FRANKLIN NATURAL RESOURCES FUND
FRANKLIN STRATEGIC SERIES
PROSPECTUS
JUNE 5, 1995
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403- 7777 1- 800/DIAL BEN
Franklin Natural Resources Fund (the "Fund"), is an open-end, non-
diversified series of Franklin Strategic Series (the "Trust"), a
management investment company. The Fund's investment objective is
to seek to provide high total return. The Fund seeks to achieve
its objective by investing at least 65% of its total assets in
securities of companies that own, produce, refine, process and
market natural resources, as well as those that provide support
services for natural resources companies (i.e. those that develop
technologies or provide services or supplies directly related to
the production of natural resources). These companies are
concentrated in the natural resources sector which includes, but
is not limited to, the following industries: Integrated oil; oil
and gas exploration and production; gold and precious metals;
steel and iron ore production; aluminum production; forest
products; farming products; paper products; chemicals; building
materials; energy services and technology; and environmental
services. The Fund may also invest in securities of issuers
outside the U.S.
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.
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 June 5, 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.
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.
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.
CONTENTS PAGE
Expense Table
About the Fund
Investment Objective
and Policies of the Fund
Management of the Fund
Distributions to Shareholders
Taxation of the Fund
and Its Shareholders
How to Buy Shares of the Fund
Purchasing Shares of the Fund in Connection with Retirement Plans
Involving Tax-Deferred Investments
Other Programs and Privileges
Available to Fund Shareholders
Exchange Privilege
How to Sell Shares of the Fund
Telephone Transactions
Valuation of Fund Shares
How to Get Information Regarding an Investment in the Fund
Performance
General Information
Account Registrations
Important Notice Regarding Taxpayer IRS Certifications
Portfolio Operations
Appendix
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. The figures are based on annualized management fees
and Rule 12b-1 fees set by contract and on annualized estimates
of the other operating expenses of the Fund for the current
fiscal year.
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price) 4.50%
Deferred Sales Charge NONE*
Exchange Fee (per transaction) $5.00**
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.24%+
Rule 12b-1 Fees 0.35%++
Other Expenses:
Reports to Shareholders 0.10%
Registration Fees 0.10%
Other 0.21%
Total Other Expenses 0.41%
Total Fund Operating Expenses 1.00%+
*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."
**$5.00 fee imposed only on Timing Accounts as described under
"Exchange Privilege." All other exchanges are processed without a
fee.
+The investment manager voluntarily agreed to reduce its
management fees and assume responsibility for payment of certain
operating expenses in order to keep the Fund's aggregate maximum
annual operating expenses to 1.00% of the Fund's average daily
net assets for the current fiscal year. Absent this reduction by
the investment manager, management fees and total operating
expenses for the Fund would be 0.63% and 1.39%,
respectively, of the average daily net assets of the Fund. After
April 30, 1996, the investment manager may terminate this
arrangement at any time.
++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.
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 charge, 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
$65 $75
*For the purposes of this example, it is assumed that the 1%
contingent deferred sales charge will not apply.
THIS EXAMPLE IS BASED ON THE OPERATING EXPENSES SHOWN ABOVE,
INCLUDING FEES SET BY CONTRACT, 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. (See "Management of the Fund" for a description of
the Fund's expenses.) 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%.
ABOUT THE FUND
Franklin Natural Resources Fund (the "Fund") is an open-end, non-
diversified series of Franklin Strategic Series (the "Trust"), a
management investment company, commonly called a "mutual fund."
The Trust, a Delaware business trust, was organized on January
25, 1991 and has registered under the Investment Company Act of
1940 (the "1940 Act").
Shares of the Fund may be purchased (minimum investment of $100
initially and $25 thereafter) at the current public offering
price, which is equal to the Fund's net asset value (see
"Valuation of Fund Shares") plus a sales charge not exceeding
4.5% of the offering price. See "How to Buy Shares of the Fund."
