As filed with the Securities and Exchange Commission on February 25, 2000
File Nos.
33-31326
811-5878
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre- Effective Amendment No. _____
Post-Effective Amendment No. 20 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 21 (X)
FRANKLIN VALUE INVESTORS TRUST
(Formerly Franklin Balance Sheet Investment Fund)
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (650) 312-2000
MURRAY L. SIMPSON, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94403
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on March 1, 2000 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on(date) pursuant to paragraph (a)(ii) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Prospectus
FRANKLIN
BALANCE SHEET
INVESTMENT
FUND
Franklin Value Investors Trust
INVESTMENT STRATEGY
GROWTH & INCOME
VALUE
MARCH 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
[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
THE FUND
2 Goal and Strategies
4 Main Risks
8 Performance
9 Fees and Expenses
10 Management
11 Distributions and Taxes
12 Financial Highlights
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INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
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YOUR ACCOUNT
13 Sales Charges
15 Buying Shares
17 Investor Services
20 Selling Shares
22 Account Policies
25 Questions
FOR MORE INFORMATION
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WHERE TO LEARN MORE ABOUT THE FUND
[End callout]
Back Cover
THE FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's principal investment goal is high total return of which
capital appreciation and income are components.
PRINCIPAL INVESTMENTS AND STRATEGIES The fund normally invests most of its
assets in equity securities of companies the fund's manager believes are
currently undervalued but that have the potential for significant capital
appreciation. An equity security, or stock, represents a proportionate share
of the ownership of a company; its value is based, in part, on the success of
the company's business, any income paid to stockholders, the value of its
assets, as well as general market conditions. Common stocks and preferred
stocks are examples of equity securities.
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The fund normally invests most of its assets in common stocks of currently
undervalued companies that have the potential
for significant capital appreciation.
[End callout]
A stock price is a "value" when it is less than the price at which the
manager believes it would trade if the market reflected all factors relating
to the company's worth. A company may be undervalued, as reflected by its
current price in the market, for many reasons. It may be as a result of
overreaction by investors to unfavorable news about a company, an industry or
the stock market in general, or as a result of a market decline, poor
economic conditions, tax-loss selling or actual or anticipated unfavorable
developments affecting a company. The types of companies the fund may invest
in include those that are attempting to recover from business setbacks or
adverse events (turnarounds), cyclical downturns, or, in certain cases,
bankruptcy.
In choosing investments, the manager conducts an in-depth analysis of a
company's balance sheet. The equity securities of a company bought by the
fund will typically be purchased at a low price relative to the book value of
the company. Although the price may be above the company's book value, the
ratio of price-to-book value typically will be lower than 80% of those
companies from which comparable data may be obtained. Book value is defined
as the stockholders' equity as reflected in a current balance sheet showing
the company's assets and liabilities. In addition to book value, the manager
may consider a variety of other factors in choosing an investment, such as
ownership of valuable franchises, trademarks or trade names, control of
distribution networks and market share for particular products, and other
factors that may identify the issuer as a potential turnaround candidate or
takeover target.
The fund may also invest in the securities of closed-end management
investment companies that the fund's manager believes are currently
undervalued in the marketplace. At the time of investment, a closed-end fund
may be trading at a discount to net asset value or, in the opinion of the
manager, present an opportunity for capital appreciation. In evaluating
closed-end funds, the manager will consider the following, as well as other,
factors: (i) historical market discounts; (ii) portfolio characteristics;
(iii) repurchase, tender offer, and (dividend) reinvestment programs; (iv)
provisions for converting into an open-end fund; and (v) quality of
management.
The fund may invest much of its assets in small capitalization companies,
which have a market capitalization of less than $1.5 billion at the time of
the fund's investment (sometimes called "small cap"). Market capitalization
is the total market value of a company's outstanding stock. The fund may
invest up to 25% of total assets in foreign securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities markets, the securities in which the fund
normally invests, or the economies of countries where the fund invests are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goal because it may not invest or may invest
substantially less in securities of undervalued companies.
[Insert graphic of chart with line going up and down] MAIN RISKS
[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]
STOCKS While stocks, as a class, have historically outperformed other types
of investments over the long term, individual stock prices tend to go up and
down more dramatically over the short term. These price movements may result
from factors affecting individual companies, or industries, or the securities
market as
a whole.
VALUE INVESTING A value stock may not increase in price as anticipated by
the manager if other investors fail to recognize the company's value and bid
up the price, the markets favor faster-growing companies, or the factors that
the manager believes will increase the price of the security do not occur.
The fund's policy of investing in securities that may be out of favor,
including turnarounds, cyclical companies, companies emerging from
bankruptcy, companies reporting poor earnings, and companies whose share
prices have declined sharply or that are not widely followed by other
investors, differs from the approach followed by many other mutual funds.
Cyclical stocks in which the fund may invest tend to increase in value more
quickly during economic upturns than non-cyclical stocks, but they also tend
to lose value more quickly in economic downturns. Companies emerging from
bankruptcy may have difficulty retaining customers and suppliers. These
companies may have relatively weak balance sheets and, during economic
downturns, they may have insufficient cash flow to pay their debt obligations
and difficulty finding additional financing needed for their operations.
SMALLER COMPANIES While smaller companies may offer substantial
opportunities for capital growth, they also involve substantial risks and
should be considered speculative. Historically, smaller company securities
have been more volatile in price than larger company securities, especially
over the short term. Among the reasons for the greater price volatility are
the less certain growth prospects of smaller companies, the lower degree of
liquidity in the markets for such securities, and the greater sensitivity of
smaller companies to changing economic conditions.
In addition, small companies may lack depth of management, be unable to
generate funds necessary for growth or development, or be developing or
marketing new products or services for which markets are not yet established
and may never become established.
DIVERSIFICATION The fund is a non-diversified fund. It may invest a greater
portion of its assets in the securities of one issuer than a diversified
fund. Economic, business, political or other changes that affect industries
or issuers in which the fund is heavily invested may result in greater
fluctuation in the price of the fund's shares than if the fund was more
widely diversified. The fund, however, intends to meet certain tax
diversification requirements.
INTEREST RATE Increases in interest rates may have a negative affect on the
types of companies in which the fund normally invests because these companies
may find it more difficult to obtain credit to expand, or may have more
difficulty meeting interest payments.
FOREIGN SECURITIES Securities of companies located outside the U.S. may
involve risks that can increase the potential for losses in the fund.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the fund's securities that
trade in that country. These movements will affect the fund's share price and
fund performance. The political, economic and social structures of some
countries the fund invests in may be less stable and more volatile than those
in the U.S. The risks of investing in these countries include the possibility
of internal and external conflicts, the imposition of exchange controls,
currency devaluations, foreign ownership limitations, expropriation,
restrictions on removal of currency and other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks.
The fund's investments in developing or emerging markets are subject to all
of the risks of foreign investing generally, and have additional heightened
risks due to a lack of established legal, political, business and social
frameworks to support securities markets. Foreign securities markets,
including emerging markets, may have substantially lower trading volumes than
U.S. markets, resulting in less liquidity and more volatility than in the
U.S. Short-term volatility in these markets is not unusual, nor are declines
in excess of 50%.
COMPANY. Foreign companies may not be subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts. Foreign markets and their participants generally
have less government supervision and regulation than in the U.S.
CURRENCY To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Changes in currency exchange rates between countries other
than the U.S. may also affect securities in the fund's portfolio. The impact
of the new European currency, the euro, on Europe and other regions is
unclear at this time. Currency markets generally are not as regulated as
securities markets.
EURO. The European Economic and Monetary Union (EMU) introduced a new single
currency, the euro, on January 1, 1999. It will replace the national currency
for participating member countries in stages through July 1, 2002.
Because this change to a single currency is new and untested, it is not
possible to predict the impact of the euro on currency valuations and on the
business or financial condition of European issuers and issuers in other
regions, that the fund may hold in its portfolio.
YEAR 2000 At this date, it appears neither the fund's operations nor those
of the companies in which it invests were adversely affected by Year 2000
computer-related problems. However, Year 2000 problems could still emerge. If
a company in which the fund is invested develops problems related to Year
2000, the price of its securities may be adversely affected, and this may
have an adverse effect on the fund's performance.
Year 2000 has been one of the many factors the manager considers when making
investment decisions. The manager reviewed public filings and other
statements made by companies about their Year 2000 readiness, but could not
audit each company to verify its readiness. Although the risk of the Year
2000 problem should decrease over time, especially after the leap day of
February 29, 2000, the possibility remains that the fund and the companies in
which it is invested may be adversely affected by Year 2000 problems until
all of their various data processing activities for the year have been
completed.
More detailed information about the fund, its policies, and risks can be
found in the fund's Statement of Additional Information (SAI).
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Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of bull and bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 9 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
ANNUAL TOTAL RETURNS 1
[Insert bar graph]
35.09% 22.03% 25.57% 1.50% 30.05% 17.50% 25.97% -0.61% -1.53%
91 92 93 94 95 96 97 98 99
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BEST
QUARTER:
Q1 '91
20.72%
WORST
QUARTER:
Q3 '98
- -13.56%
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AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
SINCE
INCEPTION
1 YEAR 5 YEARS (4/2/90)
- ------------------------------------------------------------------
Franklin Balance Sheet Investment -3.01% 13.16% 13.00%
Fund 2
Wilshire Small Companies Value -12.32% 10.59% 11.97%
Index 3,5
Russell 2000 Value Index 4,5 -1.49% 13.14% 13.00%
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's Micropal. The unmanaged Wilshire Small Companies
Value Index excludes companies with high price/earnings ratios, low yields,
or high price/book ratios. The index is selected from the Wilshire 2500
universe, includes companies that have market capitalizations of at least $70
million, and contains approximately 200 securities. It includes reinvested
dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
4. Source: Standard & Poor's Micropal. The unmanaged Russell 2000 Value Index
measures the performance of those Russell 2000 companies with lower
price-to-book ratios and lower forecasted growth values. It includes
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
5. Prior to March 1, 2000, the fund considered the Wilshire Small Companies
Value Index its benchmark to measure performance against. Effective March 1,
2000, the fund considers the Russell 2000 Value Index its benchmark to
measure performance against.
[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)
Maximum sales charge (load) as a percentage of 1.50%
offering price
Load imposed on purchases 1.50%
Maximum deferred sales charge (load)
None 1
Exchange fee None
Please see "Sales Charges" on page 13 for an explanation of how and when
these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management fees 0.47%
Distribution and service (12b-1) fees 0.25%
Other expenses 0.21%
======
Total annual fund operating expenses 0.93%
======
1. Except for investments of $1 million or more (see page 13) and purchases
by certain retirement plans without an initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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$243 1 $442 $657 $1,276
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 $235 billion in
assets.
The team responsible for the fund's management is:
BRUCE C. BAUGHMAN, SENIOR VICE PRESIDENT OF ADVISORY SERVICES
Mr. Baughman has been a manager of the fund since inception. He joined the
Franklin Templeton Group in 1988.
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.
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.
The fund pays Advisory Services a fee for managing the fund's assets. For the
fiscal year ended October 31, 1999, the fund paid 0.47% of its average daily
net assets to the manager for its services.
[Insert graphic of dollar signs and stacks of coins]
DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least quarterly representing its net investment income. Capital gains, if
any, may be distributed annually. The amount of these distributions will vary
and there is no guarantee the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution,
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will receive some of your investment back in the
form of a taxable distribution. If you would like information on upcoming
record dates for the fund's distributions, please call 1-800/DIAL BEN(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.
[Begin callout]
BACKUP WITHHOLDING
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.
Fund distributions and gains from the sale or exchange of your shares
generally will be subject to state and local income tax. Non-U.S. investors
may be subject to U.S. withholding and estate tax. You should consult your
tax advisor about the federal, state, local or foreign tax consequences of
your investment in the fund.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
YEAR ENDED OCTOBER 31,
1999 1 1998 1997 1996 1995
- -------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning 31.86 35.22 29.15 26.34 22.68
of year
-------------------------------------
Net investment income .37 .50 .48 .47 .30
Net realized and unrealized
gains (losses) (.68) (1.55) 8.40 3.85 3.98
-------------------------------------
Total from investment (.31) (1.05) 8.88 4.32 4.28
operations
-------------------------------------
Distributions from net
investment income (.43) (.51) (.46) (.44) (.27)
Distributions from net
realized gains (1.16) (1.80) (2.35) (1.07) (.35)
-------------------------------------
Total distributions (1.59) (2.31) (2.81) (1.51) (.62)
=====================================
Net asset value, end of year 29.96 31.86 35.22 29.15 26.34
=====================================
Total return (%) 2 (1.04) (3.14) 32.86 16.93 19.32
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,165,779 1,467,207 1,222,953 657,002 387,540
1,000)
Ratios to average net
assets: (%)
Expenses .93 .93 1.08 1.08 1.17
Net investment income 1.19 1.47 1.59 1.69 1.30
Portfolio turnover rate (%) 17.53 11.81 24.63 35.46 28.63
1. Based on average shares outstanding.
2. Total return does not include sales charges.
YOUR ACCOUNT
[Insert graphic of percentage sign] SALES CHARGES
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING OF YOUR NET
PRICE INVESTMENT
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Under $500,000 1.50 1.52
$500,000 but under $1 1.00 1.01
million
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 shares without an initial sales charge.
However, there is a 1% contingent deferred sales charge (CDSC) on any shares
you sell within 12 months of purchase.
The CDSC is based on the current value of the shares being sold or their net
asset value when purchased, whichever is less. There is no CDSC on shares you
acquire by reinvesting your dividends or capital gains distributions.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one
month on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to
a CDSC. If there are not enough of these to meet your request, we will sell
the shares in the order they were purchased. We will use this same method if
you exchange your shares into another Franklin Templeton Fund (please see
page 18 for exchange information).
DISTRIBUTION AND SERVICE (12B-1) FEES The fund has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution fees of up to 0.25% per year to those who sell and distribute
the fund's shares and provide other services to shareholders. Because these
fees are paid out of the fund's assets on an on-going basis, over time these
fees will increase the cost of your investment and may cost you more than
paying other types of sales charges.
SALES CHARGE REDUCTIONS AND WAIVERS If you qualify for any of the sales
charge reductions or waivers below, please let us know at the time you make
your investment to help ensure you receive the lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases
in the Franklin Templeton Funds to take advantage of the lower sales charges
for large purchases of fund shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Templeton Variable Insurance
Products Trust, Templeton Capital Accumulator Fund, Inc., and Templeton
Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in
the Franklin Templeton Funds for purposes of calculating the sales charge.
You 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.
Certain Franklin Templeton Funds offer multiple share classes not offered by
this fund. For purposes of this privilege, the fund's shares are considered
Class A shares.
If you paid a CDSC when you sold your Class A shares, we will credit your
account with the amount of the CDSC paid but a new CDSC will apply. For Class
B shares reinvested in Class A, a new CDSC will not apply, although your
account will not be credited with the amount of any CDSC paid when you sold
your Class B shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD)
also may be reinvested without an initial sales charge if you reinvest them
within 365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject
to a sales charge.
SALES CHARGE WAIVERS Fund 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.
The CDSC also 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 Plan 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.
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BUYING SHARES
MINIMUM INVESTMENTS
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INITIAL ADDITIONAL
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Regular accounts $1,000 $50
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UGMA/UTMA accounts $100 $50
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Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers,
Education IRAs or Roth IRAs)
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IRAs, IRA rollovers, Education IRAs or $250 $50
Roth IRAs
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Broker-dealer sponsored wrap account $250 $50
programs
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Full-time employees, officers, trustees $100 $50
and directors of Franklin Templeton
entities, and their immediate family
members
- ----------------------------------------------------------------
PLEASE NOTE THAT YOU MAY ONLY BUY SHARES OF A FUND ELIGIBLE FOR SALE
IN YOUR STATE OR JURISDICTION.
Certain Franklin Templeton Funds offer multiple share classes not offered by
this fund. Please note that for selling or exchanging your shares, or for
other purposes, the fund's shares are considered Class A shares.
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. To save time, you can sign up now for
services you may want on your account by completing the appropriate sections
of the application (see the next page).
BUYING SHARES
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OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- ----------------------------------------------------------------------
[Insert graphic of Contact your Contact your
hands shaking] investment investment
representative representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- ----------------------------------------------------------------------
[Insert graphic of Make your check Make your check
envelope] payable to Franklin payable to Franklin
Balance Sheet Balance Sheet
BY MAIL Investment Fund. Investment Fund.
Include your account
Mail the check and number on the check.
your signed
application to Fill out the deposit
Investor Services. slip from your
account statement. If
you do not have a
slip, include a note
with your name, the
fund name, and your
account number.
Mail the check and
deposit slip or note
to Investor Services.
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[Insert graphic of Call to receive a Call to receive a
three lightning bolts] wire control number wire control number
and wire instructions. and wire instructions.
BY WIRE
Wire the funds and To make a same day
1-800/632-2301 mail your signed wire investment,
(or 1-650/312-2000 application to please call us by
collect) Investor Services. 1:00 p.m. Pacific
Please include the time and make sure
wire control number your wire arrives by
or your new account 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.
- ----------------------------------------------------------------------
[Insert graphic of two Call Shareholder Call Shareholder
arrows pointing in Services at the Services at the
opposite directions] number below, or send number below or our
signed written automated TeleFACTS
BY EXCHANGE instructions. The system, or send
TeleFACTS system signed written
TeleFACTS(R) cannot be used to instructions.
1-800/247-1753 open a new account.
(around-the-clock (Please see page 18
access) (Please see page 18 for information on
for information on exchanges.)
exchanges.)
- ----------------------------------------------------------------------
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. The minimum investment to open an
account with an automatic investment plan is $50 ($25 for an Education IRA).
To sign up, complete the appropriate section of your account application.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in
shares of the fund by transferring money from your paycheck to the fund by
electronic funds transfer. If you are interested, indicate on your
application that you would like to receive an Automatic Payroll Deduction
Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the
fund in an existing account in the same share class of the fund or another
Franklin Templeton Fund. Initial sales charges and CDSCs will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services
at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class*, generally without paying any additional sales
charges. If you exchange shares held for less than twelve months, however,
you may be charged the difference between the initial sales charge of the two
funds if the difference is more than 0.25%. If you exchange shares from a
money fund, a sales charge may apply no matter how long you have held the
shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC
will continue to be calculated from the date of your initial investment and
will not be charged at the time of the exchange. The purchase price for
determining a CDSC on exchanged shares will be the price you paid for the
original shares. If you exchange shares subject to a CDSC into a Class A
money fund, the time your shares are held in the money fund will not count
towards the CDSC holding period.
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may
exchange into the fund without any sales charge. Advisor Class shareholders
of another Franklin Templeton Fund also may exchange into the fund without
any sales charge. Advisor Class shareholders who exchange their shares for
shares of the fund and later decide they would like to exchange into another
fund that offers Advisor Class may do so.
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 23).
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.
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 Trust Company retirement plan. For participants under
age 591/2, tax penalties may apply. Call Retirement Plan Services at
1-800/527-2020 for details.
SELLING SHARES
- ----------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR
SHARES
- ----------------------------------------------------------------------
[Insert graphic of hands shaking] Contact your investment
representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- ----------------------------------------------------------------------
[Insert graphic of envelope] Send written instructions and
endorsed share certificates
BY MAIL (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. 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 do
BY PHONE not hold share certificates
and you have not changed your
1-800/632-2301 address by phone within the
last 15 days, you can 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 lightning You can call or write to have
bolts] redemption proceeds sent to a
bank account. See the policies
BY ELECTRONIC FUNDS TRANSFER (ACH) above for selling shares by
mail or phone.
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 arrows Obtain a current prospectus
pointing in opposite directions] for the fund you are
considering.
BY EXCHANGE
Call Shareholder Services at
TeleFACTS(R) the number below or our
1-800/247-1753 automated TeleFACTS system, or
(around-the-clock send signed written
access) instructions. See the policies
above for selling shares by
mail or phone.
If you hold share
certificates, you will need to
return them to the fund before
your exchange can be processed.
- ----------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES 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). The fund's NAV is calculated by
dividing its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the
NAV plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
The fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If the fund holds securities listed primarily on a foreign exchange
that trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $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.
COMMISSION (%) -
Investment under $500,000 1.50
$500,000 but under $1 million 1.00
$1 million or more up to 1.00 1
12B-1 FEE TO DEALER 0.25
A dealer commission of up to 1% may be paid on NAV purchases by certain
retirement plans 1 and up to 0.25% on NAV purchases by certain trust companies
and bank trust departments, eligible governmental authorities, and
broker-dealers or others on behalf of clients participating in comprehensive
fee programs.
1. During the first year after purchase, dealers may not be eligible to
receive the 12b-1 fee.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the fund or your account, you can write to us
at P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one of
the following numbers. For your protection and to help ensure we provide you
with quality service, all calls may be monitored
or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE MONDAY THROUGH FRIDAY)
NUMBER
- --------------------------------------------------------------------
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 Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklintempleton.com
You can also obtain information about the fund by visiting the
SEC's Public Reference Room in Washington, D.C. (phone
1-202/942-8090) or the EDGAR Database on the SEC's Internet site at
http://www.sec.gov. You can obtain copies of this information, after paying a
duplicating fee, by writing to the SEC's Public Reference Section,
Washington, D.C. 20549-0102 or by electronic request at the following E-mail
address: publicinfo(R)sec.gov.
Investment Company Act file #811-5878 150 P 03/00
Prospectus
FRANKLIN
MICROCAP
VALUE FUND
Franklin Value Investors Trust
INVESTMENT STRATEGY
GROWTH & INCOME
o VALUE
MARCH 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
[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
THE FUND
2 Goal and Strategies
4 Main Risks
8 Performance
9 Fees and Expenses
10 Management
11 Distributions and Taxes
12 Financial Highlights
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
YOUR ACCOUNT
13 Sales Charges
16 Buying Shares
18 Investor Services
21 Selling Shares
23 Account Policies
26 Questions
[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]
FOR MORE INFORMATION
Back Cover
THE FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's principal investment goal is high total return, of which
capital appreciation and income are components.
PRINCIPAL INVESTMENTS AND STRATEGIES The fund normally invests at least 65%
of its assets in equity securities of companies with market capitalization
(the total market value of a company's outstanding stock) under $200 million
at the time purchased by the fund ("micro cap") that the fund's manager
believes are currently undervalued and have the potential for significant
capital appreciation. An equity security, or stock, represents a
proportionate share of the ownership of a company; its value is based, in
part, on the success of the company's business, any income paid to
stockholders, the value of its assets, as well as general market conditions.
Common stocks and preferred stocks are examples of equity securities.
A stock is undervalued, or a "value" when it is less than the price at which
the manager believes it would trade if the market reflected all factors
relating to the companies worth. The fund's manager may consider a company to
be undervalued because of overreaction by investors to unfavorable news about
a company, an industry or the stock market in general, or as a result of a
market decline, poor economic conditions, tax-loss selling, or actual or
anticipated unfavorable developments affecting a company. The types of
companies the fund may invest in include those that are attempting to recover
from business setbacks or adverse events (turnarounds), cyclical downturns,
or, in certain cases, bankruptcy.
[Begin callout]
The fund normally invests most of its assets in common stocks of undervalued
micro cap companies that the fund's manager believes have the potential for
significant capital appreciation.
[End callout]
In choosing investments, the manager conducts an in-depth analysis of a
company's balance sheet. The equity securities of a company bought by the
fund will typically be purchased at prices below the book value of the
company. In addition to book value, the manager may consider a variety of
other factors in choosing an investment, such as ownership of valuable
franchises, trademarks or trade names, control of distribution networks and
market share for particular products, and other factors that may identify the
issuer as a potential turnaround candidate or takeover target. The fund may
invest up to 25% of total assets in foreign securities.
OTHER INVESTMENTS The fund may invest up to 35% of its assets in securities
of companies which have market capitalization in excess of $200 million and
whose price may not be below book value.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities markets, the securities in which the fund
normally invests, or the economies of countries where the fund invests are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goal because it may not invest or may invest
substantially less in securities of undervalued companies.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks, as a class, have historically outperformed other types
of investments over the long term, individual stock prices tend to go up and
down more dramatically over the short term. These price movements may result
from factors affecting individual companies or 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 INVESTING A value stock may not increase in price as anticipated by
the manager if other investors fail to recognize the company's value and bid
up the price, the markets favor faster-growing companies, or the factors that
the manager believes will increase the price of the security do not occur.
The fund's policy of investing in securities that may be out of favor,
including turnarounds, cyclical companies, companies emerging from
bankruptcy, companies reporting poor earnings, and companies whose share
prices have declined sharply or that are not widely followed by other
investors, differs from the approach followed by many other mutual funds.
Cyclical stocks in which the fund may invest tend to increase in value more
quickly during economic upturns than non-cyclical stocks, but they also tend
to lose value more quickly in economic downturns. Companies emerging from
bankruptcy may have difficulty retaining customers and suppliers. These
companies may have relatively weak balance sheets and, during economic
downturns, they may have insufficient cash flow to pay their debt obligations
and difficulty finding additional financing needed for their operations.
SMALLER COMPANIES While smaller companies may offer substantial
opportunities for capital growth, they also involve substantial risks and
should be considered speculative. Historically, smaller company securities
have been more volatile in price than larger company securities, especially
over the short term. Among the reasons for the greater price volatility are
the less certain growth prospects of smaller companies, the lower degree of
liquidity in the markets for such securities, and the greater sensitivity of
smaller companies to changing economic conditions.
In addition, small companies may lack depth of management, be unable to
generate funds necessary for growth or development, or be developing or
marketing new products or services for which markets are not yet established
and may never become established.
DIVERSIFICATION The fund is a non-diversified fund. It may invest a greater
portion of its assets in the securities of one issuer than a diversified
fund. Economic, business, political or other changes that affect industries
or issuers in which the fund is heavily invested may result in greater
fluctuation in the price of the fund's shares than if the fund was more
widely diversified. The fund, however, intends to meet certain tax
diversification requirements.
FOREIGN SECURITIES Securities of companies located outside the U.S. may
involve risks that can increase the potential for losses in the fund.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the fund's securities that
trade in that country. These movements will affect the fund's share price and
fund performance. The political, economic and social structures of some
countries the fund invests in may be less stable and more volatile than those
in the U.S. The risks of investing in these countries include the possibility
of internal and external conflicts, the imposition of exchange controls,
currency devaluations, foreign ownership limitations, expropriation,
restrictions on removal of currency and other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks.
The fund's investments in developing or emerging markets are subject to all
of the risks of foreign investing generally, and have additional heightened
risks due to a lack of established legal, political, business and social
frameworks to support securities markets. Foreign securities markets,
including emerging markets, may have substantially lower trading volumes than
U.S. markets, resulting in less liquidity and more volatility than in the
U.S. Short-term volatility in these markets is not unusual, nor are declines
in excess of 50%.
COMPANY. Foreign companies may not be subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts. Foreign markets and their participants generally
have less government supervision and regulation than in the U.S.
CURRENCY To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Changes in currency exchange rates between countries other
than the U.S. may also affect securities in the fund's portfolio. The impact
of the new European currency, the euro, on Europe and other regions is
unclear at this time. Currency markets generally are not as regulated as
securities markets.
EURO. The European Economic and Monetary Union (EMU) introduced a new single
currency, the euro, on January 1, 1999. It will replace the national currency
for participating member countries in stages through July 1, 2002.
Because this change to a single currency is new and untested, it is not
possible to predict the impact of the euro on currency valuations and on the
business or financial condition of European issuers and issuers in other
regions, that the fund may hold in its portfolio.
INTEREST RATE Increases in interest rates may have a negative affect on the
types of companies in which the fund normally invests because these companies
may find it more difficult to obtain credit to expand, or may have more
difficulty meeting interest payments.
YEAR 2000 At this date, it appears neither the fund's operations nor those
of the companies in which it invests were adversely affected by Year 2000
computer-related problems. However, Year 2000 problems could still emerge. If
a company in which the fund is invested develops problems related to Year
2000, the price of its securities may be adversely affected, and this may
have an adverse effect on the fund's performance.
Year 2000 has been one of the many factors the manager considers when making
investment decisions. The manager reviewed public filings and other
statements made by companies about their Year 2000 readiness, but could not
audit each company to verify its readiness. Although the risk of the Year
2000 problem should decrease over time, especially after the leap day of
February 29, 2000, the possibility remains that the fund and the companies in
which it is invested may be adversely affected by Year 2000 problems until
all of their various data processing activities for the year have been
completed.
More detailed information about the fund, its policies and risks can be
found in the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of bull and bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 4 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
ANNUAL TOTAL RETURNS 1
[Insert bar graph]
27.11% 27.71% -6.76% -3.98%
96 97 98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q3 '97
17.05%
WORST
QUARTER:
Q3 '98
- -18.41%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
SINCE
INCEPTION
1 YEAR (12/12/95)
- ----------------------------------------------------------------
Franklin MicroCap Value Fund 2 -9.51% 8.46%
Wilshire Small Companies Value -12.32% 6.43%
Index 3,5
Russell 2000 Value Index 4,5 -1.49% 10.56%
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's Micropal. The unmanaged Wilshire Small Companies
Value Index excludes companies with high price/earnings ratios, low yields,
or high price/book ratios. The index is selected from the Wilshire 2500
universe, includes companies that have market capitalizations of at least $70
million, and contains approximately 200 securities. It includes reinvested
dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
4. Source: Standard & Poor's Micropal. The unmanaged Russell 2000 Value Index
measures the performance of those Russell 2000 companies with lower
price-to-book ratios and lower forecasted growth values. It includes
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
5. Prior to March 1, 2000, the fund considered the Wilshire Small Companies
Value Index its benchmark to measure performance against. Effective March 1,
2000, the fund considers the Russell 2000 Value Index its benchmark to
measure performance against.
[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)
Maximum sales charge (load) as a percentage of 5.75%
offering price
Load imposed on purchases 5.75%
Maximum deferred sales charge (load) None 1
Exchange fee None
Please see "Sales Charges" on page 13 for an explanation of how and when
these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM
FUND ASSETS)
Management fees 0.75%
Distribution and service (12b-1) fees 0.25%
Other expenses 0.27%
=======
Total annual fund operating expenses 1.27%
=======
1. Except for investments of $1 million or more (see page 13) and purchases
by certain retirement plans without an initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------
$697 1 $955 $1,232 $2,021
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 $235 billion in
assets.
The team responsible for the fund's management is:
BRUCE C. BAUGHMAN, SENIOR VICE PRESIDENT OF ADVISORY SERVICES
Mr. Baughman has been a manager of the fund since inception. He joined the
Franklin Templeton Group in 1988.
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.
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.
The fund pays Advisory Services a fee for managing the fund's assets. For the
fiscal year ended October 31, 1999, the fund paid 0.75% of its average daily
net assets to the manager for its services.
[Insert graphic of dollar signs and stacks of coins]
DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least quarterly representing its net investment income. Capital gains, if
any, may be distributed annually. The amount of these distributions will vary
and there is no guarantee the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution,
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will receive some of your investment back in the
form of a taxable distribution. If you would like information on upcoming
record dates for the fund's distributions, please call 1-800/DIAL BEN(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.
[Begin callout]
BACKUP WITHHOLDING
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.
Fund distributions and gains from the sale or exchange of fund shares
generally will be subject to state and local income tax. Non-U.S. investors
may be subject to U.S. withholding and estate tax. You should consult your
tax advisor about the federal, state, local or foreign tax consequences of
your investment in the fund.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance since its inception.
This information has been audited by PricewaterhouseCoopers LLP.
YEAR ENDED OCTOBER 31,
1999 1 1998 1997 1996 2
PER SHARE DATA ($)
Net asset value, beginning of year 20.27 24.29 18.44 15.00
--------------------------------
Net investment income (loss) (.01) (.02) (.01) .14
Net realized and unrealized gains (.29) (2.51) 6.33 3.41
(losses)
--------------------------------
Total from investment operations (.30) (2.53) 6.32 3.55
--------------------------------
Distributions from net investment - (.01) (.07) (.11)
income
Distributions from net realized (1.56) (1.48) (.40) -
gains
--------------------------------
Total distributions (1.56) (1.49) (.47) (.11)
================================
Net asset value, end of year 18.41 20.27 24.29 18.44
================================
Total return (%) 3 (1.59) (10.95) 35.05 23.72
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 115,999 175,635 191,638 119,664
Ratios to average net assets: (%)
Expenses 1.27 1.21 1.22 1.24 4
Net investment income (loss) (.05) (.11) (.05) 1.28 4
Portfolio turnover rate (%) 14.12 31.91 21.33 14.15
1. Based on average shares outstanding.
2. For the period December 12, 1995 (effective date) to October 31, 1996.
3. Total return does not include sales charges, and is not annualized.
4. Annualized.
YOUR ACCOUNT
[Insert graphic of percentage sign] SALES CHARGES
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING PRICE OF YOUR NETINVESTMENT
- -------------------------------------------------------------------------
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 2.00 2.04
million
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 shares without an initial sales charge.
However, there is a 1% contingent deferred sales charge (CDSC) on any shares
you sell within 12 months of purchase.
The CDSC is based on the current value of the shares being sold or their net
asset value when purchased, whichever is less. There is no CDSC on shares you
acquire by reinvesting your dividends or capital gains distributions.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one
month on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to
a CDSC. If there are not enough of these to meet your request, we will sell
the shares in the order they were purchased. We will use this same method if
you exchange your shares into another Franklin Templeton Fund (please see
page 19 for exchange information).
DISTRIBUTION AND SERVICE (12B-1) FEES The fund has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution fees of up to 0.25% per year to those who sell and distribute
the fund's shares and provide other services to shareholders. Because these
fees are paid out of the fund's assets on an on-going basis, over time these
fees will increase the cost of your investment and may cost you more than
paying other types of sales charges.
SALES CHARGE REDUCTIONS AND WAIVERS If you qualify for any of the sales
charge reductions or waivers below, please let us know at the time you make
your investment to help ensure you receive the lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases
in the Franklin Templeton Funds to take advantage of the lower sales charges
for large purchases of fund shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Templeton Variable Insurance
Products Trust, Templeton Capital Accumulator Fund, Inc., and Templeton
Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in
the Franklin Templeton Funds for purposes of calculating the sales charge.
You 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.
Certain Franklin Templeton Funds offer multiple share classes not offered by
this fund. For purposes of this privilege, the fund's shares are considered
Class A shares.
If you paid a CDSC when you sold your Class A shares, we will credit your
account with the amount of the CDSC paid but a new CDSC will apply. For Class
B shares reinvested in Class A, a new CDSC will not apply, although your
account will not be credited with the amount of any CDSC paid when you sold
your Class B shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD)
also may be reinvested without an initial sales charge if you reinvest them
within 365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject
to a sales charge.
SALES CHARGE WAIVERS Fund 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.
The CDSC also 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 Plan 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
- -----------------------------------------------------------------
INITIAL ADDITIONAL
- -----------------------------------------------------------------
Regular accounts $1,000 $50
- -----------------------------------------------------------------
UGMA/UTMA accounts $100 $50
- -----------------------------------------------------------------
Retirement accounts (other than IRAs, IRA
rollovers,
Education IRAs or Roth IRAs) no minimum no minimum
- -----------------------------------------------------------------
IRAs, IRA rollovers, Education IRAs or Roth $250 $50
IRAs
- -----------------------------------------------------------------
Broker-dealer sponsored wrap account $250 $50
programs
- -----------------------------------------------------------------
Full-time employees, officers, trustees and
directors of Franklin Templeton entities,
and their immediate family members $100 $50
- -----------------------------------------------------------------
PLEASE NOTE THAT YOU MAY ONLY BUY SHARES OF A FUND
ELIGIBLE FOR SALE IN YOUR STATE OR JURISDICTION.
Certain Franklin Templeton Funds offer multiple share classes not offered by
this fund. Please note that for selling or exchanging your shares, or for
other purposes, the fund's shares are considered Class A shares.
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. To save time, you can sign up now for
services you may want on your account by completing the appropriate sections
of the application (see the next page).
BUYING SHARES
- ----------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- ----------------------------------------------------------------------
[Insert graphic of Contact your Contact your
hands shaking] investment investment
representative representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- ----------------------------------------------------------------------
[Insert graphic of Make your check Make your check
envelope] payable to Franklin payable to Franklin
MicroCap Value Fund. MicroCap Value Fund.
BY MAIL Include your account
Mail the check and number on the check.
your signed
application to Fill out the deposit
Investor Services. slip from your
account statement. If
you do not have a
slip, include a note
with your name, the
fund name, and your
account number.
Mail the check and
deposit slip or note
to Investor Services.
- ----------------------------------------------------------------------
[Insert graphic of Call to receive a Call to receive a
three lightning bolts] wire control number wire control number
and wire instructions. and wire instructions.
BY WIRE
Wire the funds and To make a same day
1-800/632-2301 mail your signed wire investment,
(or 1-650/312-2000 application to please call us by
collect) Investor Services. 1:00 p.m. Pacific
Please include the time and make sure
wire control number your wire arrives by
or your new account 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.
- ----------------------------------------------------------------------
[Insert graphic of two Call Shareholder Call Shareholder
arrows pointing in Services at the Services at the
opposite directions] number below, or send number below or our
signed written automated TeleFACTS
BY EXCHANGE instructions. system, or send
The TeleFACTS system signed written
TeleFACTS(R) cannot be used to instructions.
1-800/247-1753 open a new account.
(around-the-clock (Please see page 19
access) (Please see page 19 for information on
for information on exchanges.)
exchanges.)
- ----------------------------------------------------------------------
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. The minimum investment to open an
account with an automatic investment plan is $50 ($25 for an Education IRA).
To sign up, complete the appropriate section of your account application.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in
shares of the fund by transferring money from your paycheck to the fund by
electronic funds transfer. If you are interested, indicate on your
application that you would like to receive an Automatic Payroll Deduction
Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the
fund in an existing account in the same share class of the fund or another
Franklin Templeton Fund. Initial sales charges and CDSCs will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class*, generally without paying any additional sales
charges. If you exchange shares held for less than six months, however, you
may be charged the difference between the initial sales charge of the two
funds if the difference is more than 0.25%. If you exchange shares from a
money fund, a sales charge may apply no matter how long you have held the
shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC
will continue to be calculated from the date of your initial investment and
will not be charged at the time of the exchange. The purchase price for
determining a CDSC on exchanged shares will be the price you paid for the
original shares. If you exchange shares subject to a CDSC into a Class A
money fund, the time your shares are held in the money fund will not count
towards the CDSC holding period.
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may
exchange into the fund without any sales charge. Advisor Class shareholders
of another Franklin Templeton Fund also may exchange into the fund without
any sales charge. Advisor Class shareholders who exchange their shares for
shares of the fund and later decide they would like to exchange into another
fund that offers Advisor Class may do so.
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 24).
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.
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 Trust Company retirement plan. For participants under
age 591/2, tax penalties may apply. Call Retirement Plan Services at
1-800/527-2020 for details.
SELLING SHARES
- ----------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- ----------------------------------------------------------------------
[Insert graphic of Contact your investment representative
hands shaking]
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- ----------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership or
BY MAIL trust accounts may need to send additional
documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. Be sure to include all necessary
signatures and any additional documents, as
well as signature guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise according
to your written instructions.
- ----------------------------------------------------------------------
[Insert graphic of As long as your transaction is for $100,000 or
phone] less, you do not hold share certificates and
you have not changed your address by phone
BY PHONE within the last 15 days, you can sell your
shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and
address on the account. Written instructions,
with a signature guarantee, are required to
send the check to another address or to make it
payable to another person.
- ----------------------------------------------------------------------
[Insert graphic of You can call or write to have redemption
three lightning proceeds sent to a bank account. See the
bolts] policies above for selling shares by mail or
phone.
BY ELECTRONIC FUNDS
TRANSFER (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 Obtain a current prospectus for the fund you
two arrows pointing are considering.
in opposite
directions] Call Shareholder Services at the number below
or our automated TeleFACTS system, or send
BY EXCHANGE signed written instructions. See the policies
above for selling shares by mail or phone.
TeleFACTS(R)
1-800/247-1753 If you hold share certificates, you will need
(around-the-clock to return them to the fund before your exchange
access) can be processed.
- ----------------------------------------------------------------------
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). The fund's NAV is calculated by
dividing its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the
NAV plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
The fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If the fund holds securities listed primarily on a foreign exchange
that trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $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.
COMMISSION (%) -
Investment under $50,000 5.00
$50,000 but under $100,000 3.75
$100,000 but under $250,000 2.80
$250,000 but under $500,000 2.00
$500,000 but under $1 million 1.60
$1 million or more up to 1.00 1
12B-1 FEE TO DEALER 0.25
A dealer commission of up to 1% may be paid on NAV purchases by certain
retirement plans 1 and up to 0.25% on NAV purchases by certain trust companies
and bank trust departments, eligible governmental authorities, and
broker-dealers or others on behalf of clients participating in comprehensive
fee programs.
1. During the first year after purchase, dealers may not be eligible to
receive the 12b-1 fee.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the fund or your account, you can write to us
at P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one of
the following numbers. For your protection and to help ensure we provide you
with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- --------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
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 Plan 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Services
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this
prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklintempleton.com
You can also obtain information about the fund by visiting the
SEC's Public Reference Room in Washington, D.C. (phone
1-202/942-8090) or the EDGAR Database on the SEC's Internet site at
http://www.sec.gov. You can obtain copies of this information, after paying a
duplicating fee, by writing to the SEC's Public Reference Section,
Washington, D.C. 20549-0102 or by electronic request at the following E-mail
address: publicinfo(R)sec.gov.
Investment Company Act file #811-5878 189 P 03/00
Prospectus
FRANKLIN
VALUE FUND
Franklin Value Investors Trust
CLASS A, B & C
INVESTMENT STRATEGY
GROWTH & INCOME
o VALUE
MARCH 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
7 Performance
9 Fees and Expenses
11 Management
12 Distributions and Taxes
13 Financial Highlights
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
15 Choosing a Share Class
19 Buying Shares
21 Investor Services
24 Selling Shares
26 Account Policies
29 Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]
Back Cover
THE FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is long-term total return.
