less
than the price at which the security was sold by the Fund. Until the security
is replaced, the Fund is required to pay to the lender any dividends or
interest that accrue during the period of the loan. To borrow the security,
the Fund also may be required to pay a premium, which would increase the cost
of the security sold. The proceeds of the short sale will be retained by the
broker, to the extent necessary to meet margin requirements, until the short
position is closed out.
The Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. The Fund will realize a gain if the
security declines in price between those dates. The amount of any gain will
be decreased, and the amount of any loss increased, by the amount of any
premium, dividends or interest the Fund may be required to pay in connection
with a short sale.
In addition to the short sales discussed above, the Fund may also make short
sales "against the box." A short sale is "against the box" to the extent that
the Fund contemporaneously owns or has the right to obtain at no added cost
securities identical to those sold short. The Fund at no time will have more
than 15% of the value of its net assets in deposits on short sales against
the box.
No securities will be sold short if, after the sale, the total market value
of all the Fund's open short positions, including short sales against the
box, would exceed 25% of the value of the Fund's net assets. In addition,
short sales of the securities of any one issuer may not exceed the lesser of
2% of the Fund's net assets or 2% of the securities of any class of the
issuer.
The Fund will place in a segregated account with its custodian bank an amount
of cash or U.S. government securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short
and (b) any cash or U.S. government securities required to be deposited as
collateral with the broker in connection with the short sale (not including
the proceeds from the short sale). This segregated account will be
marked-to-market daily, provided that at no time will the amount deposited in
it plus the amount deposited with the broker as collateral be less than the
market value of the securities at the time they were sold short.
WHEN-ISSUED, DELAYED DELIVERY AND TO-BE-ANNOUNCED (TBA) TRANSACTIONS are
arrangements under which the Fund buys securities that have been authorized
but not yet issued with payment for and delivery of the security scheduled
for a future time, generally within 15 to 60 days. Purchases of securities on
a when-issued or delayed delivery basis are subject to the risk that the
value or the yields at delivery may be more or less than the purchase price
or yields available when the transaction was entered into. To the extent the
Fund engages in these transactions, it will do so only for the purpose of
acquiring portfolio securities consistent with its investment objectives and
policies, and not for the purpose of investment leverage. Although the Fund
will generally buy securities on a when-issued or TBA basis with the
intention of holding the securities, it may sell the securities before the
settlement date if the manager believes it is advisable to do so.
When the Fund is the buyer in this type of transaction, it will maintain, in
a segregated account with its custodian bank, cash or marketable securities
having an aggregate value equal to the amount of the Fund's purchase
commitments until payment is made. As a buyer in one of these transactions,
the Fund relies on the seller to complete the transaction. The seller's
failure to do so may cause the Fund to miss a price or yield considered
advantageous to the Fund. Securities purchased on a when-issued or delayed
delivery basis do not generally earn interest until their scheduled delivery
date. Entering into a when-issued, delayed delivery or TBA transaction is a
form of leverage that may affect changes in net asset value to a greater
extent.
STANDBY COMMITMENT AGREEMENTS If the Fund enters into a standby commitment
agreement, it will be obligated, for a set period of time, to buy a certain
amount of a security that may be issued and sold to the Fund at the option of
the issuer. The price of the security is set at the time of the agreement.
The Fund will receive a commitment fee typically equal to 0.5% of the
purchase price of the security. The Fund will receive this fee regardless of
whether the security is actually issued.
The Fund may enter into a standby commitment agreement to invest in the
security underlying the commitment at a yield or price that the manager
believes is advantageous to the Fund. The Fund will not enter into a standby
commitment if the remaining term of the commitment is more than 45 days. If
the Fund enters into a standby commitment, it will keep cash or high-grade
marketable securities in a segregated account with its custodian bank in an
amount equal to the purchase price of the securities underlying the
commitment.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the Fund's books on the date the
security can reasonably be expected to be issued. The value of the security
will then be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. If the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
DERIVATIVE SECURITIES Although the Fund has no present intention of investing
in the following, it has the authority to enter into options, futures and
options on futures, which are generally considered "derivative securities."
Options The Fund may write (sell) covered call options on any of the
securities it owns that are listed for trading on a national securities
exchange, and it may also buy listed call and put options on securities and
securities indices for portfolio hedging purposes. The Fund may also write
covered call options and buy put options that are traded over-the-counter
(OTC). 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.
CALL OPTIONS Call options are short-term contracts (generally having a
duration of nine months or less) that give the buyer of the option the right
to buy, and obligate the writer to sell, the underlying security at the
exercise price at any time during the option period, regardless of the market
price of the underlying security. The buyer of an option pays a cash premium
that typically reflects, among other things, the relationship of the exercise
price to the market price and the volatility of the underlying security, the
remaining term of the option, supply and demand factors, and interest rates.
A call option written by the Fund is "covered" if the Fund owns or has an
absolute right (such as by conversion) to the underlying security covered by
the call. A call option is also covered if the Fund holds a call on the same
security and in the same principal amount as the call written and the
exercise price of the call held (a) is equal to or less than the exercise
price of the call written or (b) is greater than the exercise price of the
call written if the difference is maintained by the Fund in cash, government
securities or other high grade debt obligations in a segregated account with
its custodian bank.
PUT OPTIONS The Fund may also buy put options on common stock that it owns or
may acquire them through the conversion or exchange of other securities to
protect against a decline in the market value of the underlying security or
to protect the unrealized gain in an appreciated security in its portfolio
without actually selling the security. A put option gives the holder the
right to sell the underlying security at the option exercise price at any
time during the option period. The Fund may pay for a put either separately
or by paying a higher price for securities that are purchased subject to a
put, thus increasing the cost of the securities and reducing the yield
otherwise available from the same securities.
In the case of put options, any gain realized by the Fund will be reduced by
the amount of the premium and transaction costs it paid and may be offset by
a decline in the value of its portfolio securities. If the value of the
underlying stock exceeds the exercise price (or never declines below the
exercise price), the Fund may suffer a loss equal to the amount of the
premium it paid plus transaction costs. Subject to the same risks, the Fund
may also close out its option positions before they expire by entering into a
closing purchase transaction.
OPTIONS ON INDICES 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.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, since the writer may
be assigned an exercise notice at any time prior to the termination of the
obligation. Whether or not an option expires unexercised, the writer retains
the amount of the premium paid by the purchaser of the option. The amount
reflects, among other things, the relationship of the exercise price to the
market price and volatility of the underlying security, the remaining term of
the option, supply and demand and interest rates. This amount may, in the
case of a covered call option, be offset by a decline in the market value of
the underlying security during the option period. If a call option is
exercised, the writer experiences a profit or loss from the sale of the
underlying security.
The writer of an option that wants to terminate its obligation may effect a
"closing purchase transaction." This is done by buying an option of the same
series as the option previously written which will cancel the writer's
position by the clearing corporation. A writer may not effect a closing
purchase transaction, however, after being notified of the exercise of an
option. Likewise, an investor who is the holder of an option may liquidate
its position by effecting a "closing sale transaction." This is done by
selling an option of the same series as the option previously purchased.
There is no guarantee that either a closing purchase or a closing sale
transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both. In addition,
effecting a closing transaction will permit the cash or proceeds from the
sale of any securities subject to the option to be used for other Fund
investments. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or at the same time as the sale of the security.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option. The Fund will realize a
loss from a closing transaction if the price of the transaction is more than
the premium received from writing the option or is less than the premium paid
to purchase the option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of
a call option is likely to be offset in whole or in part by appreciation of
the underlying security owned by the Fund.
The Fund may purchase call options on securities it intends to purchase to
limit the risk of a substantial increase in the market price of the security
or on securities indices. The Fund may also purchase call options on
securities held in its portfolio and on which it has written call options.
Prior to its expiration, a call option may be sold in a closing sale
transaction. Profit or loss from such a sale will depend on whether the
amount received is more or less than the premium paid for the call option
plus any related transaction costs.
The Fund may also purchase put options on securities and securities indices
and enter into closing sale transactions with respect to such options,
exercise them or permit them to expire. The Fund may purchase a put option on
an underlying security (a "protective put") owned by the Fund as a hedging
technique in order to protect against an anticipated decline in the value of
the security. Such hedge protection is provided only during the life of the
put option when the Fund, as the holder of the put option, is able to sell
the underlying security at the put exercise price, regardless of any decline
in the underlying security's market price. For example, a put option may be
purchased in order to protect unrealized appreciation of a security when the
investment manager deems it desirable to continue to hold the security
because of tax considerations. The premium paid for the put option and any
transaction costs would reduce any capital gain otherwise available for
distribution when the security is eventually sold.
The Fund's investment in options and certain securities transactions
involving actual or deemed short sales may be limited by the requirements of
the Internal Revenue Code for qualification as a regulated investment company
and are subject to special tax rules that may affect the amount, timing, and
character of distributions to shareholders. These securities require the
application of complex and special tax rules and elections. For more
information, please see "Distributions and Taxes" below.
FORWARD CONVERSIONS In a forward conversion, the Fund buys securities and
writes call options and buys put options on such securities. By purchasing
puts, the Fund protects the underlying security from depreciation in value.
By selling or writing calls on the same security, the Fund receives premiums
which may offset part or all of the cost of purchasing the puts while
foregoing the opportunity for appreciation in the value of the underlying
security. The Fund will not exercise a put it has purchased while a call
option on the same security is outstanding.
Although it is generally intended that the exercise price of put and call
options would be identical, situations might occur in which some option
positions are acquired with different exercise prices. Therefore, the Fund's
return may depend in part on movements in the price of the underlying
security.
FUTURES The Fund may enter into contracts for the purchase or sale for future
delivery of securities, contracts based upon financial indices, and the Fund
may buy options on such contracts (financial futures). Financial futures
contracts are contracts that obligate the long or short holder to take or
make delivery of a specified quantity of a financial instrument, such as a
security, or the cash value of a securities index during a specified future
period at a specified price. A "sale" of a futures contract means the seller
has a contractual obligation to deliver the securities described in the
contract at a specified price on a specified date. A "purchase" of a futures
contract means the buyer has a contractual obligation to acquire the
securities described in the contract at a specified price on a specified
date. Futures contracts have been designed by exchanges that have been
designated "contracts markets" by the Commodity Futures Trading Commission
(CFTC) and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market. At the
present time, the Fund intends to limit these investments to no more than 5%
of its net assets.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by buying
(or selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation to take
delivery of the securities. Since all transactions in the futures market are
made, offset or fulfilled through a clearinghouse associated with the exchange
on which the contracts are traded, the Fund will incur brokerage fees when it
purchases or sells futures contracts.
The Fund will not engage in transactions in futures contracts or related
options for speculation. The Fund will not enter into any stock index future
or related option if, immediately thereafter, more than one third (1/3) of
the Fund's net assets would be represented by futures contracts or related
options. In addition, the Fund may not buy or sell futures contracts or buy
or sell related options if, immediately thereafter, the sum of the amount of
margin deposits on its existing futures and related options positions, and
premiums paid for related options, would exceed 5% of the market value of the
Fund's total assets.
