Franklin Global
Utilities Fund
Franklin Strategic Series
PROSPECTUS September 1, 1995
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin Global Utilities Fund (the "Fund") is a non-diversified series of
Franklin Strategic Series (the "Trust"), an open-end management investment
company, with the investment objective of seeking to provide total return
without incurring undue risk. The Fund seeks to accomplish its objective by
investing primarily, that is, at least 65% of its total assets, in securities
issued by companies which are, in the opinion of management, primarily engaged
in the ownership or operation of facilities used to generate, transmit or
distribute electricity, telephone communications, cable and other pay television
services, wireless telecommunications, gas or water.
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that a prospective investor should know before
investing. After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of shares and
other items which a prospective investor will find useful to have.
The Fund offers two classes of shares to its investors: Franklin Global
Utilities Fund - Class I ("Class I") and Franklin Global Utilities Fund - Class
II ("Class II"). Investors can choose between Class I shares, which generally
bear a higher front-end sales charge and lower ongoing Rule 12b-1 distribution
fees ("Rule 12b-1 fees"), and Class II shares, which generally have a lower
front-end sales charge and higher ongoing Rule 12b-1 fees. Investors should
consider the differences between the two classes, including the impact of sales
charges and Rule 12b-1 fees, in choosing the more suitable class given their
anticipated investment amount and time horizon. See "How to Buy Shares of the
Fund - Differences Between Class I and Class II."
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank; further, such shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
Shares of the Fund involve investment risks, including the possible loss of
principal.
A Statement of Additional Information (the "SAI") concerning the Fund, dated
September 1, 1995, as may be amended from time to time, provides a further
discussion of certain areas in this Prospectus and other matters which may be of
interest to some investors. It has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated herein by reference. A copy is available
without charge from the Fund or the Fund's principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors"), at the address or
telephone number shown above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This Prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this Prospectus. Further
information may be obtained from the underwriter.
ContentsPage
Expense Table.................................... 2
Financial Highlights............................. 4
About the Fund................................... 4
Investment Objective and
Policies of the Fund............................ 5
Management of the Fund........................... 13
Distributions to Shareholders.................... 14
Taxation of the Fund
and Its Shareholders............................ 16
How to Buy Shares of the Fund.................... 17
Purchasing Shares of the Fund
in Connection with Retirement Plans
Involving Tax-Deferred Investments.............. 25
Other Programs and Privileges
Available to Fund Shareholders.................. 25
Exchange Privilege............................... 27
How to Sell Shares of the Fund................... 30
Telephone Transactions........................... 34
Valuation of Fund Shares......................... 35
How to Get Information Regarding
an Investment in the Fund....................... 37
Performance...................................... 37
General Information.............................. 38
Account Registrations............................ 40
Important Notice Regarding
Taxpayer IRS Certifications..................... 41
Portfolio Operations............................. 41
Expense Table
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in the Fund. These figures are based on aggregate
operating expenses of Class I shares of the Fund for the fiscal year ended April
30, 1995.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses Class I Class II
Maximum Sales Charge Imposed on Purchases
<S> <C> <C>
(as a percentage of offering price).............................................. 4.50% 1.00%*
Deferred Sales Charge............................................................. NONE** NONE***
Class I Class II
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees................................................................... 0.60% 0.60%
12b-1 Fees........................................................................ 0.23%+ 1.00%+
Other Expenses:...................................................................
Reports to shareholders......................................................... 0.08% 0.08%
Registration.................................................................... 0.09% 0.09%
Other expenses.................................................................. 0.12% 0.12%
Total Other Expenses.............................................................. 0.29% 0.29%****
Total Fund Operating Expenses..................................................... 1.12% 1.89%
</TABLE>
*Although Class II has a lower front-end sales charge than Class I, over time
the higher Rule 12b-1 fee for Class II may cause shareholders to pay more for
Class II shares than for Class I shares. Given the maximum front-end sales
charge and the rate of Rule 12b-1 fees of each class, it is estimated that this
will take less than six years for shareholders who maintain total shares valued
at less than $100,000 in the Franklin Templeton Funds. Shareholders with larger
investments in the Franklin Templeton Funds will reach the crossover point more
quickly. See "How to Buy Shares of the Fund - Purchase Price of Fund Shares" for
the definition of Franklin Templeton Funds and similar references.
**Class I investments of $1 million or more are not subject to a front-end sales
charge; however, a contingent deferred sales charge of 1% is generally imposed
on certain redemptions within a "contingency period" of 12 months of the
calendar month following such investments. See "How to Sell Shares of the Fund -
Contingent Deferred Sales Charge."
***Class II shares redeemed within a "contingency period" of 18 months of the
calendar month following such investments are subject to a 1% contingent
deferred sales charge. See "How to Sell Shares of the Fund - Contingent Deferred
Sales Charge."
+Consistent with National Association of Securities Dealers, Inc.'s rules, it is
possible that the combination of front-end sales charges and Rule 12b-1 fees
could cause long-term shareholders to pay more than the economic equivalent of
the maximum front-end sales charges permitted under those same rules.
****"Other Expenses" for Class II shares are estimates based on the actual
expenses incurred by Class I shares for the fiscal year ended April 30, 1995.
Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in the Fund. Rather the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.
Example
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge and applicable contingent deferred
sales charges, that apply to a $1,000 investment in the Fund over various time
periods assuming (1) a 5% annual rate of return and (2) redemption at the end of
each time period.
One Year Three Years Five Years Ten Years
Class I...................... $56* $79 $104 $175
Class II..................... $39 $69 $111 $229
*Assumes that a contingent deferred sales charge will not apply to Class I
shares.
A shareholder would pay the following expenses on the same investment, assuming
no redemption.
One Year Three Years Five Years Ten Years
Class II..................... $29 $69 $111 $229
This example is based on the aggregate annual operating expenses shown above and
should not be considered a representation of future expenses, which may be more
or less than those shown. The operating expenses are borne by the Fund and only
indirectly by shareholders as a result of their investment in the Fund. In
addition, federal securities regulations require the example to assume an annual
return of 5%, but the Fund's actual return may be more or less than 5%.
Financial Highlights
Set forth below is a table containing financial highlights for a Class I share
of the Fund from July 2, 1992 (effective date of registration) through April 30,
1993, and through the two fiscal years in the period ended April 30, 1995. The
information for each of the periods ended April 30, 1995, has been audited by
Coopers & Lybrand L.L.P., independent auditors, whose audit report appears in
the financial statements in the Trust's Annual Report to Shareholders dated
April 30, 1995. Information regarding Class II shares will be included in this
table after they have been offered to the public for a reasonable period of
time. See the discussion "Reports to Shareholders" under "General Information"
in this Prospectus.
<TABLE>
<CAPTION>
Per Share Operating Performance Ratios/Supplemental Data
______________________________________________________ __________________________
Net Distri Distri- Net Net Ratio of Net
Year Net Asset Net Realized & butions butions Asset Assets Ratio of Investment
Ended Value at Invest- Unrealized Total From From Net From Total Value at End Expenses Income to Portfolio
April Beginning ment Gain(Loss)on Investment Investment Capital Distri- End of Total of Year to Average Average Turnover
30 of Year Income Securities Operations Income Gains butions Year Return*(in 000's) Net Assets Net Assets Rate
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19931 $10.00 $0.22 $1.270 $1.490 $(0.130) $ - $ - $11.36 18.08%** $ 14,227 - %*** 3.89%** - %
1994 11.36 0.30 1.280 1.580 (0.299) (0.042) (0.341) 12.60 14.04 124,188 0.84*** 2.95 16.28
1995 12.60 0.42 (0.067) 0.353 (0.365) (0.358) (0.723) 12.23 3.17 119,250 1.12 3.47 16.65
</TABLE>
1For the period July 2, 1992 (effective date) to April 30, 1993.
*Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum front-end sales charge and assumes
reinvestment of dividends and capital gains, if any, at net asset value.
**Annualized
***During the period indicated, Franklin Advisers, Inc. agreed in advance to
waive a portion of its management fees and made payments of other expenses
incurred by the Fund. Had such action not been taken, the ratios of expenses to
average net assets for the periods ended April 30, 1993 and 1994 would have been
1.51% (annualized) and 1.28%, respectively.
About the Fund
The Fund is a non-diversified series of the Trust, an open-end management
investment Company, commonly called a "mutual fund." The Trust was organized in
Delaware as a Delaware business trust in January 1991 and registered with the
SEC under the Investment Company Act of 1940, as amended (the "1940 Act"). The
Trust issues its shares of beneficial interest under separate series, each with
its own investment objective and policies and totally separate investment
portfolios. The Fund is managed by Franklin Advisers, Inc. (the "Manager" or
"Advisers"). Because the Fund is non-diversified, it may have greater
investments in a single issuer than a diversified fund. Consequently, changes in
the financial condition of a single issuer may have a greater effect on the
Fund's share value than such changes would have on the performance of other
mutual funds, particularly those which invest in a broad range of issuers and
industries. The Fund has two classes ("multiclass structure") of shares of
beneficial interest: Franklin Global Utilities Fund - Class I and Franklin
Global Utilities Fund - Class II. All Fund shares outstanding before May 1,
1995, have been redesignated as Class I shares, and will retain their previous
rights and privileges, except for legally required modifications to shareholder
voting procedures, as discussed in "General Information - Organization and
Voting Rights."
Shares of the Fund may be purchased (minimum investment of $100 initially and
$25 thereafter) at the current public offering price. The current public
offering price of the Class I shares is equal to the net asset value (see
"Valuation of Fund Shares"), plus a variable sales charge not exceeding 4.50% of
the offering price depending upon the amount invested. The current public
offering price of the Class II shares is equal to the net asset value, plus a
sales charge of 1% of the amount invested. (See "How to Buy Shares of the
Fund.")
Investment Objective
and Policies of the Fund
The Fund seeks to provide total return, without incurring undue risk, by
investing at least 65% of its total assets in securities issued by companies
which are, in the opinion of the Manager, primarily engaged in the ownership or
operation of facilities used to generate, transmit or distribute electricity,
telephone communications, cable and other pay television services, wireless
telecommunications, gas or water. The Fund's total return consists of both
capital appreciation and current dividend and interest income. There is, of
course, no assurance that the Fund's objective will be achieved. The objective
is a fundamental policy of the Fund and may not be changed without shareholder
approval.
The Fund may use a variety of strategies to enhance income and to hedge against
market and currency risk, as described more fully under "Transactions in
Options, Future and Options on Financial Futures" in the SAI.
The Fund invests in common stocks, preferred stocks and debt securities
including preferred or debt securities convertible into common stocks. The
mixture of common stocks, debt securities and preferred stocks varies 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 objective. The Fund
may invest, without percentage limitation, in fixed-income securities having at
the time of purchase one of the four highest ratings of Moody's Investors
Service ("Moody's") (Aaa, Aa, A, Baa), Standard & Poor's Corporation ("S&P")
(AAA, AA, A, BBB), two nationally recognized statistical rating organizations
("NRSROs") or in securities which are not rated by any NRSRO, provided that, in
the opinion of the Fund's Manager, such securities are comparable in quality to
those within the four highest ratings. Securities rated within the four highest
ratings are considered to be "investment grade" securities, although bonds rated
Baa are regarded as having an adequate capacity to pay principal and interest
but with greater vulnerability to adverse economic conditions and some
speculative characteristics. The Fund's commercial paper investments at the time
of purchase will be rated "A-1" or "A-2" by S&P or "Prime-1" or "Prime-2" by
Moody's or, if not rated by any NRSRO, will be of comparable quality as
determined by Advisers. The Fund may also invest up to 5% of its total assets at
the time of purchase in lower rated fixed-income securities and unrated
securities of comparable quality (sometimes referred to as "junk bonds" in the
popular media). Such investments will be rated no lower than Caa by Moody's or
CCC by S&P. (See the SAI for a more complete discussion regarding these
investments.) In the event the rating on an issue held in the Fund's portfolio
is changed by the NRSRO, such event will be considered by the Fund in its
evaluation of the overall investment merits of that security but will not
necessarily result in an automatic sale of the security. A discussion of ratings
is contained in the Appendix to the SAI.
The Fund may invest in the securities of foreign issuers in the form of
sponsored or unsponsored American Depositary Receipts (ADRs) or other securities
convertible into securities of foreign issuers. ADRs are receipts typically
issued by an American bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. These securities may not
necessarily be denominated in the same currency as the securities into which
they may be converted. Generally, ADRs, which are issued in registered form, are
designed for use in the United States ("U.S.") securities markets. The issuers
of unsponsored ADRs are not obligated to disclose material information in the
U.S. and, therefore, there may be less information available to the investing
public than with sponsored ADRs. Advisers will attempt to independently
accumulate and evaluate information with respect to the issuers of the
underlying securities of sponsored and unsponsored ADRs to attempt to limit the
Fund's exposure to the market risk associated with such investments. For
purposes of the Fund's investment policies, investments in ADRs will be deemed
to be investments in the equity securities of the foreign issuers into which
they may be converted.
Under normal circumstances, the Fund will invest at least 65% of its total
assets in issuers domiciled in at least three different countries, one of which
may be the U.S., although the Manager expects the Fund's portfolio to be more
geographically diversified. Under normal conditions, it is anticipated that the
percentage of assets invested in U.S. securities will be higher than that
invested in securities of any other single country. It is possible that at times
the Fund may have 65% or more of its total assets invested in foreign
securities. The Fund at all times, except during temporary defensive periods,
will maintain at least 65% of its total assets invested in securities issued by
companies in the utilities industries. The Fund reserves the right to hold, as a
temporary defensive measure or as a reserve for redemptions, short-term U.S.
government securities, high quality money market securities, including
repurchase agreements, or cash in such proportions as, in the opinion of the
Manager, prevailing market or economic conditions warrant.
The operating expense ratio of the Fund can be expected to be higher than that
of an investment company investing exclusively in U.S. securities because the
expenses of the Fund, such as custodial and brokerage costs, are higher.
The Fund is permitted to invest up to 35% of its assets in securities of issuers
that are outside the utility industries. Such investments will consist of common
stocks, debt securities or preferred stocks and will be selected to meet the
Fund's investment objective of providing total return without incurring undue
risk. These securities may be issued by either U.S. or non-U.S. companies,
governments, or governmental instrumentalities. Some of these issuers may be in
industries related to utility industries and, therefore, may be subject to
similar risks. Securities that are issued by foreign companies or are
denominated in foreign currencies are subject to the risks outlined below. See
"Special Considerations and Risk Factors."
Securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities ("U.S. Government Securities"), including U.S. Treasury bills,
notes and bonds as well as certain agency securities and mortgage-backed
securities issued or guaranteed by the Government National Mortgage Association
(GNMA), may be backed by the "full faith and credit" of the U.S. government. Any
such guarantee will extend to the payment of interest and principal due on the
securities and will not provide any protection from fluctuations in either the
securities' yield or value or to the yield or value of the Fund's shares. Other
securities issued by U.S. government agencies or instrumentalities are not
necessarily backed by the "full faith and credit" of the U.S. government, such
as certain securities issued by the Federal National Mortgage Association
(FNMA), the Federal Home Loan Mortgage Corporation, the Student Loan Marketing
Association and the Farm Credit Bank.
The Fund may invest in securities issued or guaranteed by foreign governments.
Such securities are typically denominated in foreign currencies and are subject
to the currency fluctuation and other risks of foreign securities investments
outlined below. See "Special Considerations and Risk Factors." The foreign
government securities in which the Fund intends to invest generally will consist
of obligations issued by national, state or local governments or similar
political subdivisions. Foreign government securities also include debt
obligations of supranational entities, including international organizations
designed or supported by governmental entities to promote economic
reconstruction or development and international banking institutions and related
government agencies. Examples include the International Bank of Reconstruction
and Development (the World Bank), the European Investment Bank, the Asian
Development Bank and the Inter-American Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units. An example of a multinational currency unit is the European
Currency Unit. A European Currency Unit represents specified amounts of the
currencies of certain of the 12 member states of the European Economic
Community. Debt securities of quasi-governmental agencies are issued by entities
owned by either a national or local government or are obligations of a political
unit that is not backed by the national government's full faith and credit and
general taxing powers. Foreign government securities also include
mortgage-related securities issued or guaranteed by national or local
governmental instrumentalities, including quasi-governmental agencies.
Utility Industries
Under normal circumstances, the Fund will invest at least 65% of its total
assets in common stocks, debt securities and preferred stocks including
preferred or debt securities convertible into common stocks of companies in the
utility industries, which may be domestic and/or foreign. To meet its objective,
the Fund may invest in domestic utility companies that pay higher than average
dividends, but have a lesser potential for capital appreciation. There can be no
assurance that the positive relative returns on utility securities that has
historically been the case will continue to occur in the future. The Manager
believes that the average dividend yields of common stocks issued by foreign
utility companies have also historically exceeded those of foreign industrial
companies' common stocks. To meet its objective of total return, without
incurring undue risk, the Fund may invest in foreign utility companies which pay
lower than average dividends, but have a greater potential for capital
appreciation.
The utility companies in which the Fund invests include companies primarily
engaged in the ownership or operation of facilities used to provide electricity,
telephone communications, cable and other pay television services, wireless
telecommunications, gas or water. "Primarily engaged," for this purpose, means
that (1) more than 50% of the company's assets are devoted to the ownership or
operation of one or more facilities as described above or (2) more than 50% of
the company's operating revenues are derived from the business or combination of
businesses described above. See "The Fund's Investment Objective and
Restrictions" in the SAI.
Some of the Fund's Other Investment Policies
When-Issued or Delayed Delivery Transactions. The Fund may purchase debt
obligations on a "when-issued" or "delayed delivery" basis. Such securities are
subject to market fluctuation prior to delivery to the Fund and generally do not
earn interest until their scheduled delivery date. Therefore, the value or
yields at delivery may be more or less than the purchase price or the yields
available when the transaction was entered into. When the Fund is the buyer in
such a transaction, it will maintain, in a segregated account with its
custodian, cash or high-grade marketable securities having an aggregate value
equal to the amount of such purchase commitments until payment is made. To the
extent the Fund engages in when-issued and delayed delivery transactions, it
will do so only for the purpose of acquiring portfolio securities consistent
with its investment objective and policies, and not for the purpose of
investment leverage. (See the SAI for a more complete discussion regarding
when-issued and delayed delivery transactions.)
Standby Commitment Agreements. The Fund may from time to time enter into standby
commitment agreements. Such agreements commit the Fund, for a stated period of
time, to purchase a stated amount of a fixed-income security which may be issued
and sold to the Fund at the option of the issuer. The price and coupon of the
security is fixed at the time of the commitment. At the time of entering into
the agreement, the Fund is paid a commitment fee, regardless of whether the
security is ultimately issued, which is typically approximately 0.5% of the
aggregate purchase price of the security which the Fund has committed to
purchase. The Fund will enter into such agreements only for the purpose of
investing in the security underlying the commitment at a yield and price which
is considered advantageous to the Fund. The Fund will not enter into a standby
commitment with a remaining term in excess of 45 days and will limit its
investment in such commitments so that the aggregate purchase price of the
securities subject to such commitments, together with the value of portfolio
securities subject to legal restrictions on resale, will not exceed 15% of its
assets, taken at the time of acquisition of such commitment or security. The
Fund will at all times maintain a segregated account with its custodian bank of
cash, cash equivalents, U.S. Government Securities or other high grade liquid
debt securities denominated in U.S. dollars or non-U.S. currencies in an
aggregate amount equal to the purchase price of the securities underlying the
commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued, and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, the Fund may bear the
risk of a decline in the value of such security and may not benefit from an
appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment fee.
In the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
Loans of Portfolio Securities. Consistent with procedures approved by the Board
of Trustees and subject to the following conditions, the Fund may lend its
portfolio securities to qualified securities dealers or other institutional
investors, provided that such loans do not exceed one-third of the value of the
Fund's total assets at the time of the most recent loan. The borrower must
deposit with the Fund's custodian collateral with an initial market value of at
least 102% of the initial market value of the securities loaned, including any
accrued interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 100%. Such
collateral shall consist of cash, securities issued by the U.S. Government, its
agencies or instrumentalities, or irrevocable letters of credit. The lending of
securities is a common practice in the securities industry. The Fund engages in
security loan arrangements with the primary objective of increasing the Fund's
income either through investing the cash collateral in short-term interest
bearing obligations or by receiving a loan premium from the borrower. Under the
securities loan agreement, the Fund continues to be entitled to all dividends or
interest on any loaned securities. As with any extension of credit, there are
risks of delay in recovery and loss of rights in the collateral should the
borrower of the securities fail financially.
Borrowing. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of its assets, except that the Fund may enter into reverse
repurchase agreements or borrow money from banks in an amount up to 33% of its
total asset value (computed at the time the loan is made) for temporary or
emergency purposes. While borrowings exceed 5% of the Fund's total assets, the
Fund will not make any additional investments.
Illiquid Investments. It is the policy of the Fund that illiquid securities
(securities that cannot be disposed of within seven days in the normal course of
business at approximately the amount at which the Fund has valued the
securities) may not constitute, at the time of purchase, more than 15% of the
value of the total net assets of the Fund. Subject to this limitation, the
Trust's Board of Trustees (the "Board") has authorized the Fund to invest in
restricted securities where such investment is consistent with the Fund's
investment objective and has authorized such securities to be considered to be
liquid to the extent the Manager determines on a daily basis that there is a
liquid institutional or other market for such securities. Notwithstanding the
Manager's determination in this regard, the Board will remain responsible for
such determinations and will consider appropriate action, consistent with the
Fund's objective and policies, if a security should become illiquid subsequent
to its purchase. To the extent the Fund invests in restricted securities that
are deemed liquid, the general level of illiquidity in the Fund may be increased
if qualified institutional buyers become uninterested in purchasing these
securities or the market for these securities contracts. See "The Fund's
Investment Objective and Restrictions - Short-Term Investments" in the SAI.
Notwithstanding the above policy and the federal securities laws, which permit
investments in illiquid securities up to 15% of the Fund's portfolio, the Fund
is aware that the securities laws in various states impose more restrictive
limits upon such investments. To comply with applicable state restrictions, the
Fund will limit its investments in illiquid securities, including securities of
unseasoned issuers, equity securities deemed not readily marketable and
securities subject to legal or contractual restrictions to 10% of the Fund's
Portfolio.
Short-Term Investments. The Fund may invest its cash, including cash resulting
from purchases and sales of Fund shares, temporarily in short-term debt
instruments, including high grade commercial paper, repurchase agreements and
other money market equivalents and, pursuant to an exemption from the
requirements of the 1940 Act, the shares of affiliated money market funds, which
invest primarily in short-term debt securities. To the extent the Fund invests
in affiliated money market funds, such as the Franklin Money Fund, the Manager
has agreed to waive its management fee on any portion of the Fund's assets
invested in such affiliated fund. Temporary investments will only be made with
cash held to maintain liquidity or pending investment. In addition, for
temporary defensive purposes in the event of, or when the Adviser anticipates, a
general decline in the market prices of stocks in which the Fund invests, the
Fund may invest an unlimited amount of its assets in short-term debt
instruments.