PRINCIPAL INVESTMENTS AND STRATEGIES The fund normally invests at least 65%
of its assets in equity securities of companies that the fund manager
believes are undervalued. In choosing investments that are undervalued, the
fund's manager focuses on companies that have:
o Low price-to-earnings ratio relative to the market or their industry
group
o Low price relative to book value, cash flow, sales, earnings growth, or
private market value (what a sophisticated investor would pay for the
entire company)
o Suffered sharp price declines (fallen angels), but in the fund's
manager's opinion still have significant potential
[Begin callout]
The fund normally invests most of its assets in companies of various sizes
that the manager believes are selling below the underlying value of their
assets.
[End callout]
A stock price is undervalued, or a "value" when it is less than the price at
which the manager believes it would trade if the market reflected all factors
relating to the company's worth. The fund manager may consider a company to
be undervalued in the marketplace relative to its underlying asset values
because of overreaction by investors to unfavorable news about a company, an
industry or the stock market in general, or as a result of a market decline,
poor economic conditions, tax-loss selling, or actual or anticipated
unfavorable developments affecting a company. The types of companies the fund
may invest in include those that are attempting to recover from business
setbacks or adverse events (turnarounds), cyclical downturns, or, in certain
cases, bankruptcy.
In addition to price, the fund, in choosing an investment, may consider a
variety of other factors that may identify the issuer as a potential
turnaround candidate or takeover target, such as ownership of valuable
franchises, trademarks or trade names, control of distribution networks and
market share for particular products. Purchase decisions may also be
influenced by income, company buy-backs, and insider purchases and sales. The
fund may invest up to 25% of total assets in foreign securities, but
currently intends to limit its investments in those securities to 10% or less
of total assets.
An equity security, or stock, 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, and the value of its assets as
well as general market conditions. Common stocks and preferred stocks are
examples of equity securities. The fund may invest a substantial portion of
its assets in small capitalization companies, which have market
capitalization of less than $1.5 billion at the time of the fund's investment
(sometimes called "small cap"). Market capitalization is the total market
value of a company's outstanding stock.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities markets, the securities in which the fund
normally invests, or the economies of countries where the fund invests are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goal because it may not invest or may invest less in
securities of undervalued companies.
The fund is designed for long-term investors and not as a trading vehicle. It
is not intended as a complete investment program and you should consider how
the fund fits your individual investment goals before you buy it.
[Insert graphic of chart with line going up and down] MAIN RISKS
[Begin callout]
Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
STOCKS While stocks, as a class, have historically outperformed other types
of investments over the long term, individual stock prices tend to go up and
down more dramatically over the short term. These price movements may result
from factors affecting individual companies or industries, or the securities
market as a whole.
VALUE INVESTING A value stock may not increase in price as anticipated by
the manager if other investors fail to recognize the company's value and bid
up the price, the markets favor faster-growing companies, or the factors that
the manager believes will increase the price of the security do not occur.
The fund's policy of investing in securities that may be out of favor,
including turnarounds, cyclical companies, companies emerging from
bankruptcy, companies reporting poor earnings, and companies whose share
prices have declined sharply or that are not widely followed by other
investors, differs from the approach followed by many other mutual funds.
Cyclical stocks in which the fund may invest tend to increase in value more
quickly during economic upturns than non-cyclical stocks, but they also tend
to lose value more quickly in economic downturns. Companies emerging from
bankruptcy may have difficulty retaining customers and suppliers. These
companies may have relatively weak balance sheets and, during economic
downturns, they may have insufficient cash flow to pay their debt obligations
and difficulty finding additional financing needed for their operations.
SMALLER COMPANIES While smaller companies may offer substantial
opportunities for capital growth, they also involve substantial risks and
should be considered speculative. Historically, smaller company securities
have been more volatile in price than larger company securities, especially
over the short term. Among the reasons for the greater price volatility are
the less certain growth prospects of smaller companies, the lower degree of
liquidity in the markets for such securities, and the greater sensitivity of
smaller companies to changing economic conditions.
In addition, small companies may lack depth of management, be unable to
generate funds necessary for growth or development, or be developing or
marketing new products or services for which markets are not yet established
and may never become established.
DIVERSIFICATION The fund is a non-diversified fund. It may invest a greater
portion of its assets in the securities of one issuer than a diversified
fund. Economic, business, political or other changes that affect industries
or issuers in which the fund is heavily invested may result in greater
fluctuation in the price of the fund's shares than if the fund were more
widely diversified. The fund, however, intends to meet certain tax
diversification requirements.
INTEREST RATE Increases in interest rates may also have a negative affect on
the types of companies in which the fund normally invests because these
companies may find it more difficult to obtain credit to expand, or may have
more difficulty meeting interest payments.
FOREIGN SECURITIES Securities of companies located outside the U.S. involve
additional risks that can increase the potential for losses in the fund.
These include country risks (due to general securities market movements in
any country where the fund has investments), company risks (due to less
stringent disclosure, accounting, auditing and financial reporting standards
and practices; less liquid securities; and less government supervision and
regulation of foreign markets and their participants), and currency risks
(due to fluctuations in currency exchange rates and the introduction of the
euro).
YEAR 2000 At this date, it appears neither the fund's operations nor those
of the companies in which it invests were adversely affected by Year 2000
computer-related problems. However, Year 2000 problems could still emerge. If
a company in which the fund is invested develops problems related to Year
2000, the price of its securities may be adversely affected, and this may
have an adverse effect on the fund's performance.
Year 2000 has been one of the many factors the manager considers when making
investment decisions. The manager reviewed public filings and other
statements made by companies about their Year 2000 readiness, but could not
audit each company to verify its readiness. Although the risk of the Year
2000 problem should decrease over time, especially after the leap day of
February 29, 2000, the possibility remains that the fund and the companies in
which it is invested may be adversely affected by Year 2000 problems until
all of their various data processing activities for the year have been
completed.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of bull and bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 3 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
29.37% -23.75% -0.82%
97 98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q2 '99
20.10%
WORST
QUARTER:
Q3 '98
- -25.32%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
SINCE
INCEPTION
1 YEAR (3/11/96)
- -------------------------------------------------------------
Franklin Value Fund - Class A 2 -6.53% 4.69%
Wilshire Small Companies Value -12.32% 5.99%
Index 3,5
Russell 2000 Value Index 4,5 -1.49% 9.88%
SINCE
INCEPTION
1 YEAR (1/1/99)
- -------------------------------------------------------------
Franklin Value Fund - Class B 2 -5.41% -5.41%
Wilshire Small Companies Value -12.32% -12.32%
Index 3,5
Russell 2000 Value Index 4,5 -1.49% -1.49%
SINCE
INCEPTION
1 YEAR (9/3/96)
- -------------------------------------------------------------
Franklin Value Fund - Class C 2 -3.48% 3.54%
Wilshire Small Companies Value -12.32% 6.43%
Index 3,5
Russell 2000 Value Index 4,5 -1.49% 9.98%
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's Micropal. The unmanaged Wilshire Small Companies
Value Index excludes companies with high price/earnings ratios, low yields,
or high price/book ratios. The index is selected from the Wilshire 2500
universe, includes companies that have market capitalizations of at least $70
million, and contains approximately 200 securities. It includes reinvested
dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
4. Source: Standard & Poor's Micropal. The unmanaged Russell 2000 Value Index
measures the performance of those Russell 2000 companies with lower
price-to-book ratios and lower forecasted growth values. It includes
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
5. Prior to March 1, 2000, the fund considered the Wilshire Small Companies
Value Index its benchmark to measure performance against. Effective March 1,
2000, the fund considers the Russell 2000 Value Index its benchmark to
measure performance against.
[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 1 CLASS C
- --------------------------------------------------------------------
Maximum sales charge (load)
as a percentage of offering price 5.75% 4.00% 1.99%
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge None 4.00% 3 0.99% 4
(load)
Exchange fee None None None
Please see "Choosing a Share Class" on page 15 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A CLASS B 1 CLASS C
Management fees 0.74% 0.74% 0.74%
Distribution and service (12b-1) 0.32% 1.00% 1.00%
fees
Other expenses 0.43% 0.43% 0.43%
=================================
Total annual fund operating 1.49% 2.17% 2.17%
expenses =================================
1. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses for Class B are annualized.
2. Except for investments of $1 million or more (see page 15) and purchases
by certain retirement plans without an initial sales charge.
3. Declines to zero after six years.
4. This is equivalent to a charge of 1% based on net asset value.
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 5 YEARS 10 YEARS
- -------------------------------------------------------------------------
If you sell your shares at the end of
the period:
CLASS A $718 1 $1,019 $1,341 $2,252
CLASS B $620 $979 $1,364 $2,331 2
CLASS C $417 $772 $1,253 $2,578
If you do not sell your shares:
CLASS B $220 $679 $1,164 $2,331 2
CLASS C $318 $772 $1,253 $2,578
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
[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 $235 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.
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.
The fund pays Advisory Services a fee for managing the fund's assets. For the
fiscal year ended October 31, 1999, the fund paid 0.74% of its average daily
net assets to the manager for its services.
[Insert graphic of dollar signs and stacks of coins]
DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least quarterly representing its net investment income. Capital gains, if
any, may be distributed annually. The amount of these distributions will vary
and there is no guarantee the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution,
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will receive some of your investment back in the
form of a taxable distribution. If you would like information on upcoming
record dates for the fund's distributions, please call 1-800/DIAL BEN(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.
[Begin callout]
BACKUP WITHHOLDING
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.
Fund distributions and gains from the sale or exchange of your shares
generally will be subject to state and local income tax. Non-U.S. investors
may be subject to U.S. withholding and estate tax. You should consult your
tax advisor about the federal, state, local or foreign tax consequences of
your investment in the fund.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance since its inception.
This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED OCTOBER 31,
1999 1 1998 1997 1996 2
- -------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 17.98 24.68 17.15 15.00
-----------------------------
Net investment income (loss) (.04) (.03) .08 .05
Net realized and unrealized gains (.55) (6.45) 7.90 2.15
(losses)
-----------------------------
Total from investment operations (.59) (6.48) 7.98 2.20
-----------------------------
Distributions from net investment - (.01) (.08) (.05)
income
Distributions from net realized (.09) (.21) (.37) -
gains
-----------------------------
Total distributions (.09) (.22) (.45) (.05)
-----------------------------
Net asset value, end of year 17.30 17.98 24.68 17.15
=============================
Total return (%) 3 (3.38)(26.48)47.43 14.69
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 65,898 98,288 78,897 7,828
Ratios to average net assets: (%)
Expenses 1.49 1.32 1.32 1.35 4
Expenses excluding waiver and
payments
by affiliate 1.49 1.38 1.41 2.87 4
Net investment income (.23) (.16) .27 .57 4
Portfolio turnover rate (%) 41.21 36.88 13.92 32.52
CLASS B
1999 1,5
- -------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 18.33
-----------------------------
Net investment loss (.15)
Net realized and unrealized losses (.97)
-----------------------------
Total from investment operations (1.12)
-----------------------------
Net asset value, end of year 17.21
=============================
Total return (%)2 (6.27)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 1,293
Ratios to average net assets: (%)
Expenses 2.12 4
Net investment loss (.84) 4
Portfolio turnover rate (%) 41.21
CLASS C
- -------------------------------------------------------------------
1999 1 1998 1997 1996 6
- -------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 17.82 24.59 17.14 16.38
-----------------------------
Net investment income (loss) (.16) (.13) (.02) .01
Net realized and unrealized gains (.54) (6.43) 7.84 .76
(losses)
-----------------------------
Total from investment operations (.70) (6.56) 7.82 .77
-----------------------------
Distributions from net investment - - - (.01)
income
Distributions from net realized (.09) (.21) (.37) -
gains
-----------------------------
Total distributions (.09) (.21) (.37) (.01)
-----------------------------
Net asset value, end of year 17.03 17.82 24.59 17.14
=============================
Total return (%) 3 (4.03)(26.93)46.40 4.68
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 30,133 41,694 21,554 434
Ratios to average net assets: (%)
Expenses 2.17 1.97 1.87 2.00 4
Expenses excluding waiver and
payments affiliate 2.17 2.03 1.96 3.52 4
Net investment loss (.91) (.81) (.30) (.08) 4
Portfolio turnover rate (%) 41.21 36.88 13.92 32.52
1. Based on average shares outstanding.
2. For the period March 11, 1996 (effective date) to October 31, 1996.
3. Total return does not include sales charges, and is not annualized.
4. Annualized.
5. For the period January 1, 1999 (effective date) to October 31, 1999.
6. For the period September 1, 1996 (effective date) to October 31, 1996.
YOUR ACCOUNT
[Insert graphic of pencil marking an X] CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. Your investment
representative can help you decide.
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------
o Initial sales o No initial o Initial sales
charge of 5.75% or sales charge charge of 1%
less
o Deferred sales o Deferred o Deferred sales
charge of 1% on sales charge of charge of 1% on
purchases of $1 4% on shares you shares you sell
million or more sell within the within 18 months
sold within 12 first year,
months declining to 1%
within six years
and eliminated
after that
o Lower annual o Higher annual o Higher annual
expenses than Class expenses than expenses than
B or C due to lower Class A (same as Class A (same as
distribution fees Class C) due to Class B) due to
higher higher
distribution distribution fees.
fees. Automatic No conversion to
conversion to Class A shares, so
Class A shares annual expenses do
after eight not decrease.
years, reducing
future annual
expenses.
SALES CHARGES - CLASS A
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
OF THE OFFERING OF YOUR NET
WHEN YOU INVEST THIS AMOUNT PRICE 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 2.00 2.04
million
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 18), 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 17).
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 % IS DEDUCTEDFROM
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
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 17). 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 Trust Company 403(b) plans,
and Franklin Templeton Trust Company qualified plans with participant or
earmarked accounts.
DISTRIBUTION AND SERVICE (12B-1) FEES Class B has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution and other fees of up to 1% per year for the sale of Class B
shares and for services provided to shareholders. Because these fees are paid
out of Class B's assets on an on-going basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
SALES CHARGES - CLASS C
THE SALES CHARGE
MAKES UP THIS % 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.
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.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one
month on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to
a CDSC. If there are not enough of these to meet your request, we will sell
the shares in the order they were purchased. We will use this same method if
you exchange your shares into another Franklin Templeton Fund (please see
page 22 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, Templeton Capital Accumulator Fund, Inc., and Templeton
Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in
the Franklin Templeton Funds for purposes of calculating the sales charge.
You 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 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 Plan 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
- --------------------------------------------------------------------
INITIAL ADDITIONAL
- --------------------------------------------------------------------
Regular accounts $1,000 $50
- --------------------------------------------------------------------
UGMA/UTMA accounts $100 $50
- --------------------------------------------------------------------
Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers, Education IRAs
or Roth IRAs)
- --------------------------------------------------------------------
IRAs, IRA rollovers, Education IRAs or Roth IRAs $250 $50
- --------------------------------------------------------------------
Broker-dealer sponsored wrap account programs $250 $50
- --------------------------------------------------------------------
Full-time employees, officers, trustees and $100 $50
directors of Franklin Templeton entities,
and their immediate family members
- --------------------------------------------------------------------
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 the next page).
BUYING SHARES
- -------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- ----------------------------------------------------------------------
[Insert graphic of Contact your Contact your
hands shaking] investment investment
representative representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- ----------------------------------------------------------------------
[Insert graphic of Make your check Make your check
envelope] payable to Franklin payable to Franklin
Value Fund. Value Fund. Include
BY MAIL your account number
Mail the check and on the check.
your signed
application to Fill out the deposit
Investor Services. slip from your
account statement. If
you do not have a
slip, include a note
with your name, the
fund name, and your
account number.
Mail the check and
deposit slip or note
to Investor Services.
- ----------------------------------------------------------------------
[Insert graphic of Call to receive a Call to receive a
three lightning bolts] wire control number wire control number
and wire instructions. and wire instructions.
BY WIRE
Wire the funds and To make a same day
1-800/632-2301 mail your signed wire investment,
(or 1-650/312-2000 application to please call us by
collect) Investor Services. 1:00 p.m. Pacific
Please include the time and make sure
wire control number your wire arrives by
or your new account 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.
- ----------------------------------------------------------------------
[Insert graphic of two Call Shareholder Call Shareholder
arrows pointing in Services at the Services at the
opposite directions] number below, or send number below or our
signed written automated TeleFACTS
BY EXCHANGE instructions. The system, or send
TeleFACTS system signed written
TeleFACTS(R) cannot be used to instructions.
1-800/247-1753 open a new account.
(around-the-clock (Please see page 22
access) (Please see page 22 for information on
for information on exchanges.)
exchanges.)
- ----------------------------------------------------------------------
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. The minimum investment to open an
account with an automatic investment plan is $50 ($25 for an Education IRA).
To sign up, complete the appropriate section of your account application.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in Class
A shares of the fund by transferring money from your paycheck to the fund by
electronic funds transfer. If you are interested, indicate on your
application that you would like to receive an Automatic Payroll Deduction
Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the
fund in an existing account in the same share class* of the fund or another
Franklin Templeton Fund. Initial sales charges and CDSCs will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
*Class B and C shareholders may reinvest their distributions in Class A
shares of any Franklin Templeton money fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class*, generally without paying any additional sales
charges. If you exchange shares held for less than six months, however, you
may be charged the difference between the initial sales charge of the two
funds if the difference is more than 0.25%. If you exchange shares from a
money fund, a sales charge may apply no matter how long you have held the
shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC
will continue to be calculated from the date of your initial investment and
will not be charged at the time of the exchange. The purchase price for
determining a CDSC on exchanged shares will be the price you paid for the
original shares. If you exchange shares subject to a CDSC into a Class A
money fund, the time your shares are held in the money fund will not count
towards the CDSC holding period.
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may
exchange into Class A without any sales charge.
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 27).
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 Trust Company retirement plan. For participants under
age 591/2, tax penalties may apply. Call Retirement Plan Services at
1-800/527-2020 for details.
SELLING SHARES
- ----------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR
SHARES
- ----------------------------------------------------------------------
[Insert graphic of hands shaking] Contact your investment
representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- ----------------------------------------------------------------------
[Insert graphic of envelope] Send written instructions and
endorsed share certificates
BY MAIL (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 do
BY PHONE not hold share certificates
and you have not changed your
1-800/632-2301 address by phone within the
last 15 days, you can 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 lightning You can call or write to have
bolts] redemption proceeds sent to a
bank account. See the policies
BY ELECTRONIC FUNDS TRANSFER (ACH) above for selling shares by
mail or phone.
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 arrows Obtain a current prospectus
pointing in opposite directions] for the fund you are
considering.
BY EXCHANGE
Call Shareholder Services at
TeleFACTS(R) the number below or our
1-800/247-1753 automated TeleFACTS system, or
(around-the-clock send signed written
access) instructions. See the policies
above for selling shares by
mail or phone.
If you hold share
certificates, you will need to
return them to the fund before
your exchange can be processed.
- ----------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES 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 0.35 0.25 2 1.00 3
A dealer commission of up to 1% may be paid on Class A NAV purchases by
certain retirement plans 1 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. Dealers may be eligible to receive up to 0.25% from the date of purchase.
After 8 years, Class B shares convert to Class A shares and dealers may then
receive the 12b-1 fee applicable to Class A.
3. Dealers may be eligible to receive up to 0.25% during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the
13th month.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the fund or your account, you can write to us
at P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one of
the following numbers. For your protection and to help ensure we provide you
with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- ----------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
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 Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklintempleton.com
You can also obtain information about the fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-202/942-8090) or the EDGAR
Database on the SEC's Internet site at http://www.sec.gov. You can obtain
copies of this information, after paying a duplicating fee, by writing to the
SEC's Public Reference Section, Washington, D.C. 20549-0102 or by electronic
request at the following E-mail address: publicinfo(R)sec.gov.
Investment Company Act file #811-5878 482 P 03/00
Prospectus
FRANKLIN
VALUE FUND
Franklin Value Investors Trust
ADVISOR CLASS
INVESTMENT STRATEGY
GROWTH & INCOME
o VALUE
MARCH 1, 2000
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
7 Performance
8 Fees and Expenses
9 Management
10 Distributions and Taxes
11 Financial Highlights
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
12 Qualified Investors
14 Buying Shares
15 Investor Services
18 Selling Shares
20 Account Policies
22 Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]
Back Cover
THE FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is long-term total return.
PRINCIPAL INVESTMENTS AND STRATEGIES The fund normally invests at least 65%
of its assets in equity securities of companies that the fund manager
believes are undervalued. In choosing investments that are undervalued, the
fund's manager focuses on companies that have:
o Low price-to-earnings ratio relative to the market or their industry
group
o Low price relative to book value, cash flow, sales, earnings growth, or
private market value (what a sophisticated investor would pay for the
entire company)
o Suffered sharp price declines (fallen angels), but in the fund's
manager's opinion still have significant potential
[Begin callout]
The fund normally invests most of its assets in companies of various sizes
that the manager believes are selling below the underlying value of their
assets.
[End callout]
A stock price is undervalued, or a "value" when it is less than the price at
which the manager believes it would trade if the market reflected all factors
relating to the company's worth. The fund manager may consider a company to
be undervalued in the marketplace relative to its underlying asset values
because of overreaction by investors to unfavorable news about a company, an
industry or the stock market in general, or as a result of a market decline,
poor economic conditions, tax-loss selling, or actual or anticipated
unfavorable developments affecting a company. The types of companies the fund
may invest in include those that are attempting to recover from business
setbacks or adverse events (turnarounds), cyclical downturns, or, in certain
cases, bankruptcy.
In addition to price, the fund, in choosing an investment, may consider a
variety of other factors that may identify the issuer as a potential
turnaround candidate or takeover target, such as ownership of valuable
franchises, trademarks or trade names, control of distribution networks and
market share for particular products. Purchase decisions may also be
influenced by income, company buy-backs, and insider purchases and sales. The
fund may invest up to 25% of total assets in foreign securities, but
currently intends to limit its investments in those securities to 10% or less
of total assets.
An equity security, or stock, 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, and the value of its assets as
well as general market conditions. Common stocks and preferred stocks are
examples of equity securities. The fund may invest a substantial portion of
its assets in small capitalization companies, which have market
capitalization of less than $1.5 billion at the time of the fund's investment
(sometimes called "small cap"). Market capitalization is the total market
value of a company's outstanding stock.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities markets, the securities in which the fund
normally invests, or the economies of countries where the fund invests are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goal because it may not invest or may invest less in
securities of undervalued companies.
The fund is designed for long-term investors and not as a trading vehicle. It
is not intended as a complete investment program and you should consider how
the fund fits your individual investment goals before you buy it.
[Insert graphic of chart with line going up and down] MAIN RISKS
[Begin callout]
Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
STOCKS While stocks, as a class, have historically outperformed other types
of investments over the long term, individual stock prices tend to go up and
down more dramatically over the short term. These price movements may result
from factors affecting individual companies or industries, or the securities
market as a whole.
VALUE INVESTING A value stock may not increase in price as anticipated by
the manager if other investors fail to recognize the company's value and bid
up the price, the markets favor faster-growing companies, or the factors that
the manager believes will increase the price of the security do not occur.
The fund's policy of investing in securities that may be out of favor,
including turnarounds, cyclical companies, companies emerging from
bankruptcy, companies reporting poor earnings, and companies whose share
prices have declined sharply or that are not widely followed by other
investors, differs from the approach followed by many other mutual funds.
Cyclical stocks in which the fund may invest tend to increase in value more
quickly during economic upturns than non-cyclical stocks, but they also tend
to lose value more quickly in economic downturns. Companies emerging from
bankruptcy may have difficulty retaining customers and suppliers. These
companies may have relatively weak balance sheets and, during economic
downturns, they may have insufficient cash flow to pay their debt obligations
and difficulty finding additional financing needed for their operations.
SMALLER COMPANIES While smaller companies may offer substantial
opportunities for capital growth, they also involve substantial risks and
should be considered speculative. Historically, smaller company securities
have been more volatile in price than larger company securities, especially
over the short term. Among the reasons for the greater price volatility are
the less certain growth prospects of smaller companies, the lower degree of
liquidity in the markets for such securities, and the greater sensitivity of
smaller companies to changing economic conditions.
In addition, small companies may lack depth of management, be unable to
generate funds necessary for growth or development, or be developing or
marketing new products or services for which markets are not yet established
and may never become established.
DIVERSIFICATION The fund is a non-diversified fund. It may invest a greater
portion of its assets in the securities of one issuer than a diversified
fund. Economic, business, political or other changes that affect industries
or issuers in which the fund is heavily invested may result in greater
fluctuation in the price of the fund's shares than if the fund were more
widely diversified. The fund, however, intends to meet certain tax
diversification requirements.
INTEREST RATE Increases in interest rates may also have a negative affect on
the types of companies in which the fund normally invests because these
companies may find it more difficult to obtain credit to expand, or may have
more difficulty meeting interest payments.
FOREIGN SECURITIES Securities of companies located outside the U.S. involve
additional risks that can increase the potential for losses in the fund.
These include country risks (due to general securities market movements in
any country where the fund has investments), company risks (due to less
stringent disclosure, accounting, auditing and financial reporting standards
and practices; less liquid securities; and less government supervision and
regulation of foreign markets and their participants), and currency risks
(due to fluctuations in currency exchange rates and the introduction of the
euro).
YEAR 2000 At this date, it appears neither the fund's operations nor those
of the companies in which it invests were adversely affected by Year 2000
computer-related problems. However, Year 2000 problems could still emerge. If
a company in which the fund is invested develops problems related to Year
2000, the price of its securities may be adversely affected, and this may
have an adverse effect on the fund's performance.
Year 2000 has been one of the many factors the manager considers when making
investment decisions. The manager reviewed public filings and other
statements made by companies about their Year 2000 readiness, but could not
audit each company to verify its readiness. Although the risk of the Year
2000 problem should decrease over time, especially after the leap day of
February 29, 2000, the possibility remains that the fund and the companies in
which it is invested may be adversely affected by Year 2000 problems until
all of their various data processing activities for the year have been
completed.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of bull and bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 3 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
ADVISOR CLASS ANNUAL TOTAL RETURNS
[Insert bar graph]
29.86% -23.43 -0.43%
97 98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q2 '99
20.19%
WORST
QUARTER:
Q3 '98
- -25.19%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
SINCE
INCEPTION
1 YEAR (3/11/96)
- -----------------------------------------------------------------
Franklin Value Fund - Advisor Class 1 -0.43% 6.90%
Wilshire Small Companies Value Index 2,4 -12.32% 5.99%
Russell 2000 Value Index 3,4 -1.49% 9.88%
1. Performance figures reflect a "blended" figure combining the following
methods of calculation: (a) For periods before January 1, 1997, a restated
figure is used based on the fund's Class A performance, excluding the effect
of Class A's maximum initial sales charge and including the effect of the
Class A distribution and service (12b-1) fees; and (b) for periods after
January 1, 1997, an actual Advisor Class figure is used reflecting a
deduction of all applicable charges and fees for that class. This blended
figure assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The unmanaged Wilshire Small Companies
Value Index excludes companies with high price/earnings ratios, low yields,
or high price/book ratios. The index is selected from the Wilshire 2500
universe, includes companies that have market capitalizations of at least $70
million, and contains approximately 200 securities. It includes reinvested
dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
3. Source: Standard & Poor's Micropal. The unmanaged Russell 2000 Value Index
measures the performance of those Russell 2000 companies with lower
price-to-book ratios and lower forecasted growth values. It includes
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
4. Prior to March 1, 2000, the fund considered the Wilshire Small Companies
Value Index its benchmark to measure performance against. Effective March 1,
2000, the fund considers the Russell 2000 Value Index its benchmark to
measure performance against.
[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)
ADVISOR CLASS
- --------------------------------------------------------------
Maximum sales charge (load) imposed on None
purchases
Exchange fee None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
ADVISOR CLASS
- --------------------------------------------------------------
Management fees 0.74%
Distribution and service (12b-1) fees None
Other expenses 0.43%
===============
Total annual fund operating expenses 1.17%
===============
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;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------
$119 $372 $644 $1,420
[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 $235 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.
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.
The fund pays Advisory Services a fee for managing the fund's assets. For the
fiscal year ended October 31, 1999, the fund paid 0.74% of its average daily
net assets to the manager.
[Insert graphic of dollar signs and stacks of coins]
DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least quarterly representing its net investment income. Capital gains, if
any, may be distributed annually. The amount of these distributions will vary
and there is no guarantee the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution,
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will receive some of your investment back in the
form of a taxable distribution. If you would like information on upcoming
record dates for the fund's distributions, please call 1-800/DIAL BEN(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.
[Begin callout]
BACKUP WITHHOLDING
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.
Fund distributions and gains from the sale or exchange of your shares
generally will be subject to state and local income tax. Non-U.S. investors
may be subject to U.S. withholding and estate tax. You should consult your
tax advisor about the federal, state, local or foreign tax consequences of
your investment in the fund.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Advisor Class since its
inception. This information has been audited by PricewaterhouseCoopers LLP.
ADVISOR CLASS YEAR ENDED OCTOBER 31,
1999 1 1998 1997 2
- -------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 18.07 24.72 18.75
--------------------------
Net investment income .01 .04 .10
Net realized and unrealized gains (.53) (6.45) 5.95
(losses)
--------------------------
Total from investment operations (.52) (6.41) 6.05
--------------------------
Less distributions from:
Net investment income - (.03) (.08)
Net realized gains (.09) (.21) -
--------------------------
Total distributions (.09) (.24) (.08)
--------------------------
Net asset value, end of year 17.46 18.07 24.72
==========================
Total return (%) 3 (2.97) (26.18) 32.35
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 2,941 4,739 4,495
Ratios to average net assets: (%)
Expenses 1.17 .97 .98 4
Expenses excluding waiver and payments 1.17 1.03 1.07 4
by affiliate
Net investment income .09 .19 .59 4
Portfolio turnover rate (%) 41.21 36.88 13.92
1. Based on average shares outstanding.
2. For the period January 1, 1997 (effective date) to October 31, 1997.
3. Total return is not annualized.
4. Annualized.
YOUR ACCOUNT
[Insert graphic of pencil marking an X] QUALIFIED INVESTORS
The following investors may qualify to buy Advisor Class shares of the fund.
o Qualified registered investment advisors with clients invested in any
series of Franklin Mutual Series Fund Inc. on October 31, 1996, or who buy
through a broker-dealer or service agent who has an agreement with Franklin
Templeton Distributors, Inc. (Distributors). Minimum investments: $1,000
initial and $50 additional.
o Broker-dealers, registered investment advisors or certified financial
planners who have an agreement with Distributors for clients participating
in comprehensive fee programs. Minimum investments: $250,000 initial
($100,000 initial for an individual client) and $50 additional.
o Officers, trustees, directors and full-time employees of Franklin
Templeton and their immediate family members. Minimum investments: $100
initial ($50 for accounts with an automatic investment plan) and $50
additional.
o Each series of the Franklin Templeton Fund Allocator Series. Minimum
investments: $1,000 initial and $1,000 additional.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Templeton Variable Insurance
Products Trust, Templeton Capital Accumulator Fund, Inc., and Templeton
Variable Products Series Fund.
[End callout]
o Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under section 501 of the Internal Revenue
Code. Minimum investments: $1 million initial investment in Advisor Class
or Class Z shares of any of the Franklin Templeton Funds and $50 additional.
o Accounts managed by the Franklin Templeton Group. Minimum investments:
No initial minimum and $50 additional.
o The Franklin Templeton Profit Sharing 401(k) Plan. Minimum investments:
No initial or additional minimums.
o Defined contribution plans such as employer stock, bonus, pension or
profit sharing plans that meet the requirements for qualification under
section 401 of the Internal Revenue Code, including salary reduction plans
qualified under section 401(k) of the Internal Revenue Code, and that are
sponsored by an employer (i) with at least 10,000 employees, or (ii) with
retirement plan assets of $100 million or more. Minimum investments: No
initial or additional minimums.
o Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a fiduciary,
agency, advisory, custodial or similar capacity and over which the trust
companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. Minimum investments: No initial or additional
minimums.
o Individual investors. Minimum investments: $5 million initial and $50
additional. You may combine all of your shares in the Franklin Templeton
Funds for purposes of determining whether you meet the $5 million minimum,
as long as $1 million is in Advisor Class or Class Z shares of any of the
Franklin Templeton Funds.
o Any other investor, including a private investment vehicle such as a
family trust or foundation, who is a member of an established group of 11
or more investors. Minimum investments: $5 million initial and $50
additional. For minimum investment purposes, the group's investments are
added together. The group may combine all of its shares in the Franklin
Templeton Funds for purposes of determining whether it meets the $5 million
minimum, as long as $1 million is in Advisor Class or Class Z shares of any
of the Franklin Templeton Funds. There are certain other requirements and
the group must have a purpose other than buying fund shares without a sales
charge.
Please note that Advisor Class shares of the fund generally are not available
to retirement plans through Franklin Templeton's ValuSelect(R) program.
Retirement plans in the ValuSelect program before January 1, 1998, however,
may invest in the fund's Advisor Class shares.
[Insert graphic of paper with lines and someone writing]
BUYING SHARES
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. To save time, you can sign up now for
services you may want on your account by completing the appropriate sections
of the application (see the next page).
BUYING SHARES
- --------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------
[Insert graphic of Contact your Contact your
hands shaking] investment investment
representative representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- --------------------------------------------------------------------
[Insert graphic of Make your check Make your check
envelope] payable to Franklin payable to Franklin
Value Fund. Value Fund. Include
BY MAIL your account number
Mail the check and on the check.
your signed
application to Fill out the
Investor Services. deposit slip from
your account
statement. If you
do not have a slip,
include a note with
your name, the fund
name, and your
account number.
Mail the check and
deposit slip or
note to Investor
Services.
- --------------------------------------------------------------------
[Insert graphic of Call to receive a Call to receive a
three lightning bolts] wire control number wire control number
and wire instructions. and wire
BY WIRE instructions.
Wire the funds and
1-800/632-2301 mail your signed To make a same day
(or 1-650/312-2000 application to wire investment,
collect) Investor Services. please call us by
Please include the 1:00 p.m. Pacific
wire control number time and make sure
or your new account your wire arrives
number on the by 3:00 p.m.
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.
- --------------------------------------------------------------------
[Insert graphic of two Call Shareholder Call Shareholder
arrows pointing in Services at the Services at the
opposite directions] number below, or send number below, or
signed written send signed written
BY EXCHANGE instructions. (Please instructions.
see page 16 for (Please see page 16
information on for information on
exchanges.) exchanges.)
- --------------------------------------------------------------------
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.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the
fund in an existing account in the same share class of the fund or in Advisor
Class or Class A shares of another Franklin Templeton Fund. To reinvest your
distributions in Advisor Class shares of another Franklin Templeton Fund, you
must qualify to buy that fund's Advisor Class shares. For distributions
reinvested in Class A shares of another Franklin Templeton Fund, initial
sales charges and contingent deferred sales charges (CDSCs) will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.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.
[End callout]
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class. You also may exchange your Advisor Class shares
for Class A shares of a fund that does not currently offer an Advisor Class
(without any sales charge)* or for Class Z shares of Franklin Mutual Series
Fund Inc.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.If you do not
qualify to buy Advisor Class shares of Templeton Developing Markets Trust or
Templeton Foreign Fund, you also may exchange your shares for Class A shares
of those funds (without any sales charge)* or for shares of Templeton
Institutional Funds, Inc.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page 21).
*If you exchange into Class A shares and you later decide you would like to
exchange into a fund that offers an Advisor Class, you may exchange your
Class A shares for Advisor Class shares if you otherwise qualify to buy the
fund's Advisor Class shares.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. Certain terms and
minimums apply. To sign up, complete the appropriate section of your
application.
[Insert graphic of certificate] SELLING SHARES
You can sell your shares at any time.
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 Trust Company retirement plan. For participants under
age 591/2, tax penalties may apply. Call Retirement Plan Services at
1-800/527-2020 for details.
SELLING SHARES
- ----------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- ----------------------------------------------------------------------
[Insert graphic of hands Contact your investment representative
shaking]
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- ----------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed
envelope] share certificates (if you hold share
certificates) to Investor Services.
BY MAIL 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. 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 do not hold share
BY PHONE certificates and you have not changed
your address by phone within the last 15
1-800/632-2301 days, you can 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
lightning bolts] proceeds sent to a bank account. See the
policies above for selling shares by
BY ELECTRONIC FUNDS mail or phone.
TRANSFER (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
arrows pointing in you are considering.
opposite directions]
Call Shareholder Services at the number
BY EXCHANGE below, or send signed written
instructions. See the policies above for
selling shares by mail or phone.
If you hold share certificates, you will
need to return them to the fund before
your exchange can be processed.
- ----------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES 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). The NAV for Advisor Class is
calculated by dividing its net assets by the number of its shares outstanding.
The fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If the fund holds securities listed primarily on a foreign exchange
that trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250
($50 for employee accounts) because you sell some of your shares, we may mail
you a notice asking you to bring the account back up to its applicable
minimum investment amount. If you choose not to do so within 30 days, we may
close your account and mail the proceeds to the address of record.
STATEMENTS AND REPORTS You will receive 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 You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right to
make payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check, 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 Advisor Class shares may
receive up to 0.25% of the amount invested. This amount is paid by Franklin
Templeton Distributors, Inc. from its own resources.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the fund or your account, you can write to us
at P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one of
the following numbers. For your protection and to help ensure we provide you
with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- ----------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
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 Plan 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Services
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklintempleton.com
You can also obtain information about the fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone
1-202/942-8090) or the EDGAR Database on the SEC's Internet site at
http://www.sec.gov. You can obtain copies of this information, after paying a
duplicating fee, by writing to the SEC's Public Reference Section,
Washington, D.C. 20549-0102 or by electronic request at the following E-mail
address: publicinfo(R)sec.gov.
Investment Company Act file #811-5878 482 PA 03/00
FRANKLIN
BALANCE SHEET
INVESTMENT FUND
FRANKLIN VALUE INVESTORS TRUST
STATEMENT OF ADDITIONAL INFORMATION
MARCH 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 March 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.
The audited financial statements and auditor's report in the fund's Annual
Report to Shareholders, for the fiscal year ended October 31, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual
report, contact your investment representative or call
1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goal and Strategies ..................... 2
Risks ................................... 12
Officers and Trustees ................... 16
Management and Other Services ........... 18
Portfolio Transactions .................. 19
Distributions and Taxes ................. 20
Organization, Voting Rights
and Principal Holders .................. 21
Buying and Selling Shares ............... 22
Pricing Shares .......................... 28
The Underwriter ......................... 29
Performance ............................. 30
Miscellaneous Information ............... 32
Description of Ratings .................. 32
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
- -------------------------------------------------------------------------------
150 SAI 03/00
GOAL AND STRATEGIES
- -------------------------------------------------------------------------------
The fund's principal investment goal is high total return, of which capital
appreciation and income are components. This goal is fundamental, which means
it may not be changed without shareholder approval. The fund invests
primarily in common stocks of companies the fund's manager believes are
undervalued in the marketplace relative to underlying asset values and
possess the potential for significant capital appreciation. The fund will
also invest a portion of its total assets in the securities of closed-end
management investment companies.
The fund may invest an unlimited amount of its total assets in the securities
of companies, including small capitalization companies, that, in the opinion
of the manager, represent an opportunity for (i) significant capital
appreciation due to intrinsic values not reflected in the current market
price of the securities and/or (ii) high income. The equity securities of
these companies will typically be purchased at a low price relative to the
book value of the company. Although the price may be above the company's book
value, the ratio of price-to-book value typically will be lower than that of
most of those companies with similar market capitalizations from which
comparable data may be obtained. The manager, however, will also take into
account a variety of other factors in order to determine whether to buy, and
once purchased, whether to hold or sell these securities. In addition to book
value, other factors the manager may consider include: valuable franchises or
other intangibles; ownership of valuable trademarks or trade names; control
of distribution networks or of market share for particular products;
ownership of real estate the value of which is understated; underutilized
liquidity; and other factors that would identify the issuer as a potential
takeover target or turnaround candidate.
The fund will generally invest in common stocks, although it has no limit on
the percentage of its assets that may be invested in preferred stock or debt
obligations, including securities convertible into common stocks, secured or
unsecured bonds, commercial paper, and notes. The mixture of common stocks,
preferred stocks, and debt obligations will vary from time to time based upon
the manager's assessment as to whether investments in each category will
contribute to meeting the fund's investment goal.
The fund's emphasis on securities believed to be undervalued by the market
uses a technique followed by certain very wealthy investors highlighted by
the media and a number of private partnerships with very high minimum
investments. It requires not only the resources to undertake exhaustive
research of little followed, out-of-favor securities, but also the patience
and discipline to hold these investments until their intrinsic values are
ultimately recognized by others in the marketplace. There can be no assurance
that this technique will be successful for the fund or that the fund will
achieve its investment goal.
An investment in the fund involves certain speculative considerations and may
involve a higher degree of risk than an investment in shares of more
traditional open-end, diversified investment companies because the fund may
invest up to 100% of its assets in the securities of issuers (including
closed-end funds) with less than three years continuous operation.
The policies used to seek to achieve the fund's goal are not fundamental,
unless otherwise noted, and are subject to change without shareholder
approval. Generally, the policies and restrictions discussed in the
prospectus and in this SAI apply when the fund makes an investment. In most
cases, the fund is not required to sell a security because circumstances
change and the security no longer meets one or more of the fund's policies or
restrictions.
The following is a description of the various types of securities the fund
may buy.
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. The purchaser of an equity security typically
receives an ownership interest in the company as well as certain voting
rights. The owner of an equity security may participate in a company's
success through the receipt of dividends, which are distributions of earnings
by the company to its owners. Equity security owners may also participate in
a company's success or lack of success through increases or decreases in the
value of the company's shares as traded in the public trading market for such
shares. Equity securities generally take the form of common stock or
preferred stock, as well as securities convertible into common stocks.