The purpose of the acquisition or sale of a futures contract is to attempt to
protect the Fund from fluctuations in the price of a portfolio security
without actually buying or selling the underlying security. To the extent the
Fund enters into futures contracts or related options, it will deposit in a
segregated account with its custodian bank cash or other U.S. Treasury
obligations equal to a specified percentage of the value of the futures
contract (the initial margin), as required by the relevant contract market
and futures commission merchant. The futures contract will be
marked-to-market daily. If the value of the futures contract declines
relative to the Fund's position, the Fund will be required to pay the futures
commission merchant an amount equal
to the change in value.
STOCK INDEX FUTURES CONTRACTS The Fund may purchase and sell stock index
futures contracts traded on domestic exchanges and, to the extent such
contracts have been approved by the CFTC for sale to customers in the U.S.,
on foreign exchanges. A stock index futures contract obligates the seller to
deliver (and the purchaser to take) an amount of cash equal to a specific
dollar amount times the difference between the value of a specific stock
index at the close of the last trading day of the contract and the price at
which the agreement is made. Open futures contracts are valued on a daily
basis and the Fund may be obligated to provide or receive cash reflecting any
decline or increase in the contract's value. No physical delivery of the
underlying stocks in the index is made in the future.
The Fund may sell stock index futures contracts in anticipation of or during
a market decline in an attempt to offset the decrease in market value of its
securities that might otherwise result. When the Fund is not fully invested
in stocks and anticipates a significant market advance, it may purchase stock
index futures in order to gain rapid market exposure that may offset
increases in the cost of common stocks that it intends to purchase.
FUTURE DEVELOPMENTS The Fund may take advantage of opportunities in the area
of options and futures contracts and any other derivative investments that
are not presently contemplated for use by the Fund or that are not currently
available but which may be developed, to the extent such opportunities are
both consistent with the Fund's investment goal and legally permissible for
the Fund. Prior to investing in any such investment vehicle, the Fund will
supplement its prospectus, if appropriate.
REPURCHASE AGREEMENTS The Fund generally will have a portion of its assets in
cash or cash equivalents for a variety of reasons, including waiting for a
special investment opportunity or taking a defensive position. To earn income
on this portion of its assets, the Fund may enter into repurchase agreements.
Under a repurchase agreement, the Fund agrees to buy securities guaranteed as
to payment of principal and interest by the U.S. government or its agencies
from a qualified bank or broker-dealer and then to sell the securities back
to the bank or broker-dealer after a short period of time (generally, less
than seven days) at a higher price. The bank or broker-dealer must transfer
to the Fund's custodian securities with an initial market value of at least
102% of the dollar amount invested by the Fund in each repurchase agreement.
The manager will monitor the value of such securities daily to determine that
the value equals or exceeds the repurchase price.
Repurchase agreements may involve risks in the event of default or insolvency
of the bank or broker-dealer, including possible delays or restrictions upon
the Fund's ability to sell the underlying securities. The Fund will enter
into repurchase agreements only with parties who meet certain
creditworthiness standards, i.e., banks or broker-dealers that the manager
has determined present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the repurchase transaction.
LOANS OF PORTFOLIO SECURITIES To generate additional income, the Fund may
lend certain of its portfolio securities to qualified banks, securities
dealers or other institutional investors. Such loans may not exceed 331/3% of
the value of the Fund's total assets, measured at the time of the most recent
loan. For each loan, the borrower must maintain with the Fund's custodian
collateral (consisting of any combination of cash, securities issued by the
U.S. government and its agencies and instrumentalities, or irrevocable
letters of credit) with a value at least equal to 100% of the current market
value of the loaned securities. The Fund retains all or a portion of the
interest received on investment of the cash collateral or receives a fee from
the borrower. The Fund also continues to receive any distributions paid on
the loaned securities. The Fund may terminate a loan at any time and obtain
the return of the securities loaned within the normal settlement period for
the security involved.
Where voting rights with respect to the loaned securities pass with the
lending of the securities, the manager intends to call the loaned securities
to vote proxies, or to use other practicable and legally enforceable means to
obtain voting rights, when the manager has knowledge that, in its opinion, a
material event affecting the loaned securities will occur or the manager
otherwise believes it necessary to vote. As with other extensions of credit,
there are risks of delay in recovery or even loss of rights in the collateral
in the event of default or insolvency of the borrower.
The Fund will loan its securities only to parties who meet creditworthiness
standards approved by the Fund's Board of Trustees, i.e., banks or
broker-dealers that the manager has determined present no serious risk of
becoming involved in bankruptcy proceedings within the time frame
contemplated by the loan.
ILLIQUID INVESTMENTS The Fund may invest up to 15% 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.
RESTRICTED SECURITIES Some of the securities the Fund may buy 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 Securities Act of 1933, as amended (1933 Act).
Securities not registered under the 1933 Act may not be sold without first
being registered, unless there is an available exemption under the 1933 Act.
Normally the costs of registering these securities is borne by the issuer.
Restricted securities involve certain risks, including the risk that a
secondary market may not exist when a holder wants to sell them.
In addition, the price and valuation of these securities may reflect a
discount because they are perceived as having less liquidity than similar
securities that are not restricted.
As with other securities in the Fund's portfolio, if no readily available
market quotations exist for restricted securities, they will be valued at
fair value in accordance with procedures adopted by the board of trustees. If
the Fund suddenly has to sell restricted securities, time constraints or a
lack of interested, qualified buyers may prevent the Fund from receiving the
carrying value of the securities at the time of the sale. Alternatively, the
manager may sell unrestricted securities it might have retained if the Fund
had only held unrestricted securities.
BORROWING The Fund may borrow money up to 331/3% of its total assets. Under
federal securities laws, a fund may borrow from banks up to the maximum
one-third of its total assets (including the amount borrowed) provided that
it maintains continuous asset coverage of 300% with respect to such
borrowings and to sell (within three days) sufficient portfolio holdings to
restore such coverage if it should decline to less than 300% due to market
fluctuations or otherwise, even if disadvantageous from an investment
standpoint.
Leveraging by means of borrowing may make any change in the Fund's net asset
value even greater and thus result in increased volatility of returns. The
Fund's assets that are used as collateral to secure the borrowing may
decrease in value while the borrowing is outstanding, which may force the
Fund to use its other assets to increase the collateral. In addition, the
money borrowed will be subject to interest and other costs (which may include
commitment fees and/or the cost of maintaining minimum average balances). The
cost of borrowing may exceed the income received from the securities
purchased with borrowed funds.
In addition to borrowing for leverage purposes, the Fund also may borrow
money to meet redemptions in order to avoid forced, unplanned sales of
portfolio securities. This allows the Fund greater flexibility to buy and
sell portfolio securities for investment or tax considerations, rather than
cash flow considerations. See "Investment Restrictions" for more information
about the Fund's policies with respect to borrowing.
TEMPORARY INVESTMENTS In anticipation of and during temporary defensive
periods or when investments of the type in which the Fund intends to invest
are not available at prices that the manager believes are attractive, the
Fund may invest up to 100% of its total assets in: (1) securities of the U.S.
government and certain of its agencies and instrumentalities that mature in
one year or less from the date of purchase, including U.S. Treasury bills,
notes and bonds, and securities of the Government National Mortgage
Association, the Federal Housing Administration and other agency or
instrumentality issues or guarantees that are supported by the full faith and
credit of the U.S. 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 or non-negotiable
CDs (subject to the 15% aggregate limit on the Fund's investment in illiquid
securities), letters of credit and bankers' acceptances, or instruments
secured by these types of obligations, issued by banks and savings
institutions that are subject to regulation by the U.S. government, its
agencies or instrumentalities and that have assets of over $1 billion, unless
these types of obligations are guaranteed by a parent bank that has total
assets in excess of $5 billion; (4) commercial paper considered by the
manager to be of high quality, which must be rated within the two highest
rating categories by S&P(R) or Moody's or, if unrated, issued by a company
having an outstanding debt issue rated at least AA by S&P(R) or Aa by Moody's;
and (5) corporate obligations including, but not limited to, corporate notes,
bonds and debentures considered by the manager to be high grade or that are
rated within the two highest rating categories by S&P or Moody's.
INVESTMENT RESTRICTIONS The Fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the Fund's outstanding shares or (ii) 67% or
more of the Fund's shares present at a shareholder meeting if more than 50%
of the Fund's outstanding shares are represented at the meeting in person or
by proxy, whichever is less.
The Fund may not:
1. Borrow money, except that the Fund may borrow money from banks or
affiliated investment companies to the extent permitted by the 1940 Act, or
any exemptions therefrom which may be granted by the U.S. Securities and
Exchange Commission (SEC), or from any person in a private transaction not
intended for public distribution for temporary or emergency purposes and then
in an amount not exceeding 331/3% of the value of the Fund's total assets
(including the amount borrowed).
2. Act as an underwriter except to the extent the Fund may be deemed to be an
underwriter when disposing of securities it owns or when selling its own
shares.
3. Make loans to other persons except (a) through the lending of its
portfolio securities, (b) through the purchase of debt securities, loan
participations and/or engaging in direct corporate loans in accordance with
its investment goals and policies, and (c) to the extent the entry into a
repurchase agreement is deemed to be a loan. The Fund may also make loans to
affiliated investment companies to the extent permitted by the 1940 Act or
any exemptions therefrom which may be granted by the SEC.
4. Purchase or sell real estate and commodities, except that the Fund may
purchase or sell securities of real estate investment trusts, may purchase or
sell currencies, may enter into futures contracts on securities, currencies,
and other indices or any other financial instruments, and may purchase and
sell options on such futures contracts.
5. Issue securities senior to the Fund's presently authorized shares of
beneficial interest, except that this restriction shall not be deemed to
prohibit the Fund from (a) making any permitted borrowings, loans, mortgages
or pledges, (b) entering into options, futures contracts, forward contracts,
repurchase transactions or reverse repurchase transactions, or (c) making
short sales of securities to
the extent permitted by the 1940 Act and any rule or order thereunder, or SEC
staff interpretations thereof.
6. Concentrate (invest more than 25% of its total assets) in securities of
issuers in a particular industry (other than securities issued or guaranteed
by the U.S. government or any of its agencies or instrumentalities or
securities of other investment companies).
7. Purchase the securities of any one issuer (other than the U.S. government
or any of its agencies or instrumentalities or securities of other investment
companies) if immediately after such investment (a) more than 5% of the value
of the Fund's total assets would be invested in such issuer or (b) more than
10% of the outstanding voting securities of such issuer would be owned by the
Fund, except that up to 25% of the value of such Fund's total assets may be
invested without regard to such 5% and 10% limitations.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the Fund owns, the Fund may receive stock, real estate, or other
investments that the Fund would not, or could not, buy. If this happens, the
Fund intends to sell such investments as soon as practicable while trying to
maximize the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus 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.
If a percentage restriction or limitation is met at the time of investment, a
later increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities will not be considered a violation of the
restriction or limitation.
RISKS
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There is no assurance that the Fund will meet its investment goal.
Investments in securities that have potential to increase in value may be
subject to a greater degree of risk and may be more volatile than other types
of investments.
The value of your shares will increase as the value of the securities owned
by the Fund increases and will decrease as the value of the Fund's
investments decrease. In this way, you participate in any change in the value
of the securities owned by the Fund. In addition to the factors that affect
the value of any particular security that the Fund owns, the value of Fund
shares may also change with movements in the stock market as a whole.