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
The Fund's investment objective is to seek to provide high total
return, by investing at least 65% of its total assets in
securities issued by companies which own, produce, refine,
process and market natural resources, as well as those that
provide support services for natural resources companies (i.e.
those that develop technologies or provide services or supplies
directly related to the production of natural resources). These
companies are concentrated in the natural resources sector which
includes, but is not limited to, the following industries:
Integrated oil; oil and gas exploration and production; gold and
precious metals; steel and iron ore production; aluminum
production; forest products; farming products; paper products;
chemicals; building materials; energy services and technology;
and environmental services. The Fund's total return consists of
both capital appreciation and current dividend and interest
income. The objective is a fundamental policy of the Fund and may
not be changed without shareholder approval.
The Fund at all times, except during temporary defensive periods,
seeks to maintain at least 65% of its total assets invested in
securities issued by companies in the natural resources sector.
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 investment manager, prevailing market or
economic conditions warrant.
THE FUND'S INVESTMENTS
The Fund invests in common stocks (including preferred or debt
securities convertible into common stocks), preferred stocks and
debt securities. The mixture of common stocks, debt securities
and preferred stocks varies from time to time based upon the
investment 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
("NRSRO's") or in fixed-income securities which are not rated by
any NRSRO, provided that, in the opinion of the Fund's investment
manager, such securities are comparable in quality to those
within the four highest ratings. These are considered to be
"investment grade" securities, although fixed-income securities
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 an NRSRO, will be of comparable
quality as determined by the Fund's investment managers.
The Fund may also invest up to 15% of its total assets at the
time of purchase in lower rated fixed-income securities (those
rated BB or lower by S&P or Ba or lower by Moody's) and unrated
securities of comparable quality (sometimes referred to as "junk
bonds" in the popular media). The Fund will not acquire such
securities rated lower than B by Moody's or S&P. Lower rated
securities are considered by S&P and Moody's, on balance, to be
predominantly speculative with respect to capacity to pay
principal or interest, as the case may be, in accordance with the
terms of the obligation and will generally involve more credit
risk than securities in the higher rating categories. (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 the ratings is contained in the
Appendix to this Prospectus.
WHERE THE FUND MAY INVEST
The Fund may invest in the securities of issuers both within and
outside the United States, including emerging market countries.
The Fund may purchase foreign securities which are traded in the
United States or in foreign markets or purchase sponsored or
unsponsored American Depositary Receipts ("ADRs"), which 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 ("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. The Fund's investment manager 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 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 50% or more of its total
assets invested in foreign securities.
INVESTMENTS IN OTHER THAN NATURAL RESOURCES SECURITIES
The Fund is permitted to invest up to 35% of its assets in
securities of issuers that are outside the natural resources
sector. 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 high total return. 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 the natural resources
sector 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 "Risk Factors and Special Considerations."
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 by the
Government National Mortgage Association (GNMA), may carry
guarantees which are 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
investments in agency securities 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 debt 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 "Risk Factors and Special Considerations." 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.
SOME OF THE FUND'S OTHER INVESTMENT POLICIES
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 investment 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 TRANSACTIONS. 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 Fund's 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.
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 33% 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
security fail financially.
BORROWING. As a fundamental policy, the Fund does not borrow
money or mortgage or pledge any of the assets of the Fund, 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 or at any time, more than 15% of the
value of the total net assets of the Fund. Subject to this
limitation, the Fund's Board of Trustees has authorized the Fund
to invest in restricted securities where such investments are
consistent with the Fund's investment objective and has
authorized such securities to be considered to be liquid to the
extent the investment manager determines on a daily basis that
there is a liquid institutional or other market for such
securities. Notwithstanding the investment manager's
determinations in this regard, the Fund's Board of Trustees 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.
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.
PORTFOLIO TURNOVER. 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 increases
transaction costs which must be paid by the Fund. High turnover
may also result in the realization of capital gain income, which
is taxable when distributed to shareholders.
GENERAL. As discussed more fully in the SAI, the Fund also may
purchase debt obligations on a "when-issued" or "delayed
delivery" basis and from time to time enter into standby
commitment agreements. 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 investment policies discussed
herein, please see the SAI.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Each prospective investor should take into account his/her
investment objectives as well as his/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.