Preferred stockholders typically receive greater dividends but may receive
less appreciation than common stockholders and may have greater voting rights
as well. Equity securities may also include convertible securities, warrants,
or rights. Warrants or rights give the holder the right to buy a common stock
at a given time for a specified price.
SHARES OF CLOSED-END FUNDS The fund invests a portion of its total assets
(but may invest without limitation) in the common shares of registered
closed-end management investment companies ("closed-end funds") that are
traded on a national securities exchange or in the over-the-counter markets
and that the manager believes are undervalued in the marketplace. Consistent
with seeking capital appreciation, the fund may also buy securities issued by
unit investment trusts (UITs) when, in the manager's view, these securities
are trading at a discount from net asset value. The fund's investment in the
securities of closed-end funds and UITs will be subject to certain
restrictions and conditions imposed by the Investment Company Act of 1940, as
amended (1940 Act). The fund may, consistent with its investment goal, invest
in securities of any closed-end fund without regard to whether the investment
goals and policies of the closed-end fund are similar to or consistent with
those of the fund.
The manager will consider the following, among other factors, in evaluating
closed-end funds: (i) historical market discounts, (ii) portfolio
characteristics, (iii) repurchase, tender offer, and dividend reinvestment
programs, (iv) provisions for converting into an open-end fund, and (v)
quality of management.
The fund invests in the securities of closed-end funds that, at the time of
investment, are either trading at a discount to net asset value or which, in
the opinion of the manager, present an opportunity for capital appreciation
or high income irrespective of whether the securities are trading at a
discount or at a premium to net asset value. There can be no assurance that
the market value of the securities of the closed-end funds in which the fund
invests will increase, particularly with respect to securities trading at a
premium to net asset value.
Typically, the common shares of closed-end funds are offered to the public in
a one-time initial public offering by a group of underwriters who retain a
spread or underwriting commission of between 4% and 6% of the initial public
offering price. These securities may then be listed for trading on the New
York Stock Exchange, the American Stock Exchange, the National Association of
Securities Dealers Automated Quotation ("Nasdaq") System and, in some cases,
may be traded in other over-the-counter markets. Because the common shares of
closed-end funds cannot be redeemed upon demand to the issuer like the shares
of an open-end investment company (such as the fund), investors seek to buy
and sell common shares of closed-end funds in the secondary market.
The fund also may invest in senior securities, such as preferred stock and
debt obligations, of closed-end funds. Closed-end funds may issue senior
securities for the purpose of leveraging the closed-end fund's common shares
in an attempt to enhance the current return to closed-end fund's common
shareholders. The fund's investment in the common shares of closed-end funds
that are financially leveraged may create an opportunity for greater total
return on its investment, but at the same time may be expected to exhibit
more volatility in market price and net asset value than an investment in
shares of investment companies without a leveraged capital structure. The
fund will not invest in senior securities of closed-end funds rated lower
than A by Standard & Poor's Ratings Group (S&P(R)) and Moody's Investors
Service, Inc. (Moody's) and the fund will not own more than 3% of the total
outstanding stock (including common and preferred stock and certain senior
securities that have been afforded voting rights as a consequence of the
existence of dividend arrears) of any single closed-end fund.
The fund generally will only purchase securities of closed-end funds in the
secondary market. The fund will incur normal brokerage costs on these
purchases similar to the expenses the fund would incur for the purchase of
securities of any other type of issuer in the secondary market. The fund may,
however, also purchase securities of a closed-end fund in an initial public
offering when, in the opinion of the manager, based on a consideration of the
nature of the closed-end fund's proposed investments, the prevailing market
conditions and the level of demand for such securities, they represent an
attractive opportunity for capital appreciation. The initial offering price
will include a dealer spread, which may be higher than the applicable
brokerage cost if the fund purchased the securities in the secondary market.
Closed-end funds invest the net proceeds of their public offering in the
securities of other companies consistent with their investment goals and
policies. Certain closed-end funds seek to provide current income to
investors, others seek to provide appreciation in value, while others may
seek a combination of both income and appreciation. Closed-end funds may have
a policy of investing in certain types of securities such as equity or debt
securities; some may concentrate in particular industry sectors or geographic
areas, while others may invest in a variety of securities to achieve a
particular type of return or a particular tax result. The indicated
characteristics and risks apply to the securities of closed-end funds
regardless of whether such securities trade at a market discount or premium.
According to a report from Lipper Analytical Services, Inc., as of December
31, 1998, there were approximately 473 closed-end funds with assets in excess
of $148 billion. In order to comply with federal tax regulations, the fund
will generally invest in closed-end funds that qualify as "regulated
investment companies" under federal income tax law.
The common shares of many closed-end funds, after their initial public
offering, frequently trade at a price per share that is less than the net
asset value per share, the difference representing the "market discount" of
such common shares. This market discount may be due in part to the investment
goal of long-term appreciation, which is sought by many closed-end funds, as
well as the fact that the common shares of closed-end funds are not
redeemable by the holder upon demand to the issuer at the next-determined net
asset value but rather are subject to the principles of supply and demand in
the secondary market. A relative lack of secondary market purchasers of
closed-end fund common shares also may contribute to the common shares
trading at a discount to their net asset value.
Although the fund intends primarily to purchase common shares of closed-end
funds that trade at a market discount and that the manager believes present
the opportunity for capital appreciation or increased income due in part to
such market discount, there can be no assurance that the market discount on
common shares of any closed-end fund will ever decrease. In fact, it is
possible that this market discount may increase and the fund may suffer
realized or unrealized capital losses due to a further decline in the market
price of the securities of the closed-end funds, thereby adversely affecting
the net asset value of the fund's shares. Similarly, there can be no
assurance that the common shares of closed-end funds that trade at a premium
will continue to trade at a premium or that the premium will not decrease
subsequent to a purchase of shares by the fund. Although no assurances can be
given, the manager believes that its market research and analysis and the
diversification policies of the fund will enable the fund to avoid
significant declines in the net asset value of the fund's shares due to
losses related to an individual issuer.
The fund may also invest in the securities of closed-end funds that (i)
concentrate their portfolios in the issuers of specific industries or in
specific geographic areas; and (ii) are non-diversified for purposes of the
1940 Act. However, because the fund does not intend to concentrate its
investments in any single industry and because the closed-end funds in which
the fund will invest will generally satisfy the diversification requirements
applicable to a regulated investment company under the Internal Revenue Code,
the fund does not believe that its investment in closed-end funds that
concentrate in specific industries or geographic areas or that are
non-diversified for purposes of the 1940 Act present any special risks to
you. The fund will treat its entire investment in the securities of a
closed-end fund that concentrates in a specific industry as an investment in
securities of an issuer in the industry in which such fund concentrates its
portfolio.
The fund will not invest in the securities of closed-end funds that invest
more than 10% of their assets in the securities of other investment
companies. The fund will also not invest directly in the securities of
open-end investment companies; however, the fund may retain the securities of
a closed-end investment company that has converted to open-end fund status
subsequent to the fund's investment in the securities of the closed-end fund.
1940 ACT PROVISIONS. The fund will structure its investments in the
securities of closed-end funds and UITs to comply with applicable provisions
of the 1940 Act. The presently applicable provisions require that (i) the
fund and affiliated persons of the fund not own together more than 3% of the
total outstanding stock of any one investment company, (ii) the fund not
offer its shares at a public offering price that includes a sales charge of
more than 1.5%, and (iii) the fund will either seek instructions from its
shareholders with regard to the voting of all proxies with respect to its
investment in the securities of closed-end funds and UITs and vote such
proxies only in accordance with the instructions, or vote the shares held by
it in the same proportion as the vote of all other holders of the securities.
For purposes of applying the 3% of total outstanding stock limitation, the
fund will aggregate its purchases of a closed-end fund or a UIT with the
purchases, if any, by other investment companies managed or sponsored by the
investment manager. The fund intends to vote the shares of any closed-end
fund held by it in the same proportion as the vote of all other holders of
such fund's securities. The effect of this "mirror" voting is to neutralize
the fund's influence on corporate governance matters regarding the closed-end
funds in which the fund invests.
Closed-end funds may, under certain circumstances, convert into open-end
investment companies. Pursuant to applicable provisions of the 1940 Act, the
fund may not redeem more than 1% of the outstanding redeemable securities of
an open-end investment company during any period of 30 days or less.
Consequently, should the fund own more than 1% of the outstanding redeemable
securities of an open-end investment company after such fund's conversion
from closed-end fund status, the amount in excess of 1% may be treated as an
investment in illiquid securities. Because the fund may not hold at any time
more than 10% of the value of its total assets in illiquid securities, the
fund may seek to divest itself, prior to any such conversion, of securities
in excess of 1% of the outstanding redeemable securities of a converting
fund. The fund may, however, retain such securities and any amount in excess
of 1% of the open-end fund, thereby subject to the limits on redemption,
would be treated as an investment in illiquid securities subject to the
aggregate limit of 10% of the fund's total assets.
The fund will not invest in the securities of closed-end funds that are
managed by the investment manager or UITs that are sponsored by the
investment manager. The foregoing policy is not a fundamental policy of the
fund and can therefore be changed by a majority vote of the board of trustees
without a vote of the fund's shareholders.
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 intends to
limit its investment in foreign securities to no more than 25% of its total
assets. Please see "Risks - Foreign securities risk" for more information.
DEPOSITARY RECEIPTS Many securities of foreign issuers are represented by
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), and
Global Depositary Receipts (GDRs) (collectively, depositary receipts). ADRs
evidence ownership of, and represent the right to receive, securities of
foreign issuers deposited in a domestic bank or trust company or a foreign
correspondent bank. EDRs and GDRs are typically issued by foreign banks or
trust companies, although they also may be issued by U.S. banks or trust
companies, and evidence ownership of underlying securities issued by either a
foreign or a U.S. corporation. Generally, depositary receipts in registered
form are designed for use in the U.S. securities market and depositary
receipts in bearer form are designed for use in securities markets outside
the U.S. 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.
DEBT SECURITIES represent an obligation of the issuer to repay a loan of
money to it, and generally provide for the payment of interest. These include
bonds, notes and debentures; commercial paper; time deposits; and bankers'
acceptances. A debt security typically has a fixed payment schedule that
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it
declares and pays any dividend to holders of its equity securities. Bonds,
notes, debentures, and commercial paper differ in the length of the issuer's
payment schedule, with bonds carrying the longest repayment schedule and
commercial paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the fund's net asset value per share.
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 S&P(R) or Ba or lower by 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.
CONVERTIBLE SECURITIES The fund may invest in convertible securities; these
investments will be less than 25% of its total assets. A convertible security
is generally a debt obligation or preferred stock that may be converted
within a specified period of time into a certain amount of common stock of
the same or a different issuer. A convertible security provides a
fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance
in its underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Like a common stock,
the value of a convertible security also tends to increase as the market
value of the underlying stock rises, and it tends to decrease as the market
value of the underlying stock declines. Because its value can be influenced
by both interest rate and market movements, a convertible security is not as
sensitive to interest rates as a similar fixed-income security, nor is it as
sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by
an investment bank. When issued by an operating company, a convertible
security tends to be senior to common stock, but subordinate to other types
of fixed-income securities issued by that company. When a convertible
security issued by an operating company is "converted," the operating company
often issues new stock to the holder of the convertible security but, if the
parity price of the convertible security is less than the call price, the
operating company may pay out cash instead of common stock. If the
convertible security is issued by an investment bank, the security is an
obligation of and is convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security
will have recourse only to the issuer. In addition, a convertible security
may be subject to redemption by the issuer, but only after a specified date
and under circumstances established at the time the security is issued.
While the fund uses the same criteria to rate a convertible debt security
that it uses to rate a more conventional debt security, a convertible
preferred stock is treated like a preferred stock for the fund's financial
reporting, credit rating, and investment limitation purposes. A preferred
stock is subordinated to all debt obligations in the event of insolvency, and
an issuer's failure to make a dividend payment is generally not an event of
default entitling the preferred shareholder to take action. A preferred stock
generally has no maturity date, so that its market value is dependent on the
issuer's business prospects for an indefinite period of time. In addition,
distributions from preferred stock are dividends, rather than interest
payments, and are usually treated as such for corporate tax purposes.
ENHANCED CONVERTIBLES The fund may invest in convertible preferred stocks
that offer enhanced yield features, such as Preferred Equity Redemption
Cumulative Stocks (PERCS), which provide an investor, such as the fund, with
the opportunity to earn higher dividend income than is available on a
company's common stock. PERCS are preferred stocks that generally feature a
mandatory conversion date, as well as a capital appreciation limit, which is
usually expressed in terms of a stated price. Most PERCS expire three years
from the date of issue, at which time they are convertible into common stock
of the issuer. PERCS are generally not convertible into cash at maturity.
Under a typical arrangement, after three years PERCS convert into one share
of the issuer's common stock if the issuer's common stock is trading at a
price below that set by the capital appreciation limit, and into less than
one full share if the issuer's common stock is trading at a price above that
set by the capital appreciation limit. The amount of that fractional share of
common stock is determined by dividing the price set by the capital
appreciation limit by the market price of the issuer's common stock. PERCS
can be called at any time prior to maturity, and hence do not provide call
protection. If called early, however, the issuer must pay a call premium over
the market price to the investor. This call premium declines at a preset rate
daily, up to the maturity date.
The fund may also invest in other enhanced convertible securities. These
include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities), and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all have the
following features: they are issued by the company, the common stock of which
will be received in the event the convertible preferred stock is converted,
unlike PERCS they do not have a capital appreciation limit, they seek to
provide the investor with high current income with some prospect of future
capital appreciation, they are typically issued with three to four-year
maturities, they typically have some built-in call protection for the first
two to three years, investors have the right to convert them into shares of
common stock at a preset conversion ratio or hold them until maturity, and
upon maturity they will automatically convert to either cash or a specified
number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked
as senior or subordinated debt in the issuer's corporate structure according
to the terms of the debt indenture. There may be additional types of
convertible securities not specifically referred to herein that may be
similar to those described above in which the fund may invest, consistent
with its goal and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the fund. The fund may have difficulty disposing
of such securities because there may be a thin trading market for a
particular security at any given time. Reduced liquidity may have an adverse
impact on market price and the fund's ability to dispose of particular
securities, when necessary, to meet the fund's liquidity needs or in response
to a specific economic event, such as the deterioration in the
creditworthiness of an issuer. Reduced liquidity in the secondary market for
certain securities may also make it more difficult for the fund to obtain
market quotations based on actual trades for purposes of valuing the fund's
portfolio. The fund, however, intends to acquire liquid securities, though
there can be no assurances that this will be achieved.
SYNTHETIC CONVERTIBLES The fund may invest a portion of its assets in
"synthetic convertible" securities. A synthetic convertible is created by
combining distinct securities that together possess the two principal
characteristics of a true convertible security, i.e., fixed income and the
right to acquire the underlying equity security. This combination is achieved
by investing in nonconvertible fixed-income securities and in warrants or
stock or stock index call options 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 the true convertible security in
several respects. The value of a synthetic convertible is the sum of the
values of its fixed-income component and its convertibility component. Thus,
the values of a synthetic convertible and a true convertible security will
respond differently to market fluctuations. Further, although the manager
expects normally to create synthetic convertibles whose two components
represent one issuer, the character of a synthetic convertible allows the
fund to combine components representing distinct issuers, or to combine a
fixed-income security with a call option on a stock index, when the manager
determines that such a combination would better promote the fund's investment
goal. In addition, the component parts of a synthetic convertible security
may be purchased simultaneously or separately; and the holder of a synthetic
convertible faces the risk that the price of the stock, or the level of the
market index underlying the convertibility component will decline.
SHORT-SELLING 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 effect is given to any such short
sale, the total market value of all securities sold short would exceed 25% of
the value of the fund's net assets. In addition, short sales of the
securities of any single issuer, which must be listed on a national exchange,
may not exceed 5% of the fund's net assets or 5% of any class of such
issuer's securities.
The fund will place in a segregated account with its custodian bank an amount
of cash or U.S. government securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short
and (b) any cash or U.S. government securities required to be deposited as
collateral with the broker in connection with the short sale (not including
the proceeds from the short sale). This segregated account will be
marked-to-market daily, provided that at no time will the amount deposited in
it plus the amount deposited with the broker as collateral be less than the
market value of the securities at the time they were sold short.
OPTIONS Although the fund has no present intention of investing in 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 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, an amount
reflects, among other things, the relationship of the exercise price to the
market price and volatility of the underlying security, the remaining term of
the option, supply and demand and interest rates. This amount may, in the
case of a covered call option, be offset by a decline in the market value of
the underlying security during the option period. If a call option is
exercised, the writer experiences a profit or loss from the sale of the
underlying security.
The writer of an option that wants to terminate its obligation may effect a
"closing purchase transaction." This is done by buying an option of the same
series as the option previously written which will cancel the writer's
position by the clearing corporation. A writer may not effect a closing
purchase transaction, however, after being notified of the exercise of an
option. Likewise, an investor who is the holder of an option may liquidate
its position by effecting a "closing sale transaction." This is done by
selling an option of the same series as the option previously purchased.
There is no guarantee that either a closing purchase or a closing sale
transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit the fund to write another call option on the underlying security with
either a different exercise price or expiration date or both. In addition,
effecting a closing transaction will permit the cash or proceeds from the
sale of any securities subject to the option to be used for other fund
investments. If the fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or at the same time as the sale of the security.
The fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option. The fund will realize a
loss from a closing transaction if the price of the transaction is more than
the premium received from writing the option or is less than the premium paid
to purchase the option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option is likely
to be offset in whole or in part by appreciation of the underlying security
owned by the fund.
The fund may purchase call options on securities it intends to purchase to
limit the risk of a substantial increase in the market price of the security
or on securities indices. The fund may also purchase call options on
securities held in its portfolio and on which it has written call options.
Prior to its expiration, a call option may be sold in a closing sale
transaction. Profit or loss from such a sale will depend on whether the
amount received is more or less than the premium paid for the call option
plus any related transaction costs.
The fund may also purchase put options on securities and securities indices
and enter into closing sale transactions with respect to such options,
exercise them or permit them to expire. The fund may purchase a put option on
an underlying security (a "protective put") owned by the fund as a hedging
technique in order to protect against an anticipated decline in the value of
the security. Such hedge protection is provided only during the life of the
put option when the fund, as the holder of the put option, is able to sell
the underlying security at the put exercise price, regardless of any decline
in the underlying security's market price. For example, a put option may be
purchased in order to protect unrealized appreciation of a security when the
investment manager deems it desirable to continue to hold the security
because of tax considerations. The premium paid for the put option and any
transaction costs would reduce any capital gain otherwise available for
distribution when the security is eventually sold.
The fund's investment in options and certain securities transactions
involving actual or deemed short sales may be limited by the requirements of
the 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.
Options are generally considered "derivative securities." The fund's
investment in options will be for portfolio hedging purposes in an effort to
stabilize principal fluctuation to achieve the fund's investment goal and not
for speculation. For more information about the fund's investments in
options, please see "Risks - Options risk" below.
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 and
broker-dealers. These loans may not exceed 25% 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 102% of the current market value of the loaned
securities. The fund retains all or a portion of the interest received on the
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's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally
securities that cannot be sold within seven days in the normal course of
business at approximately the amount at which the fund has valued them.
RESTRICTED SECURITIES Some of the securities the fund buys are considered
"restricted securities." The fund's investment in restricted securities may
not exceed 15% of its net assets. Restricted securities are securities with
legal or contractual restrictions on resale, including securities that are
not registered under the 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.
NON-DIVERSIFICATION The fund intends to comply with the diversification and
other requirements applicable to regulated investment companies under the
Internal Revenue Code. As a non-diversified investment company under the
Investment Company Act of 1940, the fund may invest more than 5% and up to
25% of its assets in the securities of any one issuer at the time of
purchase. For purposes of the Internal Revenue Code, however, as of the last
day of any fiscal quarter, the fund may not have more than 25% of its total
assets invested in any one issuer, and, with respect to 50% of its total
assets, the fund may not have more than 5% of its total assets invested in
any one issuer, nor may it own more than 10% of the outstanding voting
securities of any one issuer. These limitations do not apply to investments
in securities issued or guaranteed by the U.S. government or its agencies or
instrumen-talities, or to securities of investment companies that qualify as
regulated investment companies under the Internal Revenue Code.
BORROWING As a fundamental policy, the fund does not borrow money or mortgage
or pledge any of its assets, except that it may borrow up to 15% of its total
assets (including the amount borrowed) from banks in order to meet redemption
requests that might otherwise require the untimely disposition of portfolio
securities or for other temporary or emergency purposes and may pledge its
assets in connection therewith. The fund will not buy any securities while
borrowings exceed 5% of its total assets.
TEMPORARY INVESTMENTS In anticipation of and during temporary defensive
periods or when investments of the type in which the fund intends to invest
are not available at prices that the manager believes are attractive, the
fund may invest up to 100% of its total assets in: (1) securities of the U.S.
government and certain of its agencies and instrumentalities that mature in
one year or less from the date of purchase, including U.S. Treasury bills,
notes and bonds, and securities of the Government National Mortgage
Association, the Federal Housing Administration and other agency or
instrumentality issues or guarantees that are supported by the full faith and
credit of the U.S. 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 10% aggregate limit on the fund's investment in illiquid
securities), letters of credit and bankers' acceptances, or instruments
secured by these types of obligations, issued by banks and savings
institutions that are subject to regulation by the U.S. government, its
agencies or instrumentalities and that have assets of over $1 billion, unless
these types of obligations are guaranteed by a parent bank that has total
assets in excess of $5 billion; (4) commercial paper considered by the
manager to be of high quality, which must be rated within the two highest
rating categories by S&P(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(R) 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. Have invested as of the last day of any fiscal quarter (i) more than 25%
of its total assets in the securities of any one issuer, or (ii) with respect
to 50% of the fund's total assets, more than 5% of its total assets in the
obligations of any one issuer, except for securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities.
2. Purchase more than 10% of the voting securities, or more than 10% of any
class of securities, of any issuer. For purposes of this restriction, all
outstanding fixed-income securities of an issuer are considered as one class.
3. Invest in the stock of any investment company if a purchase of such stock
would result in the fund and affiliates of the fund owning together more than
3% of the total outstanding stock of such investment company.
4. Borrow money, except from banks, in order to meet redemption requests that
might otherwise require the untimely disposition of portfolio securities or
for other temporary or emergency (not leveraging) purposes in an amount up to
15% of the value of the fund's total assets (including the amount borrowed)
based on the lesser of cost or market, less liabilities (not including the
amount borrowed) at the time the borrowing is made. While borrowings exceed
5% of the fund's total assets, the fund will not make any additional
investments.
5. Pledge, hypothecate, mortgage or otherwise encumber its assets, except to
secure borrowings for temporary or emergency purposes and permissible
options, short selling or other hedging transactions.
6. Purchase securities on margin or underwrite securities. (Does not preclude
the fund from obtaining such short-term credit as may be necessary for the
clearance of purchases and sales of its portfolio securities.)
7. Buy or sell interests in oil, gas or mineral exploration or development
programs or leases, or real estate. (Does not preclude investments in
marketable securities of issuers engaged in such activities.)
8. Make loans to others except through the purchase of debt obligations
referred to in the prospectus and the entry into repurchase agreements and
portfolio lending agreements, provided that the value of securities subject
to such lending agreements may not exceed 25% of the value of the fund's
total assets. Any loans of portfolio securities will be made according to
guidelines established by the SEC and the board, including maintenance of
collateral of the borrower equal at all times to at least 102% of the current
market value of the securities loaned.
9. Purchase or sell commodities or commodity futures contracts or financial
futures contracts; or invest in put, call, straddle or spread options on
financial or other futures contracts or stock index futures contracts.
10. Invest in warrants (valued at the lower of cost or market) in excess of
5% of the value of the fund's net assets. No more than 2% of the value of the
fund's net assets may be invested in warrants (valued at the lower of cost or
market) which are not listed on the New York or American Stock Exchanges.
11. Purchase from or sell to its officers and trustees, or any firm of which
any officer or trustee is a member, as principal, any securities, but the
fund may deal with such persons or firms as brokers and pay a customary
brokerage commission; nor invest in securities of any company if, to the
knowledge of the fund, any officer, director or trustee of the fund or the
investment advisor owns more than 0.5% of the outstanding securities of such
company and such officers, directors and trustees (who own more than 0.5%) in
the aggregate own more than 5% of the outstanding securities of such company.
12. Underwrite the securities of other issuers, except insofar as the fund
may be technically deemed an underwriter under the federal securities laws in
connection with the disposition of portfolio securities.
13. Purchase or hold the securities of any issuer if, as a result, in the
aggregate, more than 10% of the value of the fund's total assets would be
invested in securities that are subject to legal or contractual restrictions
on resale (restricted securities), in securities that are not readily
marketable (including over-the-counter options) or in repurchase agreements
maturing in more than seven days.
14. Invest in any issuer for purposes of exercising control or management.
15. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the fund from (i) making any
permitted borrowings, mortgages or pledges or (ii) entering into repurchase
transactions.
16. Engage in the short sales of securities, except short sales "against the
box," if the cash or securities deposited in the segregated account with the
fund's custodian to collateralize its short positions in the aggregate exceed
25% of the fund's net assets.
The fund presently has the following additional restriction, which is not
fundamental and may be changed without shareholder approval. The fund may not
invest more than 25% of the fund's assets (at the time of the most recent
investment) in any single industry.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
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. Often these
companies are attempting to recover from business setbacks or adverse events
(turnarounds), cyclical downturns, or, in certain cases, bankruptcy.
Cyclical stocks in which the fund may invest tend to increase in value more
quickly during economic upturns than non-cyclical stocks, but they also tend
to lose value more quickly in economic downturns. As with all investments,
there is always the possibility when investing in these securities that the
manager may be incorrect in its assessment of a particular industry or
company or that the manager may not buy these securities at their lowest
possible prices or sell them at their highest.
When the fund buys securities of companies emerging from bankruptcy, it may
encounter risks that do not exist with other investments. Companies emerging
from bankruptcy may have some difficulty retaining customers and suppliers
who prefer transacting with solvent organizations. If new management is
installed in a company emerging from bankruptcy, the management may be
considered untested; if the existing management is retained, the management
may be considered incompetent. Further, even when a company has emerged from
bankruptcy with a lower level of debt, it may still retain a relatively weak
balance sheet. During economic downturns these companies may not have
sufficient cash flow to pay their debt obligations and may also have
difficulty finding additional financing. In addition, reduced liquidity in
the secondary market may make it difficult for the fund to sell the
securities or to value them based on actual trades.
The fund's policy of investing in securities that may be out of favor,
including turnarounds, cyclical stocks and companies emerging from
bankruptcy, companies reporting poor earnings, and companies whose share
prices have declined sharply or that are not widely followed, differs from
the approach followed by many other mutual funds. The manager believes,
however, that these securities may provide a greater total investment return
than securities whose prices appear to reflect anticipated favorable
developments.
CLOSED-END FUNDS risk The fund, by investing in securities of closed-end
funds, indirectly pays a portion of the operating expenses, management
expenses and brokerage costs of these companies. Thus, you will indirectly
pay higher total management and operating expenses and other costs than you
would otherwise incur if you directly owned the securities of these
closed-end funds. You will also incur some duplicative costs such as
advisory, administrative and brokerage fees. The fund's investment strategy
may result (i) in duplicative holdings, if two or more of the closed-end
funds in whose securities the fund invests own the same portfolio security
and/or (ii) in situations whereby one closed-end fund in whose securities the
fund invests buys a portfolio security that another closed-end fund in whose
securities the fund invests is selling. However, the fund offers the
opportunity for a professionally managed portfolio of the securities of
different closed-end funds and/or other companies that the manager believes
are undervalued in the marketplace.
FOREIGN SECURITIES RISK The value of foreign (and U.S.) securities is
affected by general economic conditions and individual company and industry
earnings prospects. While foreign securities may offer significant
opportunities for gain, they also involve additional risks that can increase
the potential for losses in the fund. These risks can be significantly
greater for investments in emerging markets. Investments in depositary
receipts also involve some or all of the risks described below. 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
include (i) less economic stability; (ii) political and social uncertainty
(for example, regional conflicts and risk of war); (iii) pervasiveness of
corruption and crime; (iv) the small current size of the markets for such
securities and the currently low or nonexistent volume of trading, which
result in a lack of liquidity and in greater price volatility; (v) delays in
settling portfolio transactions; (vi) risk of loss arising out of the system
of share registration and custody; (vii) certain national policies that may
restrict the fund's investment opportunities, including restrictions on
investment in issuers or industries deemed sensitive to national interests;
(viii) foreign taxation; (ix) the absence of developed legal structures
governing private or foreign investment or allowing for judicial redress for
injury to private property; (x) the absence of a capital market structure or
market-oriented economy; and (xi) the possibility that recent favorable
economic developments may be slowed or reversed by unanticipated political or
social events.
In addition, many countries in which the fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency, and balance of payments
position.
CURRENCY RISK Some of the fund's investments may be denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
EURO risk On January 1, 1999, the European Monetary Union (EMU) introduced a
new single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of
currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets. While the
implementation of the euro could have a negative effect on the fund, the
fund's manager and its affiliated services providers are taking steps they
believe are reasonably designed to address the euro issue.
DEPOSITARY 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.
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.
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.
NON-DIVERSIFICATION RISK As a non-diversified investment company under the
1940 Act, the fund may concentrate its investments in the securities of a
smaller number of issuers than if it were a diversified company. An
investment in the fund therefore will entail greater risk than an investment
in a diversified investment company because a higher percentage of
investments among fewer issuers may result in greater fluctuation in the
total market value of the fund's portfolio, and economic, political or
regulatory developments may have a greater impact on the value of the fund's
portfolio than would be the case if the portfolio were diversified among more
issuers. All securities in which the fund may invest are inherently subject
to market risk, and the market value of the fund's investments will fluctuate.
OPTIONS RISK When the fund writes (sells) covered call options, it will
receive a cash premium that can be used in whatever way the manager believes
is most beneficial to the fund. The risks associated with covered option
writing are that in the event of a price increase on the underlying security
that would likely trigger the exercise of the call option, the fund will not
participate in the increase in price beyond the exercise price. It will
generally be the fund's policy, in order to avoid the exercise of a call
option written by it, to cancel its obligation under the call option by
entering into a "closing purchase transaction," if available, unless it is
determined to be in the fund's interest to deliver the underlying securities
from its portfolio. A closing purchase transaction consists of the fund
buying an option having the same terms as the option written by the fund, and
has the effect of canceling the fund's position as the writer of the option.
The premium that the fund will pay in executing a closing purchase
transaction may be higher or lower than the premium it received when writing
the option, depending in large part upon the relative price of the underlying
security at the time of each transaction.
One risk involved in both buying and selling options is that the fund may not
be able to effect a closing purchase transaction at a time when it wishes to
do so or at an advantageous price. There is no assurance that a liquid market
will exist for a given contract or option at any particular time. To mitigate
this risk, the fund will ordinarily buy and write options only if a secondary
market for the option exists on a national securities exchange or in the
over-the-counter market. Another risk is that during the option period, if
the fund has written a covered call option, it will have given up the
opportunity to profit from a price increase in the underlying securities
above the exercise price in return for the premium on the option (although,
of course, the premium can be used to offset any losses or add to the fund's
income) but, as long as its obligation as a writer of such an option
continues, the fund will have retained the risk of loss should the price of
the underlying security decline. In addition, the fund has no control over
the time when it may be required to fulfill its obligation as a writer of the
option. Once the fund has received an exercise notice, it cannot effect a
closing transaction in order to terminate its obligation under the option and
must deliver the underlying securities at the exercise price. The aggregate
premiums paid on all such options that are held at any time will not exceed
20% of the fund's total assets.
The fund's ability to hedge effectively all or a portion of its securities
through transactions in options on securities and securities indices depends
on the degree to which price movements in the underlying indices or
securities correlate with price movements in the relevant portion of the
fund's portfolio. Inasmuch as such securities will not duplicate the
components of any index or underlying securities, the correlation will not be
perfect. Consequently, the fund bears the risk that the prices of the
securities being hedged will not move in the same amount as the hedging
instrument. It is also possible that there may be a negative correlation
between the index or other securities underlying the hedging instrument and
the hedged securities which would result in a loss on both the securities and
the hedging instrument. Accordingly, successful use by the fund of options on
securities and securities indices will be subject to the manager's ability to
correctly predict movements in the direction of the securities markets
generally or of a particular segment. This requires different skills and
techniques than predicting changes in the price of individual stocks.
Positions in stock index options and options on securities may be closed out
only on an exchange which provides a secondary market. There can be no
assurance that a liquid secondary market will exist for any particular option
at any specific time. Thus, it may not be possible to close such an option.
The inability to close an option position could also have an adverse impact
on the fund's ability to effectively hedge its securities. The fund will
enter into an option position only if there appears to be a liquid secondary
market for such option.
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 10% limitation on illiquid securities) to the extent the
manager determines that there is a liquid institutional or other market for
these securities. For example, restricted securities may be freely
transferred among qualified institutional buyers under Rule 144A of the 1933
Act, and in some cases a liquid institutional market has developed.
On an ongoing basis, the board of trustees will review the manager's
decisions to treat restricted securities as liquid - including the manager's
assessment of current trading activity and the availability of reliable price
information. In determining whether a restricted security can be considered
liquid, the manager and the board of trustees will take into account the
following factors: (i) the frequency of trades and quotes for the security,
(ii) the number of dealers willing to buy or sell the security and the number
of potential buyers, (iii) dealer undertakings to make a market in the
security, and (iv) the nature of the security and nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). To the extent the fund
invests in restricted securities that are deemed to be liquid, the general
level of illiquidity in the fund may be increased if qualified institutional
buyers become uninterested in buying these securities or the market for these
securities contracts.
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 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 (75)
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 (69)
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 (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc., 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 51 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, 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 51 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 33 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 Goss (52)
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 and Franklin
Real Estate Management, Inc.; President and Chief Executive Officer, Franklin
Properties, Inc.; officer of 51 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 51 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, and Judicial
Clerk, U.S. District Court (District of Massachusetts).
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. and Franklin Investment
Advisory Services, Inc.; Senior Vice President, Franklin Advisory Services,
LLC; Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 51 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 and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 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 32 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 of 51 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 $3,200 per
meeting attended. Noninterested board members also may serve as directors or
trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The following table
provides the total fees paid to noninterested board members by the trust and
by the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM THE GROUP OF ON WHICH
NAME TRUST 1 ($) FUNDS 2 ($) EACH SERVES 3
- -------------------------------------------------------------------
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 53 registered investment companies, with
approximately 155 U.S. based funds or series.
Noninterested board members are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or board members who are shareholders of Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
MANAGEMENT AND OTHER SERVICES
- -------------------------------------------------------------------------------
Manager and services provided The fund's manager is Franklin Advisory
Services, 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.
MANAGEMENT FEES The fund pays the manager a fee equal to an annual rate of:
o 0.625 of 1% of the value of net assets up to and including $100 million;
o 0.50 of 1% of the value of net assets over $100 million and not over
$250 million;
o 0.45 of 1% of the value of net assets over $250 million and not over $10
billion;
o 0.44 of 1% of the value of net assets over $10 billion and not over
$12.5 billion;
o 0.42 of 1% of the value of net assets over $12.5 billion and not over
$15 billion; and
o 0.40 of 1% of the value of net assets in excess of $15 billion.
The fee is computed daily according to the terms of the management agreement.
For the last three fiscal years ended October 31, the fund paid the following
management fees:
MANAGEMENT
FEES PAID ($)
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1999 6,414,944
1998 6,868,491
1997 4,247,685
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by
Resources and is an affiliate of the fund's manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended October 31, the manager paid FT
Services the following administration fees:
ADMINISTRATION
FEES PAID ($)
- -------------------------------------------------------------
1999 1,602,307
1998 1,678,083
1997 1,238,407
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/
Templeton Investor Services, Inc. (Investor Services) is the fund's
shareholder servicing agent and acts as the fund's transfer agent and
dividend-paying agent. Investor Services is located at 777 Mariners Island
Blvd., 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
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The manager selects brokers and dealers to execute the fund's portfolio
transactions in accordance with criteria set forth in the management
agreement and any directions that the board may give.
When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid is
negotiated between the manager and the broker executing the transaction. The
determination and evaluation of the reasonableness of the brokerage
commissions paid are based to a large degree on the professional opinions of
the persons responsible for placement and review of the transactions. These
opinions are based on the experience of these individuals in the securities
industry and information available to them about the level of commissions
being paid by other institutional investors of comparable size. The manager
will ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in
the opinion of the manager, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or the manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the manager include, among others, supplying
information about particular companies, markets, countries, or local,
regional, national or transnational economies, statistical data, quotations
and other securities pricing information, and other information that provides
lawful and appropriate assistance to the manager in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the fund. They must, however, be of value to the manager in carrying
out its overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on
the research services the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions 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.
During the last three fiscal years ended October 31, the fund paid the
following brokerage commissions:
BROKERAGE
COMMISSIONS ($)
- -------------------------------------------------------------
1999 957,179
1998 1,116,613
1997 1,789,140
For the fiscal year ended October 31, 1999, the fund did not pay brokerage
commissions to brokers who provided research services.
As of October 31, 1999, the fund did not own securities of its regular
broker-dealers.
DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
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 take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net capital gains realized by the fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, to reduce or eliminate excise or income taxes on
the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or 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 has elected
to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. As a regulated
investment company, the fund generally pays no federal income tax on the
income and gains it distributes to you. The board reserves the right not to
maintain the qualification of the fund as a regulated investment company if
it determines such course of action to be beneficial to shareholders. In such
case, the fund will be subject to federal, and possibly state, corporate
taxes on its taxable income and gains, and distributions to you will be taxed
as ordinary dividend income to the extent of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires the fund to distribute to you by December 31
of each year, at a minimum, the following amounts: 98% of its taxable
ordinary income earned during the calendar year; 98% of its capital gain net
income earned during the twelve month period ending October 31; and 100% of
any undistributed amounts from the prior year. The fund intends to declare
and pay these 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 after the year 2005 (2000 for certain shareholders), 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 OBLIGATIONS States grant tax-free status to dividends paid to
you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment 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 do not generally qualify for tax-free treatment.
The rules on exclusion of this income are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that 69.70% of the dividends paid by the fund
for the most recent fiscal year qualified 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. In turn, these rules
may affect the amount, timing or character of the income distributed to you
by the fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- -------------------------------------------------------------------------------
The fund is a nondiversified 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.
Certain funds in the Franklin Templeton Funds offer multiple classes of
shares. The different classes have proportionate interests in the same
portfolio of investment securities. They differ, however, primarily in their
sales charge structures and Rule 12b-1 plans. Because the fund's sales charge
structure and Rule 12b-1 plan are similar to those of Class A shares, shares
of the fund are considered Class A shares for redemption, exchange and other
purposes.
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 February 1, 2000, the principal shareholder of the fund, beneficial or
of record, was:
NAME AND ADDRESS PERCENTAGE (%)
- --------------------------------------------------------------
The Manufacturers Life Insurance Co., 10.8
Attn: Rosie Chuck Sts. Acct.
250 Bloor St. E. 7E Fl.
Toronto ON M4W 1E5
Canada
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 February 1, 2000, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of the fund.
The board members may own shares in other funds in the Franklin Templeton
Group of Funds.
BUYING AND SELLING SHARES
- -------------------------------------------------------------------------------
The fund continuously offers its shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer
orders and accounts with the fund. This reference is for convenience only and
does not indicate a legal conclusion of capacity. Banks and financial
institutions that sell shares of the fund may be required by state law to
register as securities dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank. 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 1.5%. The initial
sales charge may be reduced for certain large purchases, as described in the
prospectus. We offer several ways for you to combine your purchases in the
Franklin Templeton Funds to take advantage of the lower sales charges for
large purchases. The Franklin Templeton Funds include the U.S. registered
mutual funds in the Franklin Group of Funds(R) and the Templeton Group of Funds
except Franklin Templeton Variable Insurance Products Trust, Templeton
Capital Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge,
you may combine the amount of your current purchase with the cost or current
value, whichever is higher, of your existing shares in the Franklin Templeton
Funds. You 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 shares at a reduced sales charge by
completing the letter of intent section of your account application. A letter
of intent is a commitment by you to invest a specified dollar amount during a
13 month period. The amount you agree to invest determines the sales charge
you pay. By completing the letter of intent section of the application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase
in shares registered in your name until you fulfill your LOI. Your periodic
statements will include the reserved shares in the total shares you own,
and we will pay or reinvest dividend and capital gain distributions on the
reserved shares according to the distribution option you have chosen.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy shares at the sales charge
applicable to the amount specified in your LOI. Sales charge reductions based
on purchases in more than one Franklin Templeton Fund will be effective only
after notification to Distributors that the investment qualifies for a
discount. Any purchases you made within 90 days before you filed your LOI
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 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 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. Fund shares may be purchased
without an initial sales charge or contingent deferred sales charge (CDSC) by
investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton
Fund. The distributions generally must be reinvested in the same share
class. Certain exceptions apply, however, to Class C shareholders of
another Franklin Templeton Fund who chose to reinvest their distributions
in shares of the fund before November 17, 1997, and to Advisor Class or
Class Z shareholders of a Franklin Templeton Fund who may reinvest their
distributions in the fund.
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 or the Templeton
Variable Products Series Fund. You should contact your tax advisor for
information on any tax consequences that may apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating
Rate Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or
a Franklin Templeton money fund, you may reinvest them as described above.
The proceeds must be reinvested within 365 days from the date the CD
matures, including any rollover, or the date you redeem your money fund
shares.
o Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund shares
and the CDSC holding period will begin again. We will, however, credit your
fund account with additional shares based on the CDSC you previously paid
and the amount of the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
o Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Fund 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 agreeing to invest in
Franklin Templeton Funds over a 13 month period at least $1 million of
assets held in a fiduciary, agency, advisory, custodial or similar capacity
and over which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
o Any state or local government or any instrumentality, department,
authority or agency thereof that has determined the fund is a legally
permissible investment and that can only buy fund shares without paying
sales charges. Please consult your legal and investment advisors to
determine if an investment in the fund is permissible and suitable for you
and the effect, if any, of payments by the fund on arbitrage rebate
calculations.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
o 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
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy shares without an initial sales charge.