Repurchase Agreements. The Fund may engage in repurchase transactions, in which
the Fund purchases a U.S. government security subject to resale to a bank or
dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Fund in each agreement, with the value of the
underlying security marked-to-market daily to maintain coverage of at least
100%. A default by the seller might cause the Fund to experience a loss or delay
in the liquidation of the collateral securing the repurchase agreement. The Fund
might also incur disposition costs in liquidating the collateral. The Fund,
however, intends to enter into repurchase agreements only with financial
institutions such as broker-dealers and banks which are deemed creditworthy by
the Fund's investment manager. A repurchase agreement is deemed to be a loan by
the Fund under the 1940 Act. The U.S. government security subject to resale (the
collateral) will be held on behalf of the Fund by a custodian approved by the
Board and will be held pursuant to a written agreement.
The Fund may also enter into reverse repurchase agreements. Such agreements
involve the sale of securities held by the Fund pursuant to an agreement to
repurchase the securities on an agreed upon price, date and interest payment.
When effecting reverse repurchase transactions, cash or high grade liquid debt
securities of a dollar amount equal in value to the Fund's obligation under the
agreement, including accrued interest, will be maintained in a segregated
account with the Fund's custodian bank, and the securities subject to the
reverse repurchase agreement will be marked-to-market each day. Although reverse
repurchase agreements are borrowings under Section 2(a)(23) of the 1940 Act, the
Fund does not treat these arrangements as borrowings under investment
restriction 2 (set forth in the SAI) so long as the segregated account is
properly maintained.
The Fund is subject to a number of additional investment restrictions, some of
which may be changed only with the approval of shareholders, which limit its
activities to some extent. For a list of these restrictions and more information
concerning the policies discussed herein, please see the SAI.
The Fund expects that its portfolio turnover rate will generally not exceed
100%, but this rate should not be construed as a limiting factor. High portfolio
turnover may increase transaction costs which must be paid by the Fund. High
turnover may also result in the realization of net capital gain, which is
taxable when distributed to shareholders.
Special Considerations and Risk Factors
Each prospective investor should take into account his or her investment
objectives as well as his or her other investments when considering the purchase
of shares of the Fund.
The Fund is designed for long-term investors and not as a trading vehicle, and
is not intended to present a complete investment program.
Investment in the Fund's shares requires consideration of certain factors that
are not normally involved in investment solely in U.S. securities. Among other
things, the financial and economic policies of a foreign country may not be as
stable as in the U.S. Furthermore, foreign issuers are not generally subject to
uniform accounting, auditing and financial standards and requirements comparable
to those applicable to U.S. corporate issuers. There may also be less government
supervision and regulation of foreign securities exchanges, brokers and issuers.
Some foreign securities markets have substantially less volume than the New York
Stock Exchange (the "Exchange") and some foreign government securities may be
less liquid and more volatile than U.S. government securities. Transaction costs
on foreign securities exchanges may be higher than in the U.S. and foreign
securities settlements may, in some instances, be subject to delays and related
administrative uncertainties. Furthermore, foreign securities may be subject to
withholding taxes, thus reducing net investment income available for
distribution to shareholders.
Utility companies in the U.S. and in foreign countries are generally subject to
substantial regulations. Such regulations are intended to ensure appropriate
standards of service and adequate ability to meet public demand. The nature of
regulations of utility industries is evolving both in the U.S. and in foreign
countries. Although certain companies may develop more profitable opportunities,
others may be forced to defend their core businesses and may be less profitable.
Electric utility companies have historically been subject to the risks
associated with increases in fuel and other operating costs, high interest costs
on borrowings, costs associated with compliance with environmental, nuclear
facility and other safety regulations and changes in the regulatory climate.
Increased scrutiny of electric utilities might result in higher costs and higher
capital expenditures, with the risk that regulators may disallow inclusion of
these costs in rate authorizations. Increasing competition due to past
regulatory changes in the telephone communications industry continues and,
whereas certain companies have benefited, many companies may be adversely
affected in the future. The cable television industry is regulated in most
countries and, although such companies typically have a local monopoly, emerging
technologies and pro-competitive legislation are combining to threaten these
monopolies and could change the future outlook. The wireless telecomunications
industry is in its early developmental stages, and is predominantly
characterized by emerging, rapidly growing companies. Gas transmission and
distribution companies continue to undergo significant changes as well. Many
companies have diversified into oil and gas exploration and development, making
returns more sensitive to energy prices. The water supply industry is highly
fragmented due to local ownership. Generally, such companies are more mature and
expect little or no per capita volume growth. There is no assurance that
favorable developments will occur in the utility industries generally or that
investment opportunities will continue to undergo significant changes or growth.
See "The Fund's Investment Objective and Restrictions - Utility Industries -
Description and Risk Factors" in the SAI.
The operating expense ratio of the Fund can be expected to be higher than that
of an investment company investing exclusively in U.S. securities because of the
additional expenses of the Fund attributable to its foreign investment activity,
such as custodial costs, valuation costs and communication costs, although the
Fund's expenses are expected to be similar to expenses of other investment
companies investing in a mix of U.S. securities and securities of one or more
foreign countries.
Investments of the Fund may be denominated in foreign currencies. Changes in the
relative values of these foreign currencies and the U.S. dollar, therefore, will
affect the value of investments in the Fund. However, the Fund will utilize
forward futures and options contracts to attempt to minimize these changes. For
a discussion of forward futures and options contracts, see the SAI.
The Fund is a non-diversified Fund under the federal securities laws. As a
non-diversified Fund, there is no restriction under the 1940 Act on the
percentage of assets that may be invested at any time in the securities of any
one issuer. However, the Fund intends to comply with the diversification and
other requirements of the Internal Revenue Code of 1986, as amended (the
"Code"), applicable to "regulated investment companies" so that it will not be
subject to U.S. federal income tax on income and capital gains. Accordingly, the
Fund will not purchase securities if, as a result, more than 25% of its total
assets would be invested in the securities of a single issuer or, with respect
to 50% of its total assets, more than 5% of such assets would be invested in the
securities of a single issuer. Because the Fund is non-diversified and
concentrates its investments in a limited group of related industries, the value
of the Fund's shares may fluctuate more widely, and the Fund may present greater
risk than other investments.
How Shareholders Participate in
the Results of the Fund's Activities
The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
the shareholder owns will increase. If the securities owned by the Fund decrease
in value, the value of the shareholder's shares will also decline. In this way,
shareholders participate in any change in the value of the securities owned by
the Fund.
In addition to the factors which affect the value of individual securities, as
described in the preceding sections, a shareholder may anticipate that the value
of Fund shares will fluctuate with movements in the broader equity and bond
markets, as well.
A decline in the stock market of any country in which the Fund is invested may
also be reflected in declines in the Fund's share price. Changes in currency
valuations will also affect the price of Fund shares. Changes in the prevailing
rates of interest in any of the countries in which the Fund is invested will
likely affect the value of the Fund's holdings and thus the value of Fund
shares. Increased rates of interest which frequently accompany higher inflation
and/or a growing economy are likely to have a negative effect on the value of
Fund shares. History reflects both increases and decreases in interest rates in
individual countries and throughout the world, and in currency valuations, and
these may reoccur unpredictably in the future.
Management of the Fund
The Board has the primary responsibility for the overall management of the Fund
and for electing the officers of the Trust who are responsible for administering
its day-to-day operations.
The Board has carefully reviewed the multiclass structure to ensure that no
material conflict exists between the two classes of shares. Although the Board
does not expect to encounter material conflicts in the future, the Board will
continue to monitor the Fund and will take appropriate action to resolve such
conflicts if any should later arise.
In developing the multiclass structure the Fund has retained the authority to
establish additional classes of shares. It is the Fund's present intention to
offer only two classes of shares, but new classes may be offered in the future.
Advisers is a wholly-owned subsidiary of Franklin Resources, Inc. ("Resources"),
a publicly owned holding company, the principal shareholders of which are
Charles B. Johnson and Rupert H. Johnson, Jr., who own approximately 20% and
16%, respectively, of Resources' outstanding shares. Resources is engaged in
various aspects of the financial services industry through its various
subsidiaries (the "Franklin Templeton Group"). Advisers acts as investment
manager or administrator to 34 U.S. registered investment companies (112
separate series) with aggregate assets of over $76 billion.
Pursuant to the management agreement, the Manager supervises and implements the
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct the Fund's business.
During the fiscal year ended April 30, 1995, management fees totalling 0.60% of
the average daily net assets of the Fund were paid to Advisers.
Among the responsibilities of the Manager under the management agreement is the
selection of brokers and dealers through whom transactions in the Fund's
portfolio securities will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more than one broker is
able to provide the best execution, the Manager will consider the furnishing of
quotations and of other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of shares of the Fund,
as factors in selecting a broker. Further information is included under "The
Fund's Policies Regarding Brokers Used on Portfolio Transactions" in the SAI.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent"), in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
During the fiscal year ended April 30, 1995, expenses borne by Class I shares of
the Fund, including Fund fees paid to Advisers and to Investor Services, totaled
1.12% of the average net assets of such class.
Plans of Distribution
A separate Plan of Distribution has been approved and adopted for each class
("Class I Plan" and "Class II Plan", respectively, or "Plans") pursuant to Rule
12b-1 under the 1940 Act. The Rule 12b-1 fees charged to each class will be
based solely on the distribution and servicing fees attributable to that
particular class. Under each Plan the class may reimburse Distributors for
routine ongoing promotion and distribution expenses incurred with respect to
such class. Such expenses may include, but are not limited to, 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 prorated portion of Distributors'
overhead expenses attributable to the distribution of Fund shares, as well as
any distribution or service fees paid to securities dealers or their firms or
others who have executed a servicing agreement with the Fund, Distributors or
its affiliates.
The maximum amount which the Fund may pay to Distributors or others under the
Class I Plan for such distribution expenses is 0.25% per annum of Class I's
average daily net assets, payable on a quarterly basis. All expenses of
distribution and marketing in excess of 0.25% per annum will be borne by
Distributors, or others who have incurred them, without reimbursement from the
Fund.
Under the Class II Plan, the Fund pays to Distributors for distribution expenses
and related expenses up to 0.75% per annum of Class II's daily net assets,
payable quarterly. Such fees may be used in order to compensate Distributors or
others for providing distribution and related services and bearing certain
expenses of the class. All expenses of distribution, marketing and related
services over that amount will be borne by Distributors or others who have
incurred them, without reimbursement by the Fund. In addition, the Class II Plan
provides for an additional payment by the Fund of up to 0.25% per annum of Class
II's average daily net assets as a servicing fee, payable quarterly. This fee
will be used to pay securities dealers or others for, among other things,
assisting in establishing and maintaining customer accounts and records;
assisting with purchase and redemption requests; receiving and answering
correspondence; monitoring dividend payments from the Fund on behalf of
customers, or similar activities related to furnishing personal services and/or
maintaining shareholder accounts.
During the first year following the purchase of Class II shares, Distributors
will retain a portion of Class II's Rule 12b-1 fees equal to 0.50% per annum of
Class II's average daily net assets to partially recoup fees Distributors pays
to securities dealers. Distributors, or its affiliates, may pay, from its own
resources, a commission of up to 1% of the amount invested to securities dealers
who initiate and are responsible for shareholders' purchases of Class II shares.
Both Plans also cover any payments to or by the Fund, Advisers, Distributors, or
other parties on behalf of the Fund, Advisers or Distributors, to the extent
such payments are deemed to be for the financing of any activity primarily
intended to result in the sale of shares issued by the Fund within the context
of Rule 12b-1. The payments under the Plans are included in the maximum
operating expenses which may be borne by each class of the Fund. For more
information, please see the SAI.
Distributions to Shareholders
There are two types of distributions which the Fund may make to its
shareholders:
1. Income dividends. The Fund receives income in the form of dividends, interest
and other income derived from its investments. This income, less the expenses
incurred in the Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of dividends paid per
share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed net capital gains from the prior fiscal year. The Fund may
make more than one distribution derived from net short-term and net long-term
capital gain in any year or adjust the timing of these distributions for
operational or other reasons.
Distributions To Each Class of Shares
According to the requirements of the Code, dividends and capital gains will be
calculated and distributed in the same manner for Class I and Class II shares.
The per share amount of any income dividends will generally differ only to the
extent that each class is subject to different Rule 12b-1 fees.
Distribution Date
Although subject to change by the Board, without prior notice to or approval by
shareholders, the Fund's current policy is to declare income dividends
semiannually in June and December for shareholders of record generally on the
first business day preceding the 15th of the month, payable on or about the last
business day of such months. The amount of income dividend payments by the Fund
is dependent upon the amount of net income received by the Fund from its
portfolio holdings, is not guaranteed, and is subject to the discretion of the
Board. Fund shares are quoted ex-dividend on the first business day following
the record date. The Fund does not pay "interest" or guarantee any fixed rate of
return on an investment in its shares.
In order to be entitled to a dividend, an investor must have acquired Fund
shares prior to the close of business on the record date. An investor
considering purchasing Fund shares shortly before the record date of a
distribution should be aware that because the value of the Fund's shares is
based directly on the amount of its net assets, rather than on the principle of
supply and demand, any distribution of income or capital gain will result in a
decrease in the value of the Fund's shares equal to the amount of the
distribution. While a dividend or capital gain distribution received shortly
after purchasing shares represents, in effect, a return of a portion of the
shareholder's investment, it may be taxable as dividend income or capital gain.
Dividend Reinvestment
Unless otherwise requested, income dividends and capital gain distributions, if
any, will be automatically reinvested in the shareholder's account in the form
of additional shares, valued at the closing net asset value (without a sales
charge) on the dividend reinvestment date. Except as otherwise noted herein,
dividend and capital gain distributions are only eligible for reinvestment at
net asset value in the same class of shares of the Fund or the same class of
another of the Franklin Templeton Funds. Shareholders in Class II funds may, if
they choose, direct that their dividends and capital gain distributions be paid
to a Class I Franklin Templeton Money Market Fund. Shareholders have the right
to change their election with respect to the receipt of distributions by
notifying the Fund, but any such change will be effective only as to
distributions for which the record date is seven or more business days after the
Fund has been notified. See the SAI for more information.
Many of the Fund's shareholders receive their distributions in the form of
additional shares. This is a convenient way to accumulate additional shares and
maintain or increase the shareholder's earnings base. Of course, any shares so
acquired remain at market risk.
Distributions in Cash
A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to the
same class of another fund in the Franklin Templeton Funds, to a Class I
Franklin Templeton money market fund, to another person, or directly to a
checking account. If the bank at which the account is maintained is a member of
the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If this last option is requested, the shareholder
should allow at least 15 days for initial processing. Dividends which may be
paid in the interim will be sent to the address of record. Additional
information regarding automated fund transfers may be obtained from Franklin's
Shareholder Services Department.
Taxation of the Fund and Its Shareholders
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Fund and its shareholders is included in the section entitled
"Additional Information Regarding Taxation" in the SAI.
The Fund intends to continue to qualify for treatment as a regulated investment
company under Subchapter M of the the Code. By distributing all of its net
investment income, net foreign currency gains recharacterized as ordinary income
and net realized short-term and long-term capital gain and by meeting certain
other requirements relating to the sources of its income and diversification of
its assets, the Fund will not be liable for federal income or excise taxes.
For federal income tax purposes, any income dividends which the shareholder
receives from the Fund, as well as any distributions derived from the excess of
net short-term capital gain over net long-term capital loss, are treated as
ordinary income whether the shareholder has elected to receive them in cash or
in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time the shareholder has owned Fund shares and regardless of whether
such distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December, but which, for operational reasons, may not be paid to the
shareholder until the following January, will be treated for tax purposes as if
received by the shareholder on December 31 of the calendar year in which they
are declared.
Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on sale or exchange of
the Fund's shares, held for six months or less, will be treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such shares.
For corporate shareholders, 70.15% of the income dividends paid by the Fund for
the fiscal year ended April 30, 1995, qualified for the corporate
dividends-received deduction, subject to certain holding period and debt
financing restrictions imposed under the Code on the corporation claiming the
deduction. These restrictions are discussed in the SAI.
The Fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of the total assets of the Fund at the
end of its fiscal year are invested in securities of foreign corporations, the
Fund may elect to pass-through to its shareholders the pro rata share of foreign
taxes paid by the Fund. If this election is made, shareholders will be (i)
required to include in their gross income their pro rata share of foreign source
income (including any foreign taxes paid by the fund), and (ii) entitled either
to deduct their share of such foreign taxes in computing their taxable income or
to claim a credit for such taxes against their U.S. income tax, subject to
certain limitations under the Code. Shareholders will be informed by the Fund at
the end of each calendar year regarding the availability of any credits and the
amount of foreign source income (including any foreign taxes paid by the Fund)
to be included on their income tax returns.
The Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid and, after the close of each calendar
year, will promptly advise them of the tax status for federal income tax
purposes of such dividends
and distributions.
Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding or other taxes to distributions received by them from the
Fund and the application of foreign tax laws to these distributions.
Shareholders should also consult their tax advisors with respect to the
applicability of any state and local intangible property or income taxes to
their shares of the Fund and distributions and redemption proceeds received from
the Fund.
How to Buy Shares of the Fund
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall include other financial
institutions which, pursuant to an agreement with Distributors (directly or
through affiliates), handle customer orders and accounts with the Fund. Such
reference, however, is for convenience only and does not indicate a legal
conclusion of capacity. The minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be waived when the shares
are purchased through plans established by the Franklin Templeton Group. The
Fund and Distributors reserve the right to refuse any order for the purchase of
shares. The Fund currently does not permit investment by market timing or
allocation services ("Timing Accounts"), which generally include accounts
administered so as to redeem or purchase shares based upon certain predetermined
market indicators.
Differences Between Class I and Class II. The differences between Class I and
Class II shares are primarily in their front-end and contingent deferred sales
charges and Rule 12b-1 fees as described below. Generally Class I shares have a
higher front-end sales charge than Class II and comparatively lower Rule 12b-1
fees. Class II shares have lower front-end sales charges than Class I shares and
comparatively higher Rule 12b-1 fees. Voting rights of each class will be the
same on matters affecting the Fund as a whole, but each will vote separately on
matters affecting its class.
Class I. All Fund shares outstanding before the implementation of the multiclass
structure have been redesignated as Class I shares, and will retain their
previous rights, and privileges. Class I shares are generally subject to a
variable sales charge upon purchase and not subject to any sales charge upon
redemption. Class I shares are also subject to Rule 12b-1 fees of up to a
maximum of 0.25% per annum of the average daily net assets of Class I shares.
Class I shares may be purchased at a reduced front-end sales charge or at net
asset value if certain conditions are met. In most circumstances, contingent
deferred sales charges will not be assessed against redemptions of Class I
shares. See "Management of the Fund" and "How to Sell Shares of the Fund" for
more information.
Class II. Class II shares are subject to a front-end sales charge of 1% of the
amount invested and a contingent deferred sales charge of 1% if shares are
redeemed within 18 months of the calendar month following purchase. In addition,
Class II shares are subject to Rule 12b-1 fees of up to a maximum of 0.75% per
annum of average daily net assets of Class II shares, 0.25% of which will be
retained by Distributors during the first year of investment. See "Contingent
Deferred Sales Charge" under "How to Sell Shares of the Fund".
Purchases of Class II shares are limited to purchases below $1 million. Any
purchase of $1 million or more will automatically be invested in Class I shares,
since that is considered more beneficial to the investor. A purchase of $1
million or more in Class I shares, however, may be subject to a contingent
deferred sales charge. Investors may exceed $1 million in Class II shares by
cumulative purchases over a period of time. Investors who intend to make
investments exceeding $1 million, however, should consider purchasing Class I
shares through a Letter of Intent instead of purchasing Class II shares.
Deciding Which Class To Purchase. Investors should carefully evaluate their
anticipated investment amount and time horizon prior to determining which class
of shares to purchase. Generally, an investor who expects to invest less than
$100,000 in the Franklin Templeton Funds and who expects to make substantial
redemptions within approximately six years or less of investment should consider
purchasing Class II shares. However, the higher annual Rule 12b-1 fees on the
Class II shares will result in slightly higher operating expenses and lower
income dividends for Class II shares, which will accumulate over time to
outweigh the difference in front-end sales charges. For this reason, Class I
shares may be more attractive to long-term investors even if no sales charge
reductions are available to them.
Investors who qualify to purchase Class I shares at reduced sales charges should
seriously consider purchasing Class I shares, especially if they intend to hold
their shares approximately six years or more. Investors who qualify to purchase
Class I shares at reduced sales charges but who intend to hold their shares less
than approximately six years should evaluate whether it is more economical to
purchase Class I shares through a Letter of Intent or under Rights of
Accumulation or other means, rather than purchasing Class II shares. Investors
investing $1 million or more in a single payment and other investors who qualify
to purchase Class I shares at net asset value may not purchase Class II shares.
See "Purchases at Net Asset Value" and "Description of Special Net Asset Value
Purchases" below for a discussion of when shares may be purchased at net asset
value.
Each class represents the same interest in the investment portfolio of the Fund
and has the same rights, except that each class has a different sales charge,
bears the separate expenses of its Rule 12b-1 distribution plan, and has
exclusive voting rights with respect to such plan. The two classes also have
separate exchange privileges.
Each class also has a separate schedule for compensating securities dealers for
selling Fund shares. Investors should take all of the factors regarding an
investment in each class into account before deciding which class of shares to
purchase. There are no conversion features attached to either class of shares.
Purchase Price of Fund Shares
Shares of both classes of the Fund are offered at their respective public
offering prices, which are determined by adding the net asset value per share
plus a front-end sales charge, next computed (1) after the shareholder's
securities dealer receives the order which is promptly transmitted to the Fund,
or (2) after receipt of an order by mail from the shareholder directly in proper
form (which generally means a completed Shareholder Application accompanied by a
negotiable check).
Class I. The sales charge for Class I shares is a variable percentage of the
offering price depending upon the amount of the sale. The offering price will be
calculated to two decimal places using standard rounding criteria. A description
of the method of calculating net asset value per share is included under the
caption "Valuation of Fund Shares."
Set forth below is a table of front-end sales charges or underwriting
commissions and dealer concessions for Class I shares.
<TABLE>
<CAPTION>
Total Sales Charge
As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Offering Price Invested of Offering Price*,***
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 or more none none (see below)**
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
**The following commissions will be paid by Distributors, out of its own
resources, to securities dealers who initiate and are responsible for purchases
of $1 million or more: 1.00% on sales of $1 million but less than $2 million,
plus 0.80% on sales of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales of $50 million but
less than $100 million, plus 0.15% on sales of $100 million or more. Dealer
concession breakpoints are reset every 12 months for purposes of additional
purchases.
***At the discretion of Distributors, all front-end sales charges may at times
be allowed to the securities dealer. If 90% or more of the sales commission is
allowed, such securities dealer may be deemed to be an underwriter as that term
is defined in the Securities Act of 1933, as amended.