Although the Fund's assets will usually be invested in a
substantial number of issuers, the Fund is non-diversified as
defined by the 1940 Act. This generally means that more than 5%
of the Fund's assets may be invested in the securities of a
single issuer. 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, sectors and industries.
RISKS INVOLVING THE NATURAL RESOURCES SECTOR
There are several risk factors which need to be assessed before
investing in the natural resources sector. Certain of the
industries' commodities are subject to limited pricing
flexibility as a result of similar supply and demand factors.
Others are subject to broad price fluctuations, reflecting the
volatility of certain raw materials' prices and the instability
of supplies of other resources. These factors can effect the
overall profitability of an individual company operating within
the natural resources sector. While the investment managers of
the Fund strive to diversify among the industries within the
natural resources sector to minimize this volatility, there will
be occasions where the value of an individual company's
securities will prove more volatile than the broader market. In
addition, many of these companies operate in areas of the world
where they are subject to unstable political environments,
currency fluctuations and inflationary pressures.
RISKS INVOLVING INVESTMENT IN FOREIGN SECURITIES
Investment in the Fund's shares requires consideration of certain
risks which are not normally involved in investment solely in
U.S. issuers. These risks include political, social or economic
instability in the country of the issuer, the difficulty of
predicting international trade patterns, the possibility of the
imposition of exchange controls, expropriation, restrictions on
removal of currency or other assets, nationalization of assets,
foreign withholding and income taxation, and foreign trading
practices (including higher trading commissions, custodial
charges and delayed settlements). Such securities may be subject
to greater fluctuations in price than securities issued by U.S.
corporations or issued or guaranteed by the U.S. government, its
instrumentalities or agencies. The markets on which such
securities trade may have less volume and liquidity, and may be
more volatile than securities markets in the U.S. In addition,
there may be less publicly available information about a foreign
company than about a U.S. domiciled company. Foreign companies
generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to
U.S. domestic companies. There is generally less government
regulation of securities exchanges, brokers and listed companies
abroad than in the U.S. Confiscatory taxation or diplomatic
developments could also affect investment in those countries.
In many instances, foreign debt securities may provide higher
yields than securities of domestic issuers which have similar
maturities and quality. Under certain market conditions, these
investments may be less liquid than the securities of U.S.
corporations and are certainly less liquid than securities issued
or guaranteed by the U.S. government, its instrumentalities or
agencies. Finally, in the event of a default of any such foreign
debt obligations, it may be more difficult for the Fund to obtain
or to enforce a judgment against the issuers of such securities.
If a security is denominated in foreign currency, the value of
the security to the Fund will be affected by changes in currency
exchange rates and in exchange control regulations, and costs
will be incurred in connection with conversions between
currencies. A change in the value of any foreign currency against
the U.S. dollar will result in a corresponding change in the U.S.
dollar value of the Fund's securities denominated in that
currency. Such changes will also affect the Fund's income and
distributions to shareholders. In addition, although the Fund
will receive income on foreign securities in such currencies, the
Fund will be required to compute and distribute its income in
U.S. dollars. Therefore, if the exchange rate for any such
currency declines materially after the Fund's income has been
accrued and translated into U.S. dollars, the Fund could be
required to liquidate portfolio securities to make required
distributions. Similarly, if an exchange rate declines between
the time the Fund incurs expenses in U.S. dollars and the time
such expenses are paid, the amount of such currency required to
be converted into U.S. dollars in order to pay such expenses in
U.S. dollars will be greater.
The Fund may choose to hedge exposure to currency fluctuations by
entering into forward foreign currency exchange contracts, and
buying and selling options, futures contracts and options on
futures contracts relating to foreign currencies. The Fund may
use forward currency exchange contracts in the normal course of
business to lock in an exchange rate in connection with purchases
and sales of securities denominated in foreign currencies. The
Fund's investment manager may employ other currency management
strategies to hedge portfolio securities or to shift investment
exposure from one currency to another. Some of these strategies
will require the Fund to set aside liquid assets in a segregated
custodial account to cover its obligations. (See "Currency
Hedging Transactions and Associated Risks" 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.