Retirement plans that are not qualified retirement plans (employer sponsored
pension or profit-sharing plans that qualify under section 401 of the
Internal Revenue Code, including 401(k), money purchase pension, profit
sharing and defined benefit plans), SIMPLEs (savings incentive match plans
for employees) or SEPs (employer sponsored simplified employee pension plans
established under section 408(k) of the Internal Revenue Code) must also meet
the group purchase requirements described above to be able to buy shares
without an initial sales charge. We may enter into a special arrangement with
a securities dealer, based on criteria established by the fund, to add
together certain small qualified retirement plan accounts for the purpose of
meeting these requirements.
For retirement plan accounts opened on or after May 1, 1997, a CDSC may apply
if the retirement plan is transferred out of the Franklin Templeton Funds or
terminated within 365 days of the retirement plan account's initial purchase
in the Franklin Templeton Funds.
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, the fund's shares are available to these banks' trust accounts without
a sales charge. The banks may charge service fees to their customers who
participate in the trusts. A portion of these service fees may be paid to
Distributors or one of its affiliates to help defray expenses of maintaining
a service office in Taiwan, including expenses related to local literature
fulfillment and communication facilities.
The fund's shares may be offered to investors in Taiwan through securities
advisory firms known locally as Securities Investment Consulting Enterprises.
DEALER COMPENSATION Securities dealers may at times receive the entire sales
charge. A securities dealer who receives 90% or more of the sales charge may
be deemed an underwriter under the Securities Act of 1933, as amended.
Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated in the dealer compensation table
in the fund's prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of $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 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,
either as a lump sum or through our cumulative quantity discount or letter of
intent programs, a CDSC may apply on any shares you sell within 12 months of
purchase. The CDSC is 1% of the value of the shares sold or the net asset
value at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy shares without an initial sales charge 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.
CDSC WAIVERS. The CDSC generally will be waived for:
o Account fees
o Sales of shares purchased without an initial sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997,
or (ii) the securities dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the securities dealer of
record has entered into a supplemental agreement with Distributors
o Redemptions by 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 set up before February
1, 1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12%
annually of your account's net asset value depending on the frequency of
your plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans
or employee benefit plans serviced by ValuSelect(R)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money. If this
occurs, it is the fund's general policy to initially invest this money in
short-term, interest-bearing money market instruments, unless it is believed
that attractive investment opportunities consistent with the fund's
investment goal exist immediately. This money will then be withdrawn from the
short-term, interest-bearing money market instruments and invested in
portfolio securities in as orderly a manner as is possible when attractive
investment opportunities arise.
The proceeds from the sale of shares of an investment company 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.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday, we
will process the redemption on the next business day. When you sell your
shares under a systematic withdrawal plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold under the plan 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.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. The fund may discontinue a systematic
withdrawal plan by notifying you in writing and will automatically
discontinue a systematic withdrawal plan if all shares in your account are
withdrawn or if the fund receives notification of the shareholder's death or
incapacity.
REDEMPTIONS IN KIND The fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the U.S. Securities
and Exchange Commission (SEC). In the case of redemption requests in excess
of these amounts, the board reserves the right to make payments in whole or
in part in securities or other assets of the fund, in case of an emergency,
or if the payment of such a redemption in cash would be detrimental to the
existing shareholders of the fund. In these circumstances, the securities
distributed would be valued at the price used to compute the fund's net
assets and you may incur brokerage fees in converting the securities to cash.
The fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
SHARE CERTIFICATES We will credit your shares to your fund account. We do not
issue share certificates unless you specifically request them. This
eliminates the costly problem of replacing lost, stolen or destroyed
certificates. If a certificate is lost, stolen or destroyed, you may have to
pay an insurance premium of up to 2% of the value of the certificate to
replace it.
Any outstanding share certificates must be returned to the fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to the fund marked
"unable to forward" by the postal service, we will consider this a request by
you to change your dividend option to reinvest all distributions. The
proceeds will be reinvested in additional shares at net asset value until we
receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the fund nor
its affiliates will be liable for any loss caused by your failure to cash
such checks. The fund is not responsible for tracking down uncashed checks,
unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to
find you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.
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.
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 each business day at the close of
trading on the New York Stock Exchange (normally 1:00 p.m. Pacific time). The
fund does not calculate the NAV on days the New York Stock Exchange (NYSE) is
closed for trading, which include New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the Nasdaq National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent
quoted bid and ask prices. The fund values over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, the fund values them according to the broadest and most
representative market as determined by the manager.
The fund values portfolio securities underlying actively traded call options
at their market price as determined above. The current market value of any
option the fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last
sale price is outside the bid and ask prices, the fund values options within
the range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.
The fund determines the value of a foreign security as of the close of
trading on the foreign exchange on which the security is traded or as of the
close of trading on the NYSE, if that is earlier. The value is then converted
into its U.S. dollar equivalent at the foreign exchange rate in effect at
noon, New York time, on the day the value of the foreign security is
determined. If no sale is reported at that time, the foreign security is
valued within the range of the most recent quoted bid and ask prices.
Occasionally events that affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and
the close of the exchange and will, therefore, not be reflected in the
computation of the NAV. If events materially affecting the values of these
foreign securities occur during this period, the securities will be valued in
accordance with procedures established by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the NAV is determined as of such times. Occasionally, events affecting the
values of these securities may occur between the times at which they are
determined and the close of the NYSE that will not be reflected in the
computation of the NAV. If events materially affecting the values of these
securities occur during this period, the securities will be valued at their
fair value as determined in good faith by the board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the board. With the approval of
the board, the fund may use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
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Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the fund's shares, the net
underwriting discounts and commissions Distributors retained after allowances
to dealers, and the amounts Distributors received in connection with
redemptions or repurchases of shares for the last three fiscal years ended
October 31:
AMOUNT
RECEIVED IN
CONNECTION
AMOUNT WITH
TOTAL RETAINED REDEMPTIONS
COMMISSIONS (PAID) BY AND
RECEIVED DISTRIBUTORS REPURCHASES
($) ($) ($)
- -------------------------------------------------------------------
1999 520,585 (46) 8,343
1998 1,597,354 528 2,019
1997 1,587,115 114 0
Distributors may be entitled to reimbursement under the Rule 12b-1 plan, as
discussed below. Except as noted, Distributors received no other compensation
from the fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES The board has adopted a plan pursuant
to Rule 12b-1. The plan is designed to benefit the fund and its shareholders.
The plan is 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 the plan, the fund pays Distributors or others for the expenses of
activities that are primarily intended to sell shares of the fund. The Board
of Trustees has set the fee under the plan at 0.25% per year and has
determined that a portion of the fee may be paid for the sales and
distribution of the fund's shares and for the provision of other services to
shareholders effective February 1, 2000. 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 fund may pay up to 0.50% per year of the fund's average daily net assets.
The plan is a reimbursement plan. It allows the fund to reimburse
Distributors for eligible expenses that Distributors has shown it has
incurred. The fund will not reimburse more than the maximum amount allowed
under the plan.
For the fiscal year ended October 31, 1999, the amounts paid by the fund
pursuant to the plan were:
($)
- --------------------------------------------------------------
Advertising 104,471
Printing and mailing prospectuses
other than to current shareholders 82,501
Payments to underwriters 61,721
Payments to broker-dealers 2,939,274
Other 236,761
-------------------
Total 3,424,728
===================
In addition to the payments that Distributors or others are entitled to under
the plan, the plan also provides that to the extent the fund, the manager or
Distributors or other parties on behalf of the fund, the manager or
Distributors make payments that are deemed to be for the financing of any
activity primarily intended to result in the sale of fund shares within the
context of Rule 12b-1 under the Investment Company Act of 1940, as amended,
then such payments shall be deemed to have been made pursuant to the plan.
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 plan 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 plan 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 plan 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 plan should be continued.
The plan has been approved according to the provisions of Rule 12b-1. The
terms and provisions of the 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.
AVERAGE annual total return Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum initial sales charge is
deducted from the initial $1,000 purchase, and income dividends and capital
gain distributions are reinvested at net asset value. The quotation assumes
the account was completely redeemed at the end of each period and the
deduction of all applicable charges and fees. If a change is made to the
sales charge structure, historical performance information will be restated
to reflect the maximum initial sales charge currently in effect.
When considering the average annual total return quotations, you should keep
in mind that the maximum initial sales charge reflected in each quotation is
a one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the fund.
The average annual total returns for the indicated periods ended October 31,
1999, were:
SINCE
INCEPTION
1 YEAR (%) 5 YEARS (%) (4/2/90)
(%)
- -----------------------------------------------------------------
-2.54 11.84 12.90
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 indicated
above. The cumulative total returns for the indicated periods ended October
31, 1999, were:
SINCE
INCEPTION
1 YEAR (%) 5 YEARS (%) (4/2/90) (%)
- -------------------------------------------------------------------
-2.54 74.97 219.93
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 Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries.
o The New York Stock Exchange composite or component indices - an
unmanaged index of all industrial, utilities, transportation, and finance
stocks listed on the NYSE.
o Wilshire 5000 Equity Index - represents the return on the market value
of all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes
price, yield, risk, and total return for mutual funds.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK,
CHANGING TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines -
provide performance statistics over specified time periods.
o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J.P. Morgan(R) companies, Salomon Brothers, 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.
o Valueline Index - an unmanaged index which follows the stocks of
approximately 1,700 companies.
o Morgan Stanley Capital International World Indices, including, among
others, the Morgan Stanley Capital International Europe, Australia, Far
East Index (EAFE Index). The EAFE index is an unmanaged index of more than
1,000 companies of Europe, Australia and the Far East.
o Financial Times Actuaries Indices - including the FTA-World Index (and
components thereof), which are based on stocks in major world equity
markets.
o The Russell 1000 Value Index - a total return index that comprises
stocks from the Russell 1000 Index with a less than average growth
orientation.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment
in the fund. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or information 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. For example, as the general level of interest rates
rise, the value of the fund's fixed-income investments, if any, as well as
the value of its shares that are based upon the value of such portfolio
investments, can be expected to fall. Conversely, when interest rates
decrease, the value of the fund's shares can be expected to increase. CDs are
frequently insured by an agency of the U.S. government. An investment in the
fund is not insured by any federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the fund to calculate its figures. In
addition, there can be no assurance that the fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
- -------------------------------------------------------------------------------
The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis 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 $235 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 103 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
- -------------------------------------------------------------------------------
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present that make the long-term
risks appear somewhat larger.
A: Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered medium-grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. These bonds lack outstanding investment characteristics and, in fact,
have speculative characteristics as well.
Ba: Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and, thereby, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca: Bonds rated Ca represent obligations that are speculative to a high
degree. These issues are often in default or have other marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in
its corporate bond ratings. The modifier 1 indicates that the security ranks
in the higher end of its generic rating category; modifier 2 indicates a
mid-range ranking; and modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
STANDARD & POOR'S RATINGS GROUP (S&P(R))
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating 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.
FRANKLIN
MICROCAP
VALUE FUND
FRANKLIN VALUE INVESTORS TRUST
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 2000
[Insert Franklin Templeton Ben Head]
P.O. BOX 997151, SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
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This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the fund's prospectus.
The fund's prospectus, dated March 1, 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.
The audited financial statements and auditor's report in the fund's Annual
Report to Shareholders, for the fiscal year ended October 31, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call
1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goal and Strategies .................... 2
Risks .................................. 10
Officers and Trustees .................. 14
Management and Other Services .......... 16
Portfolio Transactions ................. 17
Distributions and Taxes ................ 18
Organization, Voting Rights and
Principal Holders ..................... 20
Buying and Selling Shares .............. 20
Pricing Shares ......................... 26
The Underwriter ........................ 27
Performance ............................ 28
Miscellaneous Information .............. 30
Description of Ratings ................. 30
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
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189 SAI 03/00
GOAL AND STRATEGIES
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The fund's principal investment goal is high total return, of which capital
appreciation and income are components. This goal is fundamental, which means
it may not be changed without shareholder approval. The fund also will seek
income when consistent with the fund's goal. The fund normally will invest at
least 65% of total assets in securities of companies with market
capitalization under $200 million that the fund's manager believes are
undervalued in the marketplace relative to underlying asset values and
possess the potential for significant capital appreciation. The fund may
invest up to 35% of its assets in securities of companies with similar
characteristics but with market capitalization over $200 million.
Under normal market conditions, the fund will invest at least 65% of its
total assets in securities of companies with market capitalization under $200
million at the time of purchase and which, in the opinion of the manager,
possess an opportunity for significant capital appreciation due to intrinsic
values in excess of the current market price of such securities. The
securities of these companies typically will be purchased at prices below the
book value of the company. The manager, however, also will take into account
a variety of other factors in order to determine whether to buy, and once
purchased, whether to hold or sell the securities. In addition to book value,
the manager may consider the following factors among others: valuable
franchises or other intangibles; ownership of valuable trademarks or trade
names; control of distribution networks or of market share for particular
products; ownership of real estate the value of which is understated;
underutilized liquidity and other factors that would identify the issuer as a
potential takeover target or turnaround candidate.
The fund will generally invest in common stocks, although it has no limit on
the percentage of its assets that may be invested in preferred stock or debt
obligations, including securities convertible into common stocks, secured or
unsecured bonds, commercial paper, and notes. The mixture of common stocks,
preferred stocks, and debt obligations will vary from time to time based upon
the manager's assessment as to whether investments in each category will
contribute to meeting the fund's investment goal.
The fund's emphasis on securities believed to be undervalued by the market
uses a technique followed by certain very wealthy investors highlighted by
the media and a number of private partnerships with very high minimum
investments. It requires not only the resources to undertake exhaustive
research of little followed, out-of-favor securities, but also the patience
and discipline to hold these investments until their intrinsic values are
ultimately recognized by others in the marketplace. There can be no assurance
that this technique will be successful for the fund or that the fund will
achieve its investment goal.
The policies used to seek to achieve the fund's goal are not fundamental,
unless otherwise noted, and are subject to change without shareholder
approval. Generally, the policies and restrictions discussed in the
prospectus and in this SAI apply when the fund makes an investment. In most
cases, the fund is not required to sell a security because circumstances
change and the security no longer meets one or more of the fund's policies or
restrictions.
The following is a description of the various types of securities the fund
may buy.
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. The purchaser of an equity security typically
receives an ownership interest in the company as well as certain voting
rights. The owner of an equity security may participate in a company's
success through the receipt of dividends, which are distributions of earnings
by the company to its owners. Equity security owners may also participate in
a company's success or lack of success through increases or decreases in the
value of the company's shares as traded in the public trading market for such
shares. Equity securities generally take the form of common stock or
preferred stock, as well as securities convertible into common stocks.
Preferred stockholders typically receive greater dividends but may receive
less appreciation than common stockholders and may have greater voting rights
as well. Equity securities may also include convertible securities, warrants,
or rights. Warrants or rights give the holder the right to buy a common stock
at a given time for a specified price.
WARRANTS A warrant is typically a long-term option issued by a corporation
which gives the holder the privilege of buying a specified number of shares
of the underlying common stock at a specified exercise price at any time on
or before an expiration date. Stock index warrants entitle the holder to
receive, upon exercise, an amount in cash determined by reference to
fluctuations in the level of a specified stock index. If the fund does not
exercise or dispose of a warrant prior to its expiration, it will expire
worthless. Further, the fund does not intend to invest directly in warrants
(valued at the lower of cost or market) in excess of 5% of the value of the
fund's net assets. No more than 2% of the value of the fund's net assets may
be invested in warrants (valued at the lower of cost or market) 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 intends to
limit its investment in foreign securities to no more than 25% of its total
assets. Please see "Risks - Foreign securities risk" for more information.
DEPOSITARY RECEIPTS Many securities of foreign issuers are represented by
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.
DEBT SECURITIES represent an obligation of the issuer to repay a loan of
money to it, and generally provide for the payment of interest. These include
bonds, notes and debentures; commercial paper; time deposits; and bankers'
acceptances. A debt security typically has a fixed payment schedule that
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it
declares and pays any dividend to holders of its equity securities. Bonds,
notes, debentures, and commercial paper differ in the length of the issuer's
payment schedule, with bonds carrying the longest repayment schedule and
commercial paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the fund's net asset value per share.
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.
CONVERTIBLE SECURITIES The fund may invest in convertible securities; these
investments will be less than 25% of its total assets. A convertible security
is generally a debt obligation or preferred stock that may be converted
within a specified period of time into a certain amount of common stock of
the same or a different issuer. A convertible security provides a
fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance
in its underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Like a common stock,
the value of a convertible security also tends to increase as the market
value of the underlying stock rises, and it tends to decrease as the market
value of the underlying stock declines. Because its value can be influenced
by both interest rate and market movements, a convertible security is not as
sensitive to interest rates as a similar fixed-income security, nor is it as
sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by
an investment bank. When issued by an operating company, a convertible
security tends to be senior to common stock, but subordinate to other types
of fixed-income securities issued by that company. When a convertible
security issued by an operating company is "converted," the operating company
often issues new stock to the holder of the convertible security but, if the
parity price of the convertible security is less than the call price, the
operating company may pay out cash instead of common stock. If the
convertible security is issued by an investment bank, the security is an
obligation of and is convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security
will have recourse only to the issuer. In addition, a convertible security
may be subject to redemption by the issuer, but only after a specified date
and under circumstances established at the time the security is issued.
While the fund uses the same criteria to rate a convertible debt security
that it uses to rate a more conventional debt security, a convertible
preferred stock is treated like a preferred stock for the fund's financial
reporting, credit rating, and investment limitation purposes. A preferred
stock is subordinated to all debt obligations in the event of insolvency, and
an issuer's failure to make a dividend payment is generally not an event of
default entitling the preferred shareholder to take action. A preferred stock
generally has no maturity date, so that its market value is dependent on the
issuer's business prospects for an indefinite period of time. In addition,
distributions from preferred stock are dividends, rather than interest
payments, and are usually treated as such for corporate tax purposes.
ENHANCED CONVERTIBLES The fund may invest in convertible preferred stocks
that offer enhanced yield features, such as Preferred Equity Redemption
Cumulative Stocks (PERCS), which provide an investor, such as the fund, with
the opportunity to earn higher dividend income than is available on a
company's common stock. PERCS are preferred stocks that generally feature a
mandatory conversion date, as well as a capital appreciation limit, which is
usually expressed in terms of a stated price. Most PERCS expire three years
from the date of issue, at which time they are convertible into common stock
of the issuer. PERCS are generally not convertible into cash at maturity.
Under a typical arrangement, after three years PERCS convert into one share
of the issuer's common stock if the issuer's common stock is trading at a
price below that set by the capital appreciation limit, and into less than
one full share if the issuer's common stock is trading at a price above that
set by the capital appreciation limit. The amount of that fractional share of
common stock is determined by dividing the price set by the capital
appreciation limit by the market price of the issuer's common stock. PERCS
can be called at any time prior to maturity, and hence do not provide call
protection. If called early, however, the issuer must pay a call premium over
the market price to the investor. This call premium declines at a preset rate
daily, up to the maturity date.
The fund may also invest in other enhanced convertible securities. These include
but are not limited to ACES (Automatically Convertible Equity Securities), PEPS
(Participating Equity Preferred Stock), PRIDES (Preferred Redeemable Increased
Dividend Equity Securities), SAILS (Stock Appreciation Income Linked
Securities), TECONS (Term Convertible Notes), QICS (Quarterly Income Cumulative
Securities), and DECS (Dividend Enhanced Convertible Securities). ACES, PEPS,
PRIDES, SAILS, TECONS, QICS, and DECS all have the following features: they are
issued by the company, the common stock of which will be received in the event
the convertible preferred stock is converted, unlike PERCS they do not have a
capital appreciation limit, they seek to provide the investor with high current
income with some prospect of future capital appreciation, they are typically
issued with three to four-year maturities, they typically have some built-in
call protection for the first two to three years, investors have the right to
convert them into shares of common stock at a preset conversion ratio or hold
them until maturity, and upon maturity they will automatically convert to either
cash or a specified number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked
as senior or subordinated debt in the issuer's corporate structure according
to the terms of the debt indenture. There may be additional types of
convertible securities not specifically referred to herein that may be
similar to those described above in which the fund may invest, consistent
with its goal and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the fund. The fund may have difficulty disposing
of such securities because there may be a thin trading market for a
particular security at any given time. Reduced liquidity may have an adverse
impact on market price and the fund's ability to dispose of particular
securities, when necessary, to meet the fund's liquidity needs or in response
to a specific economic event, such as the deterioration in the
creditworthiness of an issuer. Reduced liquidity in the secondary market for
certain securities may also make it more difficult for the fund to obtain
market quotations based on actual trades for purposes of valuing the fund's
portfolio. The fund, however, intends to acquire liquid securities, though
there can be no assurances that this will be achieved.
SYNTHETIC CONVERTIBLES The fund may invest a portion of its assets in
"synthetic convertible" securities. A synthetic convertible is created by
combining distinct securities that together possess the two principal
characteristics of a true convertible security, i.e., fixed income and the
right to acquire the underlying equity security. This combination is achieved
by investing in nonconvertible fixed-income securities and in warrants or
stock or stock index call options 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 the true convertible security in
several respects. The value of a synthetic convertible is the sum of the
values of its fixed-income component and its convertibility component. Thus,
the values of a synthetic convertible and a true convertible security will
respond differently to market fluctuations. Further, although the manager
expects normally to create synthetic convertibles whose two components
represent one issuer, the character of a synthetic convertible allows the
fund to combine components representing distinct issuers, or to combine a
fixed-income security with a call option on a stock index, when the manager
determines that such a combination would better promote the fund's investment
goal. In addition, the component parts of a synthetic convertible security
may be purchased simultaneously or separately; and the holder of a synthetic
convertible faces the risk that the price of the stock, or the level of the
market index underlying the convertibility component will decline.
SHORT-SELLING 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 effect is given to any such short
sale, the total market value of all securities sold short would exceed 25% of
the value of the fund's net assets. In addition, short sales of the
securities of any single issuer, which must be listed on a national exchange,
may not exceed 5% of the fund's net assets or 5% of any class of such
issuer's securities.
The fund will place in a segregated account with its custodian bank an amount
of cash or U.S. government securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short
and (b) any cash or U.S. government securities required to be deposited as
collateral with the broker in connection with the short sale (not including
the proceeds from the short sale). This segregated account will be
marked-to-market daily, provided that at no time will the amount deposited in
it plus the amount deposited with the broker as collateral be less than the
market value of the securities at the time they were sold short.
OPTIONS Although the fund has no present intention of investing in 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 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, an amount
reflects, among other things, the relationship of the exercise price to the
market price and volatility of the underlying security, the remaining term of
the option, supply and demand and interest rates. This amount may, in the
case of a covered call option, be offset by a decline in the market value of
the underlying security during the option period. If a call option is
exercised, the writer experiences a profit or loss from the sale of the
underlying security.
The writer of an option that wants to terminate its obligation may effect a
"closing purchase transaction." This is done by buying an option of the same
series as the option previously written which will cancel the writer's
position by the clearing corporation. A writer may not effect a closing
purchase transaction, however, after being notified of the exercise of an
option. Likewise, an investor who is the holder of an option may liquidate
its position by effecting a "closing sale transaction." This is done by
selling an option of the same series as the option previously purchased.
There is no guarantee that either a closing purchase or a closing sale
transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit the fund to write another call option on the underlying security with
either a different exercise price or expiration date or both. In addition,
effecting a closing transaction will permit the cash or proceeds from the
sale of any securities subject to the option to be used for other fund
investments. If the fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or at the same time as the sale of the security.
The fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option. The fund will realize a
loss from a closing transaction if the price of the transaction is more than
the premium received from writing the option or is less than the premium paid
to purchase the option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option is likely
to be offset in whole or in part by appreciation of the underlying security
owned by the fund.
The fund may purchase call options on securities it intends to purchase to
limit the risk of a substantial increase in the market price of the security
or on securities indices. The fund may also purchase call options on
securities held in its portfolio and on which it has written call options.
Prior to its expiration, a call option may be sold in
a closing sale transaction. Profit or loss from such a sale will depend on
whether the amount received is more or less than the premium paid for the
call option plus any related transaction costs.
The fund may also purchase put options on securities and securities indices
and enter into closing sale transactions with respect to such options,
exercise them or permit them to expire. The fund may purchase a put option on
an underlying security (a "protective put") owned by the fund as a hedging
technique in order to protect against an anticipated decline in the value of
the security. Such hedge protection is provided only during the life of the
put option when the fund, as the holder of the put option, is able to sell
the underlying security at the put exercise price, regardless of any decline
in the underlying security's market price. For example, a put option may be
purchased in order to protect unrealized appreciation of a security when the
investment manager deems it desirable to continue to hold the security
because of tax considerations. The premium paid for the put option and any
transaction costs would reduce any capital gain otherwise available for
distribution when the security is eventually sold.
The fund's investment in options and certain securities transactions
involving actual or deemed short sales may be limited by the requirements of
the 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.
Options are generally considered "derivative securities." The fund's
investment in options will be for portfolio hedging purposes in an effort to
stabilize principal fluctuation to achieve the fund's investment goal and not
for speculation. For more information about the fund's investments in
options, please see "Risks - Options risk" below.
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 off 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 and
broker-dealers. These loans may not exceed 25% 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 the
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's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally
securities that cannot be sold within seven days in the normal course of
business at approximately the amount at which the fund has valued them.
RESTRICTED SECURITIES Some of the securities the fund buys are considered
"restricted securities." The fund's investment in restricted securities may
not exceed 15% of its net assets. Restricted securities are securities with
legal or contractual restrictions on resale, including securities that are
not registered under the 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.
NON-DIVERSIFICATION The fund intends to comply with the diversification and
other requirements applicable to regulated investment companies under the
Internal Revenue Code. As a non-diversified investment company under the
Investment Company Act of 1940, the fund may invest more than 5% and up to
25% of its assets in the securities of any one issuer at the time of
purchase. For purposes of the Internal Revenue Code, however, as of the last
day of any fiscal quarter, the fund may not have more than 25% of its total
assets invested in any one issuer, and, with respect to 50% of its total
assets, the fund may not have more than 5% of its total assets invested in
any one issuer, nor may it own more than 10% of the outstanding voting
securities of any one issuer. These limitations do not apply to investments
in securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities, or to securities of investment companies that qualify as
regulated investment companies under the Internal Revenue Code.
BORROWING As a fundamental policy, the fund may not borrow money, except in
the form of reverse repurchase agreements or from banks in order to meet
redemption requests or for other temporary or emergency purposes in an amount
up to 15% of its total assets (including the amount borrowed). The fund will
not buy any securities while borrowings exceed 5% of its total assets.
TEMPORARY INVESTMENTS In anticipation of and during temporary defensive
periods or when investments of the type in which the fund intends to invest
are not available at prices that the manager believes are attractive, the
fund may invest up to 100% of its total assets in: (1) securities of the U.S.
government and certain of its agencies and instrumentalities that mature in
one year or less from the date of purchase, including U.S. Treasury bills,
notes and bonds, and securities of the Government National Mortgage
Association, the Federal Housing Administration and other agency or
instrumentality issues or guarantees that are supported by the full faith and
credit of the U.S. 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 10% aggregate limit on the fund's investment in illiquid
securities), letters of credit and bankers' acceptances, or instruments
secured by these types of obligations, issued by banks and savings
institutions that are subject to regulation by the U.S. government, its
agencies or instrumentalities and that have assets of over $1 billion, unless
these types of obligations are guaranteed by a parent bank that has total
assets in excess of $5 billion; (4) commercial paper considered by the
manager to be of high quality, which must be rated within the two highest
rating categories by S&P(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(R) or Moody's.
CONVERSION TO A MASTER/FEEDER STRUCTURE The fund currently invests directly
in securities. Certain Franklin Templeton Funds, however, are "feeder funds"
in a master/feeder fund structure. This means they invest their
assets in a "master fund" that, in turn, invests its assets directly in
securities. The fund's investment goal and other fundamental policies allow
it to invest either directly in securities or indirectly in securities
through a master fund. In the future, the fund's board may decide to convert
the fund to a master/feeder structure. If this occurs, your purchase of fund
shares will be considered your consent to a conversion and we will not seek
further shareholder approval. We will, however, notify you in advance of the
conversion. If the fund converts to a master/feeder structure, its fees and
total operating expenses are not expected to increase.
INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or
(ii) 67% or more of the fund's shares present at a shareholder meeting if
more than 50% of the fund's outstanding shares are represented at the meeting
in person or by proxy, whichever is less.
The fund may not:
1. Invest in securities for purposes of exercising management or control of
the issuer, except that all or substantially all of the assets of the fund
may be invested in another registered investment company having the same
investment goal and policies as the fund.
2. Borrow money, except in the form of reverse repurchase agreements or from
banks in order to meet redemption requests or for other temporary or
emergency purposes in an amount up to 15% of the value of the fund's total
assets (including the amount borrowed) based on the lesser of cost or market,
less liabilities (not including the amount borrowed) at the time the
borrowing is made. While borrowings exceed 5% of the fund's total assets, the
fund will not make any additional investments.
3. Pledge, hypothecate, mortgage or otherwise encumber its assets, except to
secure borrowings to meet redemption requests or for temporary or emergency
purposes and permissible options, short selling or other hedging transactions.
4. Purchase securities on margin or underwrite securities of other issuers,
except insofar as the fund may be technically deemed an underwriter under the
federal securities laws in connection with the disposition of portfolio
securities. (This does not preclude the fund from obtaining such short-term
credit as may be necessary for the clearance of purchases and sales of its
portfolio securities.)
5. Invest directly in interests in real estate, oil, gas or other mineral
leases, exploration or development programs, including limited partnership
interests. (This restriction does not preclude investments in marketable
securities of issuers engaged in such activities.)
6. Make loans to other persons, except by the purchase of debt obligations,
or through loans of the fund's portfolio securities, or to the extent the
entry into a repurchase agreement or similar transaction may be deemed a loan.
7. Purchase or sell commodities or commodity futures contracts or financial
futures contracts; or invest in put, call, straddle or spread options on
financial or other futures contracts or stock index futures contracts.
8. Invest directly in warrants (valued at the lower of cost or market) in
excess of 5% of the value of the fund's net assets. No more than 2% of the
value of the fund's net assets may be invested in warrants (valued at the
lower
of cost or market) which are not listed on the New York or American Stock
Exchanges.
9. Purchase from or sell to its officers and trustees, or any firm of which
any officer or trustee is a member, as principal, any securities, but the
fund may deal with such persons or firms as brokers and pay a customary
brokerage commission; nor invest in securities of any issuer if any officer,
director or trustee of the fund or the investment advisor owns beneficially
more than one-half of 1% of the outstanding securities of such issuer and all
such officers, directors and trustees together own beneficially more than 5%
of such securities.
10. Invest in the securities of other investment companies, except where
there is no commission other than the customary brokerage commission or sales
charge, or except that securities of another investment company may be
acquired pursuant to a plan of reorganization, merger, consolidation or
acquisition; or except further that all or substantially all of the assets of
the fund may be invested in another registered investment company having the
same investment goal and policies as the fund. Pursuant to available
exemptions from the Investment Company Act of 1940 (1940 Act), the fund may
invest in shares of one or more money market funds managed by Advisory
Services or its affiliates.
The fund presently has the following additional restrictions, which are not
fundamental and may be changed without shareholder approval.
1. The fund does not intend to invest more than 5% of its assets in
securities of issuers with less than three years continuous operation,
including the operations of any predecessor companies or to purchase or hold
securities of any issuer if, as a result, in the aggregate, more than 10% of
the value of the fund's total assets would be invested in securities that are
subject to legal or contractual restrictions on resale, in securities that
are not readily marketable (including over-the-counter options) or in
repurchase agreements maturing in more than seven days.
2. The fund may not issue senior securities, as defined in the 1940 Act,
except that this restriction shall not be deemed to prohibit the fund from
(i) making any permitted borrowings, mortgages or pledges or (ii) entering
into repurchase transactions or engage in the short sales of securities,
except short sales "against the box," if the cash or securities deposited in
the segregated account with the fund's custodian to collateralize its short
positions in the aggregate exceed 25% of the fund's net assets.
3. The fund may not invest more than 25% of the fund's assets (at the time of
the most recent investment) in any single industry.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
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. Often these
companies are attempting to recover from business setbacks or adverse events
(turnarounds), cyclical downturns, or, in certain cases, bankruptcy.
Cyclical stocks in which the fund may invest tend to increase in value more
quickly during economic upturns than non-cyclical stocks, but they also tend
to lose value more quickly in economic downturns. As with all investments,
there is always the possibility when investing in these securities that the
manager may be incorrect in its assessment of a particular industry or
company or that the manager may not buy these securities at their lowest
possible prices or sell them at their highest.
When the fund buys securities of companies emerging from bankruptcy, it may
encounter risks that do not exist with other investments. Companies emerging
from bankruptcy may have some difficulty retaining customers and suppliers
who prefer transacting with solvent organizations. If new management is
installed in a company emerging from bankruptcy, the management may be
considered untested; if the existing management is retained, the management
may be considered incompetent. Further, even when a company has emerged from
bankruptcy with a lower level of debt, it may still retain a relatively weak
balance sheet. During economic downturns these companies may not have
sufficient cash flow to pay their debt obligations and may also have
difficulty finding additional financing. In addition, reduced liquidity in
the secondary market may make it difficult for the fund to sell the
securities or to value them based on actual trades.
The fund's policy of investing in securities that may be out of favor,
including turnarounds, cyclical stocks and companies emerging from
bankruptcy, companies reporting poor earnings, and companies whose share
prices have declined sharply or that are not widely followed, differs from
the approach followed by many other mutual funds. The manager believes,
however, that these securities may provide a greater total investment return
than securities whose prices appear to reflect anticipated favorable
developments.
FOREIGN SECURITIES RISK The value of foreign (and U.S.) securities is
affected by general economic conditions and individual company and industry
earnings prospects. While foreign securities may offer significant
opportunities for gain, they also involve additional risks that can increase
the potential for losses in the fund. These risks can be significantly
greater for investments in emerging markets. Investments in depositary
receipts also involve some or all of the risks described below. 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
include (i) less economic stability; (ii) political and social uncertainty
(for example, regional conflicts and risk of war); (iii) pervasiveness of
corruption and crime; (iv) the small current size of the markets for such
securities and the currently low or nonexistent volume of trading, which
result in a lack of liquidity and in greater price volatility; (v) delays in
settling portfolio transactions; (vi) risk of loss arising out of the system
of share registration and custody; (vii) certain national policies that may
restrict the fund's investment opportunities, including restrictions on
investment in issuers or industries deemed sensitive to national interests;
(viii) foreign taxation; (ix) the absence of developed legal structures
governing private or foreign investment or allowing for judicial redress for
injury to private property; (x) the absence of a capital market structure or
market-oriented economy; and (xi) the possibility that recent favorable
economic developments may be slowed or reversed by unanticipated political or
social events.
In addition, many countries in which the fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency, and balance of payments
position.
CURRENCY RISK Some of the fund's investments may be denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
EURO RISK On January 1, 1999, the European Monetary Union (EMU) introduced a
new single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of
currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets. While the
implementation of the euro could have a negative effect on the fund, the
fund's manager and its affiliated services providers are taking steps they
believe are reasonably designed to address the euro issue.
DEPOSITARY 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.
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.
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.
NON-DIVERSIFICATION RISK As a non-diversified investment company under the
1940 Act, the fund may concentrate its investments in the securities of a
smaller number of issuers than if it were a diversified company. An
investment in the fund therefore will entail greater risk than an investment
in a diversified investment company because a higher percentage of
investments among fewer issuers may result in greater fluctuation in the
total market value of the fund's portfolio, and economic, political or
regulatory developments may have a greater impact on the value of the fund's
portfolio than would be the case if the portfolio were diversified among more
issuers. All securities in which the fund may invest are inherently subject
to market risk, and the market value of the fund's investments will fluctuate.
OPTIONS RISK When the fund writes (sells) covered call options, it will
receive a cash premium that can be used in whatever way the manager believes
is most beneficial to the fund. The risks associated with covered option
writing are that in the event of a price increase on the underlying security
that would likely trigger the exercise of the call option, the fund will not
participate in the increase in price beyond the exercise price. It will
generally be the fund's policy, in order to avoid the exercise of a call
option written by it, to cancel its obligation under the call option by
entering into a "closing purchase transaction," if available, unless it is
determined to be in the fund's interest to deliver the underlying securities
from its portfolio. A closing purchase transaction consists of the fund
buying an option having the same terms as the option written by the fund, and
has the effect of canceling the fund's position as the writer of the option.
The premium that the fund will pay in executing a closing purchase
transaction may be higher or lower than the premium it received when writing
the option, depending in large part upon the relative price of the underlying
security at the time of each transaction.
One risk involved in both buying and selling options is that the fund may not
be able to effect a closing purchase transaction at a time when it wishes to
do so or at an advantageous price. There is no assurance that a liquid market
will exist for a given contract or option at any particular time. To mitigate
this risk, the fund will ordinarily buy and write options only if a secondary
market for the option exists on a national securities exchange or in the
over-the-counter market. Another risk is that during the option period, if
the fund has written a covered call option, it will have given up the
opportunity to profit from a price increase in the underlying securities
above the exercise price in return for the premium on the option (although,
of course, the premium can be used to offset any losses or add to the fund's
income) but, as long as its obligation as a writer of such an option
continues, the fund will have retained the risk of loss should the price of
the underlying security decline. In addition, the fund has no control over
the time when it may be required to fulfill its obligation as a writer of the
option. Once the fund has received an exercise notice, it cannot effect a
closing transaction in order to terminate its obligation under the option and
must deliver the underlying securities at the exercise price. The aggregate
premiums paid on all such options that are held at any time will not exceed
20% of the fund's total assets.
The fund's ability to hedge effectively all or a portion of its securities
through transactions in options on securities and securities indices depends
on the degree to which price movements in the underlying indices or
securities correlate with price movements in the relevant portion of the
fund's portfolio. Inasmuch as such securities will not duplicate the
components of any index or underlying securities, the correlation will not be
perfect. Consequently, the fund bears the risk that the prices of the
securities being hedged will not move in the same amount as the hedging
instrument. It is also possible that there may be a negative correlation
between the index or other securities underlying the hedging instrument and
the hedged securities which would result in a loss on both the securities and
the hedging instrument. Accordingly, successful use by the fund of options on
securities and securities indices will be subject to the manager's ability to
correctly predict movements in the direction of the securities markets
generally or of a particular segment. This requires different skills and
techniques than predicting changes in the price of individual stocks.
Positions in stock index options and options on securities may be closed out
only on an exchange which provides a secondary market. There can be no
assurance that a liquid secondary market will exist for any particular option
at any specific time. Thus, it may not be possible to close such an option.
The inability to close an option position could also have an adverse impact
on the fund's ability to effectively hedge its securities. The fund will
enter into an option position only if there appears to be a liquid secondary
market for such option.
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 10% limitation on illiquid securities) to the extent the
manager determines that there is a liquid institutional or other market for
these securities. For example, restricted securities may be freely
transferred among qualified institutional buyers under Rule 144A of the 1933
Act, and in some cases a liquid institutional market has developed.
On an ongoing basis, the board of trustees will review
the manager's decisions to treat restricted securities as liquid - including
the manager's assessment of current trading activity and the availability of
reliable price information. In determining whether a restricted security can
be considered liquid, the manager and the board of trustees will take into
account the following factors: (i) the frequency of trades and quotes for the
security, (ii) the number of dealers willing to buy or sell the security and
the number of potential buyers, (iii) dealer undertakings to make a market in
the security, and (iv) the nature of the security and nature of the
marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer). To the extent
the fund invests in restricted securities that are deemed to be liquid, the
general level of illiquidity in the fund may be increased if qualified
institutional buyers become uninterested in buying these securities or the
market for these securities contracts.
OFFICERS AND TRUSTEES
- -------------------------------------------------------------------------------
The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of the
fund's investment activities. The board, in turn, elects the officers of the
trust who are responsible for administering the trust's day-to-day operations.
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 (75)
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 (69)
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 (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice Chairman, Member - Office of the Chairman and
Director, Franklin Resources, Inc., 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 51 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, 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 51 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 33 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 Goss (52)
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 and Franklin
Real Estate Management, Inc.; President and Chief Executive Officer, Franklin
Properties, Inc.; officer of 51 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 94401
VICE PRESIDENT
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior
Vice President, Templeton Worldwide, Inc. and Templeton Global Investors,
Inc.; officer of 51 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, and Judicial
Clerk, U.S. District Court (District of Massachusetts).
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. and Franklin Investment
Advisory Services, Inc.; Senior Vice President, Franklin Advisory Services,
LLC; Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 51 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 and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 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 32 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 of 51 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 $3,200 per
meeting attended. Noninterested board members also may serve as directors or
trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The following table
provides the total fees paid to noninterested board members by the trust and
by the Franklin Templeton Group of Funds.
NUMBER OF
TOTAL FEES BOARDS IN
RECEIVED THE FRANKLIN
FROM TEMPLETON
THE FRANKLIN GROUP
TOTAL FEES TEMPLETON OF FUNDS
RECEIVED FROM GROUP ON WHICH
NAME THE TRUST 1 ($) OF FUNDS 2 EACH SERVES 3
($)
- -------------------------------------------------------------------
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 53 registered investment companies, with
approximately 155 U.S. based funds or series.
Noninterested board members are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or board members who are shareholders of Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
MANAGEMENT AND OTHER SERVICES
- -------------------------------------------------------------------------------
MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisory
Services, 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.
MANAGEMENT FEES The fund pays the manager a fee equal to a daily rate of
0.75% of the fund's average daily net assets.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement.