VALUE INVESTING RISK The Fund will invest principally in the securities of
companies believed by the manager to be undervalued. Securities of a company
may be undervalued as a result of overreaction by investors to unfavorable
news about a company, industry or the stock market in general or as a result
of a market decline, poor economic conditions, tax-loss selling or actual or
anticipated unfavorable developments affecting a company. Sometimes these
companies are attempting to recover from business setbacks or adverse events
(turnarounds), cyclical downturns, or, in certain cases, bankruptcy.
Cyclical stocks in which the Fund may invest tend to increase in value more
quickly during economic upturns than non-cyclical stocks, but they also tend
to lose value more quickly in economic downturns. As with all investments,
there is always the possibility when investing in these securities that the
manager may be incorrect in its assessment of a particular industry or
company or that the manager may not buy these securities at their lowest
possible prices or sell them at their highest.
When the Fund buys securities of companies emerging from bankruptcy, it may
encounter risks that do not exist with other investments. Companies emerging
from bankruptcy may have some difficulty retaining customers and suppliers
who prefer transacting with solvent organizations. If new management is
installed in a company emerging from bankruptcy, the management may be
considered untested; if the existing management is retained, the management
may be considered incompetent. Further, even when a company has emerged from
bankruptcy with a lower level of debt, it may still retain a relatively weak
balance sheet. During economic downturns these companies may not have
sufficient cash flow to pay their debt obligations and may also have
difficulty finding additional financing. In addition, reduced liquidity in
the secondary market may make it difficult for the Fund to sell the
securities or to value them based on actual trades.
The Fund's policy of investing in securities that may be out of favor,
including turnarounds, cyclical stocks and companies emerging from
bankruptcy, companies reporting poor earnings, and companies whose share
prices have declined sharply or that are not widely followed, differs from
the approach followed by many other mutual funds. The manager believes,
however, that these securities may provide a greater total investment return
than securities whose prices appear to reflect anticipated favorable
developments.
FOREIGN SECURITIES RISK The value of foreign (and U.S.) securities is
affected by general economic conditions and individual company and industry
earnings prospects. While foreign securities may offer significant
opportunities for gain, they also involve additional risks that can increase
the potential for losses in the Fund. These risks can be significantly
greater for investments in emerging markets. Investments in depositary
receipts also involve some or all of the risks described below. You should
consider carefully the substantial risks involved in securities of companies
of foreign nations, which are in addition to the usual risks inherent in
domestic investments.
There is the possibility of cessation of trading on national exchanges,
expropriation, nationalization of assets, confiscatory or punitive taxation,
withholding and other foreign taxes on income or other amounts, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), restrictions on removal of assets, political
or social instability, or diplomatic developments that could affect
investments in securities of issuers in foreign nations.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or
financial reporting standards, and auditing practices and requirements may
not be comparable to those applicable to U.S. companies. The Fund, therefore,
may encounter difficulty in obtaining market quotations for purposes of
valuing its portfolio and calculating its net asset value.
Certain countries' financial markets and services are less developed than
those in the U.S. or other major economies. In many foreign countries there
is less government supervision and regulation of stock exchanges, brokers,
and listed companies than in the U.S. Foreign markets have substantially less
volume than the New York Stock Exchange and securities of some foreign
companies are less liquid and more volatile than securities of comparable
U.S. companies. Commission rates in foreign countries, which are generally
fixed rather than subject to negotiation as in the U.S., are likely to be
higher. Settlement practices may be cumbersome and result in delays that may
affect portfolio liquidity. The Fund may have greater difficulty voting
proxies, exercising shareholder rights, pursuing legal remedies, and
obtaining judgments with respect to foreign investments in foreign courts
than with respect
to domestic issuers in U.S. courts.
The Fund's investments in foreign securities may increase the risks with
respect to the liquidity of the Fund's portfolio. This could inhibit the
Fund's ability to meet a large number of shareholder redemption requests in
the event of economic or political turmoil in a country in which the Fund has
a substantial portion of its assets invested or deterioration in relations
between the U.S. and the foreign country.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
may include (i) less economic stability; (ii) political and social
uncertainty (for example, regional conflicts and risk of war); (iii)
pervasiveness of corruption and crime; (iv) the small current size of the
markets for such securities and the currently low or nonexistent volume of
trading, which result in a lack of liquidity and in greater price volatility;
(v) delays in settling portfolio transactions; (vi) risk of loss arising out
of the system of share registration and custody; (vii) certain national
policies that may restrict the Fund's investment opportunities, including
restrictions on investment in issuers or industries deemed sensitive to
national interests; (viii) foreign taxation; (ix) the absence of developed
legal structures governing private or foreign investment or allowing for
judicial redress for injury to private property; (x) the absence of a capital
market structure or market-oriented economy; and (xi) the possibility that
recent favorable economic developments may be slowed or reversed by
unanticipated political or social events.
In addition, many countries in which the Fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency, and balance of payments
position.
CURRENCY RISK Some of the Fund's investments may be denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the Fund owns and the Fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
EURO RISK On January 1, 1999, the European Economic and Monetary Union (EMU)
introduced a new single currency called the euro. By July 1, 2002, the euro,
which will be implemented in stages, will have replaced the national
currencies of the following member countries: Austria, Belgium, Finland,
France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and
Spain.
Currently, the exchange rate of the currencies of each of these countries is
fixed to the euro. The euro trades on currency exchanges and is available for
non-cash transactions. The participating countries currently issue sovereign
debt exclusively in euro. By July 1, 2002, euro-denominated bills and coins
will replace the bills and coins of the above countries.
The new European Central Bank has control over each country's monetary
policies. Therefore, the participating countries no longer control their own
monetary policies by directing independent interest rates for their
currencies. The national governments of the participating countries, however,
have retained the authority to set tax and spending policies and public debt
levels.
The change to the euro as a single currency is new and untested. It is not
possible to predict the impact of the euro on currency values or on the
business or financial condition of European countries and issuers, and
issuers in other regions, whose securities the Fund may hold, or the impact,
if any, on Fund performance. In the first six months of the euro's existence,
the exchange rates of the euro versus many of the world's major currencies
steadily declined. In this environment, U.S. and other foreign investors
experienced erosion of their investment returns on their euro-denominated
securities. The transition and the elimination of currency risk among EMU
countries may change the economic environment and behavior of investors,
particularly in European markets.
While the implementation of the euro could have a negative effect on the
Fund, the Fund's manager and its affiliated service providers are taking
steps they believe are reasonably designed to address the euro issue.
DEPOSITARY RECEIPTS RISK Depositary receipts reduce but do not eliminate all
the risk inherent in investing in the securities of foreign issuers. To the
extent that the Fund acquires depositary receipts through banks that do not
have a contractual relationship with the foreign issuer of the security
underlying the depositary receipt to issue and service such depositary
receipts, there may be an increased possibility that the Fund would not
become aware of and be able to respond to corporate actions such as stock
splits or rights offerings involving the foreign issuer in a timely manner.
LOWER RATED SECURITIES RISK Because the Fund may invest in securities below
investment grade, an investment in the Fund is subject to a higher degree of
risk than an investment in a Fund that invests primarily in higher-quality
securities. You should consider the increased risk of loss to principal that
is present with an investment in higher risk securities, such as those in
which the Fund invests. Accordingly, an investment in the Fund should not be
considered a complete investment program and should be carefully evaluated
for its appropriateness in light of your overall investment needs and 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, the manager may find it necessary
to replace the securities with lower-yielding securities, which could result
in less net investment income for the Fund.
The premature disposition of a high yield security due to a call or buy-back
feature, the deterioration of an issuer's creditworthiness, or a default by
an issuer may make it more difficult for the Fund to manage the timing of its
income. Under the Internal Revenue Code and U.S. Treasury regulations, the
Fund may have to accrue income on defaulted securities and distribute the
income to shareholders for tax purposes, even though the Fund is not
currently receiving interest or principal payments on the defaulted
securities. To generate cash to satisfy these distribution requirements, the
Fund may have to sell portfolio securities that it otherwise may have
continued to hold or use cash flows from other sources, such as the sale of
Fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse
impact on market price of a security and on the Fund's ability to sell a
security in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer, or if necessary to meet the Fund's
liquidity needs. Reduced liquidity may also make it more difficult to obtain
market quotations based on actual trades for purposes of valuing the Fund's
portfolio.
The Fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry
restrictions on resale. While many high yielding securities have been sold
with registration rights, covenants and penalty provisions for delayed
registration, if the Fund is required to sell restricted securities before
the securities have been registered, it may be deemed an underwriter of the
securities under the 1933 Act, which entails special responsibilities and
liabilities. The Fund may also incur special costs in disposing of restricted
securities, although the Fund will generally not incur any costs when the
issuer is responsible for registering the securities.
The Fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. The manager will carefully review their credit and other
characteristics. The Fund has no arrangement with its underwriter or any
other person concerning the acquisition of these securities.
The high yield securities market is relatively new and much of its growth
before 1990 paralleled a long economic expansion. The recession that began in
1990 disrupted the market for high yield securities and adversely affected
the value of outstanding securities, as well as the ability of issuers of
high yield securities to make timely principal and interest payments.
Although the economy has improved and high yield securities have performed
more consistently since that time, the adverse effects previously experienced
may reoccur. For example, the highly publicized defaults on some high yield
securities during 1989 and 1990 and concerns about a sluggish economy that
continued into 1993 depressed the prices of many of these securities. While
market prices may be temporarily depressed due to these factors, the ultimate
price of any security generally reflects the true operating results of the
issuer. Factors adversely impacting the market value of high yield securities
may lower the Fund's net asset value.
The Fund relies on the manager's judgment, analysis and experience in
evaluating the creditworthiness of an issuer. In this evaluation, the manager
takes into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters.
The risk factors above also apply to lower-quality zero-coupon, deferred
interest and pay-in-kind securities. These securities have an additional
risk, however, because unlike securities that pay interest throughout the
time until maturity, the Fund will not receive any cash until the cash
payment date. If the issuer defaults, the Fund may not obtain any return on
its investment.
Zero-coupon or deferred interest securities are debt obligations that make no
periodic interest payments before maturity or a specified date when the
securities begin paying current interest (the cash payment date), and
therefore are generally issued and traded at a discount from their face
amount or par value. The discount varies depending on the time remaining
until maturity or the cash payment date, as well as prevailing interest
rates, liquidity of the security, and the perceived credit quality of the
issuer. The discount, in the absence of financial difficulties of the issuer,
typically decreases as the final maturity or cash payment date approaches.
The value of zero-coupon securities is generally more volatile than the value
of other fixed-income securities that pay interest periodically. Zero-coupon
securities are also likely to respond to changes in interest rates to a
greater degree than other fixed-income securities having similar maturities
and credit quality.
Current federal income tax law requires a holder of a zero-coupon security to
report as income each year the portion of original issue discount on the
security that accrues that year, even though the holder receives no cash
payments of interest during the year. Pay-in-kind securities pay interest by
issuing more bonds. The Fund is deemed to receive interest over the life of
these bonds and is treated as if the interest were paid on a current basis
for federal income tax purposes, although the Fund does not receive any cash
interest payments until maturity or the cash payment date. Accordingly,
during times when the Fund does not receive any cash interest payments on its
zero-coupon, deferred interest or pay-in-kind securities, it may have to sell
portfolio securities to meet distribution requirements and these sales may be
subject to the risk factors discussed above. The Fund is not limited in the
amount of its assets that may be invested in these types of securities.