Investing in emerging market countries subjects the Fund to
heightened foreign securities investment risks, as discussed in
this section.
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.
To the extent the Fund's investments consist of debt securities,
changes in interest rates will affect the value of the Fund's
portfolio and thus its share price. 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. To the extent the Fund's investments consist of common
stocks, a decline in the market, expressed for example by a drop
in the Dow Jones Industrials or the Standard & Poor's 500 average
or any other equity based index, may also be reflected in
declines in the Fund's share price. History reflects both
increases and decreases in the prevailing rate of interest and in
the valuation of the market, and these may reoccur unpredictably
in the future.
CONVERSION TO MULTIPLE CLASSES OR MASTER/FEEDER STRUCTURE
Many of the Franklin Templeton Funds (as that term is defined
under "How to Buy Shares of the Fund") offer two classes of
shares (Class I and Class II). The Board of Trustees reserves
the right, without submitting the matter to a vote of security
holders, to convert the Fund to a multi-class structure at a
future date. This would permit the Fund to take advantage of
alternative methods of selling Fund shares through the issuance
of multiple classes of shares by the same series. The term
"series" in the mutual fund industry is used to refer to shares
that represent interests in a separate portfolio of investment
securities with differing investment objectives. "Classes" of
shares represent sub-divisions of series with differing
preferences, rights and privileges as the Trustees may determine
and, in most circumstances, differing marketing attributes. The
Trustees believe that offering alternative pricing structures for
investors may lead to increased sales of shares. Upon
implementation of a multiple class structure, at least two
classes of shares will invest in a single portfolio of
securities. The difference between the classes will involve
primarily the amount of up-front sales charges and distribution
fees.
The Board of Trustees reserves the right to convert the Fund to a
master/feeder structure at a future date. Currently, the Fund
invests directly in a portfolio of securities of companies
primarily engaged in the natural resources sector. Certain funds
administered by the investment manager participate as feeder
funds in master/feeder fund structures. Under a master/feeder
structure, one or more feeder funds, such as the Fund, invests
its assets in a master fund which, in turn, invests its assets
directly in the securities. Various state governments have
adopted the North American Securities Administrators Association
Guidelines for registration of master/feeder funds. If required
by those guidelines, as then in effect, the Fund will seek
shareholder approval prior to converting the Fund to a
master/feeder structure, subject to there not being adopted a
superseding contrary provision or ruling under federal law. If
it is determined by the requisite regulatory authorities that
such approval is not required, shareholders will be deemed to
have consented to such conversion by their purchase of Fund
shares and no further shareholder approval will be sought or
needed. Shareholders will, however, be informed in writing in
advance of the conversion. The determination to convert the Fund
to a master/feeder fund structure will not result in an increase
in the fees or expenses paid by the Fund or its shareholders.
The investment objective and other fundamental policies of the
Fund, which can be changed only with shareholder approval, are
structured so as to permit the Fund to invest directly in
securities or indirectly in securities through a master/feeder
fund structure.
MANAGEMENT OF THE FUND
The Board of Trustees has the primary responsibility for the
overall management of the Fund and for electing the officers of
the Fund who are responsible for administering its day-to-day
operations.
Franklin Advisers, Inc. ("Advisers" or "Manager"), serves as the
Fund's investment manager. 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 33 U.S. registered investment companies (112
separate series) with aggregate assets of over $74 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.
The Fund is responsible for its own operating expenses including,
but not limited to, the Manager's fee; taxes, if any; custodian,
legal and auditing fees; fees and expenses of trustees who are
not members of, affiliated with, or interested persons of the
Manager; salaries of any personnel not affiliated with the
Manager; insurance premiums; trade association dues; expenses of
obtaining quotations for calculating the value of the Fund's net
assets; printing and other expenses which are not expressly
assumed by the Manager.
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.