For the last three fiscal years ended October 31, the fund paid the following
management fees:
MANAGEMENT
FEES PAID ($)
- -------------------------------------------------------------------
1999 1 1,122,724
1998 1,528,066
1997 1,104,784
1. Management fees, before any advance waiver, totaled $1,127,107. Under an
agreement by the manager to limit its fees, the fund paid the management fees
shown.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by
Resources and is an affiliate of the fund's manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended October 31, the manager paid FT
Services the following administration fees:
ADMINISTRATION
FEES PAID ($)
- -------------------------------------------------------------------
1999 225,531
1998 304,056
1997 235,560
SHAREHOLDER SERVICING AND TRANSFER agent Franklin/Templeton Investor
Services, Inc. (Investor Services) is the fund's shareholder servicing agent
and acts as the fund's transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., 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.
During the last three fiscal years ended October 31, the fund paid the
following brokerage commissions:
BROKERAGE
COMMISSIONS ($)
- --------------------------------------------------------------
1999 114,583
1998 370,264
1997 340,200
For the fiscal year ended October 31, 1999, the fund did not pay brokerage
commissions to brokers who provided research services.
As of October 31, 1999, the fund did not own securities of its regular
broker-dealers.
DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
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 take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net capital gains realized by the fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, to reduce or eliminate excise or income taxes on
the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or 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 has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As a regulated investment company,
the fund generally pays no federal income tax on the income and gains it
distributes to you. The board reserves the right not to maintain the
qualification of the fund as a regulated investment company if it determines
such course of action to be beneficial to shareholders. In such case, the fund
will be subject to federal, and possibly state, corporate taxes on its taxable
income and gains, and distributions to you will be taxed as ordinary dividend
income to the extent of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires the fund to distribute to you by December 31
of each year, at a minimum, the following amounts: 98% of its taxable
ordinary income earned during the calendar year; 98% of its capital gain net
income earned during the twelve month period ending October 31; and 100% of
any undistributed amounts from the prior year. The fund intends to declare
and pay these 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 after the year 2005 (2000 for certain shareholders), 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 OBLIGATIONS States grant tax-free status to dividends paid to
you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment 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 do not generally qualify for tax-free treatment.
The rules on exclusion of this income are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that 31.73% of the dividends paid by the fund
for the most recent fiscal year qualified 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. In turn, these rules
may affect the amount, timing or character of the income distributed to you
by the fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
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The fund is a nondiversified 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.
Certain funds in the Franklin Templeton Funds offer multiple classes of
shares. The different classes have proportionate interests in the same
portfolio of investment securities. They differ, however, primarily in their
sales charge structures and Rule 12b-1 plans. Because the fund's sales charge
structure and Rule 12b-1 plan are similar to those of Class A shares, shares
of the fund are considered Class A shares for redemption, exchange and other
purposes.
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.
From time to time, the number of fund shares held in the "street name"
accounts of various securities dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding. To the best knowledge of the fund, no other person holds
beneficially or of record more than 5% of the outstanding shares of the fund.
As of February 1, 2000, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of the fund.
The board members may own shares in other funds in the Franklin Templeton
Group of Funds.
BUYING AND SELLING SHARES
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The fund continuously offers its shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer
orders and accounts with the fund. This reference is for convenience only and
does not indicate a legal conclusion of capacity. Banks and financial
institutions that sell shares of the fund may be required by state law to
register as securities dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank. 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%. The initial
sales charge may be reduced for certain large purchases, as described in the
prospectus. We offer several ways for you to combine your purchases in the
Franklin Templeton Funds to take advantage of the lower sales charges for
large purchases. The Franklin Templeton Funds include the U.S. registered
mutual funds in the Franklin Group of Funds(R) and the Templeton Group of Funds
except Franklin Templeton Variable Insurance Products Trust, Templeton
Capital Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge,
you may combine the amount of your current purchase with the cost or current
value, whichever is higher, of your existing shares in the Franklin Templeton
Funds. You 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 shares at a reduced sales charge by
completing the letter of intent section of your account application. A letter
of intent is a commitment by you to invest a specified dollar amount during a
13 month period. The amount you agree to invest determines the sales charge
you pay. By completing the letter of intent section of the application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase
in shares registered in your name until you fulfill your LOI. Your periodic
statements will include the reserved shares in the total shares you own,
and we will pay or reinvest dividend and capital gain distributions on the
reserved shares according to the distribution option you have chosen.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy shares at the sales charge
applicable to the amount specified in your LOI. Sales charge reductions based
on purchases in more than one Franklin Templeton Fund will be effective only
after notification to Distributors that the investment qualifies for a
discount. Any purchases you made within 90 days before you filed your LOI
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 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 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. Fund shares may be purchased
without an initial sales charge or contingent deferred sales charge (CDSC) by
investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton
Fund. The distributions generally must be reinvested in the same share
class. Certain exceptions apply, however, to Class C shareholders of
another Franklin Templeton Fund who chose to reinvest their distributions
in shares of the fund before November 17, 1997, and to Advisor Class or
Class Z shareholders of a Franklin Templeton Fund who may reinvest their
distributions in the fund.
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 or the Templeton
Variable Products Series Fund. You should contact your tax advisor for
information on any tax consequences that may apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating
Rate Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or
a Franklin Templeton money fund, you may reinvest them as described above.
The proceeds must be reinvested within 365 days from the date the CD
matures, including any rollover, or the date you redeem your money fund
shares.
o Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund shares
and the CDSC holding period will begin again. We will, however, credit your
fund account with additional shares based on the CDSC you previously paid
and the amount of the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
o Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Fund 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 agreeing to invest in
Franklin Templeton Funds over a 13 month period at least $1 million of
assets held in a fiduciary, agency, advisory, custodial or similar capacity
and over which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
o Any state or local government or any instrumentality, department,
authority or agency thereof that has determined the fund is a legally
permissible investment and that can only buy fund shares without paying
sales charges. Please consult your legal and investment advisors to
determine if an investment in the fund is permissible and suitable for you
and the effect, if any, of payments by the fund on arbitrage rebate
calculations.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
o 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
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy shares without an initial sales charge.
Retirement plans that are not qualified retirement plans (employer sponsored
pension or profit-sharing plans that qualify under section 401 of the
Internal Revenue Code, including 401(k), money purchase pension, profit
sharing and defined benefit plans), SIMPLEs (savings incentive match plans
for employees) or SEPs (employer sponsored simplified employee pension plans
established under section 408(k) of the Internal Revenue Code) must also meet
the group purchase requirements described above to be able to buy shares
without an initial sales charge. We may enter into a special arrangement with
a securities dealer, based on criteria established by the fund, to add
together certain small qualified retirement plan accounts for the purpose of
meeting these requirements.
For retirement plan accounts opened on or after May 1, 1997, a CDSC may apply
if the retirement plan is transferred out of the Franklin Templeton Funds or
terminated within 365 days of the retirement plan account's initial purchase
in the Franklin Templeton Funds.
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, the fund's shares are available to these banks' trust accounts without
a sales charge. The banks may charge service fees to their customers who
participate in the trusts. A portion of these service fees may be paid to
Distributors or one of its affiliates to help defray expenses of maintaining
a service office in Taiwan, including expenses related to local literature
fulfillment and communication facilities.
The fund's shares may be offered to investors in Taiwan through securities
advisory firms known locally as Securities Investment Consulting Enterprises.
In conformity with local business practices in Taiwan, shares may be offered
with the following schedule of sales charges:
SALES
SIZE OF PURCHASE - U.S. DOLLARS CHARGE (%)
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Under $30,000 3.0
$30,000 but less than $50,000 2.5
$50,000 but less than $100,000 2.0
$100,000 but less than $200,000 1.5
$200,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION Securities dealers may at times receive the entire sales
charge. A securities dealer who receives 90% or more of the sales charge may
be deemed an underwriter under the Securities Act of 1933, as amended.
Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated in the dealer compensation table
in the fund's prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of $1
million or more: 1% on sales of $1 million to $2 million, plus 0.80% on sales
over $2 million to $3 million, plus 0.50% on sales over $3 million to $50
million, plus 0.25% on sales over $50 million to $100 million, plus 0.15% on
sales over $100 million.
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 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,
either as a lump sum or through our cumulative quantity discount or letter of
intent programs, a CDSC may apply on any shares you sell within 12 months of
purchase. The CDSC is 1% of the value of the shares sold or the net asset
value at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy shares without an initial sales charge 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.
CDSC WAIVERS. The CDSC generally will be waived for:
o Account fees
o Sales of shares purchased without an initial sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997,
or (ii) the securities dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the securities dealer of
record has entered into a supplemental agreement with Distributors
o Redemptions by 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 plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans
or employee benefit plans serviced by ValuSelect(R)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money. If this
occurs, it is the fund's general policy to initially invest this money in
short-term, interest-bearing money market instruments, unless it is believed
that attractive investment opportunities consistent with the fund's
investment goal exist immediately. This money will then be withdrawn from the
short-term, interest-bearing money market instruments and invested in
portfolio securities in as orderly a manner as is possible when attractive
investment opportunities arise.
The proceeds from the sale of shares of an investment company 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.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday, we
will process the redemption on the next business day. When you sell your
shares under a systematic withdrawal plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold under the plan 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.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. The fund may discontinue a systematic
withdrawal plan by notifying you in writing and will automatically
discontinue a systematic withdrawal plan if all shares in your account are
withdrawn or if the fund receives notification of the shareholder's death or
incapacity.
REDEMPTIONS IN KIND The fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the U.S. Securities
and Exchange Commission (SEC). In the case of redemption requests in excess
of these amounts, the board reserves the right to make payments in whole or
in part in securities or other assets of the fund, in case of an emergency,
or if the payment of such a redemption in cash would be detrimental to the
existing shareholders of the fund. In these circumstances, the securities
distributed would be valued at the price used to compute the fund's net
assets and you may incur brokerage fees in converting the securities to cash.
The fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
SHARE CERTIFICATES We will credit your shares to your fund account. We do not
issue share certificates unless you specifically request them. This
eliminates the costly problem of replacing lost, stolen or destroyed
certificates. If a certificate is lost, stolen or destroyed, you may have to
pay an insurance premium of up to 2% of the value of the certificate to
replace it.
Any outstanding share certificates must be returned to the fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to the fund marked
"unable to forward" by the postal service, we will consider this a request by
you to change your dividend option to reinvest all distributions. The
proceeds will be reinvested in additional shares at net asset value until we
receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the fund nor
its affiliates will be liable for any loss caused by your failure to cash
such checks. The fund is not responsible for tracking down uncashed checks,
unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to
find you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.
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.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. If you sell shares
through your securities dealer, it is your dealer's responsibility to
transmit the order to the fund in a timely fashion. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
notice of levy.
PRICING SHARES
- -------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the
net asset value (NAV) per share plus any applicable sales charge, calculated
to two decimal places using standard rounding criteria. When you sell shares,
you receive the NAV minus any applicable CDSC.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of
shares outstanding.
The fund calculates the NAV per share each business day at the close of
trading on the New York Stock Exchange (normally 1:00 p.m. Pacific time). The
fund does not calculate the NAV on days the New York Stock Exchange (NYSE) is
closed for trading, which include New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the Nasdaq National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent
quoted bid and ask prices. The fund values over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, the fund values them according to the broadest and most
representative market as determined by the manager.
The fund values portfolio securities underlying actively traded call options
at their market price as determined above. The current market value of any
option the fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last
sale price is outside the bid and ask prices, the fund values options within
the range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.
The fund determines the value of a foreign security as of the close of
trading on the foreign exchange on which the security is traded or as of the
close of trading on the NYSE, if that is earlier. The value is then converted
into its U.S. dollar equivalent at the foreign exchange rate in effect at
noon, New York time, on the day the value of the foreign security is
determined. If no sale is reported at that time, the foreign security is
valued within the range of the most recent quoted bid and ask prices.
Occasionally events that affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and
the close of the exchange and will, therefore, not be reflected in the
computation of the NAV. If events materially affecting the values of these
foreign securities occur during this period, the securities will be valued in
accordance with procedures established by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the NAV is determined as of such times. Occasionally, events affecting the
values of these securities may occur between the times at which they are
determined and the close of the NYSE that will not be reflected in the
computation of the NAV. If events materially affecting the values of these
securities occur during this period, the securities will be valued at their
fair value as determined in good faith by the board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the board. With the approval of
the board, the fund may use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
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Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the fund's shares, the net
underwriting discounts and commissions Distributors retained after allowances
to dealers, and the amounts Distributors received in connection with
redemptions or repurchases of shares for the last three fiscal years ended
October 31:
AMOUNT
RECEIVED IN
CONNECTION
WITH
TOTAL AMOUNT REDEMPTIONS
COMMISSIONS RETAINED BY AND
RECEIVED DISTRIBUTORS REPURCHASES
($) ($) ($)
- -----------------------------------------------------------------
1999 307,711 43,306 1,457
1998 1,041,981 122,419 0
1997 1,140,735 128,844 0
Distributors may be entitled to reimbursement under the Rule 12b-1 plan, as
discussed below. Except as noted, Distributors received no other compensation
from the fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES The board has adopted a plan pursuant
to Rule 12b-1. The plan is designed to benefit the fund and its shareholders.
The plan is 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 the plan, the fund pays Distributors or others for the expenses of
activities that are primarily intended to sell shares of the fund. 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 fund may pay up to 0.25% per year of the fund's average daily net assets.
The plan is a reimbursement plan. It allows the fund to reimburse
Distributors for eligible expenses that Distributors has shown it has
incurred. The fund will not reimburse more than the maximum amount allowed
under the plan.
For the fiscal year ended October 31, 1999, the amounts paid by the fund
pursuant to the plan were:
($)
- ------------------------------------------------------------------
Advertising 6,222
Printing and mailing prospectuses other than
to current shareholders 13,375
Payments to underwriters 2,790
Payments to broker-dealers 341,209
Other 12,145
----------------
Total 375,741
================
In addition to the payments that Distributors or others are entitled to under
the plan, the plan also provides that to the extent the fund, the manager or
Distributors or other parties on behalf of the fund, the manager or
Distributors make payments that are deemed to be for the financing of any
activity primarily intended to result in the sale of fund shares within the
context of Rule 12b-1 under the Investment Company Act of 1940, as amended,
then such payments shall be deemed to have been made pursuant to the plan.
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 plan 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 plan 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 plan 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 plan should be continued.
The plan has been approved according to the provisions of Rule 12b-1. The
terms and provisions of the plan also are consistent with Rule 12b-1.
PERFORMANCE
- -------------------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return quotations used by the fund are based on the
standardized methods of computing performance mandated by the SEC.
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.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum initial sales charge is
deducted from the initial $1,000 purchase, and income dividends and capital
gain distributions are reinvested at net asset value. The quotation assumes
the account was completely redeemed at the end of each period and the
deduction of all applicable charges and fees. If a change is made to the
sales charge structure, historical performance information will be restated
to reflect the maximum initial sales charge currently in effect.
When considering the average annual total return quotations, you should keep
in mind that the maximum initial sales charge reflected in each quotation is
a one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the fund.
The average annual total returns for the indicated periods ended October 31,
1999, were:
SINCE
INCEPTION
1 YEAR (12/12/95)
(%) (%)
- -------------------------------------------------------------------
-7.26 8.63
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 indicated
above. The cumulative total returns for the indicated periods ended October
31, 1999, were:
SINCE
INCEPTION
1 YEAR (12/12/95)
- -------------------------------------------------------------------
(%) (%)
-7.26 37.97
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 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 Brothers, 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. For example, as the general level of interest rates
rise, the value of the fund's fixed-income investments, if any, as well as
the value of its shares that are based upon the value of such portfolio
investments, can be expected to fall. Conversely, when interest rates
decrease, the value of the fund's shares can be expected to increase. CDs are
frequently insured by an agency of the U.S. government. An investment in the
fund is not insured by any federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the fund to calculate its figures. In
addition, there can be no assurance that the fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
- -------------------------------------------------------------------------------
The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis 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 $235 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 103 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
- -------------------------------------------------------------------------------
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present that make the long-term
risks appear somewhat larger.
A: Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered medium-grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. These bonds lack outstanding investment characteristics and, in fact,
have speculative characteristics as well.
Ba: Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and, thereby, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca: Bonds rated Ca represent obligations that are speculative to a high
degree. These issues are often in default or have other marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S RATINGS GROUP (S&P(R))
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating 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.
FRANKLIN
VALUE FUND
FRANKLIN VALUE INVESTORS TRUST
CLASS A, B & C
STATEMENT OF ADDITIONAL INFORMATION
MARCH 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 March 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.
The audited financial statements and auditor's report in the fund's Annual
Report to Shareholders, for the fiscal year ended October 31, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goal and Strategies ................... 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 ................ 22
Buying and Selling Shares ............. 23
Pricing Shares ........................ 29
The Underwriter ....................... 30
Performance ........................... 32
Miscellaneous Information ............. 34
Description of Ratings ................ 34
- -------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
- -------------------------------------------------------------------------------
482 SAI 03/00
GOAL AND STRATEGIES
- -------------------------------------------------------------------------------
The fund's investment goal is to attain long-term total return. 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 65% of its assets in
securities of companies that the fund's manager believes are undervalued. The
securities the fund may invest in include common and preferred stocks,
warrants, secured and unsecured bonds, and notes.
The fund's manager may take into account a variety of factors in order to
determine whether to buy or hold securities, including: low price to earnings
ratio relative to the market, their industry group, or earnings growth; low
price relative to book value, cash flow, or sales; 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 may also participate in
a company's success or lack of success through increases or decreases in the
value of the company's shares as traded in the public trading market for such
shares. Equity securities generally take the form of common stock or
preferred stock, as well as securities convertible into common stocks.
Preferred stockholders typically receive greater dividends but may receive
less appreciation than common stockholders and may have greater voting rights
as well. Equity securities may also include convertible securities, warrants,
or rights. Warrants or rights give the holder the right to buy a common stock
at a given time for a specified price.
WARRANTS A warrant is typically a long-term option issued by a corporation
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. Although the fund may
invest up to 25% of total assets in foreign securities, it currently intends
to limit its investment in foreign securities to no more than 10% of its
total assets. 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.
DEBT SECURITIES represent an obligation of the issuer to repay a loan of
money to it, and generally, provide for
the payment of interest. These include bonds, notes and debentures;
commercial paper; time deposits; and bankers' acceptances. A debt security
typically has a fixed payment schedule that obligates the issuer to pay
interest to the lender and to return the lender's money over a certain time
period. A company typically meets its payment obligations associated with its
outstanding debt securities before it declares and pays any dividend to
holders of its equity securities. Bonds, notes, debentures, and commercial
paper differ in the length of the issuer's payment schedule, with bonds
carrying the longest repayment schedule and commercial paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the fund's net asset value per share.
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.
CONVERTIBLE SECURITIES The fund may invest in convertible securities; these
investments will be less than 25% of its total assets. A convertible security
is generally a debt obligation or preferred stock that may be converted
within a specified period of time into a certain amount of common stock of
the same or a different issuer. A convertible security provides a
fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance
in its underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Like a common stock,
the value of a convertible security also tends to increase as the market
value of the underlying stock rises, and it tends to decrease as the market
value of the underlying stock declines. Because its value can be influenced
by both interest rate and market movements, a convertible security is not as
sensitive to interest rates as a similar fixed-income security, nor is it as
sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by
an investment bank. When issued by an operating company, a convertible
security tends to be senior to common stock, but subordinate to other types
of fixed-income securities issued by that company. When a convertible
security issued by an operating company is "converted," the operating company
often issues new stock to the holder of the convertible security but, if the
parity price of the convertible security is less than the call price, the
operating company may pay out cash instead of common stock. If the
convertible security is issued by an investment bank, the security is an
obligation of and is convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security
will have recourse only to the issuer. In addition, a convertible security
may be subject to redemption by the issuer, but only after a specified date
and under circumstances established at the time the security is issued.
While the fund uses the same criteria to rate a convertible debt security
that it uses to rate a more conventional debt security, a convertible
preferred stock is treated like a preferred stock for the fund's financial
reporting, credit rating, and investment limitation purposes. A preferred
stock is subordinated to all debt obligations in the event of insolvency, and
an issuer's failure to make a dividend payment is generally not an event of
default entitling the preferred shareholder to take action. A preferred stock
generally has no maturity date, so that its market value is dependent on the
issuer's business prospects for an indefinite period of time. In addition,
distributions from preferred stock are dividends, rather than interest
payments, and are usually treated as such for corporate tax purposes.
ENHANCED CONVERTIBLES The fund may invest in convertible preferred stocks
that offer enhanced yield features, such as Preferred Equity Redemption
Cumulative Stocks (PERCS), which provide an investor, such as the fund, with
the opportunity to earn higher dividend income than is available on a
company's common stock. PERCS are preferred stocks that generally feature a
mandatory conversion date, as well as a capital appreciation limit, which is
usually expressed in terms of a stated price. Most PERCS expire three years
from the date of issue, at which time they are convertible into common stock
of the issuer. PERCS are generally not convertible into cash at maturity.
Under a typical arrangement, after three years PERCS convert into one share
of the issuer's common stock if the issuer's common stock is trading at a
price below that set by the capital appreciation limit, and into less than
one full share if the issuer's common stock is trading at a price above that
set by the capital appreciation limit. The amount of that fractional share of
common stock is determined by dividing the price set by the capital
appreciation limit by the market price of the issuer's common stock. PERCS
can be called at any time prior to maturity, and hence do not provide call
protection. If called early, however, the issuer must pay a call premium over
the market price to the investor. This call premium declines at a preset rate
daily, up to the maturity date.
The fund may also invest in other enhanced convertible securities. These
include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities), and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all have the
following features: they are issued by the company, the common stock of which
will be received in the event the convertible preferred stock is converted,
unlike PERCS they do not have a capital appreciation limit, they seek to
provide the investor with high current income with some prospect of future
capital appreciation, they are typically issued with three to four-year
maturities, they typically have some built-in call protection for the first
two to three years, investors have the right to convert them into shares of
common stock at a preset conversion ratio or hold them until maturity, and
upon maturity they will automatically convert to either cash or a specified
number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked
as senior or subordinated debt in the issuer's corporate structure according
to the terms of the debt indenture. There may be additional types of
convertible securities not specifically referred to herein that may be
similar to those described above in which the fund may invest, consistent
with its goal and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the fund. The fund may have difficulty disposing
of such securities because there may be a thin trading market for a
particular security at any given time. Reduced liquidity may have an adverse
impact on market price and the fund's ability to dispose of particular
securities, when necessary, to meet the fund's liquidity needs or in response
to a specific economic event, such as the deterioration in the
creditworthiness of an issuer. Reduced liquidity in the secondary market for
certain securities may also make it more difficult for the fund to obtain
market quotations based on actual trades for purposes of valuing the fund's
portfolio. The fund, however, intends to acquire liquid securities, though
there can be no assurances that this will be achieved.
SYNTHETIC CONVERTIBLES The fund may invest a portion of its assets in
"synthetic convertible" securities. A synthetic convertible is created by
combining distinct securities that together possess the two principal
characteristics of a true convertible security, i.e., fixed income and the
right to acquire the underlying equity security. This combination is achieved
by investing in nonconvertible fixed-income securities and in warrants or
stock or stock index call options 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 the true convertible security in
several respects. The value of a synthetic convertible is the sum of the
values of its fixed-income component and its convertibility component. Thus,
the values of a synthetic convertible and a true convertible security will
respond differently to market fluctuations. Further, although the manager
expects normally to create synthetic convertibles whose two components
represent one issuer, the character of a synthetic convertible allows the
fund to combine components representing distinct issuers, or to combine a
fixed-income security with a call option on a stock index, when the manager
determines that such a combination would better promote the fund's investment
goal. In addition, the component parts of a synthetic convertible security
may be purchased simultaneously or separately; and the holder of a synthetic
convertible faces the risk that the price of the stock, or the level of the
market index underlying the convertibility component will decline.
SHORT-SELLING 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.
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.
SPREAD AND STRADDLE OPTIONS TRANSACTIONS In "spread" transactions, the fund
buys and writes a put or buys and writes a call on the same underlying
security with the options having different exercise prices and/or expiration
dates. In "straddles," the fund purchases or writes combinations of put and
call options on the same security. When the fund engages in spread and
straddle transactions, it seeks to profit from differentials in the option
premiums paid and received and in the market prices of the related options
positions when they are closed out or sold. Because these transactions
require the fund to buy and/or write more than one option simultaneously, the
fund's ability to enter into such transactions and to liquidate its positions
when necessary or deemed advisable may be more limited than if the fund was
to buy or sell a single option. Similarly, costs incurred by the fund in
connection with these transactions will in many cases be greater than if the
fund was to buy or sell a single option. The fund intends to limit these
transactions to no more than 5% of the fund's net assets.
FUTURES The fund may enter into contracts for the purchase or sale for future
delivery of securities, contracts based upon financial indices, and the fund
may buy options on such contracts (financial futures). Financial futures
contracts are contracts that obligate the long or short holder to take or
make delivery of a specified quantity of a financial instrument, such as a
security, or the cash value of a securities index during a specified future
period at a specified price. A "sale" of a futures contract means the seller
has a contractual obligation to deliver the securities described in the
contract at a specified price on a specified date. A "purchase" of a futures
contract means the buyer has a contractual obligation to acquire the
securities described in the contract at a specified price on a specified
date. Futures contracts have been designed by exchanges that have been
designated "contracts markets" by the Commodity Futures Trading Commission
(CFTC) and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market. At the
present time, the fund intends to limit these investments to no more than 5%
of its net assets.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by buying
(or selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation to take
delivery of the securities. Since all transactions in the futures market are
made, offset or fulfilled through a clearinghouse associated with the exchange
on which the contracts are traded, the fund will incur brokerage fees when it
purchases or sells futures contracts.
The fund will not engage in transactions in futures contracts or related
options for speculation. The fund will not enter into any stock index future
or related option if, immediately thereafter, more than one third (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 will generally have a portion of its assets in
cash or cash equivalents for a variety of reasons, including waiting for a
special investment opportunity or taking a defensive position. To earn income
on this portion of its assets, the fund may enter into repurchase agreements.
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 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 and
broker-dealers. These loans may not exceed 25% 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 the
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's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally
securities that cannot be sold within seven days in the normal course of
business at approximately the amount at which the fund has valued them.
RESTRICTED SECURITIES Some of the securities the fund buys are considered
"restricted securities." The fund's investment in restricted securities may
not exceed 15% of its net assets. Restricted securities are securities with
legal or contractual restrictions on resale, including securities that are
not registered under the 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.
NON-DIVERSIFICATION The fund intends to comply with the diversification and
other requirements applicable to regulated investment companies under the
Internal Revenue Code. As a non-diversified investment company under the
Investment Company Act of 1940, as amended (1940 Act), the fund may invest
more than 5% and up to 25% of its assets in the securities of any one issuer
at the time of purchase. For purposes of the Internal Revenue Code, however,
as of the last day of any fiscal quarter, the fund may not have more than 25%
of its total assets invested in any one issuer, and, with respect to 50% of
its total assets, the fund may not have more than 5% of its total assets
invested in any one issuer, nor may it own more than 10% of the outstanding
voting securities of any one issuer. These limitations do not apply to
investments in securities issued or guaranteed by the U.S. government or its
agencies or instrumentalities, or to securities of investment companies that
qualify as regulated investment companies under the Internal Revenue Code.
BORROWING The fund does not borrow money or mortgage or pledge any of its
assets, except that it may borrow up to 331/3% of its total assets (including
the amount borrowed) in order to meet redemption requests that might
otherwise require the untimely disposition of portfolio securities or for
other temporary or emergency purposes and may pledge its assets in connection
therewith. The fund will not make any additional investments while any
borrowings exceed 5% of its total assets.
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 10% aggregate limit on the fund's investment in illiquid
securities), letters of credit and bankers' acceptances, or instruments
secured by these types of obligations, issued by banks and savings
institutions that are subject to regulation by the U.S. government, its
agencies or instrumentalities and that have assets of over $1 billion, unless
these types of obligations are guaranteed by a parent bank that has total
assets in excess of $5 billion; (4) commercial paper considered by the
manager to be of high quality, which must be rated within the two highest
rating categories by S&P(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 in a manner consistent
with the fund's investment goal and policies in an amount not exceeding
331/3% of the value of the fund's total assets (including the amount
borrowed). The fund may borrow in connection with short-sales and short-sales
"against the box," and the fund may borrow from banks, other Franklin
Templeton Funds or other persons to the extent permitted by applicable law.
2. Underwrite securities of other issuers, except insofar as the fund may be
technically deemed an underwriter under the federal securities laws in
connection with the disposition of portfolio securities. (This does not
preclude the fund from obtaining such short-term credit as may be necessary
for the clearance of purchases and sales of its portfolio securities.)
3. Invest directly in interests in real estate, oil, gas or other mineral
leases, exploration or development programs, including limited partnership
interests. This restriction does not preclude investments in marketable
securities
of issuers engaged in such activities.
4. Loan money, except as consistent with the fund's investment goal, and
except that the fund may (a) purchase a portion of an issue of publicly
distributed bonds, debentures, notes and other evidences of indebtedness, (b)
enter into repurchase agreements, (c) lend its portfolio securities, and (d)
participate in an interfund lending program with other Franklin Templeton
Funds to the extent permitted by the 1940 Act and any rules or orders
thereunder.
5. Purchase or sell commodities or commodity contracts; except that the fund
may enter into interest rate and financial futures contracts, options
thereon, and forward contracts.
6. Issue securities senior to the fund's presently authorized shares of
beneficial interest.
7. Invest more than 25% of the fund's assets (at the time of the most recent
investment) in any single industry.
The fund presently has the following additional restrictions, which are not
fundamental and may be changed without shareholder approval.
The fund may not:
1. Invest in any company for the purpose of exercising control or management,
except that all or substantially all of the assets of the fund may be
invested in another registered investment company having the same investment
goal and policies as the fund.
2. Purchase securities on margin, except that the fund may make margin
payments in connection with futures, options and currency transactions.
3. Purchase or retain securities of any company in which officers or trustees
of the fund, or of its investment manager, individually owning more than 1/2
of 1% of the securities of such company, in the aggregate own more than 5% of
the securities of such company.
4. Buy securities of open-end or closed-end investment companies, except that
the fund may: (i) buy securities of open-end or closed-end investment
companies in compliance with the 1940 Act; (ii) invest all or substantially
all of its assets in another registered investment company having the same
investment goal and policies as the fund; or (iii) invest in shares of one or
more money market funds managed by Franklin Advisory Services, LLC or its
affiliates, to the extent permitted by exemptions granted under the 1940 Act.
5. Invest more than 5% of its assets in securities of issuers with less than
three years continuous operation, including the operations of any predecessor
companies.
6. Hold or purchase the securities of any issuer if, as a result, in the
aggregate, more than 10% of the value of the fund's net assets would be
invested in (i) securities that are not readily marketable or (ii) repurchase
agreements maturing in more than seven days. The fund may, however, invest in
registered investment companies as described in Restriction 1 above.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
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. Often these
companies are attempting to recover from business setbacks or adverse events
(turnarounds), cyclical downturns, or, in certain cases, bankruptcy.
Cyclical stocks in which the fund may invest tend to increase in value more
quickly during economic upturns than non-cyclical stocks, but they also tend
to lose value more quickly in economic downturns. As with all investments,
there is always the possibility when investing in these securities that the
manager may be incorrect in its assessment of a particular industry or
company or that the manager may not buy these securities at their lowest
possible prices or sell them at their highest.
When the fund buys securities of companies emerging from bankruptcy, it may
encounter risks that do not exist with other investments. Companies emerging
from bankruptcy may have some difficulty retaining customers and suppliers
who prefer transacting with solvent organizations. If new management is
installed in a company emerging from bankruptcy, the management may be
considered untested; if the existing management is retained, the management
may be considered incompetent. Further, even when a company has emerged from
bankruptcy with a lower level of debt, it may still retain a relatively weak
balance sheet. During economic downturns these companies may not have
sufficient cash flow to pay their debt obligations and may also have
difficulty finding additional financing. In addition, reduced liquidity in
the secondary market may make it difficult for the fund to sell the
securities or to value them based on actual trades.
The fund's policy of investing in securities that may be out of favor,
including turnarounds, cyclical stocks and companies emerging from
bankruptcy, companies reporting poor earnings, and companies whose share
prices have declined sharply or that are not widely followed, differs from
the approach followed by many other mutual funds. The manager believes,
however, that these securities may provide a greater total investment return
than securities whose prices appear to reflect anticipated favorable
developments.
FOREIGN SECURITIES RISK The value of foreign (and U.S.) securities is
affected by general economic conditions and individual company and industry
earnings prospects. While foreign securities may offer significant
opportunities for gain, they also involve additional risks that can increase
the potential for losses in the fund. These risks can be significantly
greater for investments in emerging markets. Investments in depositary
receipts also involve some or all of the risks described below. 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 Monetary Union (EMU) introduced a
new single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of
currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets. While the
implementation of the euro could have a negative effect on the fund, the
fund's manager and its affiliated services providers are taking steps they
believe are reasonably designed to address the euro issue.
DEPOSITARY 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.
NON-DIVERSIFICATION RISK As a non-diversified investment company under the
1940 Act, the fund may concentrate its investments in the securities of a
smaller number of issuers than if it were a diversified company. An
investment in the fund therefore will entail greater risk than an investment
in a diversified investment company because a higher percentage of
investments among fewer issuers may result in greater fluctuation in the
total market value of the fund's portfolio, and economic, political or
regulatory developments may have a greater impact on the value of the fund's
portfolio than would be the case if the portfolio were diversified among more
issuers. All securities in which the fund may invest are inherently subject
to market risk, and the market value of the fund's investments will fluctuate.
OPTIONS, 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 10% limitation on illiquid securities) to the extent the
manager determines that there is a liquid institutional or other market for
these securities. For example, restricted securities may be freely
transferred among qualified institutional buyers under Rule 144A of the 1933
Act, and in some cases a liquid institutional market has developed.
On an ongoing basis, the board of trustees will review
the manager's decisions to treat restricted securities as liquid - including
the manager's assessment of current trading activity and the availability of
reliable price information. In determining whether a restricted security can
be considered liquid, the manager and the board of trustees will take into
account the following factors: (i) the frequency of trades and quotes for the
security, (ii) the number of dealers willing to buy or sell the security and
the number of potential buyers, (iii) dealer undertakings to make a market in
the security, and (iv) the nature of the security and nature of the
marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer). To the extent
the fund invests in restricted securities that are deemed to be liquid, the
general level of illiquidity in the fund may be increased if qualified
institutional buyers become uninterested in buying these securities or the
market for these securities contracts.
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 (75)
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 (69)
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 (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc., 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 51 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, 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 51 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 33 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 Goss (52)
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 and Franklin
Real Estate Management, Inc.; President and Chief Executive Officer, Franklin
Properties, Inc.; officer of 51 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 51 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, and Judicial
Clerk, U.S. District Court (District of Massachusetts).
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. and Franklin Investment
Advisory Services, Inc.; Senior Vice President, Franklin Advisory Services,
LLC; Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 51 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 and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 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 32 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 of 51 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 $3,200 per
meeting attended. Noninterested board members also may serve as directors or
trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The following table
provides the total fees paid to noninterested board members by the trust and
by the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED TEMPLETON
FROM
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM THE GROUP OF ON WHICH
TRUST 1 ($) FUNDS 2 ($) EACH SERVES 3
- -------------------------------------------------------------------
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 53 registered investment companies, with
approximately 155 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.
MANAGEMENT FEES The fund pays the manager a fee equal to an annual rate of:
o 0.75% on the first $500 million of the average daily net assets of the
fund;
o 0.625% on the next $500 million of the average daily net assets of the
fund;
o 0.50% on the average daily net assets of the fund in excess of $1
billion.
The fee is computed daily according to the terms of the management agreement.
Each class of the fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended October 31, the fund paid the following
management fees:
MANAGEMENT
FEES PAID ($)
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1999 892,1811
1998 1,105,3942
1997 236,3152
1. For the fiscal year ended October 31, 1999, the manager agreed in advance
to reduce its fees to reflect reduced services resulting from the fund's
investment in the Sweep Money Fund. Prior to this reduction, management fees
were $893,761.
2. For the fiscal years ended October 31, 1998 and 1997, management fees,
before any advance waiver, totaled $1,200,877 and $267,392, respectively.
Under an agreement by the manager to limit its fees, the fund paid the
management fees shown.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by
Resources and is an affiliate of the fund's manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the fund's average daily net assets up to
o $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended October 31, the manager paid FT
Services the following administration fees:
ADMINISTRATION FEES
PAID ($)
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1999 180,045
1998 240,184
1997 54,225
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is the fund's shareholder servicing agent
and acts as the fund's transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., 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
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The manager selects brokers and dealers to execute the fund's portfolio
transactions in accordance with criteria set forth in the management
agreement and any directions that the board may give.
When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid is
negotiated between the manager and the broker executing the transaction. The
determination and evaluation of the reasonableness of the brokerage
commissions paid are based to a large degree on the professional opinions of
the persons responsible for placement and review of the transactions. These
opinions are based on the experience of these individuals in the securities
industry and information available to them about the level of commissions
being paid by other institutional investors of comparable size. The manager
will ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in
the opinion of the manager, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or the manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the manager include, among others, supplying
information about particular companies, markets, countries, or local,
regional, national or transnational economies, statistical data, quotations
and other securities pricing information, and other information that provides
lawful and appropriate assistance to the manager in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the fund. They must, however, be of value to the manager in carrying
out its overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on
the research services the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions 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.
During the last three fiscal years ended October 31, the fund paid the
following brokerage commissions:
BROKERAGE
COMMISSIONS ($)
- ---------------------------------------------------------------
1999 274,652
1998 356,245
1997 179,663
For the fiscal year ended October 31, 1999, the fund did not pay brokerage
commissions to brokers who provided research services.
As of October 31, 1999, the fund did not own securities of its regular
broker-dealers.
DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
The fund calculates dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally
due to the difference in the distribution and service (Rule 12b-1) fees of
each class. The fund does not pay "interest" or guarantee any fixed rate of
return on an investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in
the form of dividends and interest on its investments. This income, less
expenses incurred in the operation of the fund, constitutes the fund's net
investment income from which dividends may be paid to you. Any distributions
by the fund from such income will be taxable to you as ordinary income,
whether you take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net capital gains realized by the fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, to reduce or eliminate excise or income taxes on
the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or 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 has elected
to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. As a regulated
investment company, the fund generally pays no federal income tax on the
income and gains it distributes to you. The board reserves the right not to
maintain the qualification of the fund as a regulated investment company if it
determines such course of action to be beneficial to shareholders. In such case,
the fund will be subject to federal, and possibly state, corporate taxes on its
taxable income and gains, and distributions to you will be taxed as ordinary
dividend income to the extent of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires the fund to distribute to you by December 31
of each year, at a minimum, the following amounts: 98% of its taxable
ordinary income earned during the calendar year; 98% of its capital gain net
income earned during the twelve month period ending October 31; and 100% of
any undistributed amounts from the prior year. The fund intends to declare
and pay these 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 after the year 2005 (2000 for certain shareholders), 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 OBLIGATIONS States grant tax-free status to dividends paid to
you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment 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 do not generally qualify for tax-free treatment.
The rules on exclusion of this income are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that only a small percentage of the dividends
paid by the fund for the most recent fiscal year qualified 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. In turn, these rules
may affect the amount, timing or character of the income distributed to you
by the fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- -------------------------------------------------------------------------------
The fund is a series of Franklin Value Investors Trust, an open-end
management investment company, commonly called a mutual fund. The trust was
organized as a Massachusetts business trust on September 11, 1989, and is
registered with the SEC.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations.
The Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the fund's assets if you are held personally liable for
obligations of the fund. The Declaration of Trust provides that the fund
shall, upon request, assume the defense of any claim made against you for any
act or obligation of the fund and satisfy any judgment thereon. All such
rights are limited to the assets of the fund. The Declaration of Trust
further provides that the fund may maintain appropriate insurance (for
example, fidelity bonding and errors and omissions insurance) for the
protection of the fund, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. Furthermore, the
activities of the fund as an investment company, as distinguished from an
operating company, would not likely give rise to liabilities in excess of the
fund's total assets. Thus, the risk that you would incur financial loss on
account of shareholder liability is limited to the unlikely circumstance in
which both inadequate insurance exists and the fund itself is unable to meet
its obligations.
The fund currently offers four classes of shares, Class A, Class B, Class C
and Advisor Class. Before January 1, 1999, Class A shares were designated
Class I and Class C shares were designated Class II. The fund began offering
Class B shares on January 1, 1999. The fund may offer additional classes of
shares in the future. The full title of each class is:
o Franklin Value Fund - Class A
o Franklin Value Fund - Class B
o Franklin Value Fund - Class C
o Franklin Value Fund - Advisor Class
Shares of each class represent proportionate interests in the fund's assets.
On matters that affect the fund as a whole, each class has the same voting
and other rights and preferences as any other class. On matters that affect
only one class, only shareholders of that class may vote. Each class votes
separately on matters affecting only that class, or expressly required to be
voted on separately by state or federal law. Shares of each class of a series
have the same voting and other rights and preferences as the other classes
and series of the trust for matters that affect the trust as a whole.
Additional series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all
of the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The trust does not intend to hold annual shareholder meetings. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are
required to help you communicate with other shareholders about the removal of
a board member. A special meeting also may be called by the board in its
discretion.
As of February 1, 2000, the principal shareholders of the fund, beneficial or
of record, were:
PERCENTAGE
NAME AND ADDRESS SHARE CLASS (%)
- ----------------------------------------------------------------
Charles Schwab & Co. Inc. Advisor 5.49
101 Montgomery St.
San Francisco, CA 94104-4122
FTTC Trust Services FBO Advisor 11.97
Martin Wiskemann
P.O. Box 5086
San Mateo, CA 94402-0086
FTTC Trust Services FBO Advisor 11.32
Rupert Johnson
P.O. Box 5086
San Mateo, CA 94402-0086
FTTC Trust Services FBO Advisor 8.51
Charles Rubens II
P.O. Box 5086
San Mateo, CA 94402-0086
FTTC TTEE for ValuSelect1
Franklin Resources PSP
Attn: Trading
P.O. Box 2438
Rancho Cordova, CA 95741-2438 Advisor 27.19
1. Note: Rupert H. Johnson, Jr., who is an officer of the trust, serves on
the administrative committee of the Franklin Templeton Profit Sharing 401(k)
Plan, which owns shares of the fund. In that capacity, he participates in the
voting of such shares. Rupert H. Johnson, Jr. disclaims beneficial ownership
of any share of the fund owned by the Franklin Templeton Profit Sharing
401(k) Plan.