No front-end sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of all
or a portion of investments of $1 million or more within 12 months of the
calendar month following such investment ("contingency period"). See "How to
Sell Shares of the Fund - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Class I shares is determined by adding the amount of the
shareholder's current purchase plus the cost or current value (whichever is
higher) of a shareholder's existing investment in one or more of the many funds
in the Franklin Group of Funds(R) and the Templeton Group of Funds. Included for
these aggregation purposes are (a) the mutual funds in the Franklin Group of
Funds except Franklin Valuemark Funds and Franklin Government Securities Trust
(the "Franklin Funds"), (b) other investment products underwritten by
Distributors or its affiliates (although certain investments may not have the
same schedule of sales charges and/or may not be subject to reduction), and (c)
the U.S. registered mutual funds in the Templeton Group of Funds except
Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and
Templeton Variable Products Series Fund (the "Templeton Funds"). (Franklin Funds
and Templeton Funds are collectively referred to as the "Franklin Templeton
Funds.") Sales charge reductions based upon aggregate holdings of (a), (b) and
(c) above ("Franklin Templeton Investments") may be effective only after
notification to Distributors that the investment qualifies for a discount.
Other Payments to Securities Dealers - Class I.
Distributors, or one of its affiliates, may make payments, out of its own
resources, of up to 1% of the amount purchased to securities dealers who
initiate and are responsible for purchases made at net asset value by certain
designated retirement plans (excluding IRA and IRA rollovers), certain
non-designated plans, certain trust companies and trust departments of banks and
certain retirement plans of organizations with collective retirement plan assets
of $10 million or more. See "Description of Special Net Asset Value Purchases"
and the SAI.
Class II. Unlike Class I shares, the front-end sales charges and dealer
concessions for Class II shares do not vary depending on the amount of purchase.
See table below:
<TABLE>
<CAPTION>
Class II Shares - Total Sales Charge
As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Net Offering Price Invested of Offering Price*
<S> <C> <C> <C>
any amount (less than $1 million) 1.00% 1.01% 1.00%
</TABLE>
*Distributors, or one of its affiliates, may make additional payments to
securities dealers, from its own resources, of up to 1% of the amount invested.
During the first year following a purchase of Class II shares, Distributors will
keep a portion of the Rule 12b-1 fees assessed to those shares to partially
recoup fees Distributors pays to securities dealers.
Class II shares redeemed within 18 months of their purchase will be assessed a
contingent deferred sales charge of 1.0% on the lesser of the then-current net
asset value or the net asset value of such shares at the time of purchase,
unless such charge is waived as described under "How to Sell Shares of the Fund
- Contingent Deferred Sales Charge."
Class I and Class II. Distributors, or one of its affiliates, out of its own
resources, may also provide additional compensation to securities dealers in
connection with sales of shares of the Franklin Templeton Funds. Compensation
may include financial assistance to securities dealers in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising, sales campaigns and/or shareholder services, and programs
regarding one or more of the Franklin Templeton Funds and other dealer-sponsored
programs or events. In some instances, this compensation may be made available
only to certain securities dealers whose representatives have sold or are
expected to sell significant amounts of shares of the Franklin Templeton Funds.
Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. Securities dealers may not
use sales of the Fund's shares to qualify for this compensation to the extent
such may be prohibited by the laws of any state or any self-regulatory agency,
such as the National Association of Securities Dealers, Inc. None of the
aforementioned additional compensation is paid for by the Fund or its
shareholders.
Additional terms concerning the offering of the Fund's shares are included in
the SAI.
Certain officers and trustees of the Fund are also affiliated with Distributors.
A detailed description is included in the SAI.
Quantity Discounts in Sales Charges -
Class I Shares Only
Class I shares may be purchased under a variety of plans which provide for a
reduced sales charge. To be certain to obtain the reduction of the sales charge,
the investor or the securities dealer should notify Distributors at the time of
each purchase of shares which qualifies for the reduction. In determining
whether a purchase qualifies for any discount, an investment in any of the
Franklin Templeton Investments may be combined with those of the investor's
spouse, children under the age of 21, and grandchildren under the age of 21. The
value of Class II shares owned by the investor may also be included for this
purpose.
In addition, an investment in Class I shares may qualify for a reduction in the
sales charge under the following programs:
1. Rights of Accumulation. The cost or current value (whichever is higher) of
existing investments in the Franklin Templeton Investments may be combined with
the amount of the current purchase in determining the sales charge to be paid.
2. Letter of Intent. An investor may immediately qualify for a reduced sales
charge on a purchase of Class I shares by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which, if made at one time, would qualify for
a reduced sales charge and grants to Distributors a security interest in the
reserved shares and irrevocably appoints Distributors as attorney-in-fact with
full power of substitution to surrender for redemption any or all shares for the
purpose of paying any additional sales charge due. Purchases under the Letter
will conform with the requirements of Rule 22d-1 under the 1940 Act. The
investor or the investor's securities dealer must inform Investor Services or
Distributors that this Letter is in effect each time a purchase is made.
An investor (except for certain employee benefit plans which are listed under
"Description of Special Net Asset Value Purchases") acknowledges and agrees to
the following provisions by completing the Letter of Intent section of the
Shareholder Application: Five percent (5%) of the amount of the total intended
purchase will be reserved in Class I shares registered in the investor's name,
to assure that the full applicable sales charge will be paid if the intended
purchase is not completed. The reserved shares will be included in the total
shares owned as reflected on periodic statements; income and capital gain
distributions on the reserved shares will be paid as directed by the investor.
The reserved shares will not be available for disposal by the investor until the
Letter of Intent has been completed or the higher sales charge paid. For more
information see "Additional Information Regarding Purchases" in the SAI.
Although the sales charges on Class II shares cannot be reduced through these
programs, the value of Class II shares owned by the investor may be included in
determining a reduced sales charge to be paid on Class I shares pursuant to the
Letter of Intent and Rights of Accumulation programs.
Group Purchases of Class I Shares
An individual who is a member of a qualified group may also purchase Class I
shares of the Fund at the reduced sales charge applicable to the group as a
whole. The sales charge is based upon the aggregate dollar value of shares
previously purchased and still owned by the members of the group, plus the
amount of the current purchase. For example, if members of the group had
previously invested and still held $80,000 of Fund shares and now were investing
$25,000, the sales charge would be 3.75%. Information concerning the current
sales charge applicable to a group may be obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, agree to include
sales and other materials related to the Fund in its publications and mailings
to members at reduced or no cost to Distributors, and seek to arrange for
payroll deduction or other bulk transmission of investments to the Fund.
If an investor selects a payroll deduction plan, subsequent investments will be
automatic and will continue until such time as the investor notifies the Fund
and the investor's employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the payroll deduction
information to the Fund, there may be a delay between the time of the payroll
deduction and the time the money reaches the Fund. The investment in the Fund
will be made at the offering price per share determined on the day that both the
check and payroll deduction data are received in required form by the Fund.
Purchases at Net Asset Value
Class I shares may be purchased without the imposition of a front-end sales
charge ("net asset value") or a contingent deferred sales charge by (1)
officers, trustees, directors, and full-time employees of the Fund, any of the
Franklin Templeton Funds, or of the Franklin Templeton Group, and by their
spouses and family members, including any investments made by such parties after
cessation of employment; (2) companies exchanging shares or selling assets
pursuant to a merger, acquisition or exchange offer; (3) insurance company
separate accounts for pension plan contracts; (4) accounts managed by the
Franklin Templeton Group; (5) shareholders of Templeton Institutional Funds,
Inc. reinvesting redemption proceeds from that fund under an employee benefit
plan qualified under Section 401 of the Code, in shares of the Fund; (6) certain
unit investment trusts and unit holders of such trusts reinvesting their
distributions from the trusts in the Fund; (7) registered securities dealers and
their affiliates, for their investment account only; and (8) registered
personnel and employees of securities dealers and by their spouses and family
members, in accordance with the internal policies and procedures of the
employing securities dealer.
For either Class I or Class II, the same class of shares of the Fund may be
purchased at net asset value by persons who have redeemed, within the previous
365 days, their shares of the Fund or another of the Franklin Templeton Funds
which were purchased with a front-end sales charge or assessed a contingent
deferred sales charge on redemption. If a different class of shares is
purchased, the full front-end sales charge must be paid at the time of purchase
of the new shares. An investor may reinvest an amount not exceeding the
redemption proceeds. While credit will be given for any contingent deferred
sales charge paid on the shares redeemed and subsequently repurchased, a new
contingency period will begin. Matured shares will be reinvested at net asset
value and will not be subject to a new contingent deferred sales charge. Shares
of the Fund redeemed in connection with an exchange into another fund (see
"Exchange Privilege") are not considered "redeemed" for this privilege. In order
to exercise this privilege, a written order for the purchase of shares of the
Fund must be received by the Fund or the Fund's Shareholder Services Agent
within 365 days after the redemption. The 365 days, however, do not begin to run
on redemption proceeds placed immediately after redemption in a Franklin Bank
Certificate of Deposit ("CD") until the CD (including any rollover) matures.
Reinvestment at net asset value may also be handled by a securities dealer or
other financial institution, who may charge the shareholder a fee for this
service. The redemption is a taxable transaction but reinvestment without a
sales charge may affect the amount of gain or loss recognized and the tax basis
of the shares reinvested. If there has been a loss on the redemption, the loss
may be disallowed if a reinvestment in the same fund is made within a 30-day
period. Information regarding the possible tax consequences of such a
reinvestment is included in the tax section of this Prospectus and the SAI.
For either Class I or Class II, the same class of shares of the Fund or of
another of the Franklin Templeton Funds may be purchased at net asset value and
without a contingent deferred sales charge by persons who have received
dividends and capital gains distributions in cash from investments in that class
of shares of the Fund within 365 days of the payment date of such distribution.
To exercise this privilege, a written request to reinvest the distribution must
accompany the purchase order. Additional information may be obtained from
Shareholder Services at 1-800/632-2301. See "Distributions in Cash" under
"Distributions to Shareholders."
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by investors who have, within the past 60
days, redeemed an investment in a mutual fund which is not part of the Franklin
Templeton Funds and which was subject to a front-end sales charge or a
contingent deferred sales charge and which has investment objectives similar to
those of the Fund.
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by broker-dealers who have entered into a
supplemental agreement with Distributors, or by registered investment advisors
affiliated with such broker-dealers, on behalf of their clients who are
participating in a comprehensive fee program (sometimes known as a wrap fee
program).
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by anyone who has taken a distribution from
an existing retirement plan already invested in the Franklin Templeton Funds,
including former participants of the Franklin Templeton Profit Sharing 401(k)
plan, to the extent of such distribution. In order to exercise this privilege a
written order for the purchase of shares of the Fund must be received by
Franklin Templeton Trust Company (the "Trust Company"), the Fund or Investor
Services, within 365 days after the plan distribution.
Class I shares may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or city,
or any instrumentality, department, authority or agency thereof which has
determined that the Fund is a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or its investment manager on arbitrage rebate
calculations. If an investment by an eligible governmental authority at net
asset value is made through a securities dealer who has executed a dealer
agreement with Distributors, Distributors or one of its affiliates may make a
payment, out of its own resources, to such securities dealer in an amount not to
exceed 0.25% of the amount invested. Contact the Franklin Templeton
Institutional Services Department for additional information.
Description of Special Net Asset Value Purchases
Class I shares may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by certain designated
retirement plans, including profit sharing, pension, 401(k) and simplified
employee pension plans ("designated plans"), subject to minimum requirements
with respect to number of employees or amount of purchase, which may be
established by Distributors. Currently those criteria require that the employer
establishing the plan have 200 or more employees or that the amount invested or
to be invested during the subsequent 13-month period in the Fund or in any of
the Franklin Templeton Investments totals at least $1,000,000. Employee benefit
plans not designated above or qualified under Section 401 of the Code
("non-designated plans") may be afforded the same privilege if they meet the
above requirements as well as the uniform criteria for qualified groups
previously described under "Group Purchases" which enable Distributors to
realize economies of scale in its sales efforts and sales related expenses.
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by trust companies and bank trust departments
for funds over which they exercise exclusive discretionary investment authority
and which are held in a fiduciary, agency, advisory, custodial or similar
capacity. Such purchases are subject to minimum requirements with respect to
amount of purchase, which may be established by Distributors. Currently, those
criteria require that the amount invested or to be invested during the
subsequent 13-month period in this Fund or any of the Franklin Templeton
Investments must total at least $1,000,000. Orders for such accounts will be
accepted 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 such order.
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by trustees or other fiduciaries purchasing
securities for certain retirement plans of organizations with collective
retirement plan assets of $10 million or more, without regard to where such
assets are currently invested.
Refer to the SAI for further information regarding net asset value purchases of
Class I shares.
Purchasing Class I and Class II Shares
When placing purchase orders, investors should clearly indicate which class of
shares they intend to purchase. A purchase order that fails to specify a class
will automatically be invested in Class I shares. There are no conversion
features attached to either class of shares.
General
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling Fund shares may be required to register as dealers pursuant
to state law.
Purchasing Shares of the Fund
in Connection with Retirement Plans
Involving Tax-Deferred Investments
Shares of the Fund may be used for individual or employer-sponsored retirement
plans involving tax-deferred investments. The Fund may be used as an investment
vehicle for an existing retirement plan, or the Trust Company may provide the
plan documents and serve as custodian or trustee. A plan document must be
adopted in order for a retirement plan to be in existence.
The Trust Company, an affiliate of Distributors, can serve as custodian or
trustee for various types of retirement plans. Brochures for the Trust Company
plans contain important information regarding eligibility, contribution and
deferral limits and distribution requirements. Please note that an application
other than the one contained in this Prospectus must be used to establish a
retirement plan account with the Trust Company. To obtain a retirement plan
brochure or application, call 1-800/DIAL BEN (1-800/342-5236).
Please see "How to Sell Shares of the Fund" for specific information regarding
redemptions from retirement plan accounts. Specific forms are required to be
completed for distributions from Trust Company retirement plans.
Individuals and plan sponsors should consult with legal, tax or benefits and
pension plan consultants before choosing a retirement plan. In addition,
retirement plan investors should consider consulting their investment
representatives or advisers concerning investment decisions within their plans.
Other Programs and Privileges
Available to Fund Shareholders
Certain of the programs and privileges described in this section may not be
available directly from the Fund to shareholders whose shares are held, of
record, by a financial institution or in a "street name" account or networked
account through the National Securities Clearing Corporation ("NSCC") (see the
section captioned "Account Registrations" in this Prospectus).
Share Certificates
Shares for an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by the shareholder, can be 2% or more of the value of
the lost, stolen or destroyed certificate. A certificate will be issued if
requested by the shareholder or by the securities dealer.
Confirmations
A confirmation statement will be sent to each shareholder semi-annually to
reflect the dividends reinvested during that period and after each other
transaction which affects the shareholder's account. This statement will also
show the total number of shares owned by the shareholder, including the number
of shares in "plan balance" for the account of the shareholder.
Automatic Investment Plan
Under the Automatic Investment Plan, a shareholder may be able to arrange to
make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which maintains
the account is a member of the Automated Clearing House, or by preauthorized
checks drawn on the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Automatic Investment Plan Application
included with this Prospectus contains the requirements applicable to this
program. In addition, shareholders may obtain more information concerning this
program from their securities dealers or from Distributors.
The market value of each class of the Fund's shares is subject to fluctuation.
Before undertaking any plan for systematic investment, the investor should keep
in mind that such a program does not assure a profit or protect against a loss.
Systematic Withdrawal Plan
A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account, provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum amount
which the shareholder may withdraw is $50 per withdrawal transaction, although
this is merely the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. Retirement plans subject to mandatory
distribution requirements are not subject to the $50 minimum. The plan may be
established on a monthly, quarterly, semiannual or annual basis. If the
shareholder establishes a plan, any capital gain distributions and income
dividends paid by the Fund will be reinvested for the shareholder's account in
additional shares at net asset value. Payments will then be made from the
liquidation of shares at net asset value on the day of the transaction (which is
generally the first business day of the month in which the payment is scheduled)
with payment generally received by the shareholder three to five days after the
date of liquidation. By completing the "Special Payment Instructions for
Distributions" section of the Shareholder Application included with this
Prospectus, a shareholder may direct the selected withdrawals to another of the
Franklin Templeton Funds, to another person, or directly to a checking account.
If the bank at which the account is maintained is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If this last option is requested, the shareholder should allow at
least 15 days for initial processing. Payments which may be paid in the interim
will be sent to the address of record. Liquidation of shares may reduce or
possibly exhaust the shares in the shareholder's account, to the extent
withdrawals exceed shares earned through dividends and distributions,
particularly in the event of a market decline. If the withdrawal amount exceeds
the total plan balance, the account will be closed and the remaining balance
will be sent to the shareholder. As with other redemptions, a liquidation to
make a withdrawal payment is a sale for federal income tax purposes. Because the
amount withdrawn under the plan may be more than the shareholder's actual yield
or income, part of the payment may be a return of the shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Fund would be disadvantageous because of the sales
charge on the additional purchases. Also, redemptions of Class I shares and
Class II shares may be subject to a contingent deferred sales charge if the
shares are redeemed within 12 months (Class I shares) or 18 months (Class II
shares) of the calendar month following the original purchase date. The
shareholder should ordinarily not make additional investments of less than
$5,000 or three times the annual withdrawals under the plan during the time such
a plan is in effect.
With respect to Class I shares, the contingent deferred sales charge is waived
for redemptions through a Systematic Withdrawal Plan set up prior to February 1,
1995. With respect to Systematic Withdrawal Plans set up on or after February 1,
1995, however, the applicable contingent deferred sales charge is waived for
Class I and Class II share redemptions of up to 1% monthly of an account's net
asset value (12% annually, 6% semiannually, 3% quarterly). For example, if a
Class I account maintained an annual balance of $1,000,000, only $120,000 could
be withdrawn through a once-yearly Systematic Withdrawal Plan free of charge;
any amount over that $120,000 would be assessed a 1% (or applicable) contingent
deferred sales charge. Likewise, if a Class II account maintained an annual
balance of $10,000, only $1,200 could be withdrawn through a once-yearly
Systematic Withdrawal Plan free of charge.
A Systematic Withdrawal Plan may be terminated on written notice by the
shareholder or the Fund, and it will terminate automatically if all shares are
liquidated or withdrawn from the account, or upon the Fund's receipt of
notification of the death or incapacity of the shareholder. Shareholders may
change the amount (but not below the specified minimum) and schedule of
withdrawal payments or suspend one such payment by giving written notice to
Investor Services at least seven business days prior to the end of the month
preceding a scheduled payment. Share certificates may not be issued while a
Systematic Withdrawal Plan is in effect.
Institutional Accounts
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
the Franklin Templeton Institutional Services Department at 1-800/321-8563.
Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these mutual funds are
offered to the public with a sales charge. If a shareholder's investment
objective or outlook for the securities markets changes, the Fund shares may be
exchanged for the same class of shares of other Franklin Templeton Funds which
are eligible for sale in the shareholder's state of residence and in conformity
with such fund's stated eligibility requirements and investment minimums. Some
funds, however, may not offer Class II shares. Class I shares may be exchanged
for Class I shares of any Franklin Templeton Funds. Class II shares may be
exchanged for Class II shares of any Franklin Templeton Funds. No exchanges
between different classes of shares will be allowed. A contingent deferred sales
charge will not be imposed on exchanges. If, however, the exchanged shares were
subject to a contingent deferred sales charge in the original fund purchased and
shares are subsequently redeemed within 12 months (Class I shares) or 18 months
(Class II shares) of the calendar month following the original purchase date, a
contingent deferred sales charge will be imposed. Before making an exchange,
investors should review the prospectus of the fund they wish to exchange from
and the fund they wish to exchange into for all specific requirements or
limitations on exercising the exchange privilege, for example, minimum holding
periods or applicable sales charges.
Exchanges may be made in any of the following ways:
Exchanges by Mail
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
Exchanges by Telephone
Shareholders, or their investment representative
of record, if any, may exchange shares of the
Fund by telephone by calling Investor Services at 1-800/632-2301 or the
automated Franklin TeleFACTS(R) system (day or night) at 1-800/247-1753. If the
shareholder does not wish this privilege extended to a particular account, the
Fund or Investor Services should be notified.
The Telephone Exchange Privilege allows a shareholder to effect exchanges from
the Fund into an identically registered account of the same class of shares in
one of the other available Franklin Templeton Funds. The Telephone Exchange
Privilege is available only for uncertificated shares or those which have
previously been deposited in the shareholder's account. The Fund and Investor
Services will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. Please refer to "Telephone Transactions -
Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
Telephone Exchange Privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, shareholders should follow the other
exchange procedures discussed in this section, including the procedures for
processing exchanges through securities dealers.
Exchanges Through Securities Dealers
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "Exchanges by Telephone"
above. Such a dealer-ordered exchange will be effective only for uncertificated
shares on deposit in the shareholder's account or for which certificates have
previously been deposited. A securities dealer may charge a fee for handling an
exchange.
Additional Information Regarding Exchanges
Exchanges of the same class of shares are made on the basis of the net asset
values of the class involved, except as set forth below. Exchanges of shares of
a class which were originally purchased without a sales charge will be charged a
sales charge in accordance with the terms of the prospectus of the fund and the
class of shares being purchased, unless the original investment on which no
sales charge was paid originated from a fund on which the investor paid or was
subject to a front-end or deferred contingent sales charge. Exchanges of Class I
shares of the Fund which were purchased with a lower sales charge into a fund
which has a higher sales charge will be charged the difference in sales charges,
unless the shares were held in the Fund for at least six months prior to
executing the exchange.
When an investor requests the exchange of the total value of the Fund account,
declared but unpaid income dividends and capital gain distributions will be
transferred to the fund being exchanged into and will be invested at net asset
value. Because the exchange is considered a redemption and purchase of shares,
the shareholder may realize a gain or loss for federal income tax purposes.
Backup withholding and information reporting may also apply. Information
regarding the possible tax consequences of such an exchange is included in the
tax section in this Prospectus and in the SAI.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate 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 should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing money market
instruments, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objectives exist immediately.
Subsequently, this money will be withdrawn from such short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The Exchange Privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
Exchanges of Class I Shares
The contingency period during which a contingent deferred sales charge may be
assessed for Class I shares will be tolled (or stopped) for the period such
shares are exchanged into and held in a Franklin or Templeton Class I money
market fund. If a Class I account has shares subject to a contingent deferred
sales charge, Class I shares will be exchanged into the new account on a
"first-in, first-out" basis. See "How to Sell Shares of the Fund - Contingent
Deferred Sales Charge" for a discussion of investments subject to a contingent
deferred sales charge.