During the start-up period of the Fund, Advisers has elected to
reduce the fees payable under the management agreement and to
assume responsibility for making payments, if necessary, to
offset certain operating expenses otherwise payable by the Fund
so that total ordinary operating expenses do not exceed 1.00% of
the Fund's average net assets. This arrangement is in effect
until April 30, 1996, and then may be continued or terminated by
the Manager at any time. In addition, 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. Currently,
the most restrictive of such provisions limits a fund's allowable
expenses as a percentage of its average net assets for each
fiscal year to 2 1/2% of the first $30 million in assets, 2% of
the next $70 million, and 1 1/2% of assets in excess of $100
million.
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.
PLAN OF DISTRIBUTION
The Fund has adopted a distribution plan (the "Plan") pursuant to
Rule 12b-1 under the 1940 Act. Under the Plan, the Fund may
reimburse Distributors or others for all expenses incurred by
Distributors or others in the promotion and distribution of the
Fund's shares. 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. Under the Plan,
the Fund may pay to Distributors and others up to 0.25% per annum
of its average daily net assets, payable on a quarterly basis,
for such distribution expenses. Under the Plan, the Fund is also
permitted to pay Distributors up to an additional 0.10% per annum
of its average daily net assets for reimbursement of such
distribution expenses. All expenses of distribution and marketing
in excess of such amounts will be borne by Distributors and
others, who have incurred them, without reimbursement from the
Fund. The Plan also covers 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 Plan are included
in the maximum operating expenses which may be borne by 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. These distributions, when made, will
generally be fully taxable to the Fund's shareholders. The Fund
may make more than one distribution derived from net short-term
and net long-term capital gains in any year or adjust the timing
of these distributions for operational or other reasons.
DISTRIBUTION DATE
Although subject to change by the Board of Trustees, without
prior notice to or approval by shareholders, the Fund's current
policy is to declare income dividends payable 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 of
Trustees. 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 ("ex-dividend date") Dividend and
capital gain distributions are only eligible for reinvestment at
net asset value in the Fund or Class I shares of another of the
Franklin Templeton Funds. 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 another fund in 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. 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.
See "Purchases at Net Asset Value" under "How to Buy Shares of
the Fund."
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 elect and qualify to be treated as a
regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). By distributing
all of its net investment 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.
The Fund will inform shareholders of the source of their
dividends and distributions at the time they are paid, and will
promptly after the close of each calendar year 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 on 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.
PURCHASE PRICE OF FUND SHARES
Shares of the Fund are offered at the public offering price,
which is 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). The sales charge 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 total front-end sales charges or
underwriting commissions and dealer concessions.
TOTAL SALES CHARGE
SIZE OF TRANSACTION AS A AS A DEALER
AT OFFERING PRICE PERCENTAGE OF PERCENTAGE OF CONCESSION AS
OFFERING NET AMOUNT A PERCENTAGE
PRICE INVESTED OF OFFERING
PRICE*, ***
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less 3.75% 3.90% 3.25%
than $250,000
$250,000 but less 2.75% 2.83% 2.50%
than $500,000
$500,000 but less 2.25% 2.30% 2.00%
than $1,000,000
$1,000,000 or none none (see below)**
more
*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 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 within the 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 Fund 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 funds in the Franklin Group of
Funds(Registered Trademark) 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. 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 definitions under "Description of Special
Net Asset Value Purchases" and as set forth in the SAI.
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
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 a discount, an investment in any of the Franklin
Templeton Investments may be combined with those of the
investor's spouse and children under the age of 21. In addition,
the aggregate investments of a trustee or other fiduciary account
(for an account under exclusive investment authority) may be
considered in determining whether a reduced sales charge is
available, even though there may be a number of beneficiaries of
the account. The value of any Franklin Templeton Funds Class II
shares owned by the investor may also be included for this
purpose.
In addition, an investment in the Fund 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 shares of the Fund 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 shares of the Fund, 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.
GROUP PURCHASES
An individual who is a member of a qualified group may also
purchase 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 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
Shares of the Fund may be purchased without the imposition of
either 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 subsequent
payments made by such parties after cessation of employment; (2)
companies exchanging shares with 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.