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 February 1, 2000, the officers and board members, as a group, owned of
record and beneficially 16.23% of the fund's Advisor Class shares and less
than 1% of the outstanding shares of the fund's other 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, Templeton Capital Accumulator Fund, Inc., and Templeton
Variable Products Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You 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 Class C shareholders who chose
to reinvest their distributions in Class A shares of the fund before
November 17, 1997, and to Advisor Class or Class Z shareholders of a
Franklin Templeton Fund who may reinvest their distributions in the fund's
Class A shares. This waiver category also applies to Class B and C shares.
o 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 or the Templeton
Variable Products Series Fund. You should contact your tax advisor for
information on any tax consequences that may apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating
Rate Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or
a Franklin Templeton money fund, you may reinvest them as described above.
The proceeds must be reinvested within 365 days from the date the CD
matures, including any rollover, or the date you redeem your money fund
shares.
o Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund shares
and the CDSC holding period will begin again. We will, however, credit your
fund account with additional shares based on the CDSC you previously paid
and the amount of the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
o Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. 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 agreeing to invest in
Franklin Templeton Funds over a 13 month period at least $1 million of
assets held in a fiduciary, agency, advisory, custodial or similar capacity
and over which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
o Any state or local government or any instrumentality, department,
authority or agency thereof that has determined the fund is a legally
permissible investment and that can only buy fund shares without paying
sales charges. Please consult your legal and investment advisors to
determine if an investment in the fund is permissible and suitable for you
and the effect, if any, of payments by the fund on arbitrage rebate
calculations.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
o 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:
o Account fees
o Sales of Class A shares purchased without an initial sales charge by
certain retirement plan accounts if (i) the account was opened before May
1, 1997, or (ii) the securities dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the securities dealer of
record has entered into a supplemental agreement with Distributors
o Redemptions 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 plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans
or employee benefit plans serviced by ValuSelect(R) (not applicable to Class
B)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy (for
Class B, this applies to all retirement plan accounts, not only IRAs)
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans (not applicable to Class B)
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money. If this
occurs, it is the fund's general policy to initially invest this money in
short-term, interest-bearing money market instruments unless it is believed
that attractive investment opportunities consistent with the fund's
investment goal exist immediately. This money will then be withdrawn from the
short-term, interest-bearing money market instruments and invested in
portfolio securities in as orderly a manner as is possible when attractive
investment opportunities arise.
The proceeds from the sale of shares of an investment company 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.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday, we
will process the redemption on the next business day. When you sell your
shares under a systematic withdrawal plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold under the plan 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.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. The fund may discontinue a systematic
withdrawal plan by notifying you in writing and will automatically
discontinue a systematic withdrawal plan if all shares in your account are
withdrawn or if the fund receives notification of the shareholder's death or
incapacity.
REDEMPTIONS IN KIND The fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the U.S. Securities
and Exchange Commission (SEC). In the case of redemption requests in excess
of these amounts, the board reserves the right to make payments in whole or
in part in securities or other assets of the fund, in case of an emergency,
or if the payment of such a redemption in cash would be detrimental to the
existing shareholders of the fund. In these circumstances, the securities
distributed would be valued at the price used to compute the fund's net
assets and you may incur brokerage fees in converting the securities to cash.
The fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
SHARE CERTIFICATES We will credit your shares to your fund account. We do not
issue share certificates unless you specifically request them. This
eliminates the costly problem of replacing lost, stolen or destroyed
certificates. If a certificate is lost, stolen or destroyed, you may have to
pay an insurance premium of up to 2% of the value of the certificate to
replace it.
Any outstanding share certificates must be returned to the fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to the fund marked
"unable to forward" by the postal service, we will consider this a request by
you to change your dividend option to reinvest all distributions. The
proceeds will be reinvested in additional shares at net asset value until we
receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the fund nor
its affiliates will
be liable for any loss caused by your failure to cash such checks. The fund
is not responsible for tracking down uncashed checks, unless a check is
returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to
find you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.
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.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. If you sell shares
through your securities dealer, it is your dealer's responsibility to
transmit the order to the fund in a timely fashion. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
notice of levy.
PRICING SHARES
- -------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the
net asset value (NAV) per share plus any applicable sales charge, calculated
to two decimal places using standard rounding criteria. When you sell shares,
you receive the NAV minus any applicable CDSC.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of
shares outstanding.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. Pacific
time). The fund does not calculate the NAV on days the New York Stock
Exchange (NYSE) is closed for trading, which include New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the Nasdaq National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent
quoted bid and ask prices. The fund values over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, the fund values them according to the broadest and most
representative market as determined by the manager.
The fund values portfolio securities underlying actively traded call options
at their market price as determined above. The current market value of any
option the fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last
sale price is outside the bid and ask prices, the fund values options within
the range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.
The fund determines the value of a foreign security as of the close of
trading on the foreign exchange on which the security is traded or as of the
close of trading on the NYSE, if that is earlier. The value is then converted
into its U.S. dollar equivalent at the foreign exchange rate in effect at
noon, New York time, on the day the value of the foreign security is
determined. If no sale is reported at that time, the foreign security is
valued within the range of the most recent quoted bid and ask prices.
Occasionally events that affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and
the close of the exchange and will, therefore, not be reflected in the
computation of the NAV. If events materially affecting the values of these
foreign securities occur during this period, the securities will be valued in
accordance with procedures established by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the NAV is determined as of such times. Occasionally, events affecting the
values of these securities may occur between the times at which they are
determined and the close of the NYSE that will not be reflected in the
computation of the NAV. If events materially affecting the values of these
securities occur during this period, the securities will be valued at their
fair value as determined in good faith by the board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the board. With the approval of
the board, the fund may use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
- -------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the fund's shares, the net
underwriting discounts and commissions Distributors retained after allowances
to dealers, and the amounts Distributors received in connection with
redemptions or repurchases of shares for the last three fiscal years ended
October 31:
AMOUNT
RECEIVED IN
CONNECTION
WITH
TOTAL AMOUNT REDEMPTIONS
COMMISSIONS RETAINED BY AND
RECEIVED DISTRIBUTORS REPURCHASES
($) ($) ($)
- -----------------------------------------------------------------
1999 499,032 51,502 84,599
1998 2,113,491 196,714 32,447
1997 1,093,247 235,879 4,616
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES 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. The Class A plan
is a reimbursement plan. It allows the fund to reimburse Distributors for
eligible expenses that Distributors has shown it has incurred. The fund will
not reimburse more than the maximum amount allowed under the plan.
Under the Class A plan, total payments to Distributors for the fiscal year
ended October 31, 1999, were $254,147. The eligible expenses Distributors had
incurred to that date were:
($)
- -------------------------------------------------------------
Advertising 15,578
Printing and mailing prospectuses
other than to current shareholders 17,656
Payments to underwriters 9,996
Payments to broker-dealers 173,833
Other 35,303
------------
Total 252,366
============
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 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.
Under the Class B plan, the amounts paid by the fund pursuant to the plan for
the fiscal year ended October 31, 1999, were:
($)
- -------------------------------------------------------------
Advertising 81
Printing and mailing prospectuses
other than to current shareholders 10
Payments to underwriters 57
Payments to broker-dealers 5,213
Other 72
=============
Total 5,433
=============
Under the Class C plan, total payments to Distributors for the fiscal year
ended October 31, 1999, were $363,345. The eligible expenses Distributors had
incurred to that date were:
($)
- -------------------------------------------------------------
Advertising 5,483
Printing and mailing prospectuses
other than to current shareholders 8,108
Payments to underwriters 4,760
Payments to broker-dealers 317,391
Other 11,011
-------------
Total 346,753
=============
THE CLASS A, B AND C PLANS. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the fund, the manager or Distributors or other parties on behalf of
the fund, the manager or Distributors make payments that are deemed to be for
the financing of any activity primarily intended to result in the sale of
fund shares within the context of Rule 12b-1 under the Investment Company Act
of 1940, as amended, then such payments shall be deemed to have been made
pursuant to the plan.
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
- -------------------------------------------------------------------------------
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.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum initial sales charge is
deducted from the initial $1,000 purchase, and income dividends and capital
gain distributions are reinvested at net asset value. The quotation assumes
the account was completely redeemed at the end of each period and the
deduction of all applicable charges and fees. If a change is made to the
sales charge structure, historical performance information will be restated
to reflect the maximum initial sales charge currently in effect.
When considering the average annual total return quotations 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 average annual total returns for
the indicated periods ended October 31, 1999, were:
SINCE INCEPTION
1 YEAR (%) (3/11/96) (%)
- -----------------------------------------------------------------
Class A -8.95 3.46
SINCE INCEPTION
1 YEAR (%) (9/3/96) (%)
- -----------------------------------------------------------------
Class C -5.93 2.13
The following SEC formula was used to calculate these figures:
P(1+T)n = 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 indicated
above. The cumulative total returns for the indicated periods ended October
31, 1999, were:
SINCE INCEPTION
1 YEAR (%) (3/11/96) (%)
- -----------------------------------------------------------------
Class A -8.95 13.18
SINCE INCEPTION
(1/1/99) (%)
- -----------------------------------------------------------------
Class B -10.02
SINCE INCEPTION
1 YEAR (%) (9/3/96) (%)
- -----------------------------------------------------------------
Class C -5.93 6.87
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 Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries.
o The New York Stock Exchange composite or component indices - an
unmanaged index of all industrial, utilities, transportation, and finance
stocks listed on the NYSE.
o Wilshire 5000 Equity Index - represents the return on the market value
of all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes
price, yield, risk, and total return for mutual funds.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK,
CHANGING TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines -
provide performance statistics over specified time periods.
o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its
category.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment
in the fund. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or information 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. For example, as the general level of interest rates
rise, the value of the fund's fixed-income investments, if any, as well as
the value of its shares that are based upon the value of such portfolio
investments, can be expected to fall. Conversely, when interest rates
decrease, the value of the fund's shares can be expected to increase. CDs are
frequently insured by an agency of the U.S. government. An investment in the
fund is not insured by any federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the fund to calculate its figures. In
addition, there can be no assurance that the fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
- -------------------------------------------------------------------------------
The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis 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 $235 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 103 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)
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present that make the long-term
risks appear somewhat larger.
A: Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered medium-grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. These bonds lack outstanding investment characteristics and, in fact,
have speculative characteristics as well.
Ba: Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and, thereby, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca: Bonds rated Ca represent obligations that are speculative to a high
degree. These issues are often in default or have other marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S RATINGS GROUP (S&P(R))
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating 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.
FRANKLIN
VALUE FUND
FRANKLIN VALUE INVESTORS TRUST
ADVISOR CLASS
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 2000
[Insert Franklin Templeton Ben Head]
P.O. BOX 997151, SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
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This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the fund's prospectus.
The fund's prospectus, dated March 1, 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.
The audited financial statements and auditor's report in the fund's Annual
Report to Shareholders, for the fiscal year ended October 31, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goal and Strategies ..................... 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 .................. 22
Buying and Selling Shares ............... 23
Pricing Shares .......................... 26
The Underwriter ......................... 27
Performance ............................. 27
Miscellaneous Information ............... 29
Description of Ratings .................. 29
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
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482 SAIA 03/00
GOAL AND STRATEGIES
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The fund's investment goal is to attain long-term total return. 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 65% of its assets in
securities of companies that the fund's manager believes are undervalued. The
securities the fund may invest in include common and preferred stocks,
warrants, secured and unsecured bonds, and notes.
The fund's manager may take into account a variety of factors in order to
determine whether to buy or hold securities, including: low price to earnings
ratio relative to the market, their industry group, or earnings growth; low
price relative to book value, cash flow, or sales; 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 may also participate in
a company's success or lack of success through increases or decreases in the
value of the company's shares as traded in the public trading market for such
shares. Equity securities generally take the form of common stock or
preferred stock, as well as securities convertible into common stocks.
Preferred stockholders typically receive greater dividends but may receive
less appreciation than common stockholders and may have greater voting rights
as well. Equity securities may also include convertible securities, warrants,
or rights. Warrants or rights give the holder the right to buy a common stock
at a given time for a specified price.
WARRANTS A warrant is typically a long-term option issued by a corporation
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. Although the fund may
invest up to 25% of total assets in foreign securities, it currently intends
to limit its investment in foreign securities to 10% or less of its total
assets. Please see "Risks - Foreign securities risk" for more information.
DEPOSITARY RECEIPTS Many securities of foreign issuers are 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.
DEBT SECURITIES represent an obligation of the issuer to repay a loan of
money to it, and generally, provide for the payment of interest. These
include bonds, notes and debentures; commercial paper; time deposits; and
bankers' acceptances. A debt security typically has a fixed payment schedule
that obligates the issuer to pay interest to the lender and to return the
lender's money over a certain time period. A company typically meets its
payment obligations associated with its outstanding debt securities
before it declares and pays any dividend to holders of its equity securities.
Bonds, notes, debentures, and commercial paper differ in the length of the
issuer's payment schedule, with bonds carrying the longest repayment schedule
and commercial paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the fund's net asset value per share.
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.
CONVERTIBLE SECURITIES The fund may invest in convertible securities; these
investments will be less than 25% of its total assets. A convertible security
is generally a debt obligation or preferred stock that may be converted
within a specified period of time into a certain amount of common stock of
the same or a different issuer. A convertible
security provides a fixed-income stream and the opportunity, through its
conversion feature, to participate in the capital appreciation resulting from
a market price advance in its underlying common stock. As with a straight
fixed-income security, a convertible security tends to increase in market
value when interest rates decline and decrease in value when interest rates
rise. Like a common stock, the value of a convertible security also tends to
increase as the market value of the underlying stock rises, and it tends to
decrease as the market value of the underlying stock declines. Because its
value can be influenced by both interest rate and market movements, a
convertible security is not as sensitive to interest rates as a similar
fixed-income security, nor is it as sensitive to changes
in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by
an investment bank. When issued by an operating company, a convertible
security tends to be senior to common stock, but subordinate to other types
of fixed-income securities issued by that company. When a convertible
security issued by an operating company is "converted," the operating company
often issues new stock to the holder of the convertible security but, if the
parity price of the convertible security is less than the call price, the
operating company may pay out cash instead of common stock. If the
convertible security is issued by an investment bank, the security is an
obligation of and is convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security
will have recourse only to the issuer. In addition, a convertible security
may be subject to redemption by the issuer, but only after a specified date
and under circumstances established at the time the security is issued.
While the fund uses the same criteria to rate a convertible debt security
that it uses to rate a more conventional debt security, a convertible
preferred stock is treated like a preferred stock for the fund's financial
reporting, credit rating, and investment limitation purposes. A preferred stock
is subordinated to all debt obligations in the event of insolvency, and an
issuer's failure to make a dividend payment is generally not an event of default
entitling the preferred shareholder to take action. A preferred stock generally
has no maturity date, so that its market value is dependent on the issuer's
business prospects for an indefinite period of time. In addition, distributions
from preferred stock are dividends, rather than interest payments, and are
usually treated as such for corporate tax purposes.
ENHANCED CONVERTIBLES The fund may invest in convertible preferred stocks
that offer enhanced yield features, such as Preferred Equity Redemption
Cumulative Stocks (PERCS), which provide an investor, such as the fund, with
the opportunity to earn higher dividend income than is available on a
company's common stock. PERCS are preferred stocks that generally feature a
mandatory conversion date, as well as a capital appreciation limit, which is
usually expressed in terms of a stated price. Most PERCS expire three years
from the date of issue, at which time they are convertible into common stock
of the issuer. PERCS are generally not convertible into cash at maturity.
Under a typical arrangement, after three years PERCS convert into one share
of the issuer's common stock if the issuer's common stock is trading at a
price below that set by the capital appreciation limit, and into less than
one full share if the issuer's common stock is trading at a price above that
set by the capital appreciation limit. The amount of that fractional share of
common stock is determined by dividing the price set by the capital
appreciation limit by the market price of the issuer's common stock. PERCS
can be called at any time prior to maturity, and hence do not provide call
protection. If called early, however, the issuer must pay a call premium over
the market price to the investor. This call premium declines at a preset rate
daily, up to the maturity date.
The fund may also invest in other enhanced convertible securities. These include
but are not limited to ACES (Automatically Convertible Equity Securities), PEPS
(Participating Equity Preferred Stock), PRIDES (Preferred Redeemable Increased
Dividend Equity Securities), SAILS (Stock Appreciation Income Linked
Securities), TECONS (Term Convertible Notes), QICS (Quarterly Income Cumulative
Securities), and DECS (Dividend Enhanced Convertible Securities). ACES, PEPS,
PRIDES, SAILS, TECONS, QICS, and DECS all have the following features: they are
issued by the company, the common stock of which will be received in the event
the convertible preferred stock is converted, unlike PERCS they do not have a
capital appreciation limit, they seek to provide the investor with high current
income with some prospect of future capital appreciation, they are typically
issued with three to four-year maturities, they typically have some built-in
call protection for the first two to three years, investors have the right to
convert them into shares of common stock at a preset conversion ratio or hold
them until maturity, and upon maturity they will automatically convert to either
cash or a specified number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked
as senior or subordinated debt in the issuer's corporate structure according
to the terms of the debt indenture. There may be additional types of
convertible securities not specifically referred to herein that may be
similar to those described above in which the fund may invest, consistent
with its goal and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the fund. The fund may have difficulty disposing
of such securities because there may be a thin trading market for a
particular security at any given time. Reduced liquidity may have an adverse
impact on market price and the fund's ability to dispose of particular
securities, when necessary, to meet the fund's liquidity needs or in response
to a specific economic event, such as the deterioration in the
creditworthiness of an issuer. Reduced liquidity in the secondary market for
certain securities may also make it more difficult for the fund to obtain
market quotations based on actual trades for purposes of valuing the fund's
portfolio. The fund, however, intends to acquire liquid securities, though
there can be no assurances that this will be achieved.
SYNTHETIC CONVERTIBLES The fund may invest a portion of its assets in
"synthetic convertible" securities. A synthetic convertible is created by
combining distinct securities that together possess the two principal
characteristics of a true convertible security, i.e., fixed income and the
right to acquire the underlying equity security. This combination is achieved
by investing in nonconvertible fixed-income securities and in warrants or
stock or stock index call options 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 the true convertible security in
several respects. The value of a synthetic convertible is the sum of the
values of its fixed-income component and its convertibility component. Thus,
the values of a synthetic convertible and a true convertible security will
respond differently to market fluctuations. Further, although the manager
expects normally to create synthetic convertibles whose two components
represent one issuer, the character of a synthetic convertible allows the
fund to combine components representing distinct issuers, or to combine a
fixed-income security with a call option on a stock index, when the manager
determines that such a combination would better promote the fund's investment
goal. In addition, the component parts of a synthetic convertible security
may be purchased simultaneously or separately; and the holder of a synthetic
convertible faces the risk that the price of the stock, or the level of the
market index underlying the convertibility component will decline.
SHORT-SELLING 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.
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.
SPREAD AND STRADDLE OPTIONS transactions In "spread" transactions, the fund
buys and writes a put or buys and writes a call on the same underlying
security with the options having different exercise prices and/or expiration
dates. In "straddles," the fund purchases or writes combinations of put and
call options on the same security. When the fund engages in spread and
straddle transactions, it seeks to profit from differentials in the option
premiums paid and received and in the market prices of the related options
positions when they are closed out or sold. Because these transactions
require the fund to buy and/or write more than one option simultaneously, the
fund's ability to enter into such transactions and to liquidate its positions
when necessary or deemed advisable may be more limited than if the fund was
to buy or sell a single option. Similarly, costs incurred by the fund in
connection with these transactions will in many cases be greater than if the
fund was to buy or sell a single option. The fund intends to limit these
transactions to no more than 5% of the fund's net assets.
FUTURES The fund may enter into contracts for the purchase or sale for future
delivery of securities, contracts based upon financial indices, and the fund
may buy options on such contracts (financial futures). Financial futures
contracts are contracts that obligate the long or short holder to take or
make delivery of a specified quantity of a financial instrument, such as a
security, or the cash value of a securities index during a specified future
period at a specified price. A "sale" of a futures contract means the seller
has a contractual obligation to deliver the securities described in the
contract at a specified price on a specified date. A "purchase" of a futures
contract means the buyer has a contractual obligation to acquire the
securities described in the contract at a specified price on a specified
date. Futures contracts have been designed by exchanges that have been
designated "contracts markets" by the Commodity Futures Trading Commission
(CFTC) and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market. At the
present time, the fund intends to limit these investments to no more than 5%
of its net assets.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same
month. Such a transaction, which is effected through a member of an exchange,
cancels the obligation to take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded,
the fund will incur brokerage fees when it purchases or sells
futures contracts.
The fund will not engage in transactions in futures contracts or related options
for speculation. The fund will not enter into any stock index future or related
option if, immediately thereafter, more than one third (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 will generally have a portion of its assets in
cash or cash equivalents for a
variety of reasons, including waiting for a special investment opportunity or
taking a defensive position. To earn income on this portion of its assets,
the fund may enter into repurchase agreements. 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 banker 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 banker or broker-dealer, including possible delays or restrictions
upon the fund's ability to sell of the underlying securities. The fund will
enter into repurchase agreements only with parties who meet 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 and
broker-dealers. These loans may not exceed 25% 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 the
investment of the cash collateral or receives a fee from the borrower. The
fund also continues to receive any distributions paid on any 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
securities 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's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally
securities that cannot be sold within seven days in the normal course of
business at approximately the amount at which the fund has valued them.
RESTRICTED SECURITIES Some of the securities the fund buys are considered
"restricted securities." The fund's investment in restricted securities may
not exceed 15% of its net assets. Restricted securities are securities with
legal or contractual restrictions on resale, including securities that are
not registered under the Securities Act of 1993, 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.
NON-DIVERSIFICATION The fund intends to comply with the diversification and
other requirements applicable to regulated investment companies under the
Internal Revenue Code. As a non-diversified investment company under the
Investment Company Act of 1940, as amended (1940 Act), the fund may invest
more than 5% and up to 25% of its assets in the securities of any one issuer
at the time of purchase. For purposes of the Internal Revenue Code, however,
as of the last day of any fiscal quarter, the fund may not have more than 25%
of its total assets invested in any one issuer, and, with respect to 50% of
its total assets, the fund may not have more than 5% of its total assets
invested in any one issuer, nor may it own more than 10% of the outstanding
voting securities of any one issuer. These limitations do not apply to
investments in securities issued or guaranteed by the U.S. government or its
agencies or instrumentalities, or to securities of investment companies that
qualify as regulated investment companies under the Internal Revenue Code.
BORROWING The fund does not borrow money or mortgage or pledge any of its
assets, except that it may borrow up to 331/3% of its total assets (including
the amount borrowed) in order to meet redemption requests that might
otherwise require the untimely disposition of portfolio securities or for
other temporary or emergency purposes and may pledge its assets in connection
therewith. The fund will not make any additional investments while any
borrowings exceed 5% of its total assets.
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 10% aggregate limit on the fund's investment in illiquid
securities), letters of credit and bankers' acceptances, or instruments
secured by these types of obligations, issued by banks and savings
institutions that are subject to regulation by the U.S. government, its
agencies or instrumentalities and that have assets of over $1 billion, unless
these types of obligations are guaranteed by a parent bank that has total
assets in excess of $5 billion; (4) commercial paper considered by the
manager to be of high quality, which must be rated within the two highest
rating categories by S&P(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(R) 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 in a manner consistent
with the fund's investment goal and policies in an amount not exceeding
331/3% of the value of the fund's total assets (including the amount
borrowed). The fund may borrow in connection with short-sales and short-sales
"against the box," and the fund may borrow from banks, other Franklin
Templeton Funds or other persons to the extent permitted by applicable law.
2. Underwrite securities of other issuers, except insofar as the fund may be
technically deemed an underwriter under the federal securities laws in
connection with the disposition of portfolio securities. (This does not
preclude the fund from obtaining such short-term credit as may be necessary
for the clearance of purchases and sales of its portfolio securities.)
3. Invest directly in interests in real estate, oil, gas or other mineral
leases, exploration or development programs, including limited partnership
interests. This restriction does not preclude investments in marketable
securities of issuers engaged in such activities.
4. Loan money, except as consistent with the fund's investment goal, and
except that the fund may (a) purchase a portion of an issue of publicly
distributed bonds, debentures, notes and other evidences of indebtedness, (b)
enter into repurchase agreements, (c) lend its portfolio securities, and (d)
participate in an interfund lending program with other Franklin Templeton
Funds to the extent permitted by the 1940 Act and any rules or orders
thereunder.
5. Purchase or sell commodities or commodity contracts; except that the fund
may enter into interest rate and
financial futures contracts, options thereon, and forward contracts.
6. Issue securities senior to the fund's presently authorized shares of
beneficial interest.
7. Invest more than 25% of the fund's assets (at the time of the most recent
investment) in any single industry.
The fund presently has the following additional restrictions, which are not
fundamental and may be changed without shareholder approval.
The fund may not:
1. Invest in any company for the purpose of exercising control or management,
except that all or substantially all of the assets of the fund may be
invested in another registered investment company having the same investment
goal and policies as the fund.
2. Purchase securities on margin, except that the fund may make margin
payments in connection with futures, options and currency transactions.
3. Purchase or retain securities of any company in which officers or trustees
of the fund, or of its investment manager, individually owning more than 1/2
of 1% of the securities of such company, in the aggregate own more than 5% of
the securities of such company.
4. Buy securities of open-end or closed-end investment companies, except that
the fund may: (i) buy securities of open-end or closed-end investment
companies in compliance with the 1940 Act; (ii) invest all or substantially
all of its assets in another registered investment company having the same
investment goal and policies as the fund; or (iii) invest in shares of one or
more money market funds managed by Franklin Advisory Services, LLC or its
affiliates, to the extent permitted by exemptions granted under the 1940 Act.
5. Invest more than 5% of its assets in securities of issuers with less than
three years continuous operation,
including the operations of any predecessor companies.
6. Hold or purchase the securities of any issuer if, as a result, in the
aggregate, more than 10% of the value of the fund's net assets would be
invested in (i) securities that are not readily marketable or (ii) repurchase
agreements maturing in more than seven days. The fund may, however, invest in
registered investment companies as described in Restriction 1 above.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
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. Often these
companies are attempting to recover from business setbacks or adverse events
(turnarounds), cyclical downturns, or, in certain cases, bankruptcy.
Cyclical stocks in which the fund may invest tend to increase in value more
quickly during economic upturns than non-cyclical stocks, but they also tend
to lose value more quickly in economic downturns. As with all investments,
there is always the possibility when investing in these securities that the
manager may be incorrect in its assessment of a particular industry or
company or that the manager may not buy these securities at their lowest
possible prices or sell them at their highest.
When the fund buys securities of companies emerging from bankruptcy, it may
encounter risks that do not exist with other investments. Companies emerging
from bankruptcy may have some difficulty retaining customers and suppliers
who prefer transacting with solvent organizations. If new management is
installed in a company emerging from bankruptcy, the management may be
considered untested; if the existing management is retained, the management
may be considered incompetent. Further, even when a company has emerged from
bankruptcy with a lower level of debt, it may still retain a relatively weak
balance sheet. During economic downturns these companies may not have
sufficient cash flow to pay their debt obligations and may also have
difficulty finding additional financing. In addition, reduced liquidity in
the secondary market may make it difficult for the fund to sell the
securities or to value them based on actual trades.
The fund's policy of investing in securities that may be out of favor,
including turnarounds, cyclical stocks and companies emerging from
bankruptcy, companies reporting poor earnings, and companies whose share
prices have declined sharply or that are not widely followed, differs from
the approach followed by many other mutual funds. The manager believes,
however, that these securities may provide a greater total investment return
than securities whose prices appear to reflect anticipated favorable
developments.
FOREIGN SECURITIES RISK The value of foreign (and U.S.) securities is
affected by general economic conditions and individual company and industry
earnings prospects. While foreign securities may offer significant
opportunities for gain, they also involve additional risks that can increase
the potential for losses in the fund. These risks can be significantly
greater for investments in emerging markets. Investments in depositary
receipts also involve some or all of the risks described below. 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 Monetary Union (EMU) introduced a
new single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of currency
risk among EMU countries may change the economic environment and behavior of
investors, particularly in European markets. While the implementation of the
euro could have a negative effect on the fund, the fund's manager and its
affiliated services providers are taking steps they believe are reasonably
designed to address the euro issue.
DEPOSITARY 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.
NON-DIVERSIFICATION RISK As a non-diversified investment company under the
1940 Act, the fund may concentrate its investments in the securities of a
smaller number of issuers than if it were a diversified company. An
investment in the fund therefore will entail greater risk than an investment
in a diversified investment company because a higher percentage of
investments among fewer issuers may result in greater fluctuation in the
total market value of the fund's portfolio, and economic, political or
regulatory developments may have a greater impact on the value of the fund's
portfolio than would be the case if the portfolio were diversified among more
issuers. All securities in which the fund may invest are inherently subject
to market risk, and the market value of the fund's investments will fluctuate.
OPTIONS, 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 10% limitation on illiquid securities) to the extent the
manager determines that there is a liquid institutional or other market for
these securities. For example, restricted securities may be freely
transferred among qualified institutional buyers under Rule 144A of the 1933
Act, and in some cases a liquid institutional market has developed.
On an ongoing basis, the board of trustees will review the manager's
decisions to treat restricted securities as liquid - including the manager's
assessment of current trading activity and the availability of reliable price
information. In determining whether a restricted security can be considered
liquid, the manager and the board of trustees will take into account the
following factors: (i) the frequency of trades and quotes for the security,
(ii) the number of dealers willing to buy or sell the security and the number
of potential buyers, (iii) dealer undertakings to make a market in the
security, and (iv) the nature of the security and nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). To the extent the fund
invests in restricted securities that are deemed to be liquid, the general
level of illiquidity in the fund may be increased if qualified institutional
buyers become uninterested in buying these securities or the market for these
securities contracts.
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 (75)
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 (69)
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 (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc., 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 51 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, 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 51 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 33 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 Goss (52)
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 and Franklin
Real Estate Management, Inc.; President and Chief Executive Officer, Franklin
Properties, Inc.; officer of 51 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 51 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, and Judicial
Clerk, U.S. District Court (District of Massachusetts).
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. and Franklin Investment
Advisory Services, Inc.; Senior Vice President, Franklin Advisory Services,
LLC; Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 51 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 and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28
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 32 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 of 51 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 $3,200 per
meeting attended. Noninterested board members also may serve as directors or
trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The following table
provides the total fees paid to noninterested board members by the trust and
by the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM THE GROUP ON WHICH
NAME TRUST 1 ($) OF FUNDS 2 ($) EACH SERVES 3
- -------------------------------------------------------------------
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 53 registered investment companies, with
approximately 155 U.S. based funds or series.
Noninterested board members are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or board members who are shareholders of Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
MANAGEMENT AND OTHER SERVICES
- -------------------------------------------------------------------------------
MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisory
Services, 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.
MANAGEMENT FEES The fund pays the manager a fee equal to an annual rate of:
o 0.75% on the first $500 million of the average daily net assets of the
fund;
o 0.625% on the next $500 million of the average daily net assets of the
fund;
o 0.50% on the average daily net assets of the fund in excess of $1
billion.
The fee is computed daily according to the terms of the management agreement.
Each class of the fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended October 31, the fund paid the following
management fees:
MANAGEMENT FEES
PAID ($)
- ----------------------------------------------------------------
1999 892,1811
1998 1,105,3942
1997 236,3152
1. For the fiscal year ended October 31, 1999, the manager agreed in advance
to reduce its fees to reflect reduced services resulting from the fund's
investment in the Sweep Money Fund. Prior to this reduction, management fees
were $893,761.
2. For the fiscal years ended October 31, 1998 and 1997, management fees,
before any advance waiver, totaled $1,200,877 and $267,392, respectively.
Under an agreement by the manager to limit its fees, the fund paid the
management fees shown.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by
Resources and is an affiliate of the fund's manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and
financial reports, and monitoring compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended October 31, the manager paid FT
Services the following administration fees:
ADMINISTRATION
FEES
PAID ($)
- ---------------------------------------------------------------
1999 180,045
1998 240,184
1997 54,225
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is the fund's shareholder servicing agent
and acts as the fund's transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., 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.
During the last three fiscal years ended October 31, the fund paid the
following brokerage commissions:
BROKERAGE
COMMISSIONS ($)
- --------------------------------------------------------------------
1999 274,652
1998 356,245
1997 179,663
For the fiscal year ended October 31, 1999, the fund did not pay brokerage
commissions to brokers who provided research services.
As of October 31, 1999, the fund did not own securities of its regular
broker-dealers.
DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
The fund calculates dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally
due to the difference in any 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 take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net capital gains realized by the fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, to reduce or eliminate excise or income taxes on
the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or 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 has elected
to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. As a regulated
investment company, the fund generally pays no federal income tax on the
income and gains it distributes to you. The board reserves the right not to
maintain the qualification of the fund as a regulated investment company if
it determines such course of action to be beneficial to shareholders. In such
case, the fund will be subject to federal, and possibly state, corporate
taxes on its taxable income and gains, and distributions to you will be taxed
as ordinary dividend income to the extent of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires the fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year. The fund intends to declare and pay these 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 after the year 2005 (2000 for certain shareholders), 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.
U.S. GOVERNMENT OBLIGATIONS States grant tax-free status to dividends paid to
you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment 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 do not generally qualify for tax-free treatment.
The rules on exclusion of this income are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that only a small percentage of the dividends
paid by the fund for the most recent fiscal year qualified 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. In turn, these rules
may affect the amount, timing or character of the income distributed to you
by the fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- -------------------------------------------------------------------------------
The fund is a series of Franklin Value Investors Trust, an open-end
management investment company, commonly called a mutual fund. The trust was
organized as a Massachusetts business trust on September 11, 1989, and is
registered with the SEC.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations. The
Agreement and Declaration of Trust, however, contains an express disclaimer of
shareholder liability for acts or obligations of the fund. The Declaration of
Trust also provides for indemnification and reimbursement of expenses out of the
fund's assets if you are held personally liable for obligations of the fund. The
Declaration of Trust provides that the fund shall, upon request, assume the
defense of any claim made against you for any act or obligation of the fund and
satisfy any judgment thereon. All such rights are limited to the assets of the
fund. The Declaration of Trust further provides that the fund may maintain
appropriate insurance (for example, fidelity bonding and errors and omissions
insurance) for the protection of the fund, its shareholders, trustees, officers,
employees and agents to cover possible tort and other liabilities. Furthermore,
the activities of the fund as an investment company, as distinguished from an
operating company, would not likely give rise to liabilities in excess of the
fund's total assets. Thus, the risk that you would incur financial loss on
account of shareholder liability is limited to the unlikely circumstance in
which both inadequate insurance exists and the fund itself is unable to meet its
obligations.
The fund currently offers four classes of shares, Class A, Class B, Class C
and Advisor Class. Before January 1, 1999, Class A shares were designated
Class I and Class C shares were designated Class II. The fund began offering
Class B shares on January 1, 1999. The fund may offer additional classes of
shares in the future. The full title of each class is:
o Franklin Value Fund - Class A
o Franklin Value Fund - Class B
o Franklin Value Fund - Class C
o Franklin Value Fund - Advisor Class
Shares of each class represent proportionate interests in the fund's assets.
On matters that affect the fund as a whole, each class has the same voting
and other rights and preferences as any other class. On matters that affect
only one class, only shareholders of that class may vote. Each class votes
separately on matters affecting only that class, or expressly required to be
voted on separately by state or federal law. Shares of each class of a series
have the same voting and other rights and preferences as the other classes
and series of the trust for matters that affect the trust as a whole.
Additional series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all
of the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The trust does not intend to hold annual shareholder meetings. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are
required to help you communicate with other shareholders about the removal of
a board member. A special meeting also may be called by the board in its
discretion.
As of February 1, 2000, the principal shareholders of the fund, beneficial or
of record, were:
PERCENTAGE
NAME AND ADDRESS SHARE CLASS (%)
- -----------------------------------------------------------------
Charles Schwab & Co. Inc. Advisor 5.49
101 Montgomery St.
San Francisco, CA 94104-4122
FTTC Trust Services FBO Advisor 11.97
Martin Wiskemann
P.O. Box 5086
San Mateo, CA 94402-0086
FTTC Trust Services FBO Advisor 11.32
Rupert Johnson
P.O. Box 5086
San Mateo, CA 94402-0086
PERCENTAGE
NAME AND ADDRESS SHARE CLASS (%)
- -----------------------------------------------------------------
FTTC Trust Services FBO Advisor 8.51
Charles Rubens II
P.O. Box 5086
San Mateo, CA 94402-0086
FTTC TTEE for ValuSelect1 Advisor 27.19
Franklin Resources PSP
Attn: Trading
P.O. Box 2438
Rancho Cordova, CA 95741-2438
1. Note: Rupert H. Johnson, Jr., who is an officer of the trust, serves on
the administrative committee of the Franklin Templeton Profit Sharing 401(k)
Plan, which owns shares of the fund. In that capacity, he participates in the
voting of such shares. Rupert H. Johnson, Jr. disclaims beneficial ownership
of any share of the fund owned by the Franklin Templeton Profit Sharing
401(k) Plan.
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 February 1, 2000, the officers and board members, as a group, owned of
record and beneficially 16.23% of the fund's Advisor Class shares and less
than 1% of the outstanding shares of the fund's other 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.
GROUP PURCHASES As described in the prospectus, members of a qualified group
may add the group's investments together for minimum investment purposes.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
DEALER COMPENSATION Distributors and/or its affiliates 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.
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.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday, we
will process the redemption on the next business day. When you sell your
shares under a systematic withdrawal plan, it is a taxable transaction.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. The fund may discontinue a systematic
withdrawal plan by notifying you in writing and will automatically
discontinue a systematic withdrawal plan if all shares in your account are
withdrawn or if the fund receives notification of the shareholder's death or
incapacity.
REDEMPTIONS in kind The fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the U.S. Securities
and Exchange Commission (SEC). In the case of redemption requests in excess
of these amounts, the board reserves the right to make payments in whole or
in part in securities or other assets of the fund, in case of an emergency,
or if the payment of such a redemption in cash would be detrimental to the
existing shareholders of the fund. In these circumstances, the securities
distributed would be valued at the price used to compute the fund's net
assets and you may incur brokerage fees in converting the securities to cash.
The fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
SHARE CERTIFICATES We will credit your shares to your fund account. We do not
issue share certificates unless you specifically request them. This
eliminates the costly problem of replacing lost, stolen or destroyed
certificates. If a certificate is lost, stolen or destroyed, you may have to
pay an insurance premium of up to 2% of the value of the certificate to
replace it.
Any outstanding share certificates must be returned to the fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to the fund marked
"unable to forward" by the postal service, we will consider this a request by
you to change your dividend option to reinvest all distributions. The
proceeds will be reinvested in additional shares at net asset value until we
receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the fund nor
its affiliates will be liable for any loss caused by your failure to cash
such checks. The fund is not responsible for tracking down uncashed checks,
unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to
find you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.
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.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. If you sell shares
through your securities dealer, it is your dealer's responsibility to
transmit the order to the fund in a timely fashion. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
notice of levy.
PRICING SHARES
- -------------------------------------------------------------------------------
When you buy and sell shares, you pay the net asset value (NAV) per share.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of
shares outstanding.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. Pacific
time). The fund does not calculate the NAV on days the New York Stock
Exchange (NYSE) is closed for trading, which include New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the Nasdaq National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent
quoted bid and ask prices. The fund values over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, the fund values them according to the broadest and most
representative market as determined by the manager.
The fund values portfolio securities underlying actively traded call options
at their market price as determined above. The current market value of any
option the fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last
sale price is outside the bid and ask prices, the fund values options within
the range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.
The fund determines the value of a foreign security as of the close of
trading on the foreign exchange on which the security is traded or as of the
close of trading on the NYSE, if that is earlier. The value is then converted
into its U.S. dollar equivalent at the foreign exchange rate in effect at
noon, New York time, on the day the value of the foreign security is
determined. If no sale is reported at that time, the foreign security is
valued within the range of the most recent quoted bid and ask prices.
Occasionally events that affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and
the close of the exchange and will, therefore, not be reflected in the
computation of the NAV. If events materially affecting the values of these
foreign securities occur during this period, the securities will be valued in
accordance with procedures established by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the NAV is determined as of such times. Occasionally, events affecting the
values of these securities may occur between the times at which they are
determined and the close of the NYSE that will not be reflected in the
computation of the NAV. If events materially affecting the values of these
securities occur during this period, the securities will be valued at their
fair value as determined in good faith by the board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the board. With the approval of
the board, the fund may use a
pricing service, bank or securities dealer to perform any of the above
described functions.
THE UNDERWRITER
- -------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
Distributors does not receive compensation from the fund for acting as
underwriter of the fund's Advisor Class shares.
PERFORMANCE
- -------------------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return quotations used by the fund are based on the
standardized methods of computing performance mandated by the SEC.
For periods before January 1, 1997, Advisor Class standardized performance
quotations are calculated by substituting Class A performance for the
relevant time period, excluding the effect of Class A's maximum initial sales
charge, and including the effect of the distribution and service (Rule 12b-1)
fees applicable to the fund's Class A shares. For periods after January 1,
1997, Advisor Class standardized performance quotations are calculated as
described below.
An explanation of these and other methods used by the fund to compute or
express performance follows. Regardless of the method used, past performance
does not guarantee future results, and is an indication of the return to
shareholders only for the limited historical period used.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes income dividends and capital gain
distributions are reinvested at net asset value. The quotation assumes the
account was completely redeemed at the end of each period and the deduction
of all applicable charges and fees. If a change is made to the sales charge
structure, historical performance information will be restated to reflect the
maximum initial sales charge currently in effect.