Exchanges of Class II Shares
When an account is composed of Class II shares subject to the contingent
deferred sales charge, and Class II shares that are not, the shares will be
transferred proportionately into the new fund. Shares received from reinvestment
of dividends and capital gains are referred to as "free shares," shares which
were originally subject to a contingent deferred sales charge but to which the
contingent deferred sales charge no longer applies are called "matured shares,"
and shares still subject to the contingent deferred sales charge are referred to
as "CDSC liable shares." CDSC liable shares held for different periods of time
are considered different types of CDSC liable shares. For instance, if a
shareholder has $1,000 in free shares, $2,000 in matured shares, and $3,000 in
CDSC liable shares, and the shareholder exchanges $3,000 into a new fund, $500
will be exchanged from free shares, $1,000 from matured shares, and $1,500 from
CDSC liable shares. Similarly, if CDSC liable shares have been purchased at
different periods, a proportionate amount will be taken from shares held for
each period. If, for example, a shareholder holds $1,000 in shares bought 3
months ago, $1,000 bought 6 months ago, and $1,000 bought 9 months ago, and the
shareholder exchanges $1,500 into the new fund, $500 from each of these shares
will be deemed exchanged into the new fund.
The only money market fund exchange option available to Class II shareholders is
the Franklin Templeton Money Fund II ("Money Fund II"), a series of the Franklin
Templeton Money Fund Trust. No drafts (checks) may be written on Money Fund II
accounts, nor may shareholders purchase shares of Money Fund II directly. Class
II shares exchanged for shares of Money Fund II will continue to age and a
contingent deferred sales charge will be assessed if CDSC liable shares are
redeemed. No other money market funds are available for Class II shareholders
for exchange purposes. Class I shares may be exchanged for shares of any of the
money market funds in the Franklin Templeton Funds except Money Fund II. Draft
writing privileges and direct purchases are allowed on these other money market
funds as described in their respective prospectuses.
To the extent shares are exchanged proportionately, as opposed to another
method, such as first-in first-out, or free-shares followed by CDSC liable
shares, the exchanged shares may, in some instances, be CDSC liable even though
a redemption of such shares, as discussed elsewhere herein, may no longer be
subject to a CDSC. The proportional method is believed by management to more
closely meet and reflect the expectations of Class II shareholders in the event
shares are redeemed during the contingency period. For federal income tax
purposes, the cost basis of shares redeemed or exchanged is determined under the
Code without regard to the method of transferring shares chosen by the Fund.
Retirement Plan Accounts
Franklin Templeton IRA and 403(b) retirement plan accounts may accomplish
exchanges directly. Certain restrictions may apply, however, to other types of
retirement plans. See "Restricted Accounts" under "Telephone Transactions."
Restrictions on Exchanges
The Fund currently will not accept investments from Timing Accounts.
Transfers
Transfers between identically registered accounts in the same fund and class are
treated as non-monetary and non-taxable events, and are not subject to a
contingent deferred sales charge. The transferred shares will continue to age
from the date of original purchase. Shares of each class will be transferred on
the same basis as described above for exchanges.
Conversion Rights
It is not presently anticipated that Class II shares will be convertible to
Class I shares. A shareholder may, however, sell the Class II shares and use the
proceeds to purchase Class I shares, subject to all applicable sales charges.
How to Sell Shares of the Fund
A shareholder may at any time liquidate shares owned and receive from the Fund
the value of the shares. Shares may be redeemed in any of the following ways:
Redemptions by Mail
Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from the
Fund the value of the class of shares redeemed based upon the net asset value
per share (less a contingent deferred sales charge, if applicable) next computed
after the written request in proper form is received by Investor Services.
Redemption requests received after the time at which the net asset value is
calculated, i.e., at the scheduled close of the New York Stock Exchange
("Exchange"), generally 1:00 p.m. Pacific time, each day that the Exchange is
open for business, will receive the price calculated on the following business
day. Shareholders are requested to provide a telephone number(s) where they may
be reached during business hours, or in the evening if preferred. Investor
Services' ability to contact a shareholder promptly when necessary will speed
the processing of the redemption.
To be considered in proper form, signature(s) must be guaranteed if the
redemption request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage firm
account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions, including,
for example, when (a) the current address of one or more joint owners of an
account cannot be confirmed, (b) multiple owners have a dispute or give
inconsistent instructions to the Fund, (c) the Fund has been notified of an
adverse claim, (d) the instructions received by the Fund are given by an agent,
not the actual registered owner, (e) the Fund determines that joint owners who
are married to each other are separated or may be the subject of divorce
proceedings, or (f) the authority of a representative of a corporation,
partnership, association, or other entity has not been established to the
satisfaction of the Fund.
Signature(s) must be guaranteed by an "eligible guarantor institution" as
defined under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered shareholders exactly as the account is
registered, with the signature(s) guaranteed as referenced above. Shareholders
are advised, for their own protection, to send the share certificate and
assignment form in separate envelopes if they are being mailed in for
redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officer(s) of the corporation, and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustee(s) and
(2) a copy of the pertinent pages of the trust document listing the trustee(s)
or a Certification for Trust if the trustee(s) are not listed on the account
registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form.
Redemptions by Telephone
Shareholders who complete the Franklin Templeton Telephone Redemption
Authorization Agreement (the "Agreement"), included with this Prospectus, may
redeem shares of the Fund by telephone, subject to the Restricted Account
exception noted under "Telephone Transactions - Restricted Accounts."
Information may also be obtained by writing to the Fund or Investor Services at
the address shown on the cover or by calling 1-800/632-2301. The Fund and
Investor Services will employ reasonable procedures to confirm that instructions
given by telephone are genuine. Shareholders, however, bear the risk of loss in
certain cases as described under "Telephone Transactions - Verification
Procedures."
For shareholder accounts with the completed Agreement on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before the scheduled close of
the Exchange (generally 1:00 p.m. Pacific time) on any business day will be
processed that same day. The redemption check will be sent within seven days,
made payable to all the registered owners on the account, and will be sent only
to the address of record. Redemption requests by telephone will not be accepted
within 30 days following an address change by telephone. In that case, a
shareholder should follow the other redemption procedures set forth in this
Prospectus. Institutional accounts (certain corporations, bank trust
departments, government entities, and qualified retirement plans which qualify
to purchase shares at net asset value pursuant to the terms of this Prospectus)
which wish to execute redemptions in excess of $50,000 must complete an
Institutional Telephone Privileges Agreement which is available from the
Franklin Templeton Institutional Services Department by telephoning
1-800/321-8563.
Redeeming Shares Through Securities Dealers
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if the
shareholder redeems shares through a dealer, the redemption price will be the
net asset value next calculated after the shareholder's dealer receives the
order which is promptly transmitted to the Fund, rather than on the day the Fund
receives the shareholder's written request in proper form. The documents
described under "Redemptions by Mail" above, as well as a signed letter of
instruction, are required regardless of whether the shareholder redeems shares
directly or submits such shares to a securities dealer for repurchase. After
receipt of a repurchase order from the dealer, the Fund will still require a
signed letter of instruction and all other documents set forth above. A
shareholder's letter should reference the Fund and the class, the account
number, the fact that the repurchase was ordered by a dealer and the dealer's
name. Details of the dealer-ordered trade, such as trade date, confirmation
number, and the amount of shares or dollars, will help speed processing of the
redemption. The seven-day period within which the proceeds of the shareholder's
redemption will be sent will begin when the Fund receives all documents required
to complete ("settle") the repurchase in proper form. The redemption proceeds
will not earn dividends or interest during the time between receipt of the
dealer's repurchase order and the date the redemption is processed upon receipt
of all documents necessary to settle the repurchase. Thus, it is in a
shareholder's best interest to have the required documentation completed and
forwarded to the Fund as soon as possible. The shareholder's dealer may charge a
fee for handling the order. The SAI contains more information on the redemption
of shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers, Class I investments
of $1 million or more and any Class II investments redeemed within the
contingency period of 12 months (Class I) or 18 months (Class II) of the
calendar month following their purchase will be assessed a contingent deferred
sales charge, unless one of the exceptions described below applies. The charge
is 1% of the lesser of the value of the shares redeemed (exclusive of reinvested
dividends and capital gain distributions) or the net asset value at the time of
purchase of such shares, and is retained by Distributors. The contingent
deferred sales charge is waived in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) A calculated number of shares representing amounts
attributable to capital appreciation of those shares held less than the
contingency period (12 months in the case of Class I shares and 18 months in the
case of Class II shares); (ii) shares purchased with reinvested dividends and
capital gain distributions; (iii) other shares held longer than the contingency
period; and (iv) followed by any shares held less than the contingency period,
on a "first-in, first-out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
The contingent deferred sales charge on each class of shares is waived, as
applicable, for: exchanges; any account fees; distributions to participants or
their beneficiaries in Trust Company individual retirement plan accounts due to
death, disability or attainment of age 591/2; tax-free returns of excess
contributions from employee benefit plans; distributions from employee benefit
plans, including those due to termination or plan transfer; redemptions through
a Systematic Withdrawal Plan set up for shares prior to February 1, 1995, and
for Systematic Withdrawal Plans set up thereafter, redemptions of up to 1%
monthly of an account's net asset value (3% quarterly, 6% semiannually or 12%
annually); redemptions initiated by the Fund due to a shareholder's account
falling below the minimum specified account size; and redemptions following the
death of the shareholder or the beneficial owner.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Requests for redemptions for a specified dollar amount, unless otherwise
specified, will result in additional shares being redeemed to cover any
applicable contingent deferred sales charge, while requests for redemption of a
specific number of shares will result in the applicable contingent deferred
sales charge being deducted from the total dollar amount redeemed.
Additional Information Regarding Redemptions
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption. In addition, the right of redemption may be suspended or
the date of payment postponed if the Exchange is closed (other than customary
closing) or upon the determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it, by order, for the
protection of shareholders. Of course, the amount received may be more or less
than the amount invested by the shareholder, depending on fluctuations in the
market value of securities owned by the Fund.
Retirement Plan Accounts
Retirement plan account liquidations require the completion of certain
additional forms to ensure compliance with IRS regulations. To liquidate a
retirement plan account, a shareholder or securities dealer may call Franklin's
Retirement Plans Department to obtain the necessary forms.
Tax penalties will generally apply to any distribution from such plans to a
participant under age 591/2, unless the distribution meets one of the exceptions
set forth in the Internal Revenue Code.
Other Information
Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Fund nor its affiliates will be liable for any loss to the shareholder caused by
the shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the securities dealer may
call Franklin's Dealer Services Department.
Telephone Transactions
Shareholders of the Fund and their investment representative of record, if any,
may be able to execute various transactions by calling Investor Services at
1-800/632-2301.
All shareholders will be able to execute various telephone transactions,
including: (i) effect a change in address, (ii) change a dividend option (see
"Restricted Accounts" below), (iii) transfer Fund shares in one account to
another identically registered account in the Fund, (iv) request the issuance of
certificates (to be sent to the address of record only) and (v) exchange Fund
shares as described in this Prospectus by telephone. In addition, shareholders
who complete and file the Agreement as described under "How to Sell Shares of
the Fund - Redemptions by Telephone" will be able to redeem shares of the Fund.
Verification Procedures
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to the shareholder caused by an unauthorized transaction.
The Fund and Investor Services may be liable for any losses due to unauthorized
or fraudulent instructions in the event such reasonable procedures are not
followed. Shareholders are, of course, under no obligation to apply for or
accept telephone transaction privileges. In any instance where the Fund or
Investor Services is not reasonably satisfied that instructions received by
telephone are genuine, the requested transaction will not be executed, and
neither the Fund nor Investor Services will be liable for any losses which may
occur because of a delay in implementing a transaction.
Restricted Accounts
Telephone redemptions and dividend option changes may not be accepted on
Franklin Templeton retirement accounts. To assure compliance with all applicable
regulations, special forms are required for any distribution, redemption, or
dividend payment. While the telephone exchange privilege is extended to
Franklin/Templeton IRA and 403(b) retirement accounts, certain restrictions may
apply to other types of retirement plans.
To obtain further information regarding distribution or transfer procedures,
including any required forms, retirement account shareholders may call to speak
to a Retirement Plan Specialist at 1-800/527-2020.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
investment representative for assistance, or to send written instructions to the
Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.
The telephone transaction privilege may be modified or discontinued by the Fund
at any time upon 60 days' written notice to shareholders.
Valuation of Fund Shares
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the Exchange (generally 1:00 p.m. Pacific time) each day that
the Exchange is open for trading. Many newspapers carry daily quotations of the
prior trading day's closing "bid" (net asset value) and "ask" (offering price,
which includes the maximum front-end sales charge of each class of shares of the
Fund).
The net asset value per share for each class of the Fund is determined in the
following manner: The aggregate of all liabilities, is deducted from the
aggregate gross value of all assets, and the difference is divided by the number
of shares of the respective class of the Fund outstanding at the time.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. The value of a foreign security is
determined as of the close of trading on the foreign exchange on which it is
traded or as of the scheduled closing of trading on the Exchange, if that is
earlier, and that 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
mean between the current bid and ask price is used. Occasionally, events which
affect the values of foreign securities and foreign exchange rates may occur
between the times at which values and rates are determined and the close of the
Exchange and will, therefore, not be reflected in the computation of the Fund's
net asset value. If events materially affecting the value of these foreign
securities occur during such periods, then these securities will be valued in
accordance with procedures established by the Board.
Over-the-counter portfolio securities for which market quotations are readily
available are valued within the range of the most recent bid and ask prices as
obtained from one or more dealers that make markets in the securities. Portfolio
securities which are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by the Manager. Portfolio securities underlying actively traded call
options are valued at their market price as determined above. The current market
value of any option held by the Fund is its last sale price on the relevant
exchange prior to the time when assets are valued. Lacking any sales that day or
if the last sale price is outside the bid and ask prices, the options are valued
within the range of the current closing bid and ask prices if such valuation is
believed to fairly reflect the contract's market value. 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 of Trustees. With the approval of trustees, the Fund may
utilize a pricing service, bank or securities dealer to perform any of the above
described functions.
Each of the Fund's classes will bear, pro rata, all of the common expenses of
the Fund, except that the Class I and Class II shares will bear the Rule 12b-1
expenses payable under their respective plans. The net asset value of all
outstanding shares of each class of the Fund will be computed on a pro rata
basis for each outstanding share based on the proportionate participation in the
Fund represented by the value of shares of such classes. Due to the specific
distribution expenses and other costs that will be allocable to each class, the
dividends paid to each class of the Fund may vary.
How to Get Information Regarding an Investment in the Fund
Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.
From a touch-tone phone, Franklin and Templeton shareholders may access an
automated system (day or night) which offers the following features:
By calling the Franklin TeleFACTS(R) system at 1-800/247-1753, shareholders may
obtain Class I and Class II account information, current price and, if
available, yield or other performance information specific to the Fund or any
Franklin Templeton Fund. In addition, Franklin Class I shareholders may process
an exchange, within the same class, into an identically registered Franklin
account and request duplicate confirmation or year-end statements, money fund
checks, if applicable, and deposit slips.
Franklin Class I and Class II share codes for the Fund, which will be needed to
access system information are 197 and 297, respectively. The system's automated
operator will prompt the caller with easy to follow step-by-step instructions
from the main menu. Other features may be added in the future.
To assist shareholders and securities dealers wishing to speak directly with a
representative, the following is a list of the various Franklin or Templeton
departments, telephone numbers and hours of operation to call. The same numbers
may be used when calling from a rotary phone:
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m.
(Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
Performance
Advertisements, sales literature and communications to shareholders may contain
several measures of a class' performance, including various expressions of total
return, current yield, and current distribution rate. They may occasionally cite
statistics to reflect its volatility or risk.
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five- and
ten-year periods, or portion thereof, to the extent applicable, through the end
of the most recent calendar quarter, assuming reinvestment of all distributions.
The Fund may also furnish total return quotations for each class for other
periods or based on investments at various sales charge levels or at net asset
value. For such purposes total return equals the total of all income and capital
gain paid to shareholders, assuming reinvestment of all distributions, plus (or
minus) the change in the value of the original investment, expressed as a
percentage of the purchase price.
Current yield for each class reflects the income per share earned by the Fund's
portfolio investments; it is calculated for each class by dividing that class'
net investment income per share during a recent 30-day period by the maximum
public offering price for that class of shares on the last day of that period
and annualizing the result.
Yield for each class, which is calculated according to a formula prescribed by
the SEC (see the SAI), is not indicative of the dividends or distributions which
were or will be paid to the Fund's shareholders. Dividends or distributions paid
to shareholders of a class are reflected in the current distribution rate, which
may be quoted to shareholders. The current distribution rate is computed by
dividing the total amount of dividends per share paid by a class during the past
12 months by a current maximum offering price for that class of shares. Under
certain circumstances, such as when there has been a change in the amount of
dividend payout, or a fundamental change in investment policies, it might be
appropriate to annualize the dividends paid during the period such policies were
in effect, rather than using the dividends during the past 12 months. The
current distribution rate differs from the current yield computation because it
may include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing and short-term capital
gain, and is calculated over a different period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against a class' income and will assume the payment of the
maximum front-end sales charge on the purchase of that class of shares. When
there has been a change in the sales charge structure, the historical
performance figures will be restated to reflect the new rate. The investment
results of each class, like all other investment companies, will fluctuate over
time; thus, performance figures should not be considered to represent what an
investment may earn in the future or what a class' total return, current yield
or distribution rate may be in any future period.
Because Class II shares were not offered prior to May 1, 1995, no performance
data is available for these shares. After a sufficient period of time has
passed, Class II performance data will be available.
General Information
Reports to Shareholders
The Fund's fiscal year ends April 30. Annual Reports containing audited
financial statements of the Trust, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to one household as well
as to reduce Fund expenses, Investor Services, when legally permissible, will
attempt to identify related shareholders within a household, and send only one
copy of the report. Additional copies may be obtained, without charge, upon
request to the Trust at the telephone number or address set forth on the cover
page of this Prospectus.
Additional information on Fund performance is included in the Fund's Annual
Report to Shareholders and the SAI.
Organization and Voting Rights
The Trust is authorized to issue an unlimited number of shares of beneficial
interest, with a par value of $.01 per share in various series and classes. Each
series, in effect, represents a separate mutual fund with its own investment
objective and policies. All shares have one vote and, when issued, are fully
paid, non-assessable, and redeemable. The Trust currently has eight series: the
Fund, the Franklin California Growth Fund, the Franklin Small Cap Growth Fund,
the Franklin Global Health Care Fund, the Franklin Strategic Income Fund, the
Franklin Natural Resources Fund, the Franklin Institutional MidCap Growth Fund
and the Franklin MidCap Growth Fund. Additional series and classes may be added
in the future by the Board. All shares of the Fund have equal voting, dividend
and liquidation rights. Shares have no preemptive or subscription rights and are
fully transferable. There are no conversion rights; however, holders of shares
of the Fund may reinvest all or any portion of the proceeds from the redemption
or repurchase of such shares into shares of any other fund in the Franklin
Templeton Funds as described under "Exchange Privilege."
The Trust's shareholders will vote together to elect trustees and on other
matters affecting the entire Trust, but will vote separately on matters
affecting separate series. The shares have noncumulative voting rights, which
means that in all elections of trustees, the holders of more than 50% of the
shares voting can elect 100% of the trustees if they choose to do so and in such
event, the holders of the remaining shares voting will not be able to elect any
person or persons to the Board of Trustees.
Shares of each class of a Fund represent proportionate interests in the assets
of the Fund and 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. For matters that only affect a certain class of a Fund's shares, however,
only shareholders of that class will be entitled to vote. Therefore each class
of shares of a Fund will vote separately on matters (1) affecting only that
class of such Fund, (2) expressly required to be voted on separately by state
business trust law, or (3) required to be voted on separately by the 1940 Act,
or the rules adopted thereunder. For instance, if a change to the Rule 12b-1
plan relating to Class I shares of a Fund requires shareholder approval, only
shareholders of Class I of that Fund may vote on the change to the Rule 12b-1
plan affecting that class. Similarly, if a change to the Rule 12b-1 plan
relating to Class II shares requires approval, only shareholders of Class II of
such Fund may vote on changes to such plan. On the other hand, if there is a
proposed change to the investment objective of a Fund, this affects all
shareholders of that Fund, regardless of which class of shares they hold and,
therefore, each share has the same voting rights.
The Fund does not intend to hold annual shareholders meetings. The Fund may,
however, hold a special meeting for such purposes as changing fundamental
investment restrictions, approving a new management agreement or any other
matters which are required to be acted on by shareholders under the 1940 Act. A
meeting may also be called by a majority of the Board of Trustees or by
shareholders holding at least ten percent of the shares entitled to vote at the
meeting. Shareholders will receive assistance in communicating with other
shareholders in connection with the election or removal of trustees such as that
provided in Section 16(c) of the 1940 Act.
Redemptions by the Fund
The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $50, but only where the value
of such account has been reduced by the shareholder's prior voluntary redemption
of shares and has been inactive (except for the reinvestment of distributions)
for a period of at least six months, provided advance notice is given to the
shareholder. More information is included in the SAI.
Account Registrations
An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, a shareholder may transfer an account in the Fund carried
in "street" or "nominee" name by the shareholder's securities dealer to a
comparably registered Fund account maintained by another securities dealer. Both
the delivering and receiving securities dealer must have executed dealer
agreements on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not process the
transfer and will so inform the shareholder's delivering securities dealer. To
effect the transfer, a shareholder should instruct the securities dealer to
transfer the account to a receiving securities dealer and sign any documents
required by the securities dealer(s) to evidence consent to the transfer. Under
current procedures, the account transfer may be processed by the delivering
securities dealer and the Fund after the Fund receives authorization in proper
form from the shareholder's delivering securities dealer. In the future it may
be possible to effect such transfers electronically through the services of the
NSCC.
The Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of record on an
investor's account, the investor will be deemed to have authorized the use of
electronic instructions on the account, including, without limitation, those
initiated through the services of the NSCC, to have adopted as instruction and
signature any such electronic instructions received by the Fund and the
Shareholder Services Agent, and to have authorized them to execute the
instructions without further inquiry. At the present time, such services which
are available include the NSCC's "Networking," "Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment, or by calling Franklin's Fund
Information Department.
Important Notice Regarding
Taxpayer IRS Certifications
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the Internal Revenue Service ("IRS") any taxable dividend, capital
gain distribution, or other reportable payment (including share redemption
proceeds) and withhold 31% of any such payments made to individuals and other
non-exempt shareholders who have not provided a correct taxpayer identification
number ("TIN") and made certain required certifications that appear in the
Shareholder Application. A shareholder may also be subject to backup withholding
if the IRS or a securities dealer notifies the Fund that the number furnished by
the shareholder is incorrect or that the shareholder is subject to backup
withholding for previous under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a shareholder who has
completed an "awaiting TIN" certification to provide the Fund with a certified
TIN within 60 days after opening the account.
Portfolio Operations
The following persons are primarily responsible for the day-to-day management of
the Fund's portfolio: Sally Edwards Haff and Gregory Johnson since the Fund's
inception in 1992 and Ian Link since February 1995.
Sally Edwards Haff, Portfolio Manager of Advisers - Ms. Haff holds a B.A. degree
in economics from the University of California at Santa Barbara and joined
Advisers in 1986. She is a Chartered Financial Analyst and a member of
industry-related associations.