CREDIT RISK Credit risk is the possibility that an issuer will be unable to
make interest payments and repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect a security's value and,
thus, impact Fund performance.
INTEREST RATE RISK To the extent the Fund invests in debt securities, changes
in interest rates in any country where the Fund is invested will affect the
value of the Fund's portfolio and its share price. When interest rates rise,
debt security prices fall. The opposite is also true: debt security prices
rise when interest rates fall. In general, securities with longer maturities
usually are more sensitive to interest rate changes than securities with
shorter maturities. Rising interest rates, which often occur during times of
inflation or a growing economy, are likely to have a negative effect on the
value of the Fund's shares. Of course, interest rates throughout the world
have increased and decreased, sometimes very dramatically, in the past. These
changes are likely to occur again in the future at unpredictable times.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES RISK Mortgage-backed and
asset-backed securities are often subject to more rapid repayment than their
stated maturity dates would indicate because of the pass-through of
prepayments of principal on the underlying loans. During periods of declining
interest rates, prepayment of loans underlying mortgage-backed and
asset-backed securities can be expected to accelerate, and thus impair the
Fund's ability to reinvest the returns of principal at comparable yields.
Accordingly, the market value of these securities will vary with changes in
market interest rates generally and in yield differentials among various
kinds of U.S. government securities and other mortgage-backed and
asset-backed securities. Asset-backed securities present certain additional
risks that are not presented by mortgage-backed securities because
asset-backed securities generally do not have the benefit of a security
interest in collateral that is comparable to mortgage assets. There is the
possibility that, in some cases, recoveries on repossessed collateral may not
be available to support payments on these securities.
REPURCHASE AGREEMENTS RISK The use of repurchase agreements involves certain
risks. For example, if the other party to the agreement defaults on its
obligation to repurchase the underlying security at a time when the value of
the security has declined, the Fund may incur a loss upon disposition of the
security. If the other party to the agreement becomes insolvent and subject
to liquidation or reorganization under the bankruptcy code or other laws, a
court may determine that the underlying security is collateral for a loan by
the Fund not within the control of the Fund, and therefore the realization by
the Fund on the collateral may be automatically stayed. Finally, it is
possible that the Fund may not be able to substantiate its interest in the
underlying security and may be deemed an unsecured creditor of the other
party to the agreement. While the manager acknowledges these risks, it is
expected that if repurchase agreements are otherwise deemed useful to the
Fund, these risks can be controlled through careful monitoring procedures.
OPTIONS, FUTURES AND OPTIONS ON FUTURES RISK The Fund's ability to hedge
effectively all or a portion of its securities through transactions in
options on stock indices, financial futures and related options depends on
the degree to which price movements in the underlying index or underlying
securities correlate with price movements in the relevant portion of the
Fund's portfolio. Inasmuch as these securities will not duplicate the
components of the index or such underlying securities, the correlation will
not be perfect. Consequently, the Fund bears the risk that the prices of the
securities being hedged will not move in the same amount as the hedging
instrument. It is also possible that there may be a negative correlation
between the index or other securities underlying the hedging instrument and
the hedged securities that would result in a loss on both such securities and
the hedging instrument. Accordingly, successful use by the Fund of options on
stock indices, financial futures and other options will be subject to the
manager's ability to predict correctly movements in the direction of the
securities markets generally or in a particular segment. This requires
different skills and techniques than predicting changes in the price of
individual stocks.
When the Fund writes (sells) covered call options, it will receive a cash
premium that can be used in whatever way the manager believes is most
beneficial to the Fund. The risks associated with covered option writing are
that in the event of a price increase on the underlying security that would
likely trigger the exercise of the call option, the Fund will not participate
in the increase in price beyond the exercise price. It will generally be the
Fund's policy, in order to avoid the exercise of a call option written by it,
to cancel its obligation under the call option by entering into a "closing
purchase transaction," if available, unless it is determined to be in the
Fund's interest to deliver the underlying securities from its portfolio. A
closing purchase transaction consists of the Fund buying an option having the
same terms as the option written by the Fund, and has the effect of canceling
the Fund's position as the writer of the option. The premium that the Fund
will pay in executing a closing purchase transaction may be higher or lower
than the premium it received when writing the option, depending in large part
upon the relative price of the underlying security at the time of each
transaction.
One risk involved in both buying and selling options is that the Fund may not
be able to effect a closing purchase transaction at a time when it wishes to
do so or at an advantageous price. There is no assurance that a liquid market
will exist for a given contract or option at any particular time. To mitigate
this risk, the Fund will ordinarily buy and write options only if a secondary
market for the option exists on a national securities exchange or in the
over-the-counter market. Another risk is that during the option period, if
the Fund has written a covered call option, it will have given up the
opportunity to profit from a price increase in the underlying securities
above the exercise price in return for the premium on the option (although,
of course, the premium can be used to offset any losses or add to the Fund's
income) but, as long as its obligation as a writer of such an option
continues, the Fund will have retained the risk of loss should the price of
the underlying security decline. In addition, the Fund has no control over
the time when it may be required to fulfill its obligation as a writer of the
option. Once the Fund has received an exercise notice, it cannot effect a
closing transaction in order to terminate its obligation under the option and
must deliver the underlying securities at the exercise price. The aggregate
premiums paid on all such options that are held at any time will not exceed
20% of the Fund's total assets.
OTC options may be subject to more risks than exchange-traded options because
OTC options are arranged with dealers, not with a clearing corporation, and
because pricing of OTC options is typically done by reference to information
from market makers. There can be no assurance that a continuous liquid
secondary market will exist for any particular OTC option at any specific
time. Consequently, the Fund may be able to realize the value of an OTC
option it has purchased only by exercising it or entering into a closing sale
transaction with the dealer that issued it. Similarly, when the Fund writes
an OTC option, it generally can close out that option prior to its expiration
only by entering into a closing purchase transaction with the dealer to which
the Fund originally wrote it. If a covered call option writer cannot effect a
closing transaction, it cannot sell the underlying security until the option
expires or the option is exercised. Therefore, a covered call option writer
of an OTC option may not be able to sell an underlying security even though
it might otherwise be advantageous to do so. Likewise, a secured put writer
of an OTC option may be unable to sell the securities pledged to secure the
put for other investment purposes while it is obligated as a put writer.
Similarly, a purchaser of such put or call option might also find it
difficult to terminate its position on a timely basis in the absence of a
secondary market.
The CFTC and the various exchanges have established limits, referred to as
"speculative position limits," on the maximum net long or net short position
which any person may hold or control in a particular futures contract.
Trading limits are imposed on the maximum number of contracts which any
person may trade on a particular trading day. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The Fund does not believe that these
trading and positions limits will have an adverse impact on the Fund's
strategies for hedging its securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced, thus producing distortion.
Third, from the point of view of speculators, the margin deposit requirements
in the futures market are less onerous than margin requirements in the
securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility
of distortion, a correct forecast of general interest rate trends by the
manager may still not result in a successful transaction.
In addition, futures contracts entail risks. Although the Fund believes that
use of such contracts will benefit the Fund, if the manager's judgment about
the general direction of interest rates is incorrect, the Fund's overall
performance would be poorer than if it had not entered into any such
contract. For example, if the Fund has hedged against the possibility of an
increase in interest rates that would adversely affect the price of bonds
held in its portfolio and interest rates decrease instead, the Fund will lose
part or all of the benefit of the increased value of its bonds which it has
hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Fund has insufficient cash, it may have
to sell securities from its portfolio to meet daily variation margin
requirements. Such sales may be, but will not necessarily be, at increased
prices which reflect the rising market. The Fund may have to sell securities
at a time when it may be disadvantageous to do so.
The Fund's sale of futures contracts and purchase of put options on futures
contracts will be solely to protect its investments against declines in
value. The Fund expects that in the normal course it will purchase securities
upon termination of long futures contracts and long call options on future
contracts, but under unusual market conditions it may terminate any of such
positions without a corresponding purchase of securities.
RESTRICTED SECURITIES RISK The board of trustees has authorized the Fund to
invest in restricted securities and to consider them liquid (and thus not
subject to the 15% limitation on illiquid securities) to the extent the
manager determines that there is a liquid institutional or other market for
these securities. For example, restricted securities may be freely
transferred among qualified institutional buyers under Rule 144A of the 1933
Act, and in some cases a liquid institutional market has developed.
On an ongoing basis, the board of trustees will review
the manager's decisions to treat restricted securities as liquid - including
the manager's assessment of current trading activity and the availability of
reliable price information. In determining whether a restricted security can
be considered liquid, the manager and the board of trustees will take into
account such factors as: (i) the frequency of trades and quotes for the
security, (ii) the number of dealers willing to buy or sell the security and
the number of potential buyers, (iii) dealer undertakings to make a market in
the security, and (iv) the nature of the security and nature of the
marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer). To the extent
the Fund invests in restricted securities that are deemed to be liquid, the
general level of illiquidity in the Fund may be increased if qualified
institutional buyers become uninterested in buying these securities or the
market for these securities contracts.
OFFICERS AND TRUSTEES
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The Trust has a board of trustees. The board is responsible for the overall
management of the Trust, including general supervision and review of the
Fund's investment activities. The board, in turn, elects the officers of the
Trust who are responsible for administering the Trust's day-to-day
operations. The board also monitors the Fund to ensure no material conflicts
exist among share classes. While none is expected, the board will act
appropriately to resolve any material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the Trust, and principal occupations during
the past five years are shown below.
Frank T. Crohn (76)
180 Morton Road, Rhinebeck, NY 12572-2530
TRUSTEE
Chairman, Eastport Lobster & Fish Company; Director, Unity Mutual Life
Insurance Company; trustee of two of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman, Financial Benefit Life
Insurance Company (until 1996) and Director, AmVestors Financial Corporation
(until 1997).
*William J. Lippman (75)
One Parker Plaza, 9th Floor, Fort Lee, NJ 07024
PRESIDENT, CHIEF EXECUTIVE OFFICER AND TRUSTEE
Senior Vice President, Franklin Resources, Inc. and Franklin Management,
Inc.; President, Franklin Advisory Services, LLC; and officer and/or director
or trustee, as the case may be, of six of the investment companies in the
Franklin Templeton Group of Funds.
Charles Rubens II (70)
18 Park Road, Scarsdale, NY 10583-2112
TRUSTEE
Private investor; and trustee or director, as the case may be, of three of
the investment companies in the Franklin Templeton Group of Funds.
Leonard Rubin (74)
2460 Lemoine Ave., 3rd Floor, Fort Lee, NJ 07024
TRUSTEE
Partner in LDR Equities, LLC (manages various personal investments); Vice
President, Trimtex Co., Inc. (manufactures and markets specialty fabrics);
director or trustee, as the case may be, of three of the investment companies
in the Franklin Templeton Group of Funds; and FORMERLY, Chairman of the
Board, Carolace Embroidery Co., Inc. (until 1996) and President, F.N.C.
Textiles, Inc.
Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Executive Vice President and Director, Franklin Templeton
Distributors, Inc. and Franklin Templeton Services, Inc.; Executive Vice
President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory
Services, Inc. and Franklin/Templeton Investor Services, Inc.; and officer
and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 52 of the investment
companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
President, Member - Office of the President, Chief Financial Officer and
Chief Operating Officer, Franklin Resources, Inc.; Senior Vice President,
Chief Financial Officer and Director, Franklin/Templeton Investor Services,
Inc.; Senior Vice President and Chief Financial Officer, Franklin Mutual
Advisers, LLC; Executive Vice President, Chief Financial Officer and
Director, Templeton Worldwide, Inc.; Executive Vice President, Chief
Operating Officer and Director, Templeton Investment Counsel, Inc.; Executive
Vice President and Chief Financial Officer, Franklin Advisers, Inc.; Chief
Financial Officer, Franklin Advisory Services, LLC and Franklin Investment
Advisory Services, Inc.; Director, Franklin Templeton Services, Inc.; officer
and/or director of some of the other subsidiaries of Franklin Resources,
Inc.; and officer and/or director or trustee, as the case may be, of 52 of
the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (51)
1840 Gateway Drive, San Mateo, CA 94404
SECRETARY
Partner, Stradley, Ronon, Stevens & Young, LLP; officer of 34 of the
investment companies in the Franklin Templeton Group of Funds; and formerly,
Senior Vice President and General Counsel, Franklin Resources, Inc., Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc., Executive Vice President, Franklin Advisers, Inc., Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC,
and Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc. (until January 2000).
David P. Goss (53)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Chief Executive Officer and Director, Franklin Select Realty
Trust, Property Resources, Inc., Property Resources Equity Trust, Franklin
Real Estate Management, Inc. and Franklin Properties, Inc.; officer and
director of some of the other subsidiaries of Franklin Resources, Inc.;
officer of 53 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, President, Chief Executive Officer and Director,
Franklin Real Estate Income Fund and Franklin Advantage Real Estate Income
Fund (until 1996).
Barbara J. Green (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior
Vice President, Templeton Worldwide, Inc. and Templeton Global Investors,
Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc.
and of 53 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Deputy Director, Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman, Counselor to the
Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986-1995), Attorney, Rogers & Wells (until 1986), and Judicial
Clerk, U.S. District Court (District of Massachusetts) (until 1979).
Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Executive Vice President and Director, Franklin Templeton
Distributors, Inc.; Director, Franklin Advisers, Inc., Franklin Investment
Advisory Services, Inc. and Franklin/Templeton Investor Services, Inc.;
Senior Vice President, Franklin Advisory Services, LLC; and officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 52 of the investment companies in the
Franklin Templeton Group of Funds.
Edward V. McVey (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President, Franklin Templeton Distributors, Inc.; officer of one
of the subsidiaries of Franklin Resources, Inc. and officer of 29 of the
investment companies in the Franklin Templeton Group of Funds.
Kimberley Monasterio (36)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Vice President, Franklin Templeton Services, Inc.; and officer of 33 of the
investment companies in the Franklin Templeton Group of Funds.
Murray L. Simpson (62)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President
Executive Vice President and General Counsel, Franklin Resources, Inc.;
officer and/or director of some of the subsidiaries of Franklin Resources,
Inc.; officer of 53 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Chief Executive Officer and Managing Director,
Templeton Franklin Investment Services (Asia) Limited (until January 2000)
and Director, Templeton Asset Management Ltd. (until 1999).
R. Martin Wiskemann (73)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President, Portfolio Manager and Director, Franklin Advisers,
Inc.; Senior Vice President, Franklin Management, Inc.; and officer and/or
director or trustee, as the case may be, of 15 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Vice President and
Director, ILA Financial Services, Inc. (until 1998).
*This board member is considered an "interested person" under federal
securities laws.
The Trust pays noninterested board members $3,550 per quarter plus $3,200 per
meeting attended. Noninterested board members also may serve as directors or
trustees
of other funds in the Franklin Templeton Group of Funds and may receive fees
from these funds for their services. The following table provides the total
fees paid to noninterested board members by the Trust and by the Franklin
Templeton Group of Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM GROUP ON WHICH
TRUST1 ($) OF FUNDS2 ($) EACH SERVES3
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Frank T. Crohn 17,911 31,950 2
Charles Rubens II 17,911 88,950 3
Leonard Rubin 17,911 88,950 3
1. For the fiscal year ended October 31, 1999.
2. For the calendar year ended December 31, 1999.
3. We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the board members are responsible. The Franklin Templeton Group of
Funds currently includes 52 registered investment companies, with
approximately 157 U.S. based funds or series.
Noninterested board members are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
Fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or board members who are shareholders of Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED The Fund's manager is Franklin Advisory
Services, LLC. The manager is an indirect, wholly owned subsidiary of
Franklin Resources, Inc. (Resources), a publicly owned company engaged in the
financial services industry through its subsidiaries. Charles B. Johnson and
Rupert H. Johnson, Jr. are the principal shareholders of Resources.
The manager provides investment research and portfolio management services,
and selects the securities for the Fund to buy, hold or sell. The manager
also selects the brokers who execute the Fund's portfolio transactions. The
manager provides periodic reports to the board, which reviews and supervises
the manager's investment activities. To protect the Fund, the manager and its
officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of
the other funds it manages, or for its own account, that may differ from
action taken by the manager on behalf of the Fund. Similarly, with respect to
the Fund, the manager is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that the manager
and access persons, as defined by applicable federal securities laws, may buy
or sell for its or their own account or for the accounts of any other fund.
The manager is not obligated to refrain from investing in securities held by
the Fund or other funds it manages.
The Fund, its manager and principal underwriter have each adopted a code of
ethics, as required by federal securities laws. Under the code of ethics,
employees who are designated as access persons may engage in personal
securities transactions, including transactions involving securities that are
being considered for the Fund or that are currently held by the Fund, subject
to certain general restrictions and procedures. The personal securities
transactions of access persons of the Fund, its manager and principal
underwriter will be governed by the code of ethics. The code of ethics is on
file with, and available from, the SEC.
MANAGEMENT FEES The Fund pays the manager a fee equal to an annual rate of:
o 0.550% of the value of net assets up to and including $500 million;
o 0.450% of the value of net assets over $500 million up to and including
$1 billion;
o 0.400% of the value of net assets over $1 billion up to and including
$1.5 billion;
o 0.350% of the value of net assets over $1.5 billion up to and including
$6.5 billion;
o 0.325% of the value of net assets over $6.5 billion up to and including
$11.5 billion;
o 0.300% of the value of net assets over $11.5 billion up to and including
$16.5 billion;
o 0.290% of the value of net assets over $16.5 billion up to and including
$19 billion;
o 0.280% of the value of net assets over $19 billion up to and including
$21.5 billion; and
o 0.270% of the value of net assets over $21.5 billion.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of the
Fund's shares pays its proportionate share of the fee.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the Fund to provide certain administrative
services and facilities for the Fund. FT Services is wholly owned by
Resources and is an affiliate of the Fund's manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The Fund pays FT Services a monthly fee equal to an
annual rate of 0.20% of the Fund's average daily net assets.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is the Fund's shareholder servicing agent
and acts as the Fund's transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please
send all correspondence to Investor Services to P.O. Box 997151, Sacramento,
CA 95899-9983.
For its services, Investor Services receives a fixed fee per account. The
Fund also will reimburse Investor Services for certain out-of-pocket
expenses, which may include payments by Investor Services to entities,
including affiliated entities, that provide sub-shareholder services,
recordkeeping and/or transfer agency services to beneficial owners of the
Fund. The amount of reimbursements for these services per benefit plan
participant Fund account per year will not exceed the per account fee payable
by the Fund to Investor Services in connection with maintaining shareholder
accounts.
CUSTODIAN Bank of New York, Mutual Funds Division,
90 Washington Street, New York, NY 10286, acts as custodian of the Fund's
securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the Fund's independent auditor. The auditor gives an opinion on the
financial statements included in the Trust's Annual Report to Shareholders
and reviews the Trust's registration statement filed with the U.S. Securities
and Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
-------------------------------------------------------------------------------
The manager selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management
agreement and any directions that the board may give.
When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid is
negotiated between the manager and the broker executing the transaction. The
determination and evaluation of the reasonableness of the brokerage
commissions paid are based to a large degree on the professional opinions of
the persons responsible for placement and review of the transactions. These
opinions are based on the experience of these individuals in the securities
industry and information available to them about the level of commissions
being paid by other institutional investors of comparable size. The manager
will ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in
the opinion of the manager, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or the manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the manager include, among others, supplying
information about particular companies, markets, countries, or local,
regional, national or transnational economies, statistical data, quotations
and other securities pricing information, and other information that provides
lawful and appropriate assistance to the manager in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the Fund. They must, however, be of value to the manager in carrying
out its overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on
the research services the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions to
obtain additional research services allows the manager to supplement its own
research and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, the manager and its affiliates may use this
research and data in their investment advisory capacities with other clients.
If the Fund's officers are satisfied that the best execution is obtained, the
sale of Fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, also may be considered a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of
the National Association of Securities Dealers, Inc., it may sometimes
receive certain fees when the Fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the
Fund, any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next
management fee payable to the manager will be reduced by the amount of any
fees received by Distributors in cash, less any costs and expenses incurred
in connection with the tender.
If purchases or sales of securities of the Fund and one or more other
investment companies or clients supervised by the manager are considered at
or about the same time, transactions in these securities will be allocated
among the several investment companies and clients in a manner deemed
equitable to all by the manager, taking into account the respective sizes of
the funds and the amount of securities to be purchased or sold. In some cases
this procedure could have a detrimental effect on the price or volume of the
security so far as the Fund is concerned. In other cases it is possible that
the ability to participate in volume transactions may improve execution and
reduce transaction costs to the Fund.
Because the Fund may, from time to time, invest in broker-dealers, it is
possible that the Fund will own more than 5% of the voting securities of one
or more broker-dealers through whom the Fund places portfolio brokerage
transactions. In such circumstances, the broker-dealer would be considered an
affiliated person of the Fund. To the extent the Fund places brokerage
transactions through such a broker-dealer at a time when the broker-dealer is
considered to be an affiliate of the Fund, the Fund will be required to
adhere to certain rules relating to the payment of commissions to an
affiliated broker-dealer. These rules require the Fund to adhere to
procedures adopted by the board relating to ensuring that the commissions
paid to such broker-dealers do not exceed what would otherwise be the usual
and customary brokerage commissions for similar transactions.
DISTRIBUTIONS AND TAXES
-------------------------------------------------------------------------------
The Fund calculates dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally
due to the difference in the distribution and service (Rule 12b-1) fees of
each class. Distributions are subject to approval by the board. The Fund does
not pay "interest" or guarantee any fixed rate of return on an investment in
its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The Fund receives income generally in
the form of dividends and interest on its investments. This income, less
expenses incurred in the operation of the Fund, constitutes the Fund's net
investment income from which dividends may be paid to you. Any distributions
by the Fund from such income will be taxable to you as ordinary income,
whether you receive them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The Fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the Fund. Any net capital gains realized by the Fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, to reduce or eliminate excise or income taxes on
the Fund.