The average annual total returns for the indicated periods ended October 31,
1999, were:
SINCE
INCEPTION
1 YEAR (%) (3/11/96) (%)
- -----------------------------------------------------------
Advisor Class -2.97 5.72
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 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 indicated above. The cumulative
total returns for the indicated periods ended October 31, 1999, were:
SINCE
INCEPTION
1 YEAR (%) (3/11/96) (%)
- -----------------------------------------------------------
Advisor Class -2.97 22.46
VOLATILITY Occasionally statistics may be used to show the fund's volatility or
risk. Measures of volatility or risk are generally used to compare the fund's
net asset value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities in
which the fund invests. A beta of more than 1.00 indicates volatility greater
than the market and a beta of less than 1.00 indicates volatility less than the
market. Another measure of volatility or risk is standard deviation. Standard
deviation is used to measure variability of net asset value or total return
around an average over a specified period of time. The idea is that greater
volatility means greater risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS Sales literature referring to the use of the
fund as a potential investment for IRAs, business retirement plans, and other
tax-advantaged retirement plans may quote a total return based upon
compounding of dividends on which it is presumed no federal income tax
applies.
The fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. is the parent
company of the advisors and underwriter of the Franklin Templeton Group of
Funds.
COMPARISONS To help you better evaluate how an investment in the fund may
satisfy your investment goal, advertisements and other materials about the
fund may discuss certain measures of fund performance as reported by various
financial publications. Materials 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 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 Brothers, 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 with in 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. For example, as the general level of interest rates
rise, the value of the fund's fixed-income investments, if any, as well as
the value of its shares that are based upon the value of such portfolio
investments, can be expected to fall. Conversely, when interest rates
decrease, the value of the fund's shares can be expected to increase. CDs are
frequently insured by an agency of the U.S. government. An investment in the
fund is not insured by any federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the fund to calculate its figures. In
addition, there can be no assurance that the fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
- -------------------------------------------------------------------------------
The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis 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 $235 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 103 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
- -------------------------------------------------------------------------------
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present that make the long-term
risks appear somewhat larger.
A: Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered medium-grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. These bonds lack outstanding investment characteristics and, in fact,
have speculative characteristics as well.
Ba: Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and, thereby, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca: Bonds rated Ca represent obligations that are speculative to a high
degree. These issues are often in default or have other marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S RATINGS GROUP (S&P(R))
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating 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.
FRANKLIN VALUE INVESTORS TRUST
File Nos. 33-31326
811-5878
FORM N-1A
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
The following exhibits are incorporated by reference to the previously
filed document indicated below, except as noted:
(a) Articles of Incorporation
(i) Agreement and Declaration of Trust dated September 11, 1989
Filing: Post-Effective Amendment No. 8 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: September 21, 1995
(ii) Certificate of Amendment of Agreement and Declaration of Trust
of Franklin Balance Sheet Investment Fund dated September 21,
1995
Filing: Post-Effective Amendment No. 9 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: December 26, 1995
(b) By-laws
(i) By-Laws
Filing: Post-Effective Amendment No. 8 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: September 21, 1995
(c) Instruments Defining Rights of Security Holders
Not Applicable
(d) Investment Advisory Contracts
(i) Management Agreement between the Registrant on behalf of
Franklin Balance Sheet Investment Fund and Franklin Advisory
Services, LLC., dated April 1, 1999
(ii) Management Agreement between the Registrant on behalf of
Franklin MicroCap Value Fund and Franklin Advisory Services,
LLC, dated April 1, 1999
(iii) Management Agreement between the Registrant on behalf of
Franklin Value Fund and Franklin Advisory Services, LLC, dated
April 1, 1999
(e) Underwriting Contracts
(i) Amended and Restated Distribution Agreement between the
Registrant and Franklin/Templeton Distributors, Inc., dated
April 23, 1995
Filing: Post-Effective Amendment No. 12 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: June 27, 1996
(ii) Forms of Dealer Agreements between Franklin/Templeton
Distributors, Inc. and securities dealers, dated March 1, 1998
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: December 29, 1998
(iii) Amendment of Amended and Restated Distribution Agreement
between the Registrant and Franklin/Templeton Distributors,
Inc, dated March 25, 1999
(f) Bonus or Profit Sharing Contracts
Not Applicable
(g) Custodian Agreements
(i) Master Custodian Agreement between the Registrant and Bank of
New York dated February 16, 1996
Filing: Post-Effective Amendment No. 11 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: March 8, 1996
(ii) Terminal Link Agreement between the Registrant and Bank of New
York dated February 16, 1996
Filing: Post-Effective Amendment No. 11 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: March 8, 1996
(iii) Amendment dated May 7, 1997 to Master Custody Agreement
between the Registrant and Bank of New York dated February 16,
1996
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: December 29, 1998
(iv) Amendment dated February 27, 1998 to Exhibit A in the Master
Custody Agreement dated February 16, 1996 between the
Registrant and Bank of New York.
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: December 29, 1998
(v) Foreign Custody Manager Agreement between the Registrant and
Bank of New York dated July 30, 1998.
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: December 29, 1998
(vi) Amendment dated September 16, 1999 to Exhibit A of the Master
Custody Agreement between the Registrant and Bank of New York
dated February 16, 1996
(h) Other Material Contracts
(i) Subcontract for Fund Administrative Services dated July 1,
1996 between Franklin Advisory Services, Inc. and Franklin
Templeton Services, Inc.
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: December 29, 1998
(i) Legal Opinion
(i) Opinion and Consent of counsel December 14, 1998
Filing: Post-Effective Amendment No. 19 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: December 30, 1998
(j) Other Opinions
(i) Consent of Independent Auditors
(k) Omitted Financial Statements
Not Applicable
(l) Initial Capital Agreements
(i) Letter of Understanding relating to Initial Capital of
Franklin Balance Sheet Investment Fund dated November 17, 1989
Filing: Post-Effective Amendment No. 7 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: September 21, 1995
(ii) Letter of Understanding relating to Initial Capital of
Franklin MicroCap Value Fund dated November 29, 1995
Filing: Post-Effective Amendment No. 8 to Registration
Statement on Form N-1A
File No. 33-31326
Filing date: December 1, 1995
(iii) Letter of Understanding relating to Initial Capital of
Franklin Value Fund dated December 4, 1995
Filing: Post-Effective Amendment No. 11 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: March 8, 1996
(iv) Letter of Understanding relating to Initial Capital of
Franklin Value Fund - Class II dated August 30, 1996
Filing: Post-Effective Amendment No. 13 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: August 7, 1996
(m) Rule 12b-l Plan
(i) Amended and Restated Distribution Plan between Franklin
Balance Sheet Investment Fund and Franklin/Templeton
Distributors, Inc., pursuant to Rule 12b-1 dated July 1, 1993
Filing: Post-Effective Amendment No. 8 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: September 21, 1995
(ii) Distribution Plan pursuant to Rule 12b-1 between Franklin
Value Investors Trust on behalf of Franklin MicroCap Value
Fund and Franklin/Templeton Distributors, Inc., dated December
12, 1995
Filing: Post-Effective Amendment No. 9 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: December 26, 1995
(iii) Distribution Plan pursuant to Rule 12b-1 between Franklin
Value Investors Trust on behalf of Franklin Value Fund and
Franklin/Templeton Distributors, Inc., dated March 11, 1996
Filing: Post-Effective Amendment No. 9 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: December 26, 1995
(iv) Class II Distribution Plan pursuant to Rule 12b-1 between
Franklin Value Investors Trust on behalf of Franklin Value
Fund and Franklin/Templeton Distributors, Inc., dated
September 3, 1996
Filing: Post-Effective Amendment No. 15 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: December 31, 1996
(v) Class B Distribution Plan pursuant to Rule 12b-1 between
Franklin Value Investors Trust on behalf of Franklin Value
Fund and Franklin/ Templeton Distributors, Inc., dated October
16, 1998
(o) Rule 18f-3 Plan
(i) Multiple Class Plan for Franklin MicroCap Value Fund
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 33-31326
Filing Date: December 29, 1998
(ii) Multiple Class Plan for Franklin Value Fund dated June 23, 1998
(p) Power of Attorney
(i) Power of Attorney dated February 24, 2000
(ii) Certificate of Secretary dated February 24, 2000
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
WITH REGISTRANT
None
ITEM 25. INDEMNIFICATION
Reference is made to Article VI of the Registrant's By-Laws previously
filed, which is incorporated herein by reference.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to officers and trustees and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such trustee, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Notwithstanding the provisions contained in the Registrant's By-Laws, in the
absence of authorization by the appropriate court on the merits pursuant to
Sections 4 and 5 of Article VI of said By-Laws, any indemnification under
said Article shall be made by Registrant only if authorized in the manner
provided in either subsection (a) or (b) of Section 6 of Article VI.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The officers and directors of the Franklin Advisory Services, Inc.
Registrant's manager also serve as officers and/or directors for (1)
("Advisory Services") corporate parent, Franklin Resources, Inc., and/or (2)
other investment companies in the Franklin Templeton Group of Funds. In
addition, Mr. Charles B. Johnson was formerly a director of General Host
Corporation. For additional information please see Part B and Schedules A
and D of Form ADV of Advisory Services (SEC File 801-51967), incorporated
herein by reference, which sets forth the officers and directors of Advisory
Services and information as to any business, profession, vocation or
employment of a substantial nature engaged in by those officers and directors
during the past two years.
ITEM 27. PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts
as principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Templeton Variable Insurance Products Trust
(formerly Franklin Valuemark Funds)
Institutional Fiduciary Trust
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
(b) The information required by this Item 29 with respect to each director
and officer of Distributors is incorporated by reference to Part B of
this N-1A and Schedule A of Form BD filed by Distributors with the
Securities and Exchange Commission pursuant to the Securities Act of
1934 (SEC File No. 8-5889).
(c) Not Applicable. Registrant's principal underwriter is an affiliated
person of an affiliated person of the Registrant.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section
31 (a) of the Investment Company Act of 1940 are kept by the Registrant or
its shareholder services agent, Franklin/Templeton Investor Services, Inc.,
both of whose address is 777 Mariners Island Blvd., San Mateo, CA 94404.
ITEM 29. MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 30. UNDERTAKINGS
(a) The Registrant hereby undertakes to promptly call a meeting of
shareholders for the purpose of voting upon the question of removal of
any trustee or trustees when requested in writing to do so by the record
holders of not less than 10 percent of the Registrant's outstanding
shares to assist its shareholders in the communicating with other
shareholders in accordance with the requirements of Section 16(c) of the
Investment Company Act of 1940.
(b) The Registrant hereby undertakes to comply with the information
requirement in Item 5 of the Form N1-A by including the required
information in the Registrant's annual report and to furnish each person
to whom a prospectus is delivered a copy of the annual report upon
request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of San Mateo and the State of California, on the 25th day
of February, 2000.
FRANKLIN VALUE INVESTORS TRUST
(Registrant)
By: /S/WILLIAM J. LIPPMAN*
William J. Lippman
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
and on the dates indicated:
WILLIAM J. LIPPMAN* Trustee and Principal
William J. Lippman Executive Officer
Dated: February 25, 2000
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: February 25, 2000
KIMBERLEY H. MONASTERIO* Principal Accounting Officer
Kimberley H. Monasterio Dated: February 25, 2000
FRANK T. CROHN* Trustee
Frank T. Crohn Dated: February 25, 2000
CHARLES RUBENS, II* Trustee
Charles Rubens, II Dated: February 25, 2000
LEONARD RUBIN* Trustee
Leonard Rubin Dated: February 25, 2000
*By /S/DAVID P. GOSS
David P. Goss, Attorney-in-Fact
(Pursuant to Powers of Attorney filed herewith)
FRANKLIN VALUE INVESTORS TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.(a)(i) Agreement and Declaration of Trust *
dated September 11, 1989
EX-99.(a)(ii) Certificate of Amendment of Agreement *
and Declaration of Trust of Franklin
Balance Sheet Investment Fund dated
September 21, 1995
EX-99.(b)(i) By-Laws *
EX-99.(d)(i) Management Agreement between the Attached
Registrant on behalf of Franklin
Balance Sheet Investment Fund and
Franklin Advisory Services, LLC, dated
April 1, 1999
EX-99.(d)(ii) Management Agreement between the Attached
Registrant on behalf of Franklin
MicroCap Value Fund and Franklin
Advisory Services, LLC, dated April 1,
1999
EX-99.(d)(iii) Management Agreement between the Attached
Registrant on behalf of Franklin Value
Fund and Franklin Advisory Services,
LLC, dated April 1, 1999
EX-99.(e)(i) Amended and Restated Distribution *
Agreement between Registrant and
Franklin/Templeton Distributors, Inc.,
dated April 23, 1995
EX-99.(e)(ii) Forms of Dealer Agreements between *
Franklin/Templeton Distributors, Inc.
and Securities Dealers dated March 1,
1998
EX-99.(e)(iii) Amendment of Amended and Restated Attached
Distribution Agreement between the
Registrant and Franklin/Templeton
Distributors, Inc, dated March 25, 1999
EX-99.(g)(i) Master Custodian Agreement between *
Registrant and Bank of New York dated
February 16, 1996
EX-99.(g)(ii) Terminal Link Agreement between *
Registrant and Bank of New York dated
February 16, 1996
EX-99.(g)(iii) Amendment dated May 7, 1997 to Master *
Custody Agreement between the
Registrant and Bank of New York dated
February 16, 1996
EX-99.(g)(iv) Amendment dated October 7, 1997 to *
Exhibit A in the Master Custody
Agreement between the Registrant and
Bank of New York dated February 16, 1996
EX-99.(g)(v) Foreign Custody Manager Agreement *
between the Registrant and Bank of New
York dated July 30, 1998.
EX-99.(g)(vi) Amendment dated September 16, 1999 to Attached
Exhibit A of the Master Custody
Agreement between the Registrant and
Bank of New York dated February 16, 1996
EX-99.(h)(i) Subcontract for Fund Administrative *
Services dated July 1, 1996 between
Franklin Advisory Services, Inc. and
Franklin Templeton Services, Inc.
EX-99.(i)(i) Opinion and Consent of counsel dated *
December 14, 1998
EX-99.(j)(i) Consent of Independent Auditors Attached
EX-99.(l)(i) Letter of Understanding relating to *
Initial Capital of Franklin Balance
Sheet Investment Fund dated November
17, 1989
EX-99.(l)(ii) Letter of Understanding relating to *
Initial Capital of Franklin MicroCap
Value Fund dated November 29, 1995
EX-99.(l)(iii) Letter of Understanding relating to *
Initial Capital of Franklin Value Fund
EX-99.(l)(iv) Letter of Understanding relating to *
Initial Capital of Franklin Value Fund
- Class II dated August 30, 1996
EX-99.(m)(i) Amended and Restated Distribution Plan *
between Franklin Balance Sheet
Investment Fund and Franklin/Templeton
Distributors, Inc., pursuant to Rule
12b-1 dated July 1, 1993
EX-99.(m)(ii) Distribution Plan pursuant to Rule *
12b-1 between Franklin Value Investors
Trust on behalf of Franklin MicroCap
Value Fund and Franklin/Templeton
Distributors, Inc., dated December 12,
1995
EX-99.(m)(iii) Distribution Plan Pursuant to Rule *
12b-1 between Franklin Value Investors
Trust on behalf of Franklin Value Fund
and Franklin/Templeton Distributors,
Inc., dated March 11, 1996
EX-99.(m)(iv) Class II Distribution Plan pursuant to *
Rule 12b-1 between Franklin Value
Investors Trust on behalf of Franklin
Value Fund and Franklin/Templeton
Distributors, Inc., dated September 3,
1996
EX-99.(m)(v) Class B Distribution Plan pursuant to Attached
Rule 12b-1 between Franklin Value
Investors Trust on behalf of Franklin
Value Fund and Franklin/ Templeton
Distributors, Inc.
EX-99.(o)(i) Multiple Class Plan for Franklin *
MicroCap Value Fund
EX-99.(o)(ii) Multiple Class Plan for Franklin Value Attached
Fund
EX-99.(p)(i) Power of Attorney dated February 24, Attached
2000
Ex-99.(p)(ii) Certificate of Secretary dated February Attached
24, 2000
*Incorporated by Reference
FRANKLIN VALUE INVESTORS TRUST
on behalf of
FRANKLIN BALANCE SHEET INVESTMENT FUND
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT made between FRANKLIN VALUE INVESTORS TRUST,
formerly known as Franklin Balance Sheet Investment Fund, a Massachusetts
Business Trust, on behalf of its series FRANKLIN BALANCE SHEET INVESTMENT
FUND, hereinafter called the "Fund", and FRANKLIN ADVISORY SERVICES, LLC, a
Delaware limited liability company, hereinafter called the "Manager."
WHEREAS, the Fund has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 (the
"Act") for the purpose of investing and reinvesting its assets in securities,
as set forth in its Agreement and Declaration of Trust, its By-Laws and its
Registration Statements under the Act and the Securities Act of 1933, all as
heretofore and hereafter amended and supplemented; and the Fund desires to
avail itself of the services, information, advice, assistance and facilities
of an investment manager and to have an investment manager perform various
management, statistical, research, investment advisory and other services for
the Fund and any separate series of the Fund of the Fund hereafter organized;
and,
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, is engaged in the business of rendering
management, investment advisory, counseling and supervisory services to
investment companies and other investment counseling clients, and desires to
provide these services to the Fund.
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is mutually agreed as follows:
1. EMPLOYMENT OF THE MANAGER. The Fund hereby employs the Manager to
manage the investment and reinvestment of the Fund's assets and to administer
its affairs, subject to the direction of the Board of Trustees and the
officers of the Fund, for the period and on the terms hereinafter set forth.
The Manager hereby accepts such employment and agrees during such period to
render the services and to assume the obligations herein set forth for the
compensation herein provided. The Manager shall for all purposes herein be
deemed to be an independent contractor and shall, except as expressly
provided or authorized (whether herein or otherwise), have no authority to
act for or represent the Fund in any way or otherwise be deemed an agent of
the Fund.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE MANAGER. The
Manager undertakes to provide the services hereinafter set forth and to
assume the following obligations:
A. ADMINISTRATIVE SERVICES. The Manager shall furnish to the
Fund adequate (i) office space, which may be space within the offices of the
Manager or in such other place as may be agreed upon from time to time, and
(ii) office furnishings, facilities and equipment as may be reasonably
required for managing the affairs and conducting the business of the Fund,
including conducting correspondence and other communications with the
shareholders of or Contract Holders investing in the Fund, maintaining all
internal bookkeeping, accounting and auditing services and records in
connection with the Fund's investment and business activities. The Manager
shall employ or provide and compensate the executive, secretarial and
clerical personnel necessary to provide such services. The Manager shall
also compensate all officers and employees of the Fund who are officers or
employees of the Manager or its affiliates.
B. INVESTMENT MANAGEMENT SERVICES.
(a) The Manager shall manage the Fund's assets subject to and
in accordance with the investment objectives and policies of the Fund and any
directions which the Fund's Board of Trustees may issue from time to time.
In pursuance of the foregoing, the Manager shall make all determinations with
respect to the investment of the Fund's assets and the purchase and sale of
their investment securities, and shall take such steps as may be necessary to
implement the same. Such determinations and services shall include
determining the manner in which any voting rights, rights to consent to
corporate action and any other rights pertaining to the Fund's investment
securities shall be exercised. The Manager shall render regular reports to
the Fund, at regular meetings of its Board of Trustees and at such other
times as may be reasonably requested by the Fund's Board of Trustees, of (i)
the decisions which it has made with respect to the investment of the Fund's
assets and the purchase and sale of their investment securities, (ii) the
reasons for such decisions and (iii) the extent to which those decisions have
been implemented.
(b) The Manager, subject to and in accordance with any
directions which the Fund's Board of Trustees may issue from time to time,
shall place, orders for the execution of the Fund's securities transactions.
When placing such orders the Manager shall seek to obtain the best net price
and execution for the Fund, but this requirement shall not be deemed to
obligate the Manager to place any order solely on the basis of obtaining the
lowest commission rate if the other standards set forth in this section have
been satisfied. The parties recognize that there are likely to be many cases
in which different brokers are equally able-to provide such best price and
execution and that, in selecting among such brokers with respect to
particular trades, it is desirable to choose those brokers who furnish
research, statistical, quotations and other information to the Fund and the
Manager in accord with the standards set forth below. Moreover, to the
extent that it continues to be lawful to do so and so long as the Board of
Trustees determines that the Fund will benefit, directly or indirectly, by
doing so, the Manager may place orders with a broker who charges a commission
for that transaction which is in excess of the amount of commission that
another broker would have charged for effecting that transaction, provided
that the excess commission is reasonable in relation to the value of
"brokerage and research services" (as defined in Section 28(e)(3) of the
Securities Exchange Act of 1934) provided by that broker. Accordingly, the
Fund and the Manager agree that the Manager shall select brokers for the
execution of the Fund's transactions from among:
(i) Those brokers and dealers who provide quotations and
other services to the Fund, specifically including the
quotations necessary to determine the Fund's net
assets, in such amount of total brokerage as may
reasonably be required in light of such services; and
(ii) Those brokers and dealers who supply research,
statistical and other data to the Manager or its
affiliates which the Manager or its affiliates may
lawfully and appropriately use in their investment
advisory capacities, which relate directly to
securities, actual or potential, of the Fund, or which
place the Manager in a better position to make
decisions in connection with the management of the
Fund's assets and securities, whether or not such data
may also be useful to the Manager and its affiliates in
managing other portfolios or advising other clients, in
such amount of total brokerage as may reasonably be
required.
(c) When the Manager has determined that the Fund should
tender securities pursuant to a "tender offer solicitation," the Manager
shall designate Franklin Distributors, Inc. ("Distributors") as the
"tendering dealer" so long as it is legally permissible for the Manager to do
so, and act in such capacity under the Federal securities laws and rules
thereunder and the rules of any securities exchange or association of which
Distributors may be a member. Distributors shall not be obligated to make
any additional commitments of capital, expense or personnel beyond that
already committed (other than normal periodic fees or payments necessary to
maintain its corporate existence and membership in the National Association
of Securities Dealers, Inc.) as of the date of this Agreement. This
Agreement shall not obligate the Manager or Distributors (i) to act pursuant
to the foregoing requirement under any circumstances in which they might
reasonably believe that liability might be imposed upon them as a result of
so acting, or (ii) to institute legal or other proceedings to collect fees
which may be considered to be due from others to it as a result of such a
tender, unless the Fund shall enter into an agreement with the Manager and/or
Distributors to reimburse them for all such expenses connected with
attempting to collect such fees, including legal fees and expenses and that
portion of the compensation due to their employees which is attributable to
the time involved in attempting to collect such fees.
(d) The Manager shall render regular reports to the Fund, not
more frequently than quarterly, of how much total brokerage business has been
placed by the Manager with brokers falling into each of the categories
referred to above and the manner in which the allocation has been
accomplished.
(e) The Manager agrees that no investment decision will be
made or influenced by a desire to provide brokerage for allocation in
accordance with the foregoing, and that the right to make such allocation of
brokerage shall not interfere with the Manager's paramount duty to obtain the
best net price and execution for the Fund.
C. PROVISION OF INFORMATION NECESSARY FOR PREPARATION OF
SECURITIES REGISTRATION STATEMENTS, AMENDMENTS AND OTHER MATERIALS. The
Manager, its officers and employees will make available and provide
accounting and statistical information required by the Fund in the
preparation of registration statements, reports and other documents required
by Federal and state securities laws and with such information as the Fund
may reasonably request for use in the preparation of such documents or of
other materials necessary or helpful for the offering of the Fund's shares.
D. OTHER OBLIGATIONS AND SERVICES. The Manager shall make its
officers and employees available to the Board of Trustees and officers of the
Fund for consultation and discussions regarding the administration and
management of the Fund and their investment activities.
3. EXPENSES OF THE Fund. It is understood that the Fund will pay all
of its own expenses other than those expressly assumed by the Manager herein,
which expenses payable by the Fund shall include:
A. Fees and expenses paid to the Manager as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian, dividend
disbursing agent and shareholder record-keeping services, including the
expenses of issue, repurchase or redemption of their shares;
D. Expenses of obtaining quotations for calculating the value of
the Fund's net assets;
E. Salaries and other compensations of executive officers of the
Fund who are not officers, directors, stockholders or employees of the
Manager or its affiliates;
F. Taxes levied against the Fund;
G. Brokerage fees and commissions in connection with the purchase
and sale of securities for the Fund;.
H. Costs, including the interest expense, of borrowing money;
I. Costs incident to meetings of Board of Trustees and
shareholders of the Fund, reports to the Fund's shareholders, the filing of
reports with regulatory bodies and the maintenance of the Fund's legal
existence;
J. Legal fees, including the legal fees related to the
registration and continued qualification of the Fund's shares for sale;
K. Trustees' fees and expenses to trustees who are not directors,
officers, employees or stockholders of the Manager or any of its affiliates;
L. Costs and expense of registering and maintaining the
registration of the Fund and their shares under Federal and any applicable
state laws; including the printing and mailing of prospectuses to its
shareholders;
M. Trade association dues; and
N. The Fund's pro rata portion of fidelity bond, errors and
omissions, and trustees and officer liability insurance premiums.
4. COMPENSATION OF THE MANAGER. The Fund shall pay a management fee
in cash to the Manager based upon a percentage of the value of the Fund's net
assets, calculated as set forth below, as compensation for the services
rendered and obligations assumed by the Manager, payable monthly at the
request of the Manager.
A. For purposes of calculating such fee, the value of the net
assets of the Fund shall be determined in the same manner as that the Fund
uses to compute the value of its net assets in connection with the
determination of the net asset value of its shares, all as set forth more
fully in the Fund's current prospectus and statement of additional
information. The rate of the management fee payable by the Fund shall be
calculated daily at the following annual rates:
.625 of 1% of the value of net assets up to and
including $100,000,000;
.50 of 1% of the value of net assets over
$100,000,000 up to and including $250,000,000; and
.45 of 1% of the value of net assets over $250,000,000 up
to and including $10,000,000,000; and
.44 of 1% of the value of net assets over $10,000,000,000
up to and including $12,500,000,000; and
.42 of 1% of the value of net assets over $12,500,000,000
up to and including $15,000,000,000; and
.40 of 1% of the value of net assets over
$15,000,000,000.
B. The Management fee payable by the Fund shall be reduced or
eliminated to the extent that Distributors has actually received cash
payments of tender offer solicitation fees less certain costs and expenses
incurred in connection therewith as set forth in paragraph 2.B.(c) of this
Agreement. The Manager may, from time to time, voluntarily reduce or waive
any management fee due to it hereunder.
C. To the extent that the gross operating costs and expenses of
the Fund (excluding any interest, taxes, brokerage commissions, amortization
of organization expense, expenses under the Distribution Plan, and, with the
prior written approval of any state securities commission requiring same, any
extraordinary expenses, such as litigation), exceed the most stringent
expense limitation requirements of the states in which shares of the Fund are
qualified for sale, the Manager shall reduce its fees by the amount of such
excess.
5. ACTIVITIES OF THE MANAGER. The services of the Manager to the Fund
hereunder are not to be deemed exclusive, and the Manager and 'any of its
affiliates shall be free to render similar services to others. Subject to
and in accordance with the Agreement and Declaration of Trust and By-Laws of
the Fund and Section 10(a) of the Act, it is understood that trustees,
officers, agents and shareholders of the Fund are or may be interested in the
Manager or its affiliates as directors, officers, agents or stockholders;
that directors, officers, agents or stockholders of the Manager or its
affiliates are or may be interested in the Fund as trustees, officers,
agents, shareholders or otherwise; that the Manager or its affiliates may be
interested in the Fund as shareholders or otherwise; and that the effect of
any such interests shall be governed by said Agreement and Declaration of
Trust, By-Laws and the Act.
6. LIABILITIES OF THE MANAGER.
A. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties hereunder on the
part of the Manager, the Manager shall not be subject to liability to the
Fund or to any shareholder of the Trust for any act or omission in the course
of, or connected with, rendering services hereunder or for any losses that
may be sustained in the purchase, holding or sale of any security by the Fund.
B. Notwithstanding the foregoing, the Manager agrees to reimburse
the Fund for any and all costs, expenses, and counsel and trustees' fees
reasonably incurred by the Fund in the preparation, printing and distribution
of proxy statements, amendments to its Registration Statement, holdings of
meetings of its shareholders or trustees, the conduct of factual
investigations, any legal or administrative proceedings (including any
applications for exemptions or determinations by the Securities and Exchange
Commission) which the Fund incurs as the result of action or inaction of the
Manager or any of its affiliates or any of their officers, directors,
employees or stockholders where the action or inaction necessitating such
expenditures (i) is directly or indirectly related to any transactions or
proposed transaction in the stock or control of the Manager or its affiliates
(or litigation related to any pending or proposed or future transaction in
such shares or control) which shall have been undertaken without the prior,
express approval of the Fund's Board of Trustees; or, (ii) is within the
control of the Manager or any of its affiliates or any of their officers,
directors, employees or stockholders. The Manager shall not be obligated
pursuant to the provisions of this Subparagraph 6(B), to reimburse the Fund
for any expenditures related to the institution of an administrative
proceeding or civil litigation by the Fund or a shareholder or policyholder
investing in the Fund seeking to recover all or a portion of the proceeds
derived by any stockholder of the Manager or any of its affiliates from the
sale of his shares of the Manager, or similar matters. So long as this
Agreement is in effect, the Manager shall pay to the Fund the amount due for
expenses subject to this Subparagraph 6(B) within 30 days after a bill or
statement has been received by the Manager therefor. This provision shall
not be deemed to be a waiver of any claim the Fund may have or may assert
against the Manager or others for costs, expenses or damages heretofore
incurred by the Fund or for costs, expenses or damages the Fund may hereafter
incur which are not reimbursable to it hereunder.
C. No provision of this Agreement shall be construed to protect
any trustee or officer of the Fund, or director or officer of the Manager,
from liability in violation of Sections 17(h) and (i) of the Act.
7. RENEWAL AND TERMINATION.
A. This Agreement shall become effective on the date written
below and shall continue in effect for two (2) years. The Agreement is
renewable annually thereafter for successive periods not to exceed one (1)
year (i) by a vote of a majority of the outstanding voting securities of the
Fund or by a vote of the Board of Trustees of the Fund, and (ii) by a vote of
a majority of the Trustees of the Fund who are not parties to the Agreement
(other than as Trustees of the Fund), cast in person at a meeting called for
the purpose of voting on the Agreement.
B. This Agreement:
(i) may at any time be terminated without the payment of any
penalty either by vote of the Board of Trustees of the Fund or by vote of a
majority of the outstanding voting securities of the Fund seeking to
terminate the Agreement, on 60 days' written notice to the Manager;
(ii) shall immediately terminate with respect to the Fund in
the event of its assignment; and
(iii) may be terminated by the Manager on 60 days' written
notice to the Fund.
C. As used in this Paragraph the terms "assignment,"
"interested person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth for any such terms in the Act.
D. Any notice under this Agreement shall be given in writing
addressed and delivered, or mailed post-paid, to the other party at any
office of such party.
8. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder
of this Agreement shall not be affected thereby.
9. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
10. LIMITATION OF LIABILITY. The Manager acknowledges that it has
received notice of and accepts the limitations of the Fund's liability as set
forth in Article VIII of its Agreement and Declaration of Trust. The Manager
agrees that the Fund's obligations hereunder shall be limited to the assets
of the Fund, and that the Manager shall not seek satisfaction of any such
obligation from any shareholders of the Fund nor from any trustee, officer,
employee or agent of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and effective on the 1st day of April, 1999.
FRANKLIN VALUE INVESTORS TRUST
By:/s/D.R. GATZEK
Deborah R. Gatzek
Vice President &
Secretary
FRANKLIN ADVISORY SERVICES, LLC
By:/s/LESLIE M. KRATTER
Leslie M. Kratter
Secretary
FRANKLIN VALUE INVESTORS TRUST
on behalf of
FRANKLIN MICROCAP VALUE FUND
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT made between Franklin Value Investors Trust, a
Massachusetts business trust (the "Trust"), on behalf of Franklin MicroCap
Value Fund (the "Fund"), a series of the Trust, and FRANKLIN ADVISORY
SERVICES, LLC, a Delaware limited liability company, (the "Manager").
WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 (the
"1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its
By-Laws and its Registration Statements under the 1940 Act and the Securities
Act of 1933, all as heretofore and hereafter amended and supplemented; and
the Trust desires to avail itself of the services, information, advice,
assistance and facilities of an investment manager and to have an investment
manager perform various management, statistical, research, investment
advisory and other services for the Fund; and,
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, is engaged in the business of rendering
management, investment advisory, counseling and supervisory services to
investment companies and other investment counseling clients, and desires to
provide these services to the Fund.
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is mutually agreed as follows:
l. EMPLOYMENT OF THE MANAGER. The Trust hereby employs the Manager to
manage the investment and reinvestment of the Fund's assets and to administer
its affairs, subject to the direction of the Board of Trustees and the
officers of the Trust, for the period and on the terms hereinafter set
forth. The Manager hereby accepts such employment and agrees during such
period to render the services and to assume the obligations herein set forth
for the compensation herein provided. The Manager shall for all purposes
herein be deemed to be an independent contractor and shall, except as
expressly provided or authorized (whether herein or otherwise), have no
authority to act for or represent the Fund or the Trust in any way or
otherwise be deemed an agent of the Fund or the Trust.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE MANAGER. The
Manager undertakes to provide the services hereinafter set forth and to
assume the following obligations:
A. ADMINISTRATIVE SERVICES. The Manager shall furnish to the
Fund adequate (i) office space, which may be space within the offices of the
Manager or in such other place as may be agreed upon from time to time, (ii)
office furnishings, facilities and equipment as may be reasonably required
for managing the affairs and conducting the business of the Fund, including
conducting correspondence and other communications with the shareholders of
the Fund, maintaining all internal bookkeeping, accounting and auditing
services and records in connection with the Fund's investment and business
activities. The Manager shall employ or provide and compensate the
executive, secretarial and clerical personnel necessary to provide such
services. The Manager shall also compensate all officers and employees of
the Trust who are officers or employees of the Manager or its affiliates.
B. INVESTMENT MANAGEMENT SERVICES.
(a) The Manager shall manage the Fund's assets subject to
and in accordance with the investment objectives and policies of the Fund and
any directions which the Trust's Board of Trustees may issue from time to
time. In pursuance of the foregoing, the Manager shall make all
determinations with respect to the investment of the Fund's assets and the
purchase and sale of its investment securities, and shall take such steps as
may be necessary to implement the same. Such determinations and services
shall include determining the manner in which any voting rights, rights to
consent to corporate action and any other rights pertaining to the Fund's
investment securities shall be exercised. The Manager shall render or cause
to be rendered regular reports to the Trust, at regular meetings of its Board
of Trustees and at such other times as may be reasonably requested by the
Trust's Board of Trustees, of (i) the decisions made with respect to the
investment of the Fund's assets and the purchase and sale of its investment
securities, (ii) the reasons for such decisions and (iii) the extent to which
those decisions have been implemented.
(b) The Manager, subject to and in accordance with any
directions which the Trust's Board of Trustees may issue from time to time,
shall place, in the name of the Fund, orders for the execution of the Fund's
securities transactions. When placing such orders, the Manager shall seek to
obtain the best net price and execution for the Fund, but this requirement
shall not be deemed to obligate the Manager to place any order solely on the
basis of obtaining the lowest commission rate if the other standards set
forth in this section have been satisfied. The parties recognize that there
are likely to be many cases in which different brokers are equally able to
provide such best price and execution and that, in selecting among such
brokers with respect to particular trades, it is desirable to choose those
brokers who furnish research, statistical, quotations and other information
to the Fund and the Manager in accordance with the standards set forth
below. Moreover, to the extent that it continues to be lawful to do so and
so long as the Board of Trustees determines that the Fund will benefit,
directly or indirectly, by doing so, the Manager may place orders with a
broker who charges a commission for that transaction which is in excess of
the amount of commission that another broker would have charged for effecting
that transaction, provided that the excess commission is reasonable in
relation to the value of "brokerage and research services" (as defined in
Section 28(e) (3) of the Securities Exchange Act of 1934) provided by that
broker.
Accordingly, the Trust and the Manager agree that the Manager
shall select brokers for the execution of the Fund's transactions from among:
(i) Those brokers and dealers who provide quotations and
other services to the Fund, specifically including the
quotations necessary to determine the Fund's net assets, in
such amount of total brokerage as may reasonably be required
in light of such services; and
(ii) Those brokers and dealers who supply research,
statistical and other data to the Manager or its affiliates
which the Manager or its affiliates may lawfully and
appropriately use in their investment advisory capacities,
which relate directly to securities, actual or potential, of
the Fund, or which place the Manager in a better position to
make decisions in connection with the management of the
Fund's assets and securities, whether or not such data may
also be useful to the Manager and its affiliates in managing
other portfolios or advising other clients, in such amount of
total brokerage as may reasonably be required. Provided that
the Trust's officers are satisfied that the best execution is
obtained, the sale of shares of the Fund may also be
considered as a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
(c) When the Manager has determined that the Fund should
tender securities pursuant to a "tender offer solicitation,"
Franklin/Templeton Distributors, Inc. ("Distributors") shall be designated as
the "tendering dealer" so long as it is legally permitted to act in such
capacity under the federal securities laws and rules thereunder and the rules
of any securities exchange or association of which Distributors may be a
member. Neither the Manager nor Distributors shall be obligated to make any
additional commitments of capital, expense or personnel beyond that already
committed (other than normal periodic fees or payments necessary to maintain
its corporate existence and membership in the National Association of
Securities Dealers, Inc.) as of the date of this Agreement. This Agreement
shall not obligate the Manager or Distributors (i) to act pursuant to the
foregoing requirement under any circumstances in which they might reasonably
believe that liability might be imposed upon them as a result of so acting,
or (ii) to institute legal or other proceedings to collect fees which may be
considered to be due from others to it as a result of such a tender, unless
the Trust on behalf of the Fund shall enter into an agreement with the
Manager and/or Distributors to reimburse them for all such expenses connected
with attempting to collect such fees, including legal fees and expenses and
that portion of the compensation due to their employees which is attributable
to the time involved in attempting to collect such fees.
(d) The Manager shall render regular reports to the Trust,
not more frequently than quarterly, of how much total brokerage business has
been placed by the Manager, on behalf of the Fund, with brokers falling into
each of the categories referred to above and the manner in which the
allocation has been accomplished.
(e) The Manager agrees that no investment decision will be
made or influenced by a desire to provide brokerage for allocation in
accordance with the foregoing, and that the right to make such allocation of
brokerage shall not interfere with the Manager's paramount duty to obtain the
best net price and execution for the Fund.
C. PROVISION OF INFORMATION NECESSARY FOR PREPARATION OF SECURITIES
REGISTRATION STATEMENTS, AMENDMENTS AND OTHER MATERIALS. The Manager, its
officers and employees will make available and provide accounting and
statistical information required by the Fund in the preparation of registration
statements, reports and other documents required by federal and state securities
laws and with such information as the Fund may reasonably request for use in the
preparation of such documents or of other materials necessary or helpful for the
underwriting and distribution of the Fund's shares.
D. OTHER OBLIGATIONS AND SERVICES. The Manager shall make its
officers and employees available to the Board of Trustees and officers of the
Trust for consultation and discussions regarding the administration and
management of the Fund and its investment activities.
3. EXPENSES OF THE FUND. It is understood that the Fund will pay all of
its own expenses other than those expressly assumed by the Manager herein, which
expenses payable by the Fund shall include:
A. Fees and expenses paid to the Manager as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian, dividend
disbursing agent and shareholder record-keeping services, including the expenses
of issue, repurchase or redemption of its shares;
D. Expenses of obtaining quotations for calculating the value of
the Fund's net assets;
E. Salaries and other compensations of executive officers of the
Trust who are not officers, directors, stockholders or employees of the Manager
or its affiliates;
F. Taxes levied against the Fund;
G. Brokerage fees and commissions in connection with the purchase
and sale of securities for the Fund;
H. Costs, including the interest expense, of borrowing money;
I. Costs incident to meetings of the Board of Trustees and
shareholders of the Fund, reports to the Fund's shareholders, the filing of
reports with regulatory bodies and the maintenance of the Fund's and the
Trust's legal existence;
J. Legal fees, including the legal fees related to the
registration and continued qualification of the Fund's shares for sale;
K. Trustees' fees and expenses to trustees who are not
directors, officers, employees or stockholders of the Manager or any of its
affiliates;
L. Costs and expense of registering and maintaining the
registration of the Fund and its shares under federal and any applicable
state laws; including the printing and mailing of prospectuses to its
shareholders;
M. Trade association dues; and
N. The Fund's pro rata portion of fidelity bond, errors and
omissions, and trustees and officer liability insurance premiums.
4. COMPENSATION OF THE MANAGER. The Fund shall pay a management fee
in cash to the Manager based upon a percentage of the value of the Fund's net
assets, calculated as set forth below, as compensation for the services
rendered and obligations assumed by the Manager, during the preceding month,
on the first business day of the month in each year.
A. For purposes of calculating such fee, the value of the net
assets of the Fund shall be determined in the same manner as the Fund uses to
compute the value of its net assets in connection with the determination of
the net asset value of its shares, all as set forth more fully in the Fund's
current prospectus and statement of additional information. The rate of the
management fee payable by the Fund shall be calculated daily at the rate of
.75% (.75 of 1%) per annum of the Fund's average daily net assets.
B. The management fee payable by the Fund shall be reduced or
eliminated to the extent that Distributors has actually received cash
payments of tender offer solicitation fees less certain costs and expenses
incurred in connection therewith and to the extent necessary to comply with
the limitations on expenses which may be borne by the Fund as set forth in
the laws, regulations and administrative interpretations of those states in
which the Fund's shares are registered. The Manager may waive all or a
portion of its fees provided for hereunder and such waiver shall be treated
as a reduction in purchase price of its services. The Manager shall be
contractually bound hereunder by the terms of any publicly announced waiver
of its fee, or any limitation of the Fund's expenses, as if such waiver or
limitation were fully set forth herein.