Gregory Johnson, Vice President of Advisers - Mr. Johnson has a B.S. degree in
accounting and business administration from Washington and Lee University and
holds a certificate as a Certified Public Accountant. He joined Advisers in
1986.
Ian Link, Portfolio Manager of Advisers - Mr. Link has a Bachelor of Arts degree
in economics from the University of California at Davis and recently became a
Chartered Financial Analyst. Mr. Link joined Advisers in 1989. He is a member of
several securities industry-related committees and associations.
FRANKLIN
GLOBAL
UTILITIES FUND
STATEMENT OF
ADDITIONAL INFORMATION
777 Mariners Island Blvd., P.O. Box 7777 SEPTEMBER 1, 1995
San Mateo, CA 94403-7777 1-800/DIAL BEN
Contents Page
About the Fund (See also the Prospectus
"About the Fund," "General Information")................. 2
The Fund's Investment Objective and
Restrictions (See also the Prospectus
"Investment Objective and Policies of the
Fund").................................................... 2
Special Considerations and Risk Factors................... 11
Officers and Trustees..................................... 17
Investment Advisory and Other Services
(See also the Prospectus "Management
of the Fund")............................................. 21
The Fund's Policies Regarding
Brokers Used on Portfolio Transactions................... 22
Additional Information Regarding
Fund Shares (See also the Prospectus
"How to Buy Shares of the Fund,"
"How to Sell Shares of the Fund,"
"Valuation of Fund Shares")............................... 23
Additional Information
Regarding Taxation....................................... 26
The Fund's Underwriter.................................... 29
General Information....................................... 30
Appendix.................................................. 34
Financial Statements...................................... 35
Franklin Global Utilities Fund (the "Fund") is a non-diversified series of
Franklin Strategic Series (the "Trust"), an open-end management investment
company. The Fund seeks to provide total return without incurring undue risk
through investment primarily in securities issued by companies which are, in the
opinion of management, primarily engaged in the ownership or operation of
facilities used to generate, transmit or distribute electricity, telephone
communications, cable and other pay television services, wireless
telecommunications, gas or water.
A Prospectus for the Fund, dated September 1, 1995, as may be amended from time
to time, which provides the basic information investors should know before
investing in the Fund, may be obtained without charge from the Fund or from its
principal underwriter, Franklin/Templeton Distributors, Inc. ("Distributors"),
at the address shown above.
This Statement of Additional Information (the "SAI") is not a Prospectus. It
contains information in addition to and in more detail than set forth in the
Prospectus. This SAI is intended to provide investors with additional
information regarding the activities and operations of the Fund, and should be
read in conjunction with the Fund's Prospectus.
About the Fund
The Fund is a non-diversified series of the Trust, an open-end management
investment company, commonly called a mutual fund, and registered as such under
the Investment Company Act of 1940, as amended ("1940 Act"). The Trust is a
Delaware business trust organized on January 25, 1991.
The Fund's Investment
Objective and Restrictions
As noted in the Prospectus, the Fund seeks to provide total return, without
incurring undue risk. The Fund seeks to accomplish its objective by primarily
investing in securities issued by companies which are, in the opinion of
management, primarily engaged in the ownership or operation of facilities used
to generate, transmit or distribute electricity, telephone communications, cable
and other pay television services, wireless telecommunications, gas or water.
The Fund's objective of total return is a fundamental policy and may not be
changed without shareholder approval. There is no assurance that the Fund's
objective may be achieved.
Utility Industries - Description and Risk Factors
Utility companies in the United States ("U.S.") and in foreign countries are
generally subject to regulation. In the U.S., most utility companies are
regulated by state and/or federal authorities. Such regulation is intended to
ensure appropriate standards of service and adequate capacity to meet public
demand. Prices are also regulated, with the intention of protecting the public
while ensuring that the rate of return earned by utility companies is sufficient
to allow them to attract capital in order to grow and continue to provide
appropriate services. There can be no assurance that such pricing policies or
rates of return will continue in the future.
The nature of regulation of utility industries is evolving both in the U.S. and
in foreign countries. Changes in regulation in the U.S. increasingly allow
utility companies to provide services and products outside their traditional
geographic areas and lines of business, creating new areas of competition within
the industries. Furthermore, the investment manager, Franklin Advisers, Inc.
("Advisers" or "Manager"), believes that the emergence of competition will
result in utility companies potentially earning more than their traditional
regulated rates of return. Although certain companies may develop more
profitable opportunities, others may be forced to defend their core businesses
and may be less profitable. The Manager seeks to take advantage of favorable
investment opportunities that are expected to arise from these structural
changes. Of course, there can be no assurance that favorable developments will
occur in the future.
Foreign utility companies are also subject to regulation, although such
regulation may or may not be comparable to that in the U.S. Foreign regulatory
systems vary from country to country and may evolve in ways different from
regulation in the U.S.
The Fund's investment policies are designed to enable it to capitalize on
evolving investment opportunities throughout the world. For example, the rapid
growth of certain foreign economies will necessitate expansion of capacity in
the utility industries in those countries. Although many foreign utility
companies currently are government-owned Advisers believes that, in order to
attract significant capital for growth, foreign governments are likely to seek
global investors through the privatization of their utility industries.
Privatization, which refers to the trend toward investor ownership of assets
rather than government ownership, is expected to occur in newer, faster-growing
economies and also in more mature economies. In addition, the economic
unification of European markets is expected to improve economic growth, reduce
costs and increase competition in Europe, which will result in opportunities for
investment by the Fund in European utility industries. Of course, there is no
assurance that such favorable developments will occur or that investment
opportunities in foreign markets for the Fund will increase.
The revenues of domestic and foreign utility companies generally reflect the
economic growth and developments in the geographic areas in which they do
business. The Manager takes into account anticipated economic growth rates and
other economic developments when selecting securities of utility companies.
Further descriptions of some of the anticipated opportunities and risks of
specific segments within the global utility industries are set forth below.
Electric. The electric utility industry consists of companies that are engaged
principally in the generation, transmission and sale of electric energy,
although many also provide other energy-related services. Domestic electric
utility companies in general have recently been favorably affected by lower fuel
and financing costs and the full or near completion of major construction
programs. In addition, many of these companies recently have generated cash
flows in excess of current operating expenses and construction expenditures,
permitting some degree of diversification into unregulated businesses. Some
electric utilities have also taken advantage of the right to sell power outside
of their traditional geographic areas. Electric utility companies have
historically been subject to the risks associated with increases in fuel and
other operating costs, high interest costs on borrowing needed for capital
construction programs, costs associated with compliance with environmental,
nuclear and other safety regulations and changes in the regulatory climate. For
example, in the U.S., the construction and operation of nuclear power facilities
are subject to increased scrutiny by, and evolving regulations of, the Nuclear
Regulatory Commission. Increased scrutiny might result in higher operating costs
and higher capital expenditures, with the risk that regulators may disallow
inclusion of these costs in rate authorizations.
Telephone Communications. The telephone communications industry is a distinct
utility industry segment that is subject to different risks and opportunities.
Companies that provide telephone services and access to telephone networks
compose the largest portion of this segment. The telephone industry is large and
highly concentrated. Telephone companies in the U.S. are still experiencing the
effects of the break-up of American Telephone & Telegraph Company, which
occurred in 1984. Since that time the number of local and long-distance
companies and the competition among such companies has increased. In addition,
since 1984, companies engaged in telephone communication services have expanded
their nonregulated activities into other businesses, including cellular
telephone services, cable television, data processing, equipment retailing and
software services. This expansion has provided significant opportunities for
certain telephone companies to increase their earnings and dividends at faster
rates than have been allowed in traditional regulated businesses. Increasing
competition and other structural changes, however, could adversely affect the
profitability of such utilities.
Cable and Other Pay Television Services. Cable and pay television companies
produce and distribute programming over private networks. Cable television
continues to be a growth industry throughout most of the world. The industry is
regulated in most countries, but such regulation is typically less restrictive
than regulation of the electric and telephone utility industries. Cable
companies usually enjoy local monopolies; however, emerging technologies and
pro-competition legislation are presenting substantial challenges to these
monopolies and could slow growth rates.
Wireless Telecommunications. The wireless telecommunications segment includes
those companies which provide alternative telephone and communications services.
These technologies may include: cellular, paging, satellite, microwave and
private communication networks, and other emerging technologies. The wireless
telecommunications industry is in the early development stage and is
characterized by emerging, rapidly growing companies.
Gas. Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the U.S., interstate transmission companies
are regulated by the Federal Energy Regulatory Commission, which is reducing its
regulation of the industry. Many companies have diversified into oil and gas
exploration and development, making returns more sensitive to energy prices. In
the recent decade, gas utility companies have been adversely affected by
disruption in the oil industry and have also been affected by increased
concentration and competition.
Water. Water supply utilities are companies that collect, purify, distribute and
sell water. In the U.S. and around the world, the industry is highly fragmented
because most of the supplies are owned by local authorities. Companies in this
industry are generally mature and are experiencing little or no per capita
volume growth.
There can be no assurance that the positive developments noted above, including
those relating to business growth and changing regulation, will occur or that
risk factors, other than those noted above, will not develop in the future.
Some of the Fund's Other Investment Policies
As noted in the Prospectus, the Fund may lend its portfolio securities to
qualified securities dealers in amounts not to exceed one-third of the value of
the Fund's total assets. Any voting rights the loaned securities have may pass
to the borrower during the term of the loan. Loans are typically subject to
termination by the Fund in the normal settlement time, currently five business
days after notice, or by the borrower on one day's notice. Borrowed securities
must be returned when the loan is terminated. Where matters are submitted to the
vote of the security holders of a portfolio company and such matters would
materially affect the Fund, the Fund will either terminate the loan or it will
have provided other means to permit it to vote such securities.
Short-Term Investments. As stated in the Prospectus, the Fund may temporarily
invest cash in short-term debt instruments. The Fund may also invest its
short-term cash in shares of the Franklin Money Fund, the assets of which are
managed under a "master/feeder" structure by the Fund's investment adviser. Such
temporary investments will only be made with cash held to maintain liquidity or
pending investment, and for defensive purposes in the event or in anticipation
of a general decline in the market prices of stocks in which the Fund invests.
Illiquid Securities. The Fund will not invest more than 15% of its net assets in
illiquid securities. Generally an "illiquid security" is any security that
cannot be disposed of within seven days and in the ordinary course of business
at approximately the amount at which the Fund has valued the instrument. Subject
to this limitation, the Trust's Board of Trustees has authorized the Fund to
invest in restricted securities where such investment is consistent with the
Fund's investment objective and has authorized such securities to be considered
to be liquid to the extent the Manager determines that there is a liquid
institutional or other market for such securities - for example, restricted
securities which may be freely transferred among qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933, as amended, and for
which a liquid institutional market has developed. The Board of Trustees will
review any determination by the Manager to treat a restricted security as a
liquid security on an ongoing basis, including the Manager's assessment of
current trading activity and the availability of reliable price information. In
determining whether a restricted security is properly considered a liquid
security, 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 purchase or sell the security and the number of
other potential purchasers; (iii) dealer undertakings to make a market in the
security; and (iv) the nature of the security and the 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 liquid, the general level of
illiquidity in the Fund may be increased if qualified institutional buyers
become uninterested in purchasing these securities or the market for these
securities contracts.
To comply with applicable state restrictions, the Fund will limit its
investments in illiquid securities, including illiquid securities with legal or
contractual restrictions on resale and securities which are not readily
marketable, to 10% of the Fund's net assets.
When-Issued and Delayed Delivery Transactions. The Fund may purchase securities
on a "when-issued" or "delayed delivery" basis. These transactions are
arrangements under which the Fund may purchase securities with payment and
delivery scheduled for a future time. These transactions are subject to market
fluctuation and are subject to the risk that the value or yields at delivery may
be more or less than the purchase price or the yields available when the
transaction was entered into. Although the Fund will generally purchase these
securities on a when-issued basis with the intention of acquiring such
securities, it may sell such securities before the settlement date if it is
deemed advisable. In when-issued and delayed delivery transactions, the Fund
relies on the seller to complete the transaction. The other party's failure to
do so may cause the Fund to miss a price or yield considered advantageous.
Securities purchased on a when-issued or delayed delivery basis do not generally
earn interest until their scheduled delivery date. The Fund is not subject to
any percentage limit on the amount of its assets which may be invested in
"when-issued" purchase obligations.
Transactions in Options, Futures
and Options on Financial Futures
The Fund may engage in various portfolio strategies to seek to hedge its
portfolio against adverse movements in the equity, debt and currency markets.
The Fund has authority to deal in forward foreign exchange transactions and
foreign currency options and futures and options on such futures. The Fund also
has authority to write (i.e., sell) covered put and call options on its
portfolio securities, purchase put and call options on securities and engage in
transactions in stock index options and financial futures, including stock and
bond index futures and related options on such futures. Although certain risks
are involved in options and futures transactions (as discussed below and in
"Risk Factors and Considerations Regarding Options, Futures and Options on
Futures"), the Manager believes that, because the Fund will (i) write only
covered options on portfolio securities, and (ii) engage in other options and
futures transactions only for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to the risks
frequently associated with the speculative use of options and futures
transactions. While the Fund's use of hedging strategies is intended to reduce
the volatility of the net asset value of Fund shares, the Fund's net asset value
will fluctuate. There can be no assurance that the Fund's hedging transactions
will be effective. Furthermore, the Fund will only engage in hedging activities
from time to time and may not necessarily be engaging in hedging activities when
movement in the equity, debt and currency markets occurs.
Forward Currency Exchange Contracts. The Fund may enter into forward currency
exchange contracts ("Forward Contracts") to attempt to minimize the risk to the
Fund from adverse changes in the relationship between currencies or to enhance
income. A Forward Contract is an obligation to purchase or sell a specific
currency for an agreed price at a future date which is individually negotiated
and privately traded by currency traders and their customers.
The Fund may enter into a Forward Contract, for example, when it enters into a
contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock-in" the U.S. dollar price of that security.
Additionally, for example, when the Fund believes that a foreign currency may
suffer a substantial decline against the U.S. dollar, it may enter into a
Forward Contract to sell an amount of that foreign currency approximating the
value of some or all of the Fund's portfolio securities denominated in such
foreign currency; or when the Fund believes that the U.S. dollar may suffer a
substantial decline against a foreign currency, it may enter into a Forward
Contract to buy that foreign currency for a fixed dollar amount.
To limit potential risks in connection with the purchase of currency under
Forward Contracts, cash, cash equivalents or readily marketable high grade debt
securities equal to the amount of the purchase will be held aside or segregated
in the Fund's custodian bank to be used to pay for the commitment, or the Fund
will cover any commitments under these contracts to sell currency by owning the
underlying currency (or an absolute right to acquire such currency). The
segregated account will be marked-to-market on a daily basis.
Forward Contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies or between foreign
currencies. Unanticipated changes in currency exchange rates also may result in
poorer overall performance for the Fund than if it had not entered into such
Forward Contracts.
Foreign Currency Futures. The Fund may acquire and sell foreign currency futures
contracts in order to hedge against changes in the level of future currency
rates. Such contracts involve an agreement to purchase or sell a specific
currency at a future date at a price set in the contract. The Fund will not
purchase such contracts if more than 5% of the Fund's assets are then invested
as initial or variation margin deposits on such contracts or options. Assets
will be held aside or segregated in the Fund's custodian bank, as required to
cover the Fund's obligations under foreign currency futures contracts.
Options on Foreign Currencies. The Fund may purchase and write put and call
options on foreign currencies (traded on U.S. and foreign exchanges or
over-the-counter) for hedging purposes to protect against declines in the U.S.
dollar value of foreign portfolio securities or other assets to be acquired. As
in the case of other kinds of options, however, the writing of an option on
foreign currency will constitute only a partial hedge, up to the amount of the
premium received, and the Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate movements
adverse to the Fund's position, the Fund may forfeit the entire amount of the
premium plus related transaction costs.
Options and Financial Futures. The Fund may write covered put and call options
and purchase put and call options on stocks, stock indices and bonds which trade
on securities exchanges and in the over-the-counter market. The Fund may
purchase and sell futures and options on futures with respect to stock and bond
indices. Additionally, the Fund may engage in "close-out" transactions with
respect to futures and options. The Fund will not enter into any futures
contract or related options (except for closing transactions) if, immediately
thereafter, the sum of the amount of its initial deposits and premiums on open
contracts and options would exceed 5% of the Fund's total assets (taken at
current value). The Fund will not engage in any securities options or securities
index options, if the option premiums paid regarding its open option positions,
exceed 5% of the value of the Fund's total assets.
The Fund's option and futures investments involve certain risks. For example,
the effectiveness of an options and futures strategy depends on the degree to
which price movements in the underlying index or securities correlate with price
movements in the relevant portion of the Fund's portfolio. The Fund bears the
risk that the prices of its portfolio securities will not move in the same
amount as the option or future it has purchased, or that there may be a negative
correlation which would result in a loss on both such securities and the option
or future.
Positions in exchange traded options and futures may be closed out only on an
exchange which provides a secondary market. There may not always be a liquid
secondary market for a futures or option contract at a time when the Fund seeks
to close out its position. If the Fund were unable to close out a futures or
option position, and if prices moved adversely, the Fund would have to continue
to make daily cash payments to maintain its required margin, and, if the Fund
had insufficient cash, it might have to sell portfolio securities at a
disadvantageous time. In addition, the Fund might be required to deliver the
stocks underlying futures or options contracts it holds. Over-the-counter
options ("OTC options") may not be closed out on an exchange and 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.
There can be no assurance that a liquid secondary market will exist for any
particular option or futures contract at any specific time. Thus, it may not be
possible to close such an option or futures position. The Fund will enter into
an option or futures position only if there appears to be a liquid secondary
market for such option or futures.
The Fund understands the current position of the staff of the Securities and
Exchange Commission ("SEC") to be that purchased OTC options are illiquid
securities and that the assets used to cover the sale of an OTC option are
considered illiquid. The Fund and Advisers disagree with this position.
Nevertheless, pending a change in the staff's position, the Fund will treat OTC
options and "cover" assets as subject to the Fund's limitation on illiquid
securities. (See "Investment Objective and Policies of the Fund - Illiquid
Investments" in the Prospectus.)
In addition, adverse market movements could cause the Fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a futures contract. There is also the risk of loss by
the Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a futures contract or option.
The Fund's transactions in options, futures contracts, and forward contracts may
be limited by the requirements of the Internal Revenue Code of 1986, as amended
("the Code") for qualification as a regulated investment company. These
transactions are also subject to special tax rules that may affect the amount,
timing, and character of certain distributions to shareholders, more information
about which is included in the section entitled "Additional Information
Regarding Taxation."
Writing Call Options. Call options written by the Fund give the holder the right
to buy the underlying securities from the Fund at a stated exercise price; put
options written by the Fund give the holder the right to sell the underlying
security to the Fund at a stated exercise price. A call option written by the
Fund is "covered" if the Fund owns the underlying security which is subject to
the call or has an absolute and immediate right to acquire that security without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian bank) upon conversion or exchange of other
securities held in its portfolio. 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 where 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 and high
grade debt securities in a segregated account with its custodian bank. The
premium paid by the purchaser of an option will reflect, 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.
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, with regard to certain
options, 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. This amount, of course, 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 wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is that
the writer's position will be canceled 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
accomplished 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. Also, effecting a closing
transaction will permit the cash or proceeds from the concurrent 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
concurrent with 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.
Purchasing Call Options. The Fund may purchase call options on securities which
it intends to purchase in order to limit the risk of a substantial increase in
the market price of such security. The Fund may also purchase call options on
securities held in its portfolio and on which it has written call options. A
call option gives the holder the right to buy the underlying securities from the
option writer at a stated exercise price. 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 the related transaction costs.
Writing Put Options. Although the Fund has no current intention of writing
covered put options in the foreseeable future, the Fund reserves the right to do
so.
A put option gives the purchaser of the option the right to sell, and the writer
(seller) the obligation to buy, the underlying security or currency at the
exercise price during the option period. The option may be exercised at any time
prior to its expiration date. The operation of put options in other respects,
including their related risks and rewards, is substantially identical to that of
call options.
The Fund would write put options only on a covered basis, which means that the
Fund would maintain in a segregated account cash, U.S. government securities or
other liquid, high-grade debt securities in an amount not less than the exercise
price at all times while the put option is outstanding. (The rules of the
clearing corporation currently require that such assets be deposited in escrow
to secure payment of the exercise price.) The Fund would generally write covered
put options in circumstances where the Adviser wishes to purchase the underlying
security or currency for the Fund's portfolio at a price lower than the current
market price of the security or currency. In such event, the Fund would write a
put option at an exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the Fund would also
receive interest on debt securities or currencies maintained to cover the
exercise price of the option, this technique could be used to enhance current
return during periods of market uncertainty. The risk in such a transaction
would be that the market price of the underlying security or currency would
decline below the exercise price less the premiums received.
Purchasing Put Options. The Fund may purchase put options. As the holder of a
put option, the Fund has the right to sell the underlying security or currency
at the exercise price at any time during the option period. The Fund may 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 or currency (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 or currency. 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
or currency at the put exercise price, regardless of any decline in the
underlying security's market price or currency's exchange value. For example, a
put option may be purchased in order to protect unrealized appreciation of a
security or currency when Advisers deems it desirable to continue to hold the
security or currency 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 or currency is eventually sold.
The Fund may also purchase put options at a time when the Fund does not own the
underlying security or currency. By purchasing put options on a security or
currency it does not own, the Fund seeks to benefit from a decline in the market
price of the underlying security or currency. If the put option is not sold when
it has remaining value, and if the market price of the underlying security or
currency remains equal to or greater than the exercise price during the life of
the put option, the Fund will lose its entire investment in the put option. In
order for the purchase of a put option to be profitable, the market price of the
underlying security or currency must decline sufficiently below the exercise
price to cover the premium and transaction costs, unless the put option is sold
in a closing sale transaction.
For state law purposes, the Fund will commit no more than 5% of its assets to
premiums when purchasing put options. The premium paid by the Fund when
purchasing a put option will be recorded as an asset in the Fund's statement of
assets and liabilities. This asset will be adjusted daily to the options'
current market value, which will be the latest sale price at the time at which
the net asset value per share of the Fund is computed (generally at the
scheduled close of the New York Stock Exchange), or, in the absence of such
sale, the latest bid price. The asset will be extinguished upon expiration of
the option, the writing of an identical option in a closing transaction, or the
delivery of the underlying security or currency upon the exercise of the option.
Over-the-Counter options. The Fund intends to write covered put and call options
and purchase put and call options which trade in the over-the-counter market to
the same extent that it will engage in exchange traded options. Just as with
exchange traded options, OTC call options give the option holder the right to
buy an underlying security from an option writer at a stated exercise price; OTC
put options give the option holder the right to sell an underlying security to
an option writer at a stated exercise price. OTC options, however, differ from
exchange traded options in certain material respects.