Beginning in the year 2001 for shareholders in the 15% federal income tax
bracket (or in the year 2006 for shareholders in the 28% or higher bracket),
capital gains distributions from the Fund's sale of securities held for more
than five years may be subject to a reduced tax rate.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
Fund. Similarly, foreign exchange losses realized on the sale of debt
securities generally are treated as ordinary losses. These gains when
distributed will be taxable to you as ordinary income, and any losses will
reduce the Fund's ordinary income otherwise available for distribution to
you. This treatment could increase or decrease the Fund's ordinary income
distributions to you, and may cause some or all of the Fund's previously
distributed income to be classified as a return of capital.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The Fund will inform you of
the amount of your ordinary income dividends and capital gains distributions
at the time they are paid, and will advise you of their tax status for
federal income tax purposes shortly after the close of each calendar year. If
you have not held Fund shares for a full year, the Fund may designate and
distribute to you, as ordinary income or capital gain, a percentage of income
that is not equal to the actual amount of such income earned during the
period of your investment in the Fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The Fund intends to
elect and qualify during the current fiscal year to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code. As a
regulated investment company, the Fund generally pays no federal income tax
on the income and gains it distributes to you. The board reserves the right
not to maintain the qualification of the Fund as a regulated investment
company if it determines such course of action to be beneficial to
shareholders. In such case, the Fund will be subject to federal, and possibly
state, corporate taxes on its taxable income and gains, and distributions to
you will be taxed as ordinary dividend income to the extent of the Fund's
earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires the Fund to distribute to you by December 31
of each year, at a minimum, the following amounts: 98% of its taxable
ordinary income earned during the calendar year; 98% of its capital gain net
income earned during the twelve month period ending October 31; and 100% of
any undistributed amounts from the prior year. The Fund intends to declare
and pay these distributions in December (or to pay them in January, in which
case you must treat them as received in December) but can give no assurances
that its distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions (including redemptions in kind) and
exchanges of Fund shares are taxable transactions for federal and state
income tax purposes. If you redeem your Fund shares, or exchange your Fund
shares for shares of a different Franklin Templeton Fund, the IRS will
require that you report any gain or loss on your redemption or exchange. If
you hold your shares as a capital asset, the gain or loss that you realize
will be capital gain or loss and will be long-term or short-term, generally
depending on how long you hold your shares.
Beginning in the year 2001 for shareholders in the 15% federal income tax
bracket (or in the year 2006 for shareholders in the 28% or higher bracket),
gains from the sale of Fund shares held for more than five years may be
subject to a reduced tax rate.
Any loss incurred on the redemption or exchange of shares held for six months
or less will be treated as a long-term capital loss to the extent of any
long-term capital gains distributed to you by the Fund on those shares. All
or a portion of any loss that you realize upon the redemption of your Fund
shares will be disallowed to the extent that you buy other shares in the Fund
(through reinvestment of dividends or otherwise) within 30 days before or
after your share redemption. Any loss disallowed under these rules will be
added to your tax basis in the new shares you buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in the Fund, and
then reinvest the sales proceeds in the Fund or in another Franklin Templeton
Fund within 90 days of buying the original shares, the sales charge that
would otherwise apply to your reinvestment may be reduced or eliminated. The
IRS will require you to report any gain or loss on the redemption of your
original shares in the Fund. In doing so, all or a portion of the sales
charge that you paid for your original shares in the Fund will be excluded
from your tax basis in the shares sold (for the purpose of determining gain
or loss upon the sale of such shares). The portion of the sales charge
excluded will equal the amount that the sales charge is reduced on your
reinvestment. Any portion of the sales charge excluded from your tax basis in
the shares sold will be added to the tax basis of the shares you acquire from
your reinvestment.
U.S. GOVERNMENT SECURITIES States grant tax-free status to dividends paid to
you from interest earned on certain U.S. government securities, subject in
some states to minimum investment or reporting requirements that must be met
by the Fund. Investments in Government National Mortgage Association or
Federal National Mortgage Association securities, bankers' acceptances,
commercial paper and repurchase agreements collateralized by U.S. government
securities generally do not qualify for tax-free treatment. The rules on
exclusion of this income are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that the Fund anticipated that a portion of the
dividends it may pay will qualify for the dividends-received deduction. You
may be allowed to deduct these qualified dividends, thereby reducing the tax
that you would otherwise be required to pay on these dividends. The
dividends-received deduction will be available only with respect to dividends
designated by the Fund as eligible for such treatment. All dividends
(including the deducted portion) must be included in your alternative minimum
taxable income calculation.
INVESTMENT IN COMPLEX SECURITIES The Fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the Fund are
treated as ordinary income or capital gain, accelerate the recognition of
income to the Fund (possibly causing the Fund to sell securities to raise the
cash for necessary distributions) and/or defer the Fund's ability to
recognize losses, and, in limited cases, subject the Fund to U.S. federal
income tax on income from certain foreign securities. These rules may affect
the amount, timing or character of the income distributed to you by the Fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
-------------------------------------------------------------------------------
The Fund is a series of Franklin Value Investors Trust, an open-end
management investment company, commonly called a mutual fund. The Trust was
organized as a Massachusetts business trust on September 11, 1989, and is
registered with the SEC.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations.
The Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the Fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the Fund's assets if you are held personally liable for
obligations of the Fund. The Declaration of Trust provides that the Fund
shall, upon request, assume the defense of any claim made against you for any
act or obligation of the Fund and satisfy any judgment thereon. All such
rights are limited to the assets of the Fund. The Declaration of Trust
further provides that the Fund may maintain appropriate insurance (for
example, fidelity bonding and errors and omissions insurance) for the
protection of the Fund, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. Furthermore, the
activities of the Fund as an investment company, as distinguished from an
operating company, would not likely give rise to liabilities in excess of the
Fund's total assets. Thus, the risk that you would incur financial loss on
account of shareholder liability is limited to the unlikely circumstance in
which both inadequate insurance exists and the Fund itself is unable to meet
its obligations.
The Fund currently offers three classes of shares, Class A, Class B and Class
C. The Fund may offer additional classes of shares in the future. The full
title of each class is:
o Franklin Large Cap Value Fund - Class A
o Franklin Large Cap Value Fund - Class B
o Franklin Large Cap Value Fund - Class C
Shares of each class represent proportionate interests in the Fund's assets.
On matters that affect the Fund as a whole, each class has the same voting
and other rights and preferences as any other class. On matters that affect
only one class, only shareholders of that class may vote. Each class votes
separately on matters affecting only that class, or expressly required to be
voted on separately by state or federal law. Shares of each class of a series
have the same voting and other rights and preferences as the other classes
and series of the Trust for matters that affect the Trust as a whole.
Additional series may be offered in the future.
The Trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all
of the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are
required to help you communicate with other shareholders about the removal of
a board member. A special meeting also may be called by the board in its
discretion.
As of June 1, 2000, the principal shareholders of the Fund, beneficial or of
record, were:
NAME AND ADDRESS SHARE CLASS PERCENTAGE (%)
------------------------------------------------------------------
Franklin Resources, Inc. 1
Corporate Accounting
Attn: Michael Corcoran
555 Airport Blvd., 4th Flr.
Burlingame, CA 94010 Class A 100
Franklin Resources, Inc. 1
Corporate Accounting
Attn: Michael Corcoran
555 Airport Blvd., 4th Flr.
Burlingame, CA 94010 Class B 100
Franklin Resources, Inc. 1
Corporate Accounting
Attn: Michael Corcoran
555 Airport Blvd., 4th Flr.
Burlingame, CA 94010 Class C 100
1. Franklin Resources, Inc. is a Delaware Corporation.
Note: Charles B. Johnson and Rupert H. Johnson, Jr., who are officers and/or
trustees of the Trust, may be considered beneficial holders of the Fund
shares held by Franklin Resources, Inc. (Resources). As principal
shareholders of Resources, they may be able to control the voting of
Resources' shares of the Fund.
From time to time, the number of Fund shares held in the "street name"
accounts of various securities dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding.
As of June 1, 2000, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each class.
The board members may own shares in other funds in the Franklin Templeton
Group of Funds.
BUYING AND SELLING SHARES
-------------------------------------------------------------------------------
The Fund continuously offers its shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer
orders and accounts with the Fund. This reference is for convenience only and
does not indicate a legal conclusion of capacity. Banks and financial
institutions that sell shares of the Fund may be required by state law to
register as securities dealers.
For investors outside the U.S., the offering of Fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the Fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the Fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank. We may deduct any applicable banking
charges imposed by the bank from your account.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the Fund we may impose a $10 charge against your account for each returned
item.
If you buy shares through the reinvestment of dividends, the shares will be
purchased at the net asset value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The
processing date for the reinvestment of dividends may vary and does not
affect the amount or value of the shares acquired.
Initial sales charges The maximum initial sales charge is 5.75% for Class A
and 1% for Class C. There is no initial sales charge for Class B.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of
the lower sales charges for large purchases. The Franklin Templeton Funds
include the U.S. registered mutual funds in the Franklin Group of Funds(R) and
the Templeton Group of Funds except Franklin Templeton Variable Insurance
Products Trust, and Templeton Capital Accumulator Fund, Inc.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares
in the Franklin Templeton Funds. You also may combine the shares of your
spouse, children under the age of 21 or grandchildren under the age of 21. If
you are the sole owner of a company, you also may add any company accounts,
including retirement plan accounts. Companies with one or more retirement
plans may add together the total plan assets invested in the Franklin
Templeton Funds to determine the sales charge that applies.
LETTER OF INTENT (LOI). You may buy Class A shares at a reduced sales charge
by completing the letter of intent section of your account application. A
letter of intent is a commitment by you to invest a specified dollar amount
during a 13 month period. The amount you agree to invest determines the sales
charge you pay. By completing the letter of intent section of the
application, you acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase
in Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the Fund, you may buy Class A shares at the
sales charge applicable to the amount specified in your LOI. Sales charge
reductions based on purchases in more than one Franklin Templeton Fund will
be effective only after notification to Distributors that the investment
qualifies for a discount. Any Class A purchases you made within 90 days
before you filed your LOI also may qualify for a retroactive reduction in the
sales charge. If you file your LOI with the Fund before a change in the
Fund's sales charge, you may complete the LOI at the lower of the new sales
charge or the sales charge in effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days
before you filed your LOI will be counted towards the completion of the LOI,
but they will not be entitled to a retroactive reduction in the sales charge.
Any redemptions you make during the 13 month period, except in the case of
certain retirement plans, will be subtracted from the amount of the purchases
for purposes of determining whether the terms of the LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of
your total purchases, less redemptions, is more than the amount specified in
your LOI and is an amount that would qualify for a further sales charge
reduction, a retroactive price adjustment will be made by Distributors and
the securities dealer through whom purchases were made. The price adjustment
will be made on purchases made within 90 days before and on those made after
you filed your LOI and will be applied towards the purchase of additional
shares at the offering price applicable to a single purchase or the dollar
amount of the total purchases.