Shares of the Fund may be purchased at net asset value by persons
who have redeemed, within the previous 120 days, their shares of
the Fund or Class I shares of 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. Shares of the
Fund redeemed in connection with an exchange into Class I shares
of another of the Franklin Templeton Funds (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 120 days after the
redemption. The 120 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.
Shares of the Fund or Class I shares 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 the Fund within 120 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."
Shares of the Fund 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 charged the investor a contingent
deferred sales charge upon redemption and which has investment
objectives similar to those of the Fund.
Shares of the Fund 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).
Shares of the Fund 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 120 days after the plan distribution.
Shares of the Fund 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 their own resources, to
such securities dealer in an amount not to exceed 0.25% of the
amount invested. Contact Franklin's Institutional Sales
Department for additional information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES
Shares of the Fund 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.
Shares of the Fund 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.
Shares of the Fund 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 Fund 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 Franklin Templeton Trust Company ( 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 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 Franklin Templeton 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 in writing 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 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 Fund shares may be subject to a
contingent deferred sales charge if the shares are redeemed
within 12 months of the calendar month of 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 Systematic Withdrawal Plans, the applicable
contingent deferred sales charge is waived for share redemptions
of up to 1% monthly of an account's net asset value (12%
annually, 6% semiannually, 3% quarterly). For example, if an
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.
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 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 or 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 Class I shares of any 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.
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 of the
calendar month following the original purchase date, a contingent
deferred sales charge will be imposed.
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 between different classes of shares of
the Franklin Templeton Funds are not permitted. Therefore,
shares of the Fund may not be exchanged for Class II shares of
other Franklin Templeton Funds. Shareholders, however, may choose
to redeem shares of the Fund and purchase Class II shares of
other Franklin Templeton Funds, subject to the Class II front-end
sales charge and the contingent deferred sales charge for the 18
month contingency period. 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 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 Class I
share account 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 eleFACTS 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
The contingency period 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 the account has shares
subject to a contingent deferred sales charge, shares will be
exchanged into the new account on a "first-in," "first-out"
basis. See also "How to Sell Shares of the Fund - Contingent
Deferred Sales Charge."
Exchanges are made on the basis of the net asset values of the
funds involved, except as set forth below. Exchanges of shares of
the Fund which were purchased without a sales charge will be
charged a sales charge in accordance with the terms of the
prospectus of the fund being purchased, unless the investment on
which no sales charge was paid was transferred in from a fund on
which the investor paid a sales charge. Exchanges of 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 account in 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.
There are differences among the Franklin Templeton Funds. Before
making an exchange, a shareholder should obtain and review a
current prospectus of the fund into which the shareholder wishes
to transfer.
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 objective 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.
RETIREMENT PLANS
Franklin Templeton IRA and 403(b) retirement plan accounts may
accomplish exchanges by contacting the Fund directly. Certain
restrictions may apply, however, to other types of retirement
plans. See "Restricted Accounts" under "Telephone Transactions."
TIMING ACCOUNTS
Accounts which are administered by allocation or market timing
services to purchase or redeem shares based on predetermined
market indicators ("Timing Accounts") will be charged a $5.00
administrative service fee per each such exchange. All other
exchanges are without charge.
RESTRICTIONS ON EXCHANGES
In accordance with the terms of their respective prospectuses,
certain funds do not accept or may place differing limitations
than those below on exchanges by Timing Accounts.
The Fund reserves the right to temporarily or permanently
terminate the exchange privilege or reject any specific purchase
order for any Timing Account or any person whose transactions
seem to follow a timing pattern who: (i) makes an exchange
request out of the Fund within two weeks of an earlier exchange
request out of the Fund, or (ii) makes more than two exchanges
out of the Fund per calendar quarter, or (iii) exchanges shares
equal in value to at least $5 million, or more than 1% of the
Fund's net assets. Accounts under common ownership or control,
including accounts administered so as to redeem or purchase
shares based upon certain predetermined market indicators, will
be aggregated for purposes of the exchange limits.