OTC options are arranged directly with dealers and not, as is the case with
exchange traded options, with a clearing corporation. Thus, there is a risk of
non-performance by the dealer. Because there is no exchange, pricing is
typically done by reference to information from market makers. OTC options are
available, however, for a greater variety of securities, and in a wider range of
expiration dates and exercise prices, than exchange traded options; and the
writer of an OTC option is paid the premium in advance by the dealer.
There can be no assurance that a continuous liquid secondary market will exist
for any particular 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.
Options on Stock Indices. The Fund may also purchase call and put options on
stock indices in order to hedge against the risk of market or industry-wide
stock price fluctuations. Call and put options on stock indices are similar to
options on securities except that, rather than the right to purchase or sell
stock at a specified price, options on a stock 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
puts) the exercise price of the option. This amount of cash 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
stock options, 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 price movements in individual stocks.
When the Fund writes an option on a stock index, the Fund will establish a
segregated account containing cash or high quality fixed-income securities with
its custodian bank in an amount at least equal to the market value of the
underlying stock index and will maintain the account while the option is open or
it will otherwise cover the transaction.
Futures Contracts. The Fund may enter into contracts for the purchase or sale
for future delivery of securities and in such contracts based upon financial
indices ("financial futures"). Financial futures contracts are commodity
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 acquisition of a contractual
obligation to deliver the securities called for by the contract at a specified
price on a specified date. A "purchase" of a futures contract means the
acquisition of a contractual obligation to acquire the securities called for by
the contract at a specified price on a specified date. Futures contracts have
been designed by exchanges which 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 same time a futures contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment ("initial deposit"). Daily thereafter,
the futures contract is valued and the payment of "variation margin" may be
required since each day the Fund would provide or receive cash that reflects any
decline or increase in the contract's value.
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 make or 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 but only as a hedge against changes resulting from market
conditions in the values of its securities or securities which it intends to
purchase. The Fund will not enter into any stock index or financial futures
contract or related option if, immediately thereafter, more than one-third of
the Fund's net assets would be represented by futures contracts or related
options. In addition, the Fund may not purchase or sell futures contracts or
purchase 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. In instances involving the purchase of futures contracts or
related call options, money market instruments equal to the market value of the
futures contract or related option will be deposited in a segregated account
with the custodian bank to collateralize such long positions.
The purpose of the acquisition or sale of a futures contract is to attempt to
protect the Fund from fluctuations in price of portfolio securities without
actually buying or selling the underlying security. To the extent the Fund
enters into a futures contract, it will maintain with its custodian bank, to the
extent required by the rules of the SEC, assets in a segregated account to cover
its obligations with respect to such contract which will consist of cash, cash
equivalents or high quality debt securities from its portfolio in an amount
equal to the difference between the fluctuating market value of such futures
contract and the aggregate value of the initial and variation margin payments
made by the Fund with respect to such futures contracts.
Stock Index Futures and Options on Stock Index Futures. The Fund may purchase
and sell stock index futures contracts and options on stock index futures
contracts.
Stock Index Futures. 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. No physical delivery of the underlying stocks in the index is
made.
The Fund may sell stock index futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of its equity
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 in part or entirely
offset increases in the cost of common stocks that it intends to purchase.
Options on Stock Index Futures. The Fund may purchase and sell call and put
options on stock index futures to hedge against risks of market-side price
movements. The need to hedge against such risks will depend on the extent of
diversification of the Fund's common stock portfolio and the sensitivity of such
investments to factors influencing the stock market as a whole.
Call and put options on stock index futures are similar to options on securities
except that, rather than the right to purchase or sell stock at a specified
price, options on a stock index futures give the holder the right to receive
cash. Upon exercise of the option, the delivery of the futures position by the
writer of the option to the holder of the option will be accompanied by delivery
of the accumulated balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. If an option is
exercised on the last trading day prior to the expiration date of the option,
the settlement will be made entirely in cash equal to the difference between the
exercise price of the option and the closing price of the futures contract on
the expiration date.
Bond Index Futures and Options on such Contracts. The Fund may purchase and sell
futures contracts based on an index of debt securities and options on such
futures contracts to the extent they currently exist and, in the future, may be
developed. The Fund reserves the right to conduct futures and options
transactions based on an index which may be developed in the future to correlate
with price movements in certain categories of debt securities. The Fund's
investment strategy in employing futures contracts based on an index of debt
securities will be similar to that used by it in other financial futures
transactions.
The Fund also may purchase and write put and call options on such index futures
and enter into closing transactions with respect to such options.
Future Developments. The Fund may take advantage of opportunities in the area of
options and futures contracts and options on futures contracts and any other
derivative investments which are not presently contemplated for use by the Fund
or which are not currently available but which may be developed, to the extent
such opportunities are both consistent with the Fund's investment objective and
legally permissible for the Fund. Prior to investing in any such investment
vehicle, the Fund will supplement its Prospectus, if appropriate.
Investment Restrictions
The Fund has adopted the following restrictions as fundamental policies, which
means that they may not be changed without the approval of a majority of the
Fund's shareholders. In order to change any of these restrictions (i) 67% or
more of the voting securities present at a meeting of shareholders if the
holders of more than 50% of the voting securities of the Fund are represented at
that meeting or (ii) more than 50% of the outstanding voting securities of the
Fund, whichever is less, must vote to make the change.
The Fund may not:
1. Make loans to other persons, except by the purchase of bonds, debentures or
similar obligations which are publicly distributed or of a character usually
acquired by institutional investors, or through loans of the Fund's portfolio
securities, or to the extent the entry into a repurchase agreement may be deemed
a loan;
2. Borrow money or mortgage or pledge any of its assets, except in the form of
reverse repurchase agreements or from banks for temporary or emergency purposes
in an amount up to 33% 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. Underwrite securities of other issuers (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) or invest more than 5% of its
assets in securities with legal or contractual restrictions on resale (although
the Fund may invest in such securities to the extent permitted under the federal
securities laws) or which are not readily marketable, if more than 15% of the
Fund's total assets would be invested in such companies;
4. Invest in securities for the purpose of exercising management or control of
the issuer;
5. Maintain a margin account with a securities dealer or invest in commodities
and commodity contracts (except that the Fund may engage in financial futures,
including stock index futures, and options on stock index futures) or lease or
acquire any interests, including interests issued by limited partnerships (other
than publicly traded equity securities), in oil, gas, or other mineral
exploration or development programs, or invest in excess of 5% of its total
assets in options unrelated to the Fund's transactions in futures, including
puts, calls, straddles, spreads, or any combination thereof;
6. Effect short sales, unless at the time the Fund owns securities equivalent
in kind and amount to those sold (which will normally be for deferring
recognition of gains or losses for tax purposes). The Fund does not currently
intend to employ this investment technique;
7. Invest directly in real estate, real estate limited partnerships or illiquid
securities issued by real estate investment trusts (the Fund may, however,
invest in marketable securities issued by real estate investment trusts);
8. 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, and except
where the Fund would not own, immediately after the acquisition, securities of
the investment companies which exceed in the aggregate i) more than 3% of the
issuer's outstanding voting stock, ii) more than 5% of the Fund's total assets
and iii) together with the securities of all other investment companies held by
the Fund, exceed, in the aggregate, more than 10% of the Fund's total assets.
Pursuant to available exemptions from the 1940 Act, the Fund may invest in
shares of one or more money market funds managed by Franklin Advisers, Inc. or
its affiliates;
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 may deal with
such persons or firms as brokers and pay a customary brokerage commission; or
purchase or retain securities of any issuer if, to the knowledge of the Trust,
one or more of the officers or trustees of the Trust, or its investment adviser,
own beneficially more than one-half of 1% of the securities of such issuer and
all such officers and trustees together own beneficially more than 5% of such
securities;
10. Concentrate in any industry, except that the Fund will invest at least 25%
of total assets in the equity and debt securities issued by domestic and foreign
companies in the utilities industries; and
11. Invest more than 10% of its assets in securities of companies which have a
record of less than three years continuous operation, including the operations
of any predecessor companies.
In addition to these fundamental policies, it is the present policy of the Fund
(which may be changed without the approval of the shareholders) not to engage in
joint or joint and several trading accounts in securities, except that it may
participate in joint repurchase arrangements, invest its short-term cash in
shares of the Franklin Money Fund (pursuant to the terms of any order, and any
conditions therein, issued by the SEC permitting such investments), or combine
orders to purchase or sell with orders from other persons to obtain lower
brokerage commissions. The Fund may not invest in excess of 5% of its net
assets, valued at the lower of cost or market, in warrants, nor more than 2% of
its net assets in warrants not listed on either the New York or American Stock
Exchange. It is also the policy of the Fund that it may, consistent with its
objective, invest a portion of its assets, as permitted by the 1940 Act and the
rules adopted thereunder, in securities or other obligations issued by companies
engaged in securities related businesses, including such companies that are
securities brokers, dealers, underwriters or investment advisers.
Special Considerations and Risk Factors
Political and Economic Risks. Investing in securities of non-U.S. companies may
entail additional risks due to the potential political and economic instability
of certain countries and the risks of expropriation, nationalization,
confiscation or the imposition of restrictions on foreign investment and on
repatriation of capital invested. In the event of such expropriation,
nationalization or other confiscation by any country, the Fund could lose its
entire investment in any such country.
Illiquid Securities. The sale of restricted or illiquid securities often
requires more time and results in higher brokerage charges or dealer discounts
and other selling expenses than does the sale of securities eligible for trading
on national securities exchanges or in the over-the-counter markets. Restricted
securities often sell at a price lower than similar securities that are not
subject to restrictions on resale.
Religious and Ethnic Instability. Certain countries in which the Fund may invest
may have vocal minorities that advocate radical religious or revolutionary
philosophies or support ethnic independence. Any disturbance on the part of such
individuals could carry the potential for widespread destruction or confiscation
of property owned by individuals and entities foreign to such country and could
cause the loss of the Fund's investment in those countries.
Foreign Investment Restrictions. Certain countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Fund. As illustrations,
certain countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investment by foreign persons to only a specific class of
securities of a company that may have less advantageous terms than securities of
the company available for purchase by nationals. Moreover, the national policies
of certain countries may restrict investment opportunities in issuers or
industries deemed sensitive to national interests. In addition, some countries
require governmental approval for the repatriation of investment income, capital
or the proceeds of securities sold by foreign investors. The Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation, as well as by the application to it of
other restrictions on investments.
Non-Uniform Corporate Disclosure Standards and Governmental Regulation. Foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards or to other regulatory requirements comparable to
those applicable to U.S. companies. Most of the securities held by the Fund will
not be registered with the SEC or regulators of any foreign country, nor will
the issuers thereof be subject to the SEC's reporting requirements. Thus, there
will be less available information concerning foreign issuers of securities held
by the Fund than is available concerning U.S. issuers. In instances where the
financial statements of an issuer are not deemed to reflect accurately the
financial situation of the issuer, Advisers may take appropriate steps to
evaluate the proposed investment, which may include on-site inspection of the
issuer, interviews with its management and consultations with accountants,
bankers and other specialists.
Currency Fluctuations. Because the Fund under normal circumstances will invest a
substantial portion of its total assets in the securities of foreign issuers
which are denominated in foreign currencies, the strength or weakness of the
U.S. dollar against such foreign currencies will account for part of the Fund's
investment performance. A decline in the value of any particular currency
against the U.S. dollar will cause a decline in the U.S. dollar value of the
Fund's holdings of securities denominated in such currency and, therefore, will
cause an overall decline in the Fund's net asset value and any net investment
income and capital gains to be distributed in U.S. dollars to shareholders of
the Fund.
The rate of exchange between the U.S. dollar and other currencies is determined
by several factors, including the supply and demand for particular currencies,
central bank efforts to support particular currencies, the movement of interest
rates, the pace of business activity in certain other countries and the U.S.,
and other economic and financial conditions affecting the world economy.
Although the Fund values its assets daily in terms of U.S. dollars, the Fund
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund will do so from time to time, and investors should be
aware of the costs of currency conversion. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit based on the
difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Fund at one rate, while offering a lesser rate of exchange should the
Fund desire to sell that currency to the dealer.
Adverse Market Characteristics. Securities of many foreign issuers may be less
liquid and their prices more volatile than securities of comparable U.S.
issuers. In addition, foreign securities exchanges and brokers are generally
subject to less governmental supervision and regulation than in the U.S., and
foreign securities exchange transactions are usually subject to fixed
commissions, which are generally higher than negotiated commissions on U.S.
transactions. In addition, foreign securities exchange transactions may be
subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems could either result in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible gain
to the purchaser. The Manager will consider such difficulties when determining
the allocation of the Fund's assets, although the Manager does not believe that
such difficulties will have a material adverse effect on the Fund's portfolio
trading activities.
Non-U.S. Taxes. The Fund's net investment income from foreign issuers may be
subject to non-U.S. withholding or other taxes, thereby reducing the Fund's net
investment income.
Risk Factors and Considerations Regarding
Options, Futures and Options on Futures
The Fund's ability to hedge effectively all or a portion of its securities
through transactions in options on stock indexes, stock index futures, financial
futures and related options depends on the degree to which price movements in
the underlying index or underlying debt 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 such underlying
debt 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 such securities and the hedging instrument. Accordingly, successful use by
the Fund of options on stock indexes, stock index futures, financial futures and
related options will be subject to the Manager's ability to predict correctly
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, stock index futures and financial futures and
related options may be closed out only on an exchange which provides a secondary
market. There can be no assurance that a liquid secondary market will exist for
any particular stock index option or futures contract or related option at any
specific time. Thus, it may not be possible to close such an option or futures
position. The inability to close options or futures positions also could have an
adverse impact on the Fund's ability to effectively hedge its securities. The
Fund will enter into an option or futures position only if there appears to be a
liquid secondary market for such options or futures.
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 investment 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 which 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.
Forward Foreign Currency Exchange Contracts. While these contracts are not
presently regulated by the CFTC, the CFTC may in the future assert authority to
regulate forward contracts. In such event, the Fund's ability to utilize forward
contracts may be restricted. Forward contracts will reduce the potential gain
from a positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance for the Fund than if it had not entered into such contracts.
The use of foreign currency forward contracts will not eliminate fluctuations in
the underlying U.S. dollar equivalent value of, or rates of return on, the
Fund's foreign currency denominated portfolio securities and the use of such
techniques will subject the Fund to certain risks.
The matching of the increase in value of a forward contract and the decline in
the U.S. dollar equivalent value of the foreign currency denominated asset that
is the subject of the hedge generally will not be precise. In addition, the Fund
may not always be able to enter into foreign currency forward contracts at
attractive prices and this will limit the Fund's ability to use such contracts
to hedge or cross-hedge its assets. Also, with regard to the Fund's use of
cross-hedges, there can be no assurance that historical correlations between the
movement of certain foreign currencies relative to the U.S. dollar will
continue. Thus, at any time, poor correlation may exist between movements in the
exchange rates of the foreign currencies in which the Fund's assets that are the
subject of such cross-hedges are denominated.
Foreign Currency Futures. By entering into such contracts, the Fund is able to
protect against a loss resulting from an adverse change in the relationship
between the U.S. dollar and a foreign currency occurring between the trade and
settlement dates of the Fund's securities transaction. Such contracts also tend
to limit the potential gains that might result from a positive change in such
currency relationships.
Options on Foreign Currencies. As stated above, the Fund may purchase and write
options on foreign currencies for hedging purposes in a manner similar to that
in which futures contracts on foreign currencies, or forward contracts, will be
utilized. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Fund may purchase put options on the foreign currency. If the value of the
currency does decline, the Fund will have the right to sell such currency for a
fixed amount in dollars and will thereby offset, in whole or part, the adverse
effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Fund deriving from purchases of foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options which would require it to forego a portion or all of the benefits of
advantageous changes in such rates.
The Fund may write options on foreign currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the dollar value
of foreign currency denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option, write a call option
on the relevant currency. If the expected decline occurs, the option will most
likely not be exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write a
put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. As in the case of other types of options,
however, the writing of a foreign currency option will constitute only a partial
hedge up to the amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the Fund
would be required to purchase or sell the underlying currency at a loss which
may not be offset by the amount of the premium. Through the writing of options
on foreign currencies, the Fund also may be required to forego all or a portion
of the benefits which might otherwise have been obtained from favorable
movements in exchange rates.
The Fund intends to write covered call options on foreign currencies. A call
option written on a foreign currency by the Fund is "covered" if the Fund owns
the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other foreign currency held in
its portfolio. A call option is also covered if the Fund has a call on the same
foreign currency and in the same principal amount as the call written where 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, U.S. government
securities or other high grade liquid debt securities in a segregated account
with its custodian bank.
The Fund also intends to write call options on foreign currencies that are not
covered for cross-hedging purposes. A call option on a foreign currency is for
cross-hedging purposes if it is not covered, but is designed to provide a hedge
against a decline in the U.S. dollar value of a security which the Fund owns or
has the right to acquire and which is denominated in the currency underlying the
option due to an adverse change in the exchange rate. In such circumstances, the
Fund collateralizes the option by maintaining in a segregated account with the
Fund's custodian bank, cash or U.S. government securities or other high grade
liquid debt securities in an amount not less than the value of the underlying
foreign currency in U.S. dollars marked to market daily.
Options on foreign currencies and forward contracts are not traded on contract
markets regulated by the CFTC or (with the exception of certain foreign currency
options) by the SEC. To the contrary, such instruments are traded through
financial institutions acting as market makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. Similarly, options on currencies may be traded over-the-counter.
In an over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer and a
trader of forward contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements associated
with such positions.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation ("OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting the Fund to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
In addition, forward contracts and options on foreign currencies may be traded
on foreign exchanges. Such transactions are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign currencies. The value of
such positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the U.S. of
data on which to make trading decisions, (iii) delays in the Fund's ability to
act upon economic events occurring in foreign markets during nonbusiness hours
in the U.S., (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the U.S., and (v) less trading
volume.
Risk Factors Relating to High
Yielding, Fixed-income Securities
The Fund may invest up to 5% of its assets in lower-rated, fixed-income
securities and unrated securities of comparable quality (known as "junk bonds").
The market values of such securities tend to reflect individual corporate
developments to a greater extent than do higher-rated securities, which react
primarily to fluctuations in the general level of interest rates. Such
lower-rated securities also tend to be more sensitive to economic conditions
than higher-rated securities. These lower-rated, fixed-income securities are
considered by Standard & Poor's Corporation ("S&P") and Moody's Investors
Service ("Moody's"), two nationally recognized statistical rating organizations
("NRSROs"), 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 will generally involve more credit risk than
securities in the higher-rating categories. Even securities rated BBB by S&P or
Baa by Moody's, ratings which are considered investment grade, possess some
speculative characteristics.
Companies that issue high yielding, fixed-income securities are often highly
leveraged and may not have more traditional methods of financing available to
them. Therefore, the risk associated with acquiring the securities of such
issuers is generally greater than is the case with higher-rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of high yielding securities may experience
financial stress. During these periods, such issuers may not have sufficient
cash flow to meet their interest payment obligations. The issuer's ability to
service its debt obligations may also be adversely affected by specific
corporate developments, or the issuer's inability to meet specific projected
business forecasts, or the unavailability of additional financing. The risk of
loss due to default by the issuer may be significantly greater for the holders
of high yielding securities because such securities are generally unsecured and
are often subordinated to other creditors of the issuer.
High yielding, fixed-income securities frequently have call or buy-back features
which would permit an issuer to call or repurchase the security from the Fund.
Although such securities are typically not callable for a period from three to
five years after their issuance, when calls are exercised by the issuer during
periods of declining interest rates, the Fund would likely have to replace such
called security with a lower yielding security, thus decreasing the net
investment income to the Fund and dividends to shareholders. The premature
disposition of a high yielding security due to a call or buy-back feature, the
deterioration of the issuer's creditworthiness, or a default may also make it
more difficult for the Fund to manage the timing of its receipt of income, which
may have tax implications. Further information is included under "Taxation of
the Fund and Its Shareholders" in the Fund's Prospectus.
The Fund may have difficulty disposing of certain high yielding securities
because there may be a thin trading market for a particular security at any
given time. The market for lower-rated, fixed-income securities generally tends
to be concentrated among a smaller number of dealers than is the case for
securities which trade in a broader secondary retail market. Generally,
purchasers of these securities are predominantly dealers and other institutional
buyers, rather than individuals. To the extent a secondary trading market for a
particular high yielding, fixed-income security does exist, it is generally not
as liquid as the secondary market for higher-rated securities. Reduced liquidity
in the secondary market may have an adverse impact on market price and the
Fund's ability to dispose of particular issues, 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 the 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. Current values for these issues are obtained from pricing
services and/or a limited number of dealers and may be based upon factors other
than actual sales. (See "Valuation of Fund Shares.")
The Fund is authorized to acquire high yielding, fixed-income securities that
are sold without registration under the federal securities laws and therefore
carry restrictions on resale. While many recent high yielding securities have
been sold with registration rights, covenants and penalty provisions for delayed
registration, if the Fund were required to sell such restricted securities
before the securities have been registered, it may be deemed an underwriter of
such securities as defined in the Securities Act of 1933, which entails special
responsibilities and liabilities. The Fund may incur special costs in disposing
of such securities; however, the Fund will generally incur no costs when the
issuer is responsible for registering the securities.
The Fund may acquire such securities during an initial underwriting. Such
securities involve special risks because they are new issues. The Fund has no
arrangement with any person concerning the acquisition of such securities, and
the Manager will carefully review the credit and other characteristics pertinent
to such new issues.
Factors adversely impacting the market value of high yielding securities will
adversely impact the Fund's net asset values. For example, adverse publicity
regarding lower-rated bonds which appeared during 1989 and 1990, along with
highly publicized defaults of some high yield issuers, and concerns regarding a
sluggish economy which continued in 1993, depressed the prices for many such
securities. The Fund may also incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of principal or interest
on its portfolio holdings. The Fund will rely on the Manager's judgment,
analysis and experience in evaluating the creditworthiness of an issuer. In this
evaluation, the Manager will take 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.
Rather than relying principally on the ratings assigned by the NRSRO, however,
the Manager will perform its own internal investment analysis of debt securities
being considered for the Fund's portfolio. Such analysis may include, among
other things, consideration of relative values, based on such factors as:
anticipated cash flow; interest coverage; asset coverage; earning prospects; the
experience and managerial strength of the issuer; responsiveness to changes in
interest rates and business conditions; debt maturity schedules and borrowing
requirements; and the issuer's changing financial condition and public
recognition thereof. Investments will be evaluated in the context of economic
and political conditions in the issuer's domicile, such as the inflation rate,
growth prospects, global trade patterns and government policies. In the event
the rating on an issue held in the Fund's portfolio is changed by the ratings
service, such change will be considered by the Fund in its evaluation of the
overall investment merits of that security but will not necessarily result in an
automatic sale of the security. At fiscal year end, April 30, 1995, none of the
securities in the Fund's portfolio were in default on their contractual
provisions.
The Fund may engage in a substantial number of portfolio transactions. Portfolio
turnover is calculated by dividing the lesser of the Fund's annual sales or
purchases of portfolio securities (exclusive of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
the securities in the portfolio during the year.