If the amount of your total purchases, less redemptions, is less than the
amount specified in your LOI, the sales charge will be adjusted upward,
depending on the actual amount purchased (less redemptions) during the
period. You will need to send Distributors an amount equal to the difference
in the actual dollar amount of sales charge paid and the amount of sales
charge that would have applied to the total purchases if the total of the
purchases had been made at one time. Upon payment of this amount, the
reserved shares held for your account will be deposited to an account in your
name or delivered to you or as you direct. If within 20 days after written
request the difference in sales charge is not paid, we will redeem an
appropriate number of reserved shares to realize the difference. If you
redeem the total amount in your account before you fulfill your LOI, we will
deduct the additional sales charge due from the sale proceeds and forward the
balance to you.
For LOIs filed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the LOI. These plans are not subject to the requirement to reserve 5%
of the total intended purchase or to the policy on upward adjustments in
sales charges described above, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class
A shares at a reduced sales charge that applies to the group as a whole. The
sales charge is based on the combined dollar value of the group members'
existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
A qualified group generally does not include a 403(b) plan that only allows
salary deferral contributions, although any such plan that purchased the
Fund's Class A shares at a reduced sales charge under the group purchase
privilege before February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be
purchased without an initial sales charge or contingent deferred sales charge
(CDSC) by investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton
Fund. The distributions generally must be reinvested in the same share
class. Certain exceptions apply, however, to Advisor Class or Class Z
shareholders of a Franklin Templeton Fund who may reinvest their
distributions in the Fund's Class A shares. This waiver category also
applies to Class B and C shares.
o Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option
the Franklin Templeton Variable Insurance Products Trust. You should
contact your tax advisor for information on any tax consequences that may
apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating
Rate Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or a
Franklin Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date the CD matures,
including any rollover, or the date you redeem your money fund shares.
o Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of Fund shares
and the CDSC holding period will begin again. We will, however, credit your
Fund account with additional shares based on the CDSC you previously paid and
the amount of the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in
a Franklin Templeton money fund, you may reinvest them as described above.
The proceeds must be reinvested within 365 days from the date they are
redeemed from the money fund.
o Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without
an initial sales charge or CDSC by various individuals and institutions due
to anticipated economies in sales efforts and expenses, including:
o Trust companies and bank trust departments investing 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 may accept orders for these accounts by telephone
or other means of electronic data transfer directly from the bank or trust
company, with payment by federal funds received by the close of business on
the next business day following the order.
o Any state or local government or any instrumentality, department,
authority or agency thereof that has determined the Fund is a legally
permissible investment and that can only buy Fund shares without paying
sales charges. Please consult your legal and investment advisors to
determine if an investment in the Fund is permissible and suitable for you
and the effect, if any, of payments by the Fund on arbitrage rebate
calculations.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
o Any investor who is currently a Class Z shareholder of Franklin Mutual
Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31,
1996, or who sold his or her shares of Mutual Series Class Z within the
past 365 days
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting
distributions from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under
"Retirement plans" below
In addition, Class C shares may be purchased without
an initial sales charge by any investor who buys Class C shares through an
omnibus account with Merrill Lynch Pierce Fenner & Smith, Inc. A CDSC may
apply, however, if the shares are sold within 18 months of purchase.
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without an initial sales
charge. Retirement plans that are not qualified retirement plans (employer
sponsored pension or profit-sharing plans that qualify under section 401 of
the Internal Revenue Code, including 401(k), money purchase pension, profit
sharing and defined benefit plans), SIMPLEs (savings incentive match plans
for employees) or SEPs (employer sponsored simplified employee pension plans
established under section 408(k) of the Internal Revenue Code) must also meet
the group purchase requirements described above to be able to buy Class A
shares without an initial sales charge. We may enter into a special
arrangement with a securities dealer, based on criteria established by the
Fund, to add together certain small qualified retirement plan accounts for
the purpose of meeting these requirements.
For retirement plan accounts opened on or after May 1, 1997, a CDSC may apply
if the retirement plan is transferred out of the Franklin Templeton Funds or
terminated within 365 days of the retirement plan account's initial purchase
in the Franklin Templeton Funds.
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, the Fund's shares are available to these banks' trust accounts without
a sales charge. The banks may charge service fees to their customers who
participate in the trusts. A portion of these service fees may be paid to
Distributors or one of its affiliates to help defray expenses of maintaining
a service office in Taiwan, including expenses related to local literature
fulfillment and communication facilities.
The Fund's Class A shares may be offered to investors in Taiwan through
securities advisory firms known locally
as Securities Investment Consulting Enterprises. In conformity with local
business practices in Taiwan, Class A shares may be offered with the
following schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE
(%)
-----------------------------------------------------------------
Under $30,000 3.0
$30,000 but less than $50,000 2.5
$50,000 but less than $100,000 2.0
$100,000 but less than $200,000 1.5
$200,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION Securities dealers may at times receive the entire sales
charge. A securities dealer who receives 90% or more of the sales charge may
be deemed an underwriter under the Securities Act of 1933, as amended.
Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated in the dealer compensation table
in the Fund's prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
shares of $1 million or more: 1% on sales of $1 million to $2 million, plus
0.80% on sales over $2 million to $3 million, plus 0.50% on sales over $3
million to $50 million, plus 0.25% on sales over $50 million to $100 million,
plus 0.15% on sales over $100 million.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors or one of its affiliates may pay up to 1%, out of its own
resources, to securities dealers who initiate and are responsible for
purchases of Class A shares by certain retirement plans without an initial
sales charge. These payments may be made in the form of contingent advance
payments, which may be recovered from the securities dealer or set off
against other payments due to the dealer if shares are sold within 12 months
of the calendar month of purchase. Other conditions may apply. All terms and
conditions may be imposed by an agreement between Distributors, or one of its
affiliates, and the securities dealer.
In addition to the payments above, Distributors and/or its affiliates may
provide financial support to securities dealers that sell shares of the Franklin
Templeton Group of Funds. This support is based primarily on the amount of sales
of fund shares and/or total assets with the Franklin Templeton Group of Funds.
The amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a securities dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a securities dealer's support of, and
participation in, Distributors' marketing programs; a securities dealer's
compensation programs for its registered representatives; and the extent of a
securities dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to securities dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain securities dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the rules of the National Association of Securities Dealers,
Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity
discount or letter of intent programs, a CDSC may apply on any shares you
sell within 12 months of purchase. For Class C shares, a CDSC may apply if
you sell your shares within 18 months of purchase. The CDSC is 1% of the
value of the shares sold or the net asset value at the time of purchase,
whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class A shares without an initial sales charge also may be
subject to a CDSC if the retirement plan is transferred out of the Franklin
Templeton Funds or terminated within 365 days of the account's initial
purchase in the Franklin Templeton Funds.
For Class B shares, there is a CDSC if you sell your shares within six years,
as described in the table below. The charge is based on the value of the
shares sold or the net asset value at the time of purchase, whichever is less.
IF YOU SELL YOUR CLASS B SHARES WITHIN THIS % IS DEDUCTED FROM
THIS MANY YEARS AFTER BUYING THEM YOUR PROCEEDS AS A CDSC
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
Account fees
o Sales of Class A shares purchased without an initial sales charge by
certain retirement plan accounts if (i) the account was opened before May
1, 1997, or (ii) the securities dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the securities dealer of
record has entered into a supplemental agreement with Distributors
o Redemptions of Class A shares by investors who purchased $1 million or
more without an initial sales charge if the securities dealer of record
waived its commission in connection with the purchase
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan, up to 1% monthly, 3%
quarterly, 6% semiannually or 12% annually of your account's net asset
value depending on the frequency of your pl
o Redemptions by an employee benefit plan: (i) that is a customer of
Franklin Templeton Defined Contribution Services; and/or (ii) whose assets
are held by Franklin Templeton Bank & Trust as trustee or custodian (not
applicable to Class B)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy (for
Class B, this applies to
o all retirement plan accounts, not only IRAs)
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans (not applicable to Class B)
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the Fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their Fund shares under the exchange privilege, the Fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments unless it is believed that attractive
investment opportunities consistent with the Fund's investment goal exist
immediately. This money will then be withdrawn from the short-term,
interest-bearing money market instruments and invested in portfolio securities
in as orderly a manner as is possible when attractive investment opportunities
arise.
The proceeds from the sale of shares of an investment company generally are
not available until the seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh day. The sale of Fund shares to complete an exchange will
be effected at net asset value at the close of business on the day the
request for exchange is received in proper form.
SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell
your shares and receive regular payments from your account on a monthly,
quarterly, semiannual or annual basis. The value of your account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at
least $50. For retirement plans subject to mandatory distribution
requirements, the $50 minimum will not apply. There are no service charges
for establishing or maintaining a systematic withdrawal plan.
Each month in which a payment is scheduled, we will redeem an equivalent
amount of shares in your account on the day of the month you have indicated
on your account application or, if no day is indicated, on the 20th day of
the month. If that day falls on a weekend or holiday, we will process the
redemption on the next business day.
For plans set up before June 1, 2000, we will continue to process redemptions
on the 25th day of the month (or the next business day) unless you instruct
us to change the processing date. Available processing dates currently are
the 1st, 5th, 10th, 15th, 20th and 25th days of the month. 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 also
may be subject to a CDSC.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
Fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
To discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment, we must receive instructions
from you at least three business days before a scheduled payment. The Fund
may discontinue a systematic withdrawal plan by notifying you in writing and
will discontinue a systematic withdrawal plan automatically if all shares in
your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
REDEMPTIONS IN KIND The Fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of
the value of the Fund's net assets at the beginning of the 90-day period.
This commitment is irrevocable without the prior approval of the U.S.
Securities and Exchange Commission (SEC). In the case of redemption requests
in excess of these amounts, the board reserves the right to make payments in
whole or in part in securities or other assets of the Fund, in case of an
emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the
securities to cash. The Fund does not intend to redeem illiquid securities in
kind. If this happens, however, you may not be able to recover your
investment in a timely manner.
SHARE CERTIFICATES We will credit your shares to your Fund account. We do not
issue share certificates unless you specifically request them. This
eliminates the costly problem of replacing lost, stolen or destroyed
certificates. If a certificate is lost, stolen or destroyed, you may have to
pay an insurance premium of up to 2% of the value of the certificate to
replace it.
Any outstanding share certificates must be returned to the Fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to the Fund marked
"unable to forward" by the postal service, we will consider this a request by
you to change your dividend option to reinvest all distributions. The
proceeds will be reinvested in additional shares at net asset value until we
receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the Fund nor
its affiliates will
be liable for any loss caused by your failure to cash such checks. The Fund
is not responsible for tracking down uncashed checks, unless a check is
returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to
find you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.
Sending redemption proceeds by wire or electronic funds transfer (ACH) is a
special service that we make available whenever possible. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire or ACH is not processed as described in the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay
certain financial institutions that maintain omnibus accounts with the Fund
on behalf of numerous beneficial owners for recordkeeping operations
performed with respect to such owners. For each beneficial owner
in the omnibus account, the Fund may reimburse Investor Services an amount
not to exceed the per account fee that the Fund normally pays Investor
Services. These financial institutions also may charge a fee for their
services directly to their clients.
There are special procedures for banks and other institutions that wish to
open multiple accounts. An institution may open a single master account by
filing one application form with the Fund, signed by personnel authorized to
act for the institution. Individual sub-accounts may be opened when the
master account is opened by listing them on the application, or by providing
instructions to the Fund at a later date. These sub-accounts may be
registered either by name or number. The Fund's investment minimums apply to
each sub-account. The Fund will send confirmation and account statements for
the sub-accounts to the institution.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the Fund. If you sell shares
through your securities dealer, it is your dealer's responsibility to
transmit the order to the Fund in a timely fashion. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the Fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling Fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the Fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the Fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
notice of levy.