C. If this Agreement is terminated prior to the end of any
month, the accrued management fee shall be paid to the date of termination.
5. ACTIVITIES OF THE MANAGER. The services of the Manager to the Fund
hereunder are not to be deemed exclusive, and the Manager and any of its
affiliates shall be free to render similar services to others. Subject to
and in accordance with the Agreement and Declaration of Trust and By-Laws of
the Trust and Section 10(a) of the 1940 Act, it is understood that trustees,
officers, agents and shareholders of the Trust are or may be interested in
the Manager or its affiliates as directors, officers, agents or stockholders;
that directors, officers, agents or stockholders of the Manager or its
affiliates are or may be interested in the Trust as trustees, officers,
agents, shareholders or otherwise; that the Manager or its affiliates may be
interested in the Fund as shareholders or otherwise; and that the effect of
any such interests shall be governed by said Agreement and Declaration of
Trust, By-Laws and the 1940 Act.
6. LIABILITIES OF THE MANAGER.
A. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties hereunder on the
part of the Manager, the Manager shall not be subject to liability to the
Trust or the Fund or to any shareholder of the Fund for any act or omission
in the course of, or connected with, rendering services hereunder or for any
losses that may be sustained in the purchase, holding or sale of any security
by the Fund.
B. Notwithstanding the foregoing, the Manager agrees to
reimburse the Trust for any and all costs, expenses, and counsel and
trustees' fees reasonably incurred by the Trust in the preparation, printing
and distribution of proxy statements, amendments to its Registration
Statement, holdings of meetings of its shareholders or trustees, the conduct
of factual investigations, any legal or administrative proceedings (including
any applications for exemptions or determinations by the Securities and
Exchange Commission) which the Trust incurs as the result of action or
inaction of the Manager or any of its affiliates or any of their officers,
directors, employees or stockholders where the action or inaction
necessitating such expenditures (i) is directly or indirectly related to any
transactions or proposed transaction in the stock or control of the Manager
or its affiliates (or litigation related to any pending or proposed or future
transaction in such shares or control) which shall have been undertaken
without the prior, express approval of the Trust's Board of Trustees; or,
(ii) is within the control of the Manager or any of its affiliates or any of
their officers, directors, employees or stockholders. The Manager shall not
be obligated pursuant to the provisions of this Subparagraph 6(B), to
reimburse the Trust for any expenditures related to the institution of an
administrative proceeding or civil litigation by the Trust or a shareholder
seeking to recover all or a portion of the proceeds derived by any
stockholder of the Manager or any of its affiliates from the sale of his
shares of the Manager, or similar matters. So long as this Agreement is in
effect, the Manager shall pay to the Trust the amount due for expenses
subject to this Subparagraph 6(B) within 30 days after a bill or statement
has been received by the Manager therefor. This provision shall not be
deemed to be a waiver of any claim the Trust may have or may assert against
the Manager or others for costs, expenses or damages heretofore incurred by
the Trust or for costs, expenses or damages the Trust may hereafter incur
which are not reimbursable to it hereunder.
C. No provision of this Agreement shall be construed to protect
any trustee or officer of the Trust, or director or officer of the Manager,
from liability in violation of Sections 17(h) and (i) of the 1940 Act.
7. RENEWAL AND TERMINATION.
A. This Agreement shall become effective on the date written
below and shall continue in effect for two (2) years thereafter, unless
sooner terminated as hereinafter provided and shall continue in effect
thereafter for periods not exceeding one (1) year so long as such
continuation is approved at least annually (i) by a vote of a majority of the
outstanding voting securities of each Fund or by a vote of the Board of
Trustees of the Trust, and (ii) by a vote of a majority of the Trustees of
the Trust who are not parties to the Agreement (other than as Trustees of the
Trust), cast in person at a meeting called for the purpose of voting on the
Agreement.
B. This Agreement:
(i) may at any time be terminated without the payment of
any penalty either by vote of the Board of Trustees of the Trust or by vote
of a majority of the outstanding voting securities of the Fund on 60 days'
written notice to the Manager;
(ii) shall immediately terminate with respect to the Fund in
the event of its assignment; and
(iii) may be terminated by the Manager on 60 days' written
notice to the Fund.
C. As used in this Paragraph the terms "assignment," "interested
person" and "vote of a majority of the outstanding voting securities" shall
have the meanings set forth for any such terms in the 1940 Act.
D. Any notice under this Agreement shall be given in writing
addressed and delivered, or mailed post-paid, to the other party at any
office of such party.
8. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder
of this Agreement shall not be affected thereby.
9. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and effective on the 1st day of April, 1999.
FRANKLIN VALUE INVESTORS TRUST
By:/s/ D.R.GATZEK
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN ADVISORY SERVICES, LLC
By:/s/LESLIE M. KRATTER
Leslie M. Kratter
Secretary
FRANKLIN VALUE INVESTORS TRUST
on behalf of
FRANKLIN VALUE FUND
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT made between FRANKLIN VALUE INVESTORS TRUST, a
Massachusetts business trust (the "Trust"), on behalf of FRANKLIN VALUE FUND
(the "Fund"), a series of the Trust, and other series of the Trust hereafter
created, unless other provisions are made respecting such services, and
FRANKLIN ADVISORY SERVICES, LLC, a Delaware limited liability company, (the
"Manager").
WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 (the
"1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its
By-Laws and its Registration Statements under the 1940 Act and the Securities
Act of 1933, all as heretofore and hereafter amended and supplemented; and
the Trust desires to avail itself of the services, information, advice,
assistance and facilities of an investment manager and to have an investment
manager perform various management, statistical, research, investment
advisory and other services for the Fund; and,
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, is engaged in the business of rendering
management, investment advisory, counseling and supervisory services to
investment companies and other investment counseling clients, and desires to
provide these services to the Fund.
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is mutually agreed as follows:
l. EMPLOYMENT OF THE MANAGER. The Trust hereby employs the Manager to
manage the investment and reinvestment of the Fund's assets and to administer
its affairs, subject to the direction of the Board of Trustees and the
officers of the Trust, for the period and on the terms hereinafter set
forth. The Manager hereby accepts such employment and agrees during such
period to render the services and to assume the obligations herein set forth
for the compensation herein provided. The Manager shall for all purposes
herein be deemed to be an independent contractor and shall, except as
expressly provided or authorized (whether herein or otherwise), have no
authority to act for or represent the Fund or the Trust in any way or
otherwise be deemed an agent of the Fund or the Trust.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE MANAGER. The
Manager undertakes to provide the services hereinafter set forth and to
assume the following obligations:
A. ADMINISTRATIVE SERVICES. The Manager shall furnish to the
Fund adequate (i) office space, which may be space within the offices of the
Manager or in such other place as may be agreed upon from time to time, (ii)
office furnishings, facilities and equipment as may be reasonably required
for managing the affairs and conducting the business of the Fund, including
conducting correspondence and other communications with the shareholders of
the Fund, maintaining all internal bookkeeping, accounting and auditing
services and records in connection with the Fund's investment and business
activities. The Manager shall employ or provide and compensate the
executive, secretarial and clerical personnel necessary to provide such
services. The Manager shall also compensate all officers and employees of
the Trust who are officers or employees of the Manager or its affiliates.
B. INVESTMENT MANAGEMENT SERVICES.
(a) The Manager shall manage the Fund's assets subject to
and in accordance with the investment objectives and policies of the Fund and
any directions which the Trust's Board of Trustees may issue from time to
time. In pursuance of the foregoing, the Manager shall make all
determinations with respect to the investment of the Fund's assets and the
purchase and sale of its investment securities, and shall take such steps as
may be necessary to implement the same. Such determinations and services
shall include determining the manner in which any voting rights, rights to
consent to corporate action and any other rights pertaining to the Fund's
investment securities shall be exercised. The Manager shall render or cause
to be rendered regular reports to the Trust, at regular meetings of its Board
of Trustees and at such other times as may be reasonably requested by the
Trust's Board of Trustees, of (i) the decisions made with respect to the
investment of the Fund's assets and the purchase and sale of its investment
securities, (ii) the reasons for such decisions and (iii) the extent to which
those decisions have been implemented.
(b) The Manager, subject to and in accordance with any
directions which the Trust's Board of Trustees may issue from time to time,
shall place, in the name of the Fund, orders for the execution of the Fund's
securities transactions. When placing such orders, the Manager shall seek to
obtain the best net price and execution for the Fund, but this requirement
shall not be deemed to obligate the Manager to place any order solely on the
basis of obtaining the lowest commission rate if the other standards set
forth in this section have been satisfied. The parties recognize that there
are likely to be many cases in which different brokers are equally able to
provide such best price and execution and that, in selecting among such
brokers with respect to particular trades, it is desirable to choose those
brokers who furnish research, statistical, quotations and other information
to the Fund and the Manager in accordance with the standards set forth
below. Moreover, to the extent that it continues to be lawful to do so and
so long as the Board of Trustees determines that the Fund will benefit,
directly or indirectly, by doing so, the Manager may place orders with a
broker who charges a commission for that transaction which is in excess of
the amount of commission that another broker would have charged for effecting
that transaction, provided that the excess commission is reasonable in
relation to the value of "brokerage and research services" (as defined in
Section 28(e) (3) of the Securities Exchange Act of 1934) provided by that
broker.
Accordingly, the Trust and the Manager agree that the Manager
shall select brokers for the execution of the Fund's transactions from among:
(i) Those brokers and dealers who provide quotations and
other services to the Fund, specifically including the
quotations necessary to determine the Fund's net assets, in
such amount of total brokerage as may reasonably be required
in light of such services; and
(ii) Those brokers and dealers who supply research,
statistical and other data to the Manager or its affiliates
which the Manager or its affiliates may lawfully and
appropriately use in their investment advisory capacities,
which relate directly to securities, actual or potential, of
the Fund, or which place the Manager in a better position to
make decisions in connection with the management of the
Fund's assets and securities, whether or not such data may
also be useful to the Manager and its affiliates in managing
other portfolios or advising other clients, in such amount of
total brokerage as may reasonably be required. Provided that
the Trust's officers are satisfied that the best execution is
obtained, the sale of shares of the Fund may also be
considered as a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
(c) When the Manager has determined that the Fund should
tender securities pursuant to a "tender offer solicitation,"
Franklin/Templeton Distributors, Inc. ("Distributors") shall be designated as
the "tendering dealer" so long as it is legally permitted to act in such
capacity under the federal securities laws and rules thereunder and the rules
of any securities exchange or association of which Distributors may be a
member. Neither the Manager nor Distributors shall be obligated to make any
additional commitments of capital, expense or personnel beyond that already
committed (other than normal periodic fees or payments necessary to maintain
its corporate existence and membership in the National Association of
Securities Dealers, Inc.) as of the date of this Agreement. This Agreement
shall not obligate the Manager or Distributors (i) to act pursuant to the
foregoing requirement under any circumstances in which they might reasonably
believe that liability might be imposed upon them as a result of so acting,
or (ii) to institute legal or other proceedings to collect fees which may be
considered to be due from others to it as a result of such a tender, unless
the Trust on behalf of the Fund shall enter into an agreement with the
Manager and/or Distributors to reimburse them for all such expenses connected
with attempting to collect such fees, including legal fees and expenses and
that portion of the compensation due to their employees which is attributable
to the time involved in attempting to collect such fees.
(d) The Manager shall render regular reports to the Trust,
not more frequently than quarterly, of how much total brokerage business has
been placed by the Manager, on behalf of the Fund, with brokers falling into
each of the categories referred to above and the manner in which the
allocation has been accomplished.
(e) The Manager agrees that no investment decision will be
made or influenced by a desire to provide brokerage for allocation in
accordance with the foregoing, and that the right to make such allocation of
brokerage shall not interfere with the Manager's paramount duty to obtain the
best net price and execution for the Fund.
C. PROVISION OF INFORMATION NECESSARY FOR PREPARATION OF SECURITIES
REGISTRATION STATEMENTS, AMENDMENTS AND OTHER MATERIALS. The Manager, its
officers and employees will make available and provide accounting and
statistical information required by the Fund in the preparation of registration
statements, reports and other documents required by federal and state securities
laws and with such information as the Fund may reasonably request for use in the
preparation of such documents or of other materials necessary or helpful for the
underwriting and distribution of the Fund's shares.
D. OTHER OBLIGATIONS AND SERVICES. The Manager shall make its
officers and employees available to the Board of Trustees and officers of the
Trust for consultation and discussions regarding the administration and
management of the Fund and its investment activities.
3. EXPENSES OF THE FUND. It is understood that the Fund will pay all of
its own expenses other than those expressly assumed by the Manager herein, which
expenses payable by the Fund shall include:
A. Fees and expenses paid to the Manager as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian, dividend
disbursing agent and shareholder record-keeping services, including the expenses
of issue, repurchase or redemption of its shares;
D. Expenses of obtaining quotations for calculating the value of
the Fund's net assets;
E. Salaries and other compensations of executive officers of the
Trust who are not officers, directors, stockholders or employees of the Manager
or its affiliates;
F. Taxes levied against the Fund;
G. Brokerage fees and commissions in connection with the purchase
and sale of securities for the Fund;
H. Costs, including the interest expense, of borrowing money;
I. Costs incident to meetings of the Board of Trustees and
shareholders of the Fund, reports to the Fund's shareholders, the filing of
reports with regulatory bodies and the maintenance of the Fund's and the
Trust's legal existence;
J. Legal fees, including the legal fees related to the
registration and continued qualification of the Fund's shares for sale;
K. Trustees' fees and expenses to trustees who are not
directors, officers, employees or stockholders of the Manager or any of its
affiliates;
L. Costs and expense of registering and maintaining the
registration of the Fund and its shares under federal and any applicable
state laws; including the printing and mailing of prospectuses to its
shareholders;
M. Trade association dues; and
N. The Fund's pro rata portion of fidelity bond, errors and
omissions, and trustees and officer liability insurance premiums.
4. COMPENSATION OF THE MANAGER. The Fund shall pay a management fee
in cash to the Manager based upon a percentage of the value of the Fund's net
assets, calculated as set forth below, as compensation for the services
rendered and obligations assumed by the Manager, during the preceding month,
on the first business day of the month in each year.
A. For purposes of calculating such fee, the value of the net
assets of the Fund shall be determined in the same manner as that Fund uses
to compute the value of its net assets in connection with the determination
of the net asset value of its shares, all as set forth more fully in the
Fund's current prospectus and statement of additional information. The rate
of the management fee payable by the Fund shall be calculated daily at the
rate of 0.75% per annum on the first $500 million of the average daily net
assets of the Fund, 0.625% per annum on the next $500 million of the average
daily net assets of the Fund, and 0.50% per annum on the average daily net
assets of the Fund in excess of $1 billion.
B. The management fee payable by the Fund shall be reduced or
eliminated to the extent that Distributors has actually received cash
payments of tender offer solicitation fees less certain costs and expenses
incurred in connection therewith and to the extent necessary to comply with
the limitations on expenses which may be borne by the Fund as set forth in
the laws, regulations and administrative interpretations of those states in
which the Fund's shares are registered. The Manager may waive all or a
portion of its fees provided for hereunder and such waiver shall be treated
as a reduction in purchase price of its services. The Manager shall be
contractually bound hereunder by the terms of any publicly announced waiver
of its fee, or any limitation of the Fund's expenses, as if such waiver or
limitation were full set forth herein.
C. If this Agreement is terminated prior to the end of any
month, the accrued management fee shall be paid to the date of termination.
5. ACTIVITIES OF THE MANAGER. The services of the Manager to the Fund
hereunder are not to be deemed exclusive, and the Manager and any of its
affiliates shall be free to render similar services to others. Subject to
and in accordance with the Agreement and Declaration of Trust and By-Laws of
the Trust and Section 10(a) of the 1940 Act, it is understood that trustees,
officers, agents and shareholders of the Trust are or may be interested in
the Manager or its affiliates as directors, officers, agents or stockholders;
that directors, officers, agents or stockholders of the Manager or its
affiliates are or may be interested in the Trust as trustees, officers,
agents, shareholders or otherwise; that the Manager or its affiliates may be
interested in the Fund as shareholders or otherwise; and that the effect of
any such interests shall be governed by said Agreement and Declaration of
Trust, By-Laws and the 1940 Act.
6. LIABILITIES OF THE MANAGER.
A. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties hereunder on the
part of the Manager, the Manager shall not be subject to liability to the
Trust or the Fund or to any shareholder of the Fund for any act or omission
in the course of, or connected with, rendering services hereunder or for any
losses that may be sustained in the purchase, holding or sale of any security
by the Fund.
B. Notwithstanding the foregoing, the Manager agrees to
reimburse the Trust for any and all costs, expenses, and counsel and
trustees' fees reasonably incurred by the Trust in the preparation, printing
and distribution of proxy statements, amendments to its Registration
Statement, holdings of meetings of its shareholders or trustees, the conduct
of factual investigations, any legal or administrative proceedings (including
any applications for exemptions or determinations by the Securities and
Exchange Commission) which the Trust incurs as the result of action or
inaction of the Manager or any of its affiliates or any of their officers,
directors, employees or stockholders where the action or inaction
necessitating such expenditures (i) is directly or indirectly related to any
transactions or proposed transaction in the stock or control of the Manager
or its affiliates (or litigation related to any pending or proposed or future
transaction in such shares or control) which shall have been undertaken
without the prior, express approval of the Trust's Board of Trustees; or,
(ii) is within the control of the Manager or any of its affiliates or any of
their officers, directors, employees or stockholders. The Manager shall not
be obligated pursuant to the provisions of this Subparagraph 6(B), to
reimburse the Trust for any expenditures related to the institution of an
administrative proceeding or civil litigation by the Trust or a shareholder
seeking to recover all or a portion of the proceeds derived by any
stockholder of the Manager or any of its affiliates from the sale of his
shares of the Manager, or similar matters. So long as this Agreement is in
effect, the Manager shall pay to the Trust the amount due for expenses
subject to this Subparagraph 6(B) within 30 days after a bill or statement
has been received by the Manager therefor. This provision shall not be
deemed to be a waiver of any claim the Trust may have or may assert against
the Manager or others for costs, expenses or damages heretofore incurred by
the Trust or for costs, expenses or damages the Trust may hereafter incur
which are not reimbursable to it hereunder.
C. No provision of this Agreement shall be construed to protect
any trustee or officer of the Trust, or director or officer of the Manager,
from liability in violation of Sections 17(h) and (i) of the 1940 Act.
7. RENEWAL AND TERMINATION.
A. This Agreement shall become effective on the date written
below and shall continue in effect for two (2) years thereafter, unless
sooner terminated as hereinafter provided and shall continue in effect
thereafter for periods not exceeding one (1) year so long as such
continuation is approved at least annually (i) by a vote of a majority of the
outstanding voting securities of each Fund or by a vote of the Board of
Trustees of the Trust, and (ii) by a vote of a majority of the Trustees of
the Trust who are not parties to the Agreement (other than as Trustees of the
Trust), cast in person at a meeting called for the purpose of voting on the
Agreement.
B. This Agreement:
(i) may at any time be terminated without the payment of
any penalty either by vote of the Board of Trustees of the Trust or by vote
of a majority of the outstanding voting securities of the Fund on 60 days'
written notice to the Manager;
(ii) shall immediately terminate with respect to the Fund in
the event of its assignment; and
(iii) may be terminated by the Manager on 60 days' written
notice to the Fund.
C. As used in this Paragraph the terms "assignment,"
"interested person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth for any such terms in the 1940
Act.
D. Any notice under this Agreement shall be given in
writing addressed and delivered, or mailed post-paid, to the other party at
any office of such party.
8. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder
of this Agreement shall not be affected thereby.
9. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and effective on the 1st day of April, 1999.
FRANKLIN VALUE INVESTORS TRUST
By:
/s/Deborah R. Gatzek
Vice President & Secretary
FRANKLIN ADVISORY SERVICES, LLC
By:
/s/Leslie M. Kratter
Secretary
FRANKLIN VALUE INVESTORS TRUST
777 Mariners Island Blvd.
San Mateo, California 94404
Franklin/Templeton Distributors, Inc
777 Mariners Island Blvd.
San Mateo, CA 94404
Re: Amendment of Amended and Restated Distribution Agreement
Gentlemen:
We (the "Fund") are a corporation or business trust operating as an open-end
management investment company or "mutual fund," which is registered under the
Investment Company Act of 1940, as amended (the "1940 Act") and whose shares
are registered under the Securities Act of 1933, as amended (the "1933
Act"). You have informed us that your company is registered as a
broker-dealer under the provisions of the Securities Exchange Act of 1934, as
amended (the "1934 Act") and that your company is a member of the National
Association of Securities Dealers, Inc.
This agreement is an amendment (the "Amendment") of the Amended and Restated
Distribution Agreement (the "Agreement") currently in effect between you and
us. As used herein all capitalized terms herein have the meanings set forth
in the Agreement. We have been authorized to execute and deliver the
Amendment to you by a resolution of our Board passed at a meeting at which a
majority of Board members, including a majority who are not otherwise
interested persons of the Fund and who are not interested persons of our
investment adviser, its related organizations or of you or your related
organizations, were present and voted in favor of such resolution approving
the Amendment.
To the extent that any provision of the Amendment conflicts with any
provision of the Agreement, the Amendment provision supersedes the Agreement
provision. The Agreement and the Amendment together constitute the entire
agreement between the parties hereto and supersede all prior oral or written
agreements between the parties hereto.
Section 4. entitled "Compensation" is amended by adding the following
sentences at the end of Subsection 4.B:
The compensation provided in the Class B Distribution Plan
applicable to Class B Shares (the "Class B Plan") is divided into a
distribution fee and a service fee, each of which fees is in
compensation for different services to be rendered to the Fund.
Subject to the termination provisions in the Class B Plan, the
distribution fee with respect to the sale of a Class B Share shall
be earned when such Class B Share is sold and shall be payable from
time to time as provided in the Class B Plan. The distribution fee
payable to you as provided in the Class B Plan shall be payable
without offset, defense or counterclaim (it being understood by the
parties hereto that nothing in this sentence shall be deemed a
waiver by the Fund of any claim the Fund may have against you).
You may direct the Fund to cause our custodian to pay such
distribution fee to Lightning Finance Company Limited ("LFL") or
other persons providing funds to you to cover expenses referred to
in Section 2(a) of the Class B Plan and to cause our custodian to
pay the service fee to you for payment to dealers or others or
directly to others to cover expenses referred to in Section 2(b) of
the Class B Plan.
We understand that you intend to assign your right to receive
certain distribution fees with respect to Class B Shares to LFL in
exchange for funds that you will use to cover expenses referred to
in Section 2(a) of the Class B Plan. In recognition that we will
benefit from your arrangement with LFL, we agree that, in addition
to the provisions of Section 7 (iii) of the Class B Plan, we will
not pay to any person or entity, other than LFL, any such assigned
distribution fees related to Class B Shares sold by you prior to
the termination of either the Agreement or the Class B Plan. We
agree that the preceding sentence shall survive termination of the
Agreement.
Section 4. entitled "Compensation" is amended by adding the following
Subsection 4.C. after Subsection 4.B.:
C. With respect to the sales commission on the redemption of
Shares of each series and class of the Fund as provided in
Subsection 4.A. above, we will cause our shareholder services agent
(the "Transfer Agent") to withhold from redemption proceeds payable
to holders of the Shares all contingent deferred sales charges
properly payable by such holders in accordance with the terms of
our then current prospectuses and statements of additional
information (each such sales charge, a "CDSC"). Upon receipt of an
order for redemption, the Transfer Agent shall direct our custodian
to transfer such redemption proceeds to a general trust account.
We shall then cause the Transfer Agent to pay over to you or your
assigns from the general trust account such CDSCs properly payable
by such holders as promptly as possible after the settlement date
for each such redemption of Shares. CDSCs shall be payable without
offset, defense or counterclaim (it being understood that nothing
in this sentence shall be deemed a waiver by us of any claim we may
have against you.) You may direct that the CDSCs payable to you be
paid to any other person.
Section 11. entitled "Conduct of Business" is amended by replacing the
reference in the second paragraph to "Rules of Fair Practice" with a
reference to the "Conduct Rules".
Section 16. entitled "Miscellaneous" is amended in the first paragraph by
changing the first letter of each of the words in each of the terms in
quotations marks, except "Parent," to the lower case and giving to the term
"assignment" the meaning as set forth only in the 1940 Act and the Rules and
Regulations thereunder (and not as set forth in the 1933 Act and the Rules
and Regulations thereunder.)
If the foregoing meets with your approval, please acknowledge your acceptance
by signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.
Very truly yours,
FRANKLIN VALUE INVESTORS TRUST
By:/s/D.R. GATZEK
Deborah R. Gatzek
Vice President & Secretary
Accepted:
Franklin/Templeton Distributors, Inc.
By:/s/H.E. BURNS
Harmon E. Burns
Executive Vice President
Dated: March 25, 1999
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective
Series for which the Custodian shall serve under the Master Custody Agreement
dated as of February 16, 1996.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -----------------------------------------------------------------------------------------------
Adjustable Rate Securities Delaware Business U.S. Government Adjustable Rate Mortgage
Portfolios Trust Portfolio
Franklin Asset Allocation Fund Delaware Business
Trust
Franklin California Tax-Free Maryland Corporation
Income
Fund, Inc.
Franklin California Tax-Free Massachusetts Franklin California Insured Tax-Free
Trust Business Trust Income Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term
Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
Franklin Equity Fund California
Corporation
Franklin Federal Money Fund California
Corporation
Franklin Federal Tax- Free California
Income Fund Corporation
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -----------------------------------------------------------------------------------------------
Franklin Gold Fund California
Corporation
Franklin High Income Trust Delaware Business AGE High Income Fund
Trust
Franklin Investors Securities Massachusetts Franklin Global Government Income Fund
Trust Business Trust Franklin Short-Intermediate U.S. Govt
Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government
Securities Fund
Franklin Equity Income Fund
Franklin Bond Fund
Franklin Managed Trust Delaware Business Franklin Rising Dividends Fund
Trust
Franklin Money Fund California
Corporation
Franklin Municipal Securities Delaware Business Franklin California High Yield Municipal
Trust Trust Fund
Franklin Tennessee Municipal Bond Fund
Franklin Mutual Series Fund Maryland Corporation Mutual Shares Fund
Inc. Mutual Beacon Fund
Mutual Qualified Fund
Mutual Discovery Fund
Mutual European Fund
Mutual Financial Services Fund
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin New York Tax-Free Delaware Business
Income Fund Trust
Franklin New York Tax-Free Massachusetts Franklin New York Tax-Exempt Money Fund
Trust Business Trust Franklin New York Intermediate-Term
Tax-Free
Income Fund
Franklin New York Insured Tax-Free
Income Fund
Franklin Real Estate Delaware Business Franklin Real Estate Securities Fund
Securities Trust Trust
Franklin Strategic Mortgage Delaware Business
Portfolio Trust
Franklin Strategic Series Delaware Business Franklin California Growth Fund
Trust Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Blue Chip Fund
Franklin Biotechnology Discovery Fund
Franklin U.S. Long-Short Fund
Franklin Large Cap Growth Fund
Franklin Aggressive Growth Fund
Franklin Tax-Exempt Money Fund California
Corporation
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
Franklin Tax-Free Trust Massachusetts Franklin Massachusetts Insured Tax-Free
Business Trust Income Fund
Franklin Michigan Insured Tax-Free
Income Fund
Franklin Minnesota Insured Tax-Free
Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income
Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income
Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin North Carolina Tax-Free Income
Fund
Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term
Tax-Free Income
Fund
Franklin Arizona Insured Tax-Free Income
Fund
Franklin Florida Insured Tax-Free Income
fund
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Templeton Fund Delaware Business Franklin Templeton Conservative Target
Allocator Series Trust Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Global Trust Delaware Business Franklin Templeton Global Currency Fund
Trust Franklin Templeton Hard Currency Fund
Franklin Templeton Delaware Business Templeton Pacific Growth Fund
International Trust Trust Templeton Foreign Smaller Companies Fund
Franklin Templeton Money Fund Delaware Business Franklin Templeton Money Fund
Trust Trust
Franklin Value Investors Trust Massachusetts Franklin Balance Sheet Investment Fund
Business Trust Franklin MicroCap Value Fund
Franklin Value Fund
Franklin Templeton Variable Massachusetts Franklin Money Market Fund
Insurance Products Trust Business Trust Franklin Growth and Income Fund
Franklin Natural Resources Securities
Fund
Franklin Real Estate Fund
Franklin Global Communications
Securities Fund
Franklin High Income Fund
Templeton Global Income Securities Fund
Franklin Income Securities Fund
Franklin U.S. Government Fund
Zero Coupon Fund - 2000
Zero Coupon Fund - 2005
Zero Coupon Fund - 2010
Franklin Rising Dividends Securities Fund
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Templeton Variable Massachusetts Templeton Pacific Growth Fund
Insurance Products Trust Business Trust Templeton International Equity Fund
(cont.) Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton Global Asset Allocation Fund
Franklin Small Cap Fund
Franklin Large Cap Growth Securities Fund
Templeton International Smaller
Companies Fund
Mutual Discovery Securities Fund
Mutual Shares Securities Fund
Franklin Global Health Care Securities
Fund
Franklin Value Securities Fund
Franklin Aggressive Growth Securities
Fund
- -----------------------------------------------------------------------------------------------
Institutional Fiduciary Trust Massachusetts Money Market Portfolio
Business Trust Franklin U.S. Government Securities
Money Market
Portfolio
Franklin Cash Reserves Fund
The Money Market Portfolios Delaware Business The Money Market Portfolio
Trust The U.S. Government Securities Money
Market Portfolio
Templeton Variable Products Franklin Growth Investments Fund
Series Fund Mutual Shares Investments Fund
Mutual Discovery Investments Fund
Franklin Small Cap Investments Fund
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -----------------------------------------------------------------------------------------------
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts
Business Trust
Franklin Universal Trust Massachusetts
Business Trust
Franklin Floating Rate Trust Delaware Business
Trust
- -----------------------------------------------------------------------------------------------
</TABLE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No. 20
to the Registration Statement of Franklin Value Investors Trust on Form N-1A,
File No. 33-31326 of our report dated December 6, 1999, on our audit of the
financial statements and financial highlights of Franklin Value Investors Trust,
which report is included in the Annual Report to Shareholders for the year ended
October 31, 1999, filed with the Securities and Exchange Commission pursuant to
section 30(d) of the Investment Company Act of 1940, which is incorporated by
reference in the Registration Statement. We also consent to the reference to our
firm under the captions "Financial Highlights" and "Auditor."
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Francisco, California
February 24, 2000
CLASS B DISTRIBUTION PLAN
I. Investment Company: FRANKLIN VALUE INVESTORS TRUST
II. Fund: FRANKLIN VALUE FUND - CLASS B
III. Maximum Per Annum Rule 12b-1 Fees for Class B Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS B DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant
to Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class B shares
(the "Class") of the Fund named above ("Fund"), which Plan shall take effect
as of the date Class B shares are first offered (the "Effective Date of the
Plan"). The Plan has been approved by a majority of the Board of Trustees of
the Investment Company (the "Board"), including a majority of the Board
members who are not interested persons of the Investment Company and who have
no direct, or indirect financial interest in the operation of the Plan (the
"non-interested Board members"), cast in person at a meeting called for the
purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Management Agreement between the Investment Company
and Franklin Advisory Services, Inc. ("Advisers") and the terms of the
Underwriting Agreement between the Investment Company and Franklin/Templeton
Distributors, Inc. ("Distributors"). The Board concluded that the
compensation of Advisers, under the Management Agreement, and of
Distributors, under the Underwriting Agreement, was fair and not excessive.
The approval of the Plan included a determination that in the exercise of
their reasonable business judgment and in light of their fiduciary duties,
there is a reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
The Board recognizes that Distributors has entered into an arrangement
with a third party in order to finance the distribution activities of the
Class pursuant to which Distributors may assign its rights to the fees
payable hereunder to such third party. The Board further recognizes that it
has an obligation to act in good faith and in the best interests of the Fund
and its shareholders when considering the continuation or termination of the
Plan and any payments to be made thereunder.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a monthly fee not to exceed
the above-stated maximum distribution fee per annum of the Class' average
daily net assets represented by shares of the Class, as may be determined by
the Board from time to time.
(b) In addition to the amounts described in (a) above, the Fund
shall pay (i) to Distributors for payment to dealers or others, or (ii)
directly to others, an amount not to exceed the above-stated maximum service
fee per annum of the Class' average daily net assets represented by shares of
the Class, as may be determined by the Investment Company's Board from time
to time, as a service fee pursuant to servicing agreements which have been
approved from time to time by the Board, including the non-interested Board
members.
2. (a) The monies paid to Distributors pursuant to Paragraph 1(a)
above shall be treated as compensation for Distributors' distribution-related
services including compensation for amounts advanced to securities dealers or
their firms or others selling shares of the Class who have executed an
agreement with the Investment Company, Distributors or its affiliates, which
form of agreement has been approved from time to time by the Board, including
the non-interested Board members, with respect to the sale of Class shares.
In addition, such monies may be used to compensate Distributors for other
expenses incurred to assist in the distribution and promotion of shares of
the Class. Payments made to Distributors under the Plan may be used for,
among other things, the printing of prospectuses and reports used for sales
purposes, expenses of preparing and distributing sales literature and related
expenses, advertisements, and other distribution-related expenses, including
a pro-rated portion of Distributors' overhead expenses attributable to the
distribution of Class shares, as well as for additional distribution fees
paid to securities dealers or their firms or others who have executed
agreements with the Investment Company, Distributors or its affiliates, or
for certain promotional distribution charges paid to broker-dealer firms or
others, or for participation in certain distribution channels. None of such
payments are the legal obligation of Distributors or its designee.
(b) The monies to be paid pursuant to paragraph 1(b) above shall
be used to pay dealers or others for, among other things, furnishing personal
services and maintaining shareholder accounts, which services include, among
other things, assisting in establishing and maintaining customer accounts and
records; assisting with purchase and redemption requests; arranging for bank
wires; monitoring dividend payments from the Fund on behalf of customers;
forwarding certain shareholder communications from the Fund to customers;
receiving and answering correspondence; and aiding in maintaining the
investment of their respective customers in the Class. Any amounts paid
under this paragraph 2(b) shall be paid pursuant to a servicing or other
agreement, which form of agreement has been approved from time to time by the
Board. None of such payments are the legal obligation of Distributors or its
designee.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of Class shares issued
by the Fund within the context of Rule 12b-1 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to
be made pursuant to the Plan under this paragraph, exceed the amount
permitted to be paid pursuant to Rule 2830(d) of the Conduct Rules of the
National Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a
quarterly basis, a written report of the monies paid to it and to others
under the Plan, and shall furnish the Board with such other information as
the Board may reasonably request in connection with the payments made under
the Plan in order to enable the Board to make an informed determination of
whether the Plan should be continued.
5. (a) Distributors may assign, transfer or pledge ("Transfer") to
one or more designees (each an "Assignee"), its rights to all or a designated
portion of the fees to which it is entitled under paragraph 1 of this Plan
from time to time (but not Distributors' duties and obligations pursuant
hereto or pursuant to any distribution agreement in effect from time to time,
if any, between Distributors and the Fund), free and clear of any offsets or
claims the Fund may have against Distributors. Each such Assignee's
ownership interest in a Transfer of a specific designated portion of the fees
to which Distributors is entitled is hereafter referred to as an "Assignee's
12b-1 Portion." A Transfer pursuant to this Section 5(a) shall not reduce or
extinguish any claims of the Fund against Distributors.
(b) Distributors shall promptly notify the Fund in writing of each
such Transfer by providing the Fund with the name and address of each such
Assignee.
(c) Distributors may direct the Fund to pay any Assignee's 12b-1
Portion directly to each Assignee. In such event, Distributors shall provide
the Fund with a monthly calculation of the amount to which each Assignee is
entitled (the "Monthly Calculation"). In such event, the Fund shall, upon
receipt of such notice and Monthly Calculation from Distributors, make all
payments required directly to the Assignee in accordance with the information
provided in such notice and Monthly Calculation upon the same terms and
conditions as if such payments were to be paid to Distributors.
(d) Alternatively, in connection with a Transfer, Distributors may
direct the Fund to pay all or a portion of the fees to which Distributors is
entitled from time to time to a depository or collection agent designated by
any Assignee, which depository or collection agent may be delegated the duty
of dividing such fees between the Assignee's 12b-1 Portion and the balance
(such balance, when distributed to Distributors by the depository or
collection agent, the "Distributors' 12b-1 Portion"), in which case only
Distributors' 12b-1 Portion may be subject to offsets or claims the Fund may
have against Distributors.
6. The Plan shall continue in effect for a period of more than one
year only so long as such continuance is specifically approved at least
annually by the Board, including the non-interested Board members, cast in
person at a meeting called for the purpose of voting on the Plan. In
determining whether there is a reasonable likelihood that the continuation of
the Plan will benefit the Fund and its shareholders, the Board may, but is
not obligated to, consider that Distributors has incurred substantial cost
and has entered into an arrangement with a third party in order to finance
the distribution activities for the Class.
7. This Plan and any agreements entered into pursuant to this Plan may
be terminated with respect to the shares of the Class, without penalty, at
any time by vote of a majority of the non-interested Board members of the
Investment Company, or by vote of a majority of outstanding Shares of such
Class. Upon termination of this Plan with respect to the Class, the
obligation of the Fund to make payments pursuant to this Plan with respect to
such Class shall terminate, and the Fund shall not be required to make
payments hereunder beyond such termination date with respect to expenses
incurred in connection with Class shares sold prior to such termination date,
provided, in each case that each of the requirements of a Complete
Termination of this Plan in respect of such Class, as defined below, are
met. For purposes of this Section 7, a "Complete Termination" of this Plan
in respect of the Class shall mean a termination of this Plan in respect of
such Class, provided that: (i) the non-interested Board members of the
Investment Company shall have acted in good faith and shall have determined
that such termination is in the best interest of the Investment Company and
the shareholders of the Fund and the Class; (ii) and the Investment Company
does not alter the terms of the contingent deferred sales charges applicable
to Class shares outstanding at the time of such termination; and (iii) unless
Distributors at the time of such termination was in material breach under the
distribution agreement in respect of the Fund, the Fund shall not, in respect
of such Fund, pay to any person or entity, other than Distributors or its
designee, either the payments described in paragraph 1(a) or 1(b) or in
respect of the Class shares sold by Distributors prior to such termination.
8. The Plan, and any agreements entered into pursuant to this Plan,
may not be amended to increase materially the amount to be spent for
distribution pursuant to Paragraph 1 hereof without approval by a majority of
the outstanding voting securities of the Class of the Fund.
9. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
10. So long as the Plan is in effect, the selection and nomination of
the Fund's non-interested Board members shall be committed to the discretion
of such non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: OCTOBER, 16, 1998
FRANKLIN VALUE INVESTORS TRUST
By:/s/D.R. GATZEK
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:/s/H.E. BURNS
Harmon E. Burns
Executive Vice President
POWER OF ATTORNEY
The undersigned officers and trustees of FRANKLIN VALUE INVESTORS TRUST
(the "Registrant") hereby appoint MARK H. PLAFKER, HARMON E. BURNS, DEBORAH R.
GATZEK, KAREN L. SKIDMORE, LEIANN NUZUM, Murray L. Simpson, Barbara J. Green and
David P. Goss (with full power to each of them to act alone) his
attorney-in-fact and agent, in all capacities, to execute, deliver and file in
the names of the undersigned, any and all instruments that said attorneys and
agents may deem necessary or advisable to enable the Registrant to comply with
or register any security issued by the Registrant under the Securities Act of
1933, as amended, and/or the Investment Company Act of 1940, as amended, and the
rules, regulations and interpretations thereunder, including but not limited to,
any registration statement, including any and all pre- and post-effective
amendments thereto, any other document to be filed with the U.S. Securities and
Exchange Commission and any and all documents required to be filed with respect
thereto with any other regulatory authority. Each of the undersigned grants to
each of said attorneys, full authority to do every act necessary to be done in
order to effectuate the same as fully, to all intents and purposes, as he could
do if personally present, thereby ratifying all that said attorneys-in-fact and
agents may lawfully do or cause to be done by virtue hereof.
This Power of Attorney may be executed in one or more counterparts, each of
which shall be deemed to be an original, and all of which shall be deemed to be
a single document.
The undersigned officers and trustees hereby execute this Power of Attorney
as of the 24th day of February, 2000.
/s/WILLIAM J. LIPPMAN /s/FRANK T. CROHN
William J. Lippman, Frank T. Crohn,
Principal Executive Officer and Trustee Trustee
/s/CHARLES RUBENS, II /s/LEONARD RUBIN
Charles Rubens, II, Leonard Rubin,
Trustee Trustee
/s/MARTIN L. FLANAGAN /s/KIMBERLEY H. MONASTERIO
Martin L. Flanagan, Kimberley H. Monasterio,
Principal Financial Officer Principal Accounting Officer
CERTIFICATE OF SECRETARY
I, David P. Goss, certify that I am Assistant Secretary of FRANKLIN VALUE
INVESTORS TRUST (the "Trust").
As Assistant Secretary of the Trust, I further certify that the following
resolution was adopted by a majority of the Trustees of the Trust present at
a meeting held at 777 Mariners Island Boulevard, San Mateo, California
94404, on February 24, 2000.
RESOLVED, that a Power of Attorney, substantially in the form
of the Power of Attorney presented to this Board, appointing
Mark H. Plafker, Harmon E, Burns Deborah R. Gatzek, Karen L.
Skidmore. Leiann Nuzum, Murray L. Simpson, Barbara J. Green
and David P. Goss as attorneys-in-fact for the purpose of
filing documents with the Securities and Exchange Commission,
be executed by each Trustee and designated officer.
I declare under penalty of perjury that the matters set forth in this
certificate are true and correct of my own knowledge.
/S/ DAVID P. GOSS
Dated: FEBRUARY 24, 2000 David P. Goss
Assistant Secretary