Officers and Trustees
The Board of Trustees has the responsibility for the overall management of the
Fund, including general supervision and review of its investment activities. The
trustees, in turn, elect the officers of the Trust who are responsible for
administering day-to-day operations of the Fund. The affiliations of the
officers and trustees and their principal occupations for the past five years
are listed below. Trustees who are deemed to be "interested persons" of the
Trust as defined in the 1940 Act, are indicated by an asterisk (*).
Frank H. Abbott, III (74) Trustee
1045 Sansome St.
San Francisco, CA 94111
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 31 of the
investment companies in the Franklin Group of Funds.
Harris J. Ashton (63) Trustee
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 56 of the investment companies in the Franklin
Templeton Group of Funds.
*Harmon E. Burns (50) Vice President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 43 of the investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (63) Trustee
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 58 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (80) Trustee
111 New Montgomery St., #402
San Francisco, CA 94105
Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director, trustee or managing
general partner, as the case may be, of 30 of the investment companies in the
Franklin Group of Funds.
*Charles B. Johnson (62) Chairman of
777 Mariners Island Blvd. the Board
San Mateo, CA 94404 and Trustee
President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general partner,
as the case may be, of most other subsidiaries of Franklin Resources, Inc. and
of 57 of the investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (55) President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director, trustee or managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 43 of the investment companies
in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (66) Trustee
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or trustee, as the case may
be, of 26 of the investment companies in the Franklin Group of Funds.
Gordon S. Macklin (67) Trustee
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI
Communications Corporation, MedImmune, Inc. (biotechnology), InfoVest
Corporation (information services), and Fusion Systems Corporation (industrial
technology); and director, trustee or managing general partner, as the case may
be, of 53 of the investment companies in the Franklin Templeton Group of Funds;
and formerly held the following positions: Chairman, Hambrecht and Quist Group;
Director, H & Q Healthcare Investors; and President, National Association of
Securities Dealers, Inc.
Kenneth V. Domingues (62) Vice President -
777 Mariners Island Blvd. Financial
San Mateo, CA 94404 Reporting and
Accounting
Standards
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and
Franklin Templeton Distributors, Inc.; officer and/or director, as the case may
be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of 37 of the investment companies
in the Franklin Group of Funds.
Martin L. Flanagan (35) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and
officer of 61 of the investment companies in the Franklin Templeton Group of
Funds.
Deborah R. Gatzek (46) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President - Legal, Franklin Resources, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and officer of 37 of
the investment companies in the Franklin Group of Funds.
Charles E. Johnson (39) Vice President
777 Mariners Island Blvd.
San Mateo CA 94404
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc. and Franklin Institutional Services Corporation;
officer and/or director, as the case may be, of some of the subsidiaries of
Franklin Resources, Inc. and officer and/or director or trustee, as the case may
be, of 24 of the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (56) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting
Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey (58) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 32 of the investment companies in the Franklin Group of
Funds.
Trustees not affiliated with the investment manager ("nonaffiliated trustees")
may be but are not currently paid fees or expenses incurred in connection with
attending meetings. As indicated above, certain of the Trust's nonaffiliated
trustees also serve as directors, trustees or managing general partners of other
investment companies in the Franklin Group of Funds(R) and the Templeton Group
of Funds (the "Franklin Templeton Group of Funds") from which they may receive
fees for their services. The following table indicates the total fees paid to
nonaffiliated trustees by the funds in the Franklin Group of Funds.
<TABLE>
<CAPTION>
Number of Boards
Total Fees Received in the Franklin
from the Franklin Templeton Group
Templeton Group of Funds on Which
Name of Funds* Each Serves**
<S> <C> <C>
Frank H. Abbott, III ....................... $176,870 31
Harris J. Ashton ........................... 319,925 56
S. Joseph Fortunato ........................ 336,065 58
David Garbellano ........................... 153,300 30
Frank W.T. LaHaye .......................... 150,817 26
Gordon S. Macklin .......................... 303,685 53
</TABLE>
*For the calendar year ended December 31, 1994.
**The number of boards is based on the number of registered investment companies
in the Franklin Templeton Group of Funds and does not include the total number
of series or funds within each investment company for which the trustees are
responsible. The Franklin Templeton Group of Funds currently includes 61
registered investment companies, consisting of more than 162 U.S. based mutual
funds or series.
No officer or trustee received any compensation directly from the Fund. Certain
officers or trustees 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.
As of June 5, 1995, the trustees and officers, as a group, owned no shares of
either class of the Fund. Many of the Trust's trustees also own shares in
various of the other funds in the Franklin Templeton Group of Funds. Charles E.
Johnson is the son and nephew, respectively, of Charles B. Johnson and Rupert H.
Johnson, Jr., who are brothers.
Investment Advisory and Other Services
Advisers is a wholly-owned subsidiary of Franklin Resources, Inc. ("Resources"),
a publicly owned holding company whose shares are listed on the New York Stock
Exchange (the "Exchange"). Resources owns several other subsidiaries which are
involved in investment management and shareholder services. The Manager and
other subsidiary companies of Resources currently manage over $125 billion in
assets for over 3.8 million shareholders.
Pursuant to the management agreement, the Manager provides investment research
and portfolio management services, including the selection of securities for the
Fund to purchase, hold or sell and the selection of brokers through whom the
Fund's portfolio transactions are executed. The Manager's activities are subject
to the review and supervision of the Trust's Board of Trustees to whom the
Manager renders periodic reports of the Fund's investment activities. Under the
terms of the Management Agreement, the Manager provides office space and office
furnishings, facilities and equipment required for managing the business affairs
of the Fund; maintains all internal bookkeeping, clerical, secretarial and
administrative personnel and services; and provides certain telephone and other
mechanical services. The Manager is covered by fidelity insurance on its
officers, directors and employees for the protection of the Fund. See the
Statements of Operations in the financial statements included in the Trust's
Annual Report to Shareholders dated April 30, 1995.
Pursuant to the management agreement, the Fund is obligated to pay the Manager a
fee computed and accrued daily and paid monthly at the annual rate of 0.625 of
1% of the value of average daily net assets up to and including $100 million;
0.50 of 1% of the value of average daily net assets over $100 million up to and
including $250 million; 0.45 of 1% of the value of average daily net assets over
$250 million up to and including $10 billion; 0.44 of 1% of the value of average
daily net assets over $10 billion up to and including $12.5 billion; 0.42 of 1%
of the value of average daily net assets over $12.5 billion up to and including
$15 billion; and 0.40 of 1% of the value of average daily net assets over $15
billion.
The Manager agreed in advance to waive all or a portion of its management fees
and make certain payments to reduce expenses. This arrangement was terminated
during fiscal year ended April 30, 1994. The management agreement specifies that
the management fee will be reduced to the extent necessary to comply with the
most stringent limits on the expenses which may be borne by the Fund as
prescribed by any state in which the Fund's shares are offered for sale. The
most stringent current limit requires the Manager to reduce or eliminate its fee
to the extent that aggregate operating expenses of the Fund (excluding interest,
taxes, brokerage commissions and extraordinary expenses such as litigation
costs) would otherwise exceed in any fiscal year 2.5% of the first $30 million
of average net assets of the Fund, 2% of the next $70 million of average net
assets of the Fund and 1.5% of average net assets of the Fund in excess of $100
million. Expense reductions have not been necessary based on state requirements.
For the fiscal years ended April 30, 1993 and 1994, the management fees, before
any advance waiver, were $33,316 and $394,550, respectively. The Fund paid no
management fees for the fiscal year ended April 30, 1993 and paid $191,367,
respectively, for the fiscal year ended April 30, 1994. For fiscal year ended
April 30, 1995, the Fund paid fees totaling $737,090.
The management agreement is in effect until April 30, 1996. Thereafter, it may
continue in effect for successive annual periods providing such continuance is
specifically approved at least annually by a vote of the Trust's Board of
Trustees or by a vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the Fund's trustees
who are not parties to the management agreement or interested persons of any
such party (other than as trustees of the Trust), cast in person at a meeting
called for that purpose. The management agreement may be terminated without
penalty at any time by the Fund or by the Manager on 30 days' written notice and
will automatically terminate in the event of its assignment, as defined in the
1940 Act.
Franklin/Templeton Investor Services, Inc. ("Investor Services" or "Shareholder
Services Agent"), a wholly-owned subsidiary of Resources, is the shareholder
servicing agent for the Fund and acts as the Fund's transfer agent and
dividend-paying agent. Investor Services is compensated on the basis of a fixed
fee per account.
Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian of the securities and other assets of the
Fund. Citibank Delaware, One Penn's Way, New Castle, Delaware 19720, acts as
custodian in connection with transfer services through bank automated clearing
houses. The custodians do not participate in decisions relating to the purchase
and sale of portfolio securities.
Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California 94105,
are the Fund's independent auditors. During the fiscal year ended April 30,
1995, their auditing services consisted of rendering an opinion on the financial
statements of the Fund included in the Fund's Annual Report to Shareholders
dated April 30, 1995.
The Fund's Policies Regarding
Brokers Used on Portfolio Transactions
Under the current management agreement with Advisers, the selection of brokers
and dealers to execute transactions in the Fund's portfolio is made by the
Manager in accordance with criteria set forth in the management agreement and
any directions which the Trust's Board of Trustees may give.
When placing a portfolio transaction, the Manager attempts to obtain the best
net price and execution of the transaction. On portfolio transactions which are
done on a securities exchange, the amount of commission paid by the Fund is
negotiated between the Manager and the broker executing the transaction. The
Manager seeks to obtain the lowest commission rate available from brokers which
are felt to be capable of efficient execution of the transactions. The
determination and evaluation of the reasonableness of the brokerage commissions
paid in connection with portfolio transactions are based to a large degree on
the professional opinions of the persons responsible for the placement and
review of such transactions. These opinions are formed on the basis of, among
other things, the experience of these individuals in the securities industry and
information available to them concerning the level of commissions being paid by
other institutional investors of comparable size. The Manager will ordinarily
place orders for the purchase and sale of 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 Fund seeks to obtain
prompt execution of orders at the most favorable net price.
The amount of commission is not the only relevant factor to be considered in the
selection of a broker to execute a trade. If it is felt to be in the Fund's best
interests, the Manager may place portfolio transactions with brokers who provide
the types of services described below, even if it means the Fund will have to
pay a higher commission than would be the case if no weight were given to the
broker's furnishing of these services. This will be done only if, in the opinion
of the Manager, the amount of any additional commission is reasonable in
relation to the value of the services. Higher commissions will be paid only when
the brokerage and research services received are bona fide and produce a direct
benefit to the Fund or assist the Manager in carrying out its responsibilities
to the Fund, or when it is otherwise in the best interest of the Fund to do so,
whether or not such data may also be useful to the Manager in advising other
clients.
When it is felt that several brokers are equally able to provide the best net
price and execution, the Manager may decide to execute transactions through
brokers who provide quotations and other services to the Fund, specifically
including the quotations necessary to determine the value of the Fund's net
assets, in such amount of total brokerage as may reasonably be required in light
of such services, and through brokers who supply research, statistical and other
data to the Fund and Manager in such amount of total brokerage as may reasonably
be required.
It is not possible to place a dollar value on the special executions or on the
research services received by Advisers from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staff 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. Provided that
the Fund's officers are satisfied that the best execution is obtained, the sale
of Fund shares may also be considered as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the National Association of Securities
Dealers, it is sometimes entitled to obtain certain fees when the Fund tenders
portfolio securities pursuant to a tender-offer solicitation. As a means of
recapturing 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 Advisers under
the management agreement will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection
therewith.
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 such 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. It is recognized that in some cases this
procedure could possibly 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 and to negotiate lower brokerage
commissions will be beneficial to the Fund.
During the fiscal years ended April 30, 1993, 1994 and 1995, the Fund paid total
brokerage commissions of $0, $156,666, and $74,757, respectively. As of April
30, 1995, the Fund did not own securities of its regular broker-dealers.
Additional Information
Regarding Fund Shares
All checks, drafts, wires and other payment mediums used for purchasing or
redeeming shares of the Fund must be denominated in U.S. dollars. The Fund
reserves the right, in its sole discretion, to either (a) reject any order for
the purchase or sale of shares denominated in any other currency, or (b) honor
the transaction or make adjustments to a shareholder's account for the
transaction as of a date and with a foreign currency exchange factor determined
by the drawee bank.
In connection with exchanges (see the Prospectus "Exchange Privilege"), it
should be noted that since the proceeds from the sale of shares of an investment
company generally are not available until the fifth business day following the
redemption, the fund into which the Fund's shareholders are seeking to exchange
reserves the right to delay issuing shares pursuant to an exchange until said
fifth business day. The redemption of shares of the Fund to complete an exchange
will be effected at the close of business on the day the request for exchange is
received in proper form at the net asset value then effective.
Dividend checks which are returned to the Fund marked "unable to forward" by the
postal service will be deemed to be a request by the shareholder to change the
dividend option and the proceeds will be reinvested in additional shares at net
asset value until new instructions are received.
The Fund may impose a $10 charge for each returned item, against any shareholder
account which, in connection with the purchase of Fund shares, submits a check
or a draft which is returned unpaid to the Fund.
The Fund may deduct from a shareholder's account the costs of its efforts to
locate a shareholder if mail is returned as undeliverable or the Fund is
otherwise unable to locate the shareholder or verify the current mailing
address. These costs may include a percentage of the account when a search
company charges a percentage fee in exchange for its location services.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to such banks' discretionary trust funds at net asset
value. The banks may charge service fees to their customers who participate in
the discretionary trusts. Pursuant to agreements, a portion of such service fees
may be paid to Distributors, or an affiliate of Distributors, to help defray
expenses of maintaining a service office in Taiwan, including expenses related
to local literature fulfillment and communication facilities.
Class I shares of the Fund may be offered to investors in Taiwan through
securities firms known locally as Securities Investment Consulting Enterprises.
In conformity with local business practices in Taiwan, Class I shares of the
Fund will be offered with the following schedule of sales charges:
Sales
Size of Purchase - in U.S. dollars Charge
Up to $100,000 ...................................... 3%
$100,000 to $1,000,000 .............................. 2%
Over $1,000,000 ..................................... 1%
Purchases and Redemptions
Through Securities Dealers
Orders for the purchase of shares of the Fund received in proper form prior to
the scheduled close of the Exchange (generally 1:00 p.m. Pacific time) any
business day that the Exchange is open for trading and promptly transmitted to
the Fund will be based upon the public offering price determined that day.
Purchase orders received by securities dealers or other financial institutions
after the scheduled close of the Exchange will be effected at the Fund's public
offering price on the day it is next calculated. The use of the term "securities
dealer" herein shall include other financial institutions which, pursuant to an
agreement with Distributors (directly or through affiliates), handle customer
orders and accounts with the Fund. Such reference, however, is for convenience
only and does not indicate a legal conclusion of capacity.
Orders for the redemption of shares are effected at net asset value subject to
the same conditions concerning time of receipt in proper form. It is the
securities dealer's responsibility to transmit the order in a timely fashion and
any loss to the customer resulting from failure to do so must be settled between
the customer and the securities dealer.
Special Net Asset Value Purchases -
Class I Shares
As discussed in the Prospectus under "How to Buy Shares of the Fund -
Description of Special Net Asset Value Purchases," certain categories of
investors may purchase Class I shares of the Fund without a front-end sales
charge ("net asset value") or a contingent deferred sales charge. Distributors
or one of its affiliates may make payments, out of its own resources, to
securities dealers who initiate and are responsible for such purchases, as
indicated below. Distributors may make these payments in the form of contingent
advance payments, which may be recovered from the securities dealer, or set off
against other payments due to the securities dealer, in the event of investor
redemptions made within 12 months of the calendar month following purchase.
Other conditions may apply. All terms and conditions may be imposed by an
agreement between Distributors, or its affiliates, and the securities dealer.
The following amounts may be paid by Distributors or one of its affiliates, out
of its own resources, to securities dealers who initiate and are responsible for
(i) purchases of most equity and taxable-income Franklin Templeton Funds made at
net asset value by certain designated retirement plans (excluding IRA and IRA
rollovers): 1.00% on sales of $1 million but less than $2 million, plus 0.80% on
sales of $2 million but less than $3 million, plus 0.50% on sales of $3 million
but less than $50 million, plus 0.25% on sales of $50 million but less than $100
million, plus 0.15% on sales of $100 million or more; and (ii) purchases of most
taxable income Franklin Templeton Funds made at net asset value by
non-designated retirement plans: 0.75% on sales of $1 million but less than $2
million, plus 0.60% on sales of $2 million but less than $3 million, plus 0.50%
on sales of $3 million but less than $50 million, plus 0.25% on sales of $50
million but less than $100 million, plus 0.15% on sales of $100 million or more.
These payment breakpoints are reset every 12 months for purposes of additional
purchases. With respect to purchases made at net asset value by certain trust
companies and trust departments of banks and certain retirement plans of
organizations with collective retirement plan assets of $10 million or more,
Distributors, or one of its affiliates, out of its own resources, may pay up to
1% of the amount invested.
Letter of Intent
An investor may qualify for a reduced sales charge on the purchase of Class I
shares of the Fund, as described in the Prospectus. At any time within 90 days
after the first investment which the investor wants to qualify for the reduced
sales charge, a signed Shareholder Application, with the Letter of Intent
section completed, may be filed with the Fund. After the Letter of Intent is
filed, each additional investment will be entitled to the sales charge
applicable to the level of investment indicated on the Letter. Sales charge
reductions based upon purchases in more than one of the Franklin Templeton
Funds, including Class II shares, will be effective only after notification to
Distributors that the investment qualifies for a discount. The shareholder's
holdings in the Franklin Templeton Funds acquired more than 90 days before the
Letter of Intent is filed will be counted towards completion of the Letter of
Intent but will not be entitled to a retroactive downward adjustment in the
sales charge. Any redemptions made by the shareholder, other than by a
designated benefit plan, during the 13-month period will be subtracted from the
amount of the purchases for purposes of determining whether the terms of the
Letter of Intent have been completed. If the Letter of Intent is not completed
within the 13-month period, there will be an upward adjustment of the sales
charge, depending upon the amount actually purchased (less redemptions) during
the period. The upward adjustment does not apply to designated benefit plans. An
investor who executes a Letter of Intent prior to a change in the sales charge
structure for the Fund will be entitled to complete the Letter of Intent at the
lower of (i) the new sales charge structure; or (ii) the sales charge structure
in effect at the time the Letter of Intent was filed with the Fund.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in the
investor's name, unless the investor is a designated benefit plan. If the total
purchases, less redemptions, equal the amount specified under the Letter, the
reserved shares will be deposited to an account in the name of the investor or
delivered to the investor or the investor's order. If the total purchases, less
redemptions, exceed the amount specified under the Letter of Intent and is an
amount which would qualify for a further quantity discount, a retroactive price
adjustment will be made by Distributors and the securities dealer through whom
purchases were made pursuant to the Letter of Intent (to reflect such further
quantity discount) on purchases made within 90 days before and on those made
after filing the Letter. The resulting difference in offering price will be
applied to the purchase of additional shares at the offering price applicable to
a single purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified under the
Letter, the investor will remit to Distributors an amount equal to the
difference in the dollar amount of sales charge actually paid and the amount of
sales charge which would have applied to the aggregate purchases if the total of
such purchases had been made at a single time. The shareholder will receive a
written notification from Distributors requesting the remittance. Upon such
remittance the reserved shares held for the investor's account will be deposited
to an account in the name of the investor or delivered to the investor or to the
investor's order. If within 20 days after written request such difference in
sales charge is not paid, the redemption of an appropriate number of reserved
shares to realize such difference will be made. In the event of a total
redemption of the account prior to fulfillment of the Letter of Intent, the
additional sales charge due will be deducted from the proceeds of the
redemption, and the balance will be forwarded to the investor.
If a Letter of Intent is executed on behalf of a benefit plan (such plans are
described under "Purchases at Net Asset Value" in the Prospectus), the level and
any reduction in sales charge for these designated benefit plans will be based
on actual plan participation and the projected investments in the Franklin
Templeton Funds under the Letter of Intent. Benefit plans are not subject to the
requirement to reserve 5% of the total intended purchase, or to any penalty as a
result of the early termination of a plan, nor are benefit plans entitled to
receive retroactive adjustments in price for investments made before executing
the Letter of Intent.
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 such period. Such commitment is irrevocable without
the prior approval of the SEC. In the case of requests for redemption in excess
of such amounts, the trustees reserve the right to make payments in whole or in
part in securities or other assets of the Fund from which the shareholder is
redeeming, 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 such
circumstances, the securities distributed would be valued at the price used to
compute the Fund's net assets. Should the Fund do so, a shareholder may incur
brokerage fees in converting the securities to cash. The Fund does not intend to
redeem illiquid securities in kind; however, should it happen, shareholders may
not be able to timely recover their investment and may also incur brokerage
costs in selling such securities.
Redemptions by the Fund
Due to the relatively high cost of handling small investments, the Fund reserves
the right to redeem, involuntarily, at net asset value, the shares of any
shareholder whose account has a value of less than one-half of the initial
minimum investment required for that shareholder, but only where the value of
such account has been reduced by the shareholder's prior voluntary redemption of
shares. Until further notice, it is the present policy of the Fund not to
exercise this right with respect to any shareholder whose account has a value of
$50 or more. In any event, before the Fund redeems such shares and sends the
proceeds to the shareholder, it will notify the shareholder that the value of
the shares in the account is less than the minimum amount and allow the
shareholder 30 days to make an additional investment in an amount which will
increase the value of the account to at least $100.
Calculation of Net Asset Value
As noted in the Prospectus, the Fund generally calculates net asset value as of
the scheduled close of the Exchange (generally 1:00 p.m. Pacific time) each day
that the Exchange is open for trading. As of the date of this SAI, the Fund is
informed that the Exchange observes the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The Fund's portfolio securities are valued as stated in the Prospectus.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times prior to
the close of the Exchange. The values of such securities used in computing the
net asset value of the Fund's shares are determined as of such times.
Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and the scheduled close of the Exchange
which will not be reflected in the computation of the Fund's net asset value. If
events materially affecting the value of such securities occur during such
period, then these securities will be valued at their fair value as determined
following procedures approved by the Board of Trustees.
Reinvestment Date
Shares acquired through the reinvestment of dividends will be purchased at the
net asset value determined on the business day following the dividend record
date. The processing date for the reinvestment of dividends may vary from month
to month, and does not affect the amount or value of the shares acquired.
Reports to Shareholders
The Fund sends annual and semi-annual reports to its shareholders regarding the
Fund's performance and its portfolio holdings. Shareholders who would like to
receive an interim quarterly report may phone Fund Information at 1-800/DIAL
BEN.
Special Services
The Franklin Templeton Institutional Services Department of Distributors
provides specialized services, including recordkeeping, for institutional
investors of the Fund. The cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions which maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such beneficial owners. For each beneficial
owner in the omnibus account, the Fund may reimburse Investor Services an amount
not to exceed the per account fee which the Fund normally pays Investor
Services. Such financial institutions may also charge a fee for their services
directly to their clients.