PRICING SHARES
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When you buy shares, you pay the offering price. The offering price is the
net asset value (NAV) per share plus any applicable sales charge, calculated
to two decimal places using standard rounding criteria. When you sell shares,
you receive the NAV minus any applicable CDSC.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of
shares outstanding.
The Fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. Pacific
time). The Fund does not calculate the NAV on days the New York Stock
Exchange (NYSE) is closed for trading, which include New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the Fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the Nasdaq National Market
System, the Fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent
quoted bid and ask prices. The Fund values over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, the Fund values them according to the broadest and most
representative market as determined by the manager.
The Fund values portfolio securities underlying actively traded call options
at their market price as determined above. The current market value of any
option the Fund holds is its last sale price on the relevant exchange before
the Fund values its assets. If there are no sales that day or if the last
sale price is outside the bid and ask prices, the Fund values options within
the range of the current closing bid and ask prices if the Fund believes the
valuation fairly reflects the contract's market value.
The Fund determines the value of a foreign security as of the close of
trading on the foreign exchange on which the security is traded or as of the
close of trading on the NYSE, if that is earlier. The value is then converted
into its U.S. dollar equivalent at the foreign exchange rate in effect at
noon, New York time, on the day the value of the foreign security is
determined. If no sale is reported at that time, the foreign security is
valued within the range of the most recent quoted bid and ask prices.
Occasionally events that affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and
the close of the exchange and will, therefore, not be reflected in the
computation of the NAV. If events materially affecting the values of these
foreign securities occur during this period, the securities will be valued in
accordance with procedures established by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the NAV is determined as of such times. Occasionally, events affecting the
values of these securities may occur between the times at which they are
determined and the close of the NYSE that will not be reflected in the
computation of the NAV. If events materially affecting the values of these
securities occur during this period, the securities will be valued at their
fair value as determined in good faith by the board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the board. With the approval of
the board, the Fund may use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
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Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the Fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The Fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
Distributors may be entitled to payment under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the Fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES The board has adopted a separate plan
pursuant to Rule 12b-1 for each class. Although the plans differ in some ways
for each class, each plan is designed to benefit the Fund and its
shareholders. The plans are expected to, among other things, increase
advertising of the Fund, encourage sales of the Fund and service to its
shareholders, and increase or maintain assets of the Fund so that certain
fixed expenses may be spread over a broader asset base, resulting in lower
per share expense ratios. In addition, a positive cash flow into the Fund is
useful in managing the Fund because the manager has more flexibility in
taking advantage of new investment opportunities and handling shareholder
redemptions.
Under each plan, the Fund pays Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses also may include service fees paid to securities dealers or others
who have executed a servicing agreement with the Fund, Distributors or its
affiliates who provide service or account maintenance to shareholders
(service fees); the expenses of printing prospectuses and reports used for
sales purposes, and of preparing and distributing sales literature and
advertisements; and a prorated portion of Distributors' overhead expenses
related to these activities. Together, these expenses, including the service
fees, are "eligible expenses." The distribution and service (12b-1) fees
charged to each class are based only on the fees attributable to that
particular class.
THE CLASS A PLAN. The Fund may pay up to 0.35% per year of Class A's average
daily net assets. Of this amount, the Fund may pay up to 0.35% to
Distributors or others, out of which Distributors generally will retain 0.10%
for distribution expenses.
THE CLASS B AND C PLANS. The Fund pays Distributors up to 1% per year of the
class's average daily net assets, out of which 0.25% may be used for service
fees. The Class B and C plans also may be used to pay Distributors for
advancing commissions to securities dealers with respect to the initial sale
of Class B and C shares. Class B plan fees payable to Distributors are used
by Distributors to pay third party financing entities that have provided
financing to Distributors in connection with advancing commissions to
securities dealers.
THE CLASS A, B AND C PLANS. The Class A, B and C plans are compensation
plans. They allow the Fund to pay a
fee to Distributors that may be more than the eligible expenses Distributors
has incurred at the time of the payment. Distributors must, however,
demonstrate to the board that it has spent or has immediate plans to spend
the amount received on eligible expenses. The Fund will not pay more than the
maximum amount allowed under the plans.
In addition to the payments that Distributors or others are entitled to under
each plan, each plan also provides that to the extent the Fund, the manager
or Distributors or other parties on behalf of the Fund, the manager or
Distributors make payments that are deemed to be for the financing
of any activity primarily intended to result in the sale of Fund shares
within the context of Rule 12b-1 under the Investment Company Act of 1940, as
amended, then such payments shall be deemed to have been made pursuant to the
plan.
To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks may not participate in the plans because of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banks, however, are allowed to receive fees under the plans for
administrative servicing or for agency transactions.
Distributors must provide written reports to the board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, and furnish the board with such other information as the board
may reasonably request to enable it to make an informed determination of
whether the plans should be continued.
Each plan has been approved according to the provisions of Rule 12b-1. The
terms and provisions of each plan also are consistent with Rule 12b-1.
PERFORMANCE
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Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return quotations used by the Fund are based on the
standardized methods of computing performance mandated by the SEC.
Performance figures reflect Rule 12b-1 fees from the date of the plan's
implementation. An explanation of these and other methods used by the Fund to
compute or express performance follows. Regardless of the method used, past
performance does not guarantee future results, and is an indication of the
return to shareholders only for the limited historical period used.
Because the fund is new, it has no performance history and thus no
performance quotations have been provided.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by
finding the average annual rates of return over certain periods that would
equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes the maximum initial sales charge is deducted
from the initial $1,000 purchase, and income dividends and capital gain
distributions are reinvested at net asset value. The quotation assumes the
account was completely redeemed at the end of each period and the deduction
of all applicable charges and fees. If a change is made to the sales charge
structure, historical performance information will be restated to reflect the
maximum initial sales charge currently in effect.
When considering the average annual total return quotations for Class A and C
shares, you should keep in mind that the maximum initial sales charge
reflected in each quotation is a one time fee charged on all direct
purchases, which will have its greatest impact during the early stages of
your investment. This charge will affect actual performance less the longer
you retain your investment in the Fund.
The following SEC formula was used to calculate these figures:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial sales charge is deducted from the initial
$1,000 purchase, income dividends and capital gain distributions are
reinvested at net asset value, the account was completely redeemed at the end
of each period and the deduction of all applicable charges and fees.
Cumulative total return, however, is based on the actual return for a
specified period rather than on the average return over the periods that are
indicated in an average annual return figure.
VOLATILITY Occasionally statistics may be used to show the Fund's volatility
or risk. Measures of volatility or risk are generally used to compare the
Fund's net asset value or performance to a market index. One measure of
volatility is beta. Beta is the volatility of a fund relative to the total
market, as represented by an index considered representative of the types of
securities in which the fund invests. A beta of more than 1.00 indicates
volatility greater than the market and a beta of less than 1.00 indicates
volatility less than the market. Another measure of volatility or risk is
standard deviation. Standard deviation is used to measure variability of net
asset value or total return around an average over a specified period of
time. The idea is that greater volatility means greater risk undertaken in
achieving performance.
OTHER PERFORMANCE QUOTATIONS The Fund also may quote the performance of
shares without a sales charge. Sales literature and advertising may quote a
cumulative total return, average annual total return and other measures of
performance with the substitution of net asset value for the public offering
price.
Sales literature referring to the use of the Fund as a potential investment
for IRAs, business retirement plans, and other tax-advantaged retirement
plans may quote a total return based upon compounding of dividends on which
it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. is the parent
company of the advisors and underwriter of the Franklin Templeton Group of
Funds.
COMPARISONS To help you better evaluate how an investment in the Fund may
satisfy your investment goal, advertisements and other materials about the
Fund may discuss certain measures of Fund performance as reported by various
financial publications. Materials also may compare performance (as calculated
above) to performance as reported by other investments, indices, and
averages. These comparisons may include, but are not limited to, the
following examples:
o Dow Jones(R) Composite Average and its component averages - a
price-weighted average of 65 stocks that trade on the New York Stock
Exchange. The average is a combination of the Dow Jones Industrial Average
(30 blue-chip stocks that are generally leaders in their industry), the Dow
Jones Transportation Average (20 transportation stocks), and the Dow Jones
Utilities Average (15 utility stocks involved in the production
of electrical energy).
o Russell 1000 Index - Published by Frank Russell Company, the index
measures the performance of the 1,000 largest companies in the Russell 3000
Index. The Russell 3000 contains the 3,000 largest companies incorporated
in the U.S. and its territories.
o Russell 1000 Value Index - The index measures the performance of those
Russell 1000 companies with lower price-to-book ratios and lower forecasted
growth values.
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries.
o The New York Stock Exchange composite or component indices - an
unmanaged index of all industrial, utilities, transportation, and finance
stocks listed on the NYSE.
o Wilshire 5000 Equity Index - represents the return on the market value
of all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes
price, yield, risk, and total return for mutual funds.
o Financial publications: The Wall Street Journal, and Business Week,
Changing Times, Financial World, Forbes, Fortune, and Money magazines -
provide performance statistics over specified time periods.
o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J.P. Morgan(R) companies, Salomon Smith Barney Inc., Merrill
Lynch, Lehman Brothers(R) and Bloomberg(R) L.P.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its
category.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment
in the Fund. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or information also may compare the Fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the Fund involves the risk of
fluctuation of principal value, a risk generally not present in an investment
in a CD issued by a bank. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the Fund to calculate its figures. In
addition, there can be no assurance that the Fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
-------------------------------------------------------------------------------
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis to have a
projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by
the College Board.) The Franklin Retirement Planning Guide leads you through
the steps to start a retirement savings program. Of course, an investment in
the Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group
of Funds, one of the largest mutual fund organizations in the U.S., and may
be considered in a program for diversification of assets. Founded in 1947,
Franklin is one of the oldest mutual fund organizations and now services
approximately 3 million shareholder accounts. In 1992, Franklin, a leader in
managing fixed-income mutual funds and an innovator in creating domestic
equity funds, joined forces with Templeton, a pioneer in international
investing. The Mutual Series team, known for its value-driven approach to
domestic equity investing, became part of the organization four years later.
Together, the Franklin Templeton Group has over $225 billion in assets under
management for more than 5 million U.S. based mutual fund shareholder and
other accounts. The Franklin Templeton Group of Funds offers 105 U.S. based
open-end investment companies to the public. The Fund may identify itself by
its Nasdaq symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the Fund are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
DESCRIPTION OF RATINGS
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CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
INVESTMENT GRADE
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.
BELOW INVESTMENT GRADE
Ba: Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and, thereby, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca: Bonds rated Ca represent obligations that are speculative to a high
degree. These issues are often in default or have other marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in
its corporate bond ratings. The modifier 1 indicates that the security ranks
in the higher end of its generic rating category; modifier 2 indicates a
mid-range ranking; and modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
STANDARD & POOR'S RATINGS GROUP (S&P(R))
INVESTMENT GRADE
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.
BELOW INVESTMENT GRADE
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 also may 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.