Additional Information Regarding Taxation
As stated in the Prospectus, the Fund intends to continue to qualify as a
regulated investment company under Subchapter M of the Code. The trustees
reserve the right not to maintain the qualification of the Fund as a regulated
investment company if they determine such course of action to be beneficial to
the 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
shareholders will be ordinary dividend income to the extent of the Fund's
available earnings and profits.
Subject to the limitations discussed below, all or a portion of the income
distributions paid by the Fund may be treated by corporate shareholders as
qualifying dividends for purposes of the dividends-received deduction under
federal income tax law. If the aggregate qualifying dividends received by the
Fund (generally, dividends from U.S. domestic corporations, the stock in which
is not debt-financed by the Fund and is held for at least a minimum holding
period) is less than 100% of its distributable income, then the amount of the
Fund's dividends paid to corporate shareholders which may be designated as
eligible for such deduction will not exceed the aggregate qualifying dividends
received by the Fund for the taxable year. The amount or percentage of income
qualifying for the corporate dividends-received deduction will be declared by
the Fund annually in a notice to shareholders mailed shortly after the end of
the Fund's fiscal year.
Corporate shareholders should note that dividends paid by a Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividends-received deduction. For example, any interest income and net
short-term capital gain (in excess of any net long-term capital loss or capital
loss carryover) included in investment company taxable income and distributed by
a Fund as a dividend will not qualify for the dividends-received deduction.
Corporate shareholders should also note that availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless the Fund shares have been held (or deemed
held) for at least 46 days in a substantially unhedged manner. The
dividends-received deduction may also be reduced to the extent interest paid or
accrued by a corporate shareholder is directly attributable to its investment in
Fund shares. The entire dividend, including the portion which is treated as a
deduction, is includable in the tax base on which the alternative minimum tax is
computed and may also result in a reduction in the shareholder's tax basis in
its Fund shares, under certain circumstances, if the shares have been held for
less than two years. Corporate shareholders whose investment in the Fund is
"debt financed" for these tax purposes should consult with their tax advisors
concerning the availability of the dividends-received deduction.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed, nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. Under these rules, certain distributions
which are declared in October, November or December but which, for operational
reasons, may not be paid to the shareholder until the following January, will be
treated for tax purposes as if paid by the Fund and received by the shareholder
on December 31 of the calendar year in which they are declared. The Fund intends
as a matter of policy to declare and pay such dividends, if any, in December to
avoid the imposition of this tax, but does not guarantee that its distributions
will be sufficient to avoid any or all federal excise taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between the shareholder's basis
in the shares and the amount realized from the transaction, subject to the rules
described below. If such shares are a capital asset in the hands of the
shareholder, gain or loss will be capital gain or loss and will be long-term for
federal income tax purposes if the shares have been held for more than one year.
All or a portion of the sales charge incurred in purchasing shares of the Fund
will not be included in the federal tax basis of such shares sold or exchanged
within 90 days of their purchase (for purposes of determining gain or loss with
respect to such shares) if the sales proceeds are reinvested in the Fund or in
another fund in the FranklinTempleton Funds (defined under "How to Buy Shares of
the Fund" in the Prospectus) and a sales charge which would otherwise apply to
the reinvestment is reduced or eliminated. Any portion of such sales charge
excluded from the tax basis of the shares sold will be added to the tax basis of
the shares acquired in the reinvestment.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares purchased.
The Fund's investment in options, futures contracts and forward contracts,
including transactions involving actual or deemed short sales, or foreign
exchange gains or losses are subject to many complex and special tax rules. For
example, OTC options on debt securities and equity options, including options on
stock and on narrow-based stock indexes, will be subject to tax under Section
1234 of the Code, generally producing a long-term or short-term capital gain or
loss upon exercise, lapse, or closing out of the option or sale of the
underlying stock or security. By contrast, the Fund's treatment of certain other
options, futures and forward contracts entered into by the Fund is generally
governed by Section 1256 of the Code. These "Section 1256" positions generally
include listed options on debt securities, options on broad-based stock indexes,
options on securities indexes, options on futures contracts, regulated futures
contracts and certain foreign currency contracts and options thereon.
Absent a tax election to the contrary, each such Section 1256 position held by
the Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Fund's fiscal year, and all gain
or loss associated with fiscal year transactions and mark-to-market positions at
fiscal year end (except certain foreign currency gain or loss covered by Section
988 of the Code) will generally be treated as 60% long-term capital gain or loss
and 40% short-term capital gain or loss. The effect of Section 1256
mark-to-market rules may be to accelerate income or to convert what otherwise
would have been long-term capital gains into short-term capital gains or
short-term capital losses into long-term capital losses within the Fund. The
acceleration of income on Section 1256 positions may require the Fund to accrue
taxable income without the corresponding receipt of cash. In order to generate
cash to satisfy the distribution requirements of the Code, the Fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares. In these ways, any or all of these rules may affect the amount,
character and time of income distributed to shareholders by the Fund.
When the Fund holds an option or contract which substantially diminishes the
Fund's risk of loss with respect to another position of the Fund (as might occur
in some hedging transactions), this combination of positions could be treated as
a straddle for tax purposes, resulting in possible deferral of losses,
adjustments in the holding periods of Fund securities and conversion of
short-term capital losses into long-term capital losses. Certain tax elections
exist for mixed straddles, i.e., straddles comprised of at least one Section
1256 position and at least one non-Section 1256 position, which may reduce or
eliminate the operation of these straddle rules.
As a regulated investment company, the Fund is also subject to the requirement
that less than 30% of its annual gross income be derived from the sale or other
disposition of securities and certain other investments held for less than three
months, ("short-short income"). This requirement may limit the Fund's ability to
engage in options, straddles, hedging transactions and forward or futures
contracts because these transactions are often consummated in less than three
months, may require the sale of portfolio securities held less than three months
and may, as in the case of short sales of portfolio securities, reduce the
holding periods of certain securities within the Fund, resulting in additional
short-short income for the Fund.
The Fund will monitor its transactions in such options and futures contracts and
may make certain other tax elections in order to mitigate the effect of the
above rules and to prevent disqualification of the Fund as a regulated
investment company under Subchapter M of the Code.
In order for the Fund to qualify as a regulated investment company, at least 90%
of the Fund's annual gross income must consist of dividends, interest and
certain other types of qualifying income, and no more than 30% of its annual
gross income may be derived from the sale or other disposition of securities or
certain other instruments held for less than three months. Foreign exchange
gains are presently treated as qualifying income for purposes of this 90%
limitation. Foreign exchange gains derived by the Fund with respect to the
Fund's business of investing in stock or securities or options or futures with
respect to such stock or securities is qualifying income for purposes of this
90% limitation.
Currency speculation or the use of currency forward contracts or other currency
instruments for non-hedging purposes may generate gains deemed to be not derived
with respect to the Fund's principal business of investing in stock or
securities and related options or futures. Under current law,
non-directly-related gains arising from foreign currency positions or
instruments held for less than three months are treated as derived from the
disposition of securities held less than three months in determining the Fund's
compliance with the 30% limitation. The Fund will limit its activities involving
foreign exchange gains to the extent necessary to comply with these
requirements.
If the Fund owns shares in a foreign corporation that constitutes a "passive
foreign investment company" (a "PFIC") for federal income tax purposes and the
Fund does not elect to treat the foreign corporation as a "qualified electing
fund" within the meaning of the Code, the Fund may be subject to U.S. federal
income taxation on a portion of any "excess distribution" it receives from the
PFIC or any gain it derives from the disposition of such shares, even if such
income is distributed as a taxable dividend by the Fund to its U.S.
shareholders. The Fund may also be subject to additional interest charges in
respect of deferred taxes arising from such distributions or gains. Any federal
income tax paid by the Fund as a result of its ownership of shares of a PFIC
will not give rise to a deduction or credit to the Fund or to any shareholder. A
PFIC means any foreign corporation if, for the taxable year involved, either (i)
it derives at least 75 percent of its income from "passive income" (including,
but not limited to, interest, dividends, royalties, rents and annuities), or
(ii) on average, at least 50 percent of the value (or adjusted basis, if
elected) of the assets held by the corporation produce "passive income."
On April 1, 1992, proposed U.S. Treasury regulations were issued regarding a
special mark to market election for regulated investment companies. Under these
regulations, the annual mark-to-market gain, if any, on shares held by a Fund in
a PFIC would be treated as an excess distribution received by the Fund in the
current year, eliminating the deferral and the related interest charge. Such
excess distribution amounts are treated as ordinary income, which the Fund will
be required to distribute to shareholders even though the Fund has nor received
any cash to satisfy this distribution requirement. These regulations would be
effective for taxable years ending after the promulgation of the proposed
regulations as final regulations.
The Fund's Underwriter
Pursuant to an underwriting agreement in effect until April 30, 1996,
Distributors acts as principal underwriter in a continuous public offering for
both classes of the Fund's shares. The underwriting agreement will continue in
effect for successive annual periods provided that its continuance is
specifically approved at least annually by a vote of the Trust's Board of
Trustees, or by a vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the Trust's
trustees who are not parties to the underwriting agreement or interested persons
of any such party (other than as trustees of the Trust), cast in person at a
meeting called for that purpose. The underwriting agreement terminates
automatically in the event of its assignment and may be terminated by either
party on 90 days' written notice.
Distributors pays the expenses of 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.
In connection with the offering of Class I shares, aggregate underwriting
commissions for the fiscal years ended April 30, 1993, 1994 and 1995 were
$419,248, $2,538,088, and $664,553, respectively. After allowances to dealers,
Distributors retained $18,194, $304,423, and $76,600, respectively. Distributors
may be entitled to reimbursement under the distribution plan relating to Class I
shares as discussed in "Plans of Distribution" below. Distributors received no
other compensation from the Fund for acting as underwriter.
Plans of Distribution
Each class of the Fund has adopted a Distribution Plan ("Class I Plan" and
"Class II Plan," respectively or "Plans"), pursuant to Rule 12b-1 under the 1940
Act.
The Class I Plan
Pursuant to the Class I Plan, Distributors or others will be entitled to be
reimbursed each quarter up to a maximum of .25% for actual expenses incurred in
the distribution and promotion of Class I shares, including, but not limited to,
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 prorated
portion of Distributors' overhead expenses attributable to the distribution of
Class I shares, as well as any distribution or service fees paid to securities
dealers or their firms or others who have executed a servicing agreement with
the Fund, Distributors or its affiliates.
The Class II Plan
Under the Class II Plan, the Fund pays to Distributors for distribution expenses
up to .75% per annum of Class II's average daily net assets, payable quarterly.
Such fees may be used in order to compensate Distributors or others for
providing distribution and related services and bearing certain expenses of the
Class. All expenses of distribution and marketing over that amount will be borne
by Distributors, or others who have incurred them, without reimbursement by the
Fund. In addition to this amount, under the Class II Plan, the Fund shall pay
0.25% per annum, payable quarterly, of the Class' average daily net assets as a
servicing fee. This fee will be used to pay dealers or others for, among other
things, assisting in establishing and maintaining customer accounts and records;
assisting with purchase and redemption requests; receiving and answering
correspondence; monitoring dividend payments from the Fund on behalf of
customers, and similar activities related to furnishing personal services and
maintaining shareholder accounts. Distributors may pay the securities dealer,
from its own resources, a commission of up to 1% of the amount invested at the
time of investment.
In General
In addition to the payments to which Distributors or others are entitled under
the Plans, the Plans also provide 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 payments for the financing of
any activity primarily intended to result in the sale of each class of shares of
the Fund within the context of Rule 12b-1 under the 1940 Act, then such payments
shall be deemed to have been made pursuant to the Plans.
In no event shall the aggregate asset-based sales charges which include payments
made under a Plan, plus any other payments deemed to be made pursuant to a Plan,
exceed the amount permitted to be paid pursuant to the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., Article III, Section
26(d)4. The terms and provisions of the Plan relating to required reports, term,
and approval are consistent with Rule 12b-1. The Plans do not permit
unreimbursed expenses incurred in a particular year to be carried over or
reimbursed in subsequent years.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks may not be
entitled to participate in the Plan to the extent that applicable federal law
prohibits certain banks from engaging in the distribution of mutual fund shares.
Such banking institutions, however, are permitted to receive fees under the
Plans for administrative servicing or for agency transactions. If a bank were
prohibited from providing such services, its customers who are shareholders
would be permitted to remain shareholders of the Fund, and alternate means for
continuing the servicing of such shareholders would be sought. In such an event,
changes in the services provided might occur and such shareholders might no
longer be able to avail themselves of any automatic investment or other services
then being provided by the bank. It is not expected that shareholders would
suffer any adverse financial consequences as a result of any of these changes.
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law expressed herein, and banks and
financial institutions selling shares of the Fund may be required to register as
dealers pursuant to state law.
The Plans have been approved in accordance with the provisions of Rule 12b-1.
Both Plans are effective through April 30, 1996, and renewable annually by a
vote of the Trust's Board of Trustees, including a majority vote of the trustees
who are non-interested persons of the Trust and who have no direct or indirect
financial interest in the operation of the Plans, cast in person at a meeting
called for that purpose. It is also required that the selection and nomination
of such trustees be done by the non-interested trustees. The Class I Plan and
any related agreement may be terminated at any time, without any penalty, by
vote of a majority of the non-interested trustees on not more than 60 days'
written notice, by Distributors on not more than 60 days' written notice, by any
act that constitutes an assignment of the management agreement with the Manager
or the underwriting agreement with Distributors, or by vote of a majority of
Class I's outstanding shares. The Class II Plan and any related agreement may be
terminated at any time, without any penalty, by vote of a majority of the
non-interested trustees on not more than 60 days' written notice, by
Distributors, on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with the Manager or by
vote of a majority of Class II's outstanding shares. Distributors or any dealer
or other firm may also terminate their respective distribution or service
agreement at any time upon written notice.
With respect to a Plan, the Plan and any related agreements may not be amended
to increase materially the amount to be spent for distribution expenses without
approval by a majority of the Fund's outstanding shares, and all material
amendments to the Plan or any related agreements shall be approved by a vote of
the non-interested trustees, cast in person at a meeting called for the purpose
of voting on any such amendment.
Distributors is required to report in writing to the Board of Trustees at least
quarterly on the amounts and purpose of any payment made under the Plans and any
related agreements, as well as to furnish the Board of Trustees with such other
information as may reasonably be requested in order to enable the Board of
Trustees to make an informed determination of whether the Plans should be
continued.
For the fiscal year ended April 30, 1995, the total amount paid by the Fund
pursuant to the Class I Plan was $283,696, all of which was paid to dealers.
General Information
Performance
As noted in the Prospectus, the Fund may from time to time quote various
performance figures to illustrate the Fund's past performance. It may
occasionally cite statistics to reflect its volatility or risk.
Performance quotations by investment companies are subject to rules recently
adopted by the SEC. 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. Current yield and average annual
compounded total return quotations used by the Fund are based on the new
standardized methods of computing performance mandated by the SEC. An
explanation of those and other methods used by the Fund to compute or express
performance follows.
Total Return
The average annual total return is determined by finding the average annual
compounded rates of return over one-, five-, and ten-year periods (or fractional
portion thereof) that would equate an initial hypothetical $1,000 investment to
its ending redeemable value. The calculation assumes the maximum front-end sales
charge is deducted from the initial $1,000 purchase order and income dividends
and capital gains are reinvested at net asset value. The quotation assumes the
account was completely redeemed at the end of each one-, five- and ten-year
period and the deduction of all applicable charges and fees. If a change is made
on the sales charge structure, historical performance information will be
restated to reflect the maximum front-end sales charge in effect currently.
In considering the quotations of total return by the Fund, investors should
remember that the maximum front-end 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 an investor's investment in the Fund. The
actual performance of an investment will be affected less by this charge the
longer an investor retains the investment in the Fund. The average annual
compounded rates of return for the Fund for the one-year period ended April 30,
1995, was -1.45% and for the period from inception (July 2, 1992) to April 30,
1995, was 9.49%.
These figures were calculated according to the Securities and Exchange
Commission formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five-, or ten-year periods at the end of the one-, five-,
or ten-year periods (or fractional portion thereof)
As discussed in the Prospectus, the Fund may quote total rates of return in
addition to its average annual total return. Such quotations are computed in the
same manner as the Fund's average annual compounded rate, except that such
quotations will be based on the Fund's actual return for a specified period
rather than on its average return over one-, five- and ten-year periods, or
fractional portion thereof. The total rates of return for the Fund for a
one-year period ended April 30, 1995, was -1.45%, and for the period from
inception (July 2, 1992) to April 30, 1995, was 29.24%.
Yield
Current yield reflects the income per share earned by the Fund's portfolio
investments.
Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the maximum offering price per share on
the last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders during the base period. The
yield for the Fund for the 30-day period ended on the date of the financial
statements incorporated herein by reference to the Trust's Annual Report to
Shareholders dated April 30, 1995 was 3.12%.
This figure was obtained using the following SEC formula:
6
Yield = 2 [( a-b + 1 )6 - 1]
---
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reductions)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
Current Distribution Rate
Yield which is calculated according to a formula prescribed by the SEC is not
indicative of the amounts which were or will be paid to the Fund's shareholders.
Amounts paid to shareholders are reflected in the quoted "current distribution
rate." The current distribution rate is computed by dividing the total amount of
dividends per share paid by the Fund during the past 12 months by a current
maximum offering price. Under certain circumstances, such as when there has been
a change in the amount of dividend payout, or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid over the
period such policies were in effect, rather than using the dividends during the
past 12 months. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing
and short-term capital gains, and is calculated over a different period of time.
Volatility
Occasionally statistics may be used to specify Fund volatility or risk. Measures
of volatility or risk are generally used to compare Fund net asset value or
performance relative 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 the S
& P's 500 Stock Index. 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 premise is that greater
volatility connotes greater risk undertaken in achieving performance.
Other Performance Quotations
With respect to those categories of investors who are permitted to purchase
shares of the Fund at net asset value, sales literature pertaining to the Fund
may quote a current distribution rate, yield, total return, average annual total
return and other measures of performance as described elsewhere in this SAI 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
Individual Retirement Accounts (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.
Regardless of the method used, past performance is not necessarily indicative of
future results, but is an indication of the return to shareholders only for the
limited historical period used.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Templeton Group of Funds. Resources is the parent company of the advisers and
underwriters of both the Franklin Group of Funds(R) and Templeton Group of
Funds.
Comparisons
To help investors better evaluate how an investment in the Fund might satisfy
their investment objective, advertisements and other materials regarding the
Fund may discuss various measures of Fund performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
Such comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) S&P's 500 Stock Index or its component indices - an unmanaged index composed
of 400 industrial stocks, 40 financial stocks, 40 utilities stocks, and 20
transportation stocks. Comparisons of performance assume reinvestment of
dividends.
c) The Exchange composite or component indices - unmanaged indices of all
industrial, utilities, transportation, and finance stocks listed on the
Exchange.
d) 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.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure of total return and average current yield for the
mutual fund industry. Rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
f) 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.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for equity funds.
h) Valueline Index - an unmanaged index which follows the stocks of
approximately 1,700 companies.
i) 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.
j) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Pierce, Fenner & Smith, Lehman Brothers and Bloomberg L.P.
k) 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.
l) 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.
m) Financial Times Actuaries Indices - including the FTA-World Index (and
components thereof), which are based on stocks in major world equity markets.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived by an investment in
the Fund. Such advertisements or information may include symbols, headlines, or
other material which highlight or summarize the information discussed in more
detail in the communication.
Advertisements or information may also compare the Fund's performance to the
return on certificates of deposit or other investments. Investors 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
certificate of deposit issued by a bank. For example, as the general level of
interest rates rise, the value of the Fund's fixed-income investments, as well
as the value of its shares which are based upon the value of such portfolio
investments, can be expected to decrease. Conversely, when interest rates
decrease, the value of the Fund's shares can be expected to increase.
Certificates of deposit 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 such comparisons of performance, an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the Fund's portfolio, that the indices and averages are
generally unmanaged, and that the items included in the calculations of such
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 this
performance as compared to such other averages.
Other Features and Benefits
The Fund may help investors achieve various investment goals such as
accumulating money for retirement, saving for a down payment on a home, college
cost and/or other long-term goals. The Franklin College Costs Planner may assist
an investor in determining how much money must be invested on a monthly basis in
order to have a projected amount available in the future to fund a child's
college education. (Projected college cost estimates are based upon current
costs published by the College Board.) The Franklin Templeton Retirement
Planning Guide leads an investor through the steps to start a retirement savings
program. Of course, an investment in the Fund cannot guarantee that such goals
will be met.
Miscellaneous Information
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the United States and may be considered in
a program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 47 years and
now services more than 2.5 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 Worldwide, Inc., a pioneer
in international investing. Together, the Franklin/Templeton Group has over $128
billion in assets under management for more than 3.8 million shareholder
accounts in addition to foundations and endowments, employee benefit plans, and
individuals and offers 162 U.S.-based mutual funds.
The Fund may identify itself by its NASDAQ or CUSIP number.
The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin number one in
service quality for five of the past seven years.
Franklin has been managing utility securities since 1948. As a pioneer in
running the oldest mutual fund exclusively devoted to utilities, this expertise
is applied to the management of the Fund.
Access persons of the Franklin Templeton Group, as defined in SEC Rule 17(j)
under the 1940 Act, who are employees of Resources or its subsidiaries, are
permitted to engage in personal securities transactions subject to the following
general restrictions and procedures: (1) The trade must receive advance
clearance from a Compliance Officer and must be completed within 24 hours after
this clearance; (2) Copies of all brokerage confirmations must be sent to the
Compliance Officer and within 10 days after the end of each calendar quarter, a
report of all securities transactions must be provided to the Compliance
Officer; (3) In addition to items (1) and (2), access persons involved in
preparing and making investment decisions must file annual reports of their
securities holdings each January and also inform the Compliance Officer (or
other designated personnel) if they own a security that is being considered for
a fund or other client transaction or if they are recommending a security in
which they have an ownership interest for purchase or sale by a fund or other
client.
Ownership and Authority Disputes
In the event of disputes involving multiple claims of ownership or authority to
control a shareholder's 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, prior
to 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 Internal Revenue Service in response
to a Notice of Levy.
Appendix
Description of Bond Ratings*
Moody's
Aaa - Bonds which are 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-edge." Interest payments are protected by a large or by an 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 which are rated Aa are judged to be of 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 as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., 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. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - Bonds rated AAA are highest grade debt obligation. This rating 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 they
differ from AAA issues only in 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.
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 obligations 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 numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1 - This designation indicates that 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 payments on issues with this designation is strong.
The relative degree of safety, however, is not as high for issues designated
"A-1."
*Ratings are generally given to securities at the time of issuance. While the
rating agencies may from time to time revise such ratings, they undertake no
obligation to do so.
Financial Statements
The audited financial statements contained in the Annual Report to Shareholders
of the Trust dated April 30, 1995, including the auditors' report, are
incorporated herein by reference.