The Fund also reserves the right to refuse the purchase side of
an exchange request by any Timing Account, person, or group if,
in the Manager's judgment, the Fund would be unable to invest
effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely affected.
A shareholder's purchase exchanges may be restricted or refused
if the Fund receives or anticipates simultaneous orders affecting
significant portions of the Fund's assets. In particular, a
pattern of exchanges that coincide with a "market timing"
strategy may be disruptive to the Fund and therefore may be
refused.
The Fund and Distributors also, as indicated in "How to Buy
Shares of the Fund," reserve the right to refuse any order for
the purchase of shares.
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 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 (at the
scheduled closing of the New York Stock Exchange ["Exchange"],
which is 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.
Share Certificates - 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 closing 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, as described in
the preceding section, are required even if the shareholder's
securities dealer has placed the repurchase order. 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, 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 on
investments of $1 million or more redeemed within the contingency
period of 12 months 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 if 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 of 12 months; (ii) shares purchased with
reinvested dividends and capital gain distributions; and (iii)
other shares held longer than the contingency period; and
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 is waived 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 59 1/2;
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 59 1/2, unless the distribution
meets one of the exceptions set forth in the Code.
OTHER
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: (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, and (iv) exchange Fund shares as
described in this Prospectus by telephone. In addition,
shareholders who complete and file an 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
by 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.
Changes to dividend options must also be made in writing.
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 for Franklin accounts or 1-800/354-9191 (press "2"
when prompted to do so) for Templeton accounts.
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 the Fund is determined as of the
scheduled closing 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 sales charge of the Fund).
The net asset value per share 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 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.
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 options
are valued at their market price as determined above. The
current market value of any option held by a Fund is its last
sales 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.
The value of a foreign security is determined in its national
currency as of the close of trading on the foreign exchange on
which it is traded or as of the scheduled close 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, Eastern time, on the day the value of the foreign
security is determined. Occasionally, events which affect the
values of foreign securities and foreign exchange rates may occur
between the times at which they are determined and the close of
the exchange and will, therefore, not be reflected in the
computation of the Fund's net asset value. If events which
materially affect the value of these foreign securities occur
during such period, then these securities will be valued at fair
value as determined by management and approved in good faith 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.
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, shareholders may access an automated
system (day or night) which offers the following features.
By calling the Franklin TeleFACTS system at 1-800/247-1753,
shareholders may obtain account information, current price and,
if available, yield or other performance information, specific to
the Fund or any Franklin or Templeton Fund, regardless of class.
In addition, 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.
Information about the Fund may be accessed by entering Fund Code
203. The system 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 departments, telephone numbers and hours of
operation to call. The same numbers may be used when calling from
a rotary phone:
DEPARTMENT NAME TELEPHONE NO. HOURS OF OPERATION
(PACIFIC TIME)
(Monday through
Friday)
SHAREHOLDER SERVICES 1-800/632-2301 6:00 A.M. TO 5:00
P.M.
DEALER SERVICES 1-800/524-4040 6:00 A.M. TO 5:00
P.M.
FUND INFORMATION 1-800/DIAL BEN 6:00 A.M. TO 8:00
P.M., 8:30 A.M. TO
5:00 P.M. (SATURDAY)
RETIREMENT PLANS 1-800/527-2020 6:00 A.M. TO 5:00
P.M.
TDD (HEARING 1-800/851-0637 6:00 A.M. TO 5:00
IMPAIRED) P.M.
In order to ensure that the highest quality of service is being
provided, telephone calls placed to or by representatives in
Franklin or Templeton'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 various measures of the Fund's
performance, including current yield, various expressions of
total return 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 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 reflects the income per share earned by the Fund's
portfolio investments; it is calculated by dividing the Fund's
net investment income per share during a recent 30-day period by
the maximum public offering price on the last day of that period
and annualizing the result.
Yield 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 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 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 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 Fund income and will assume
the payment of the maximum sales charge on the purchase 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 the Fund, 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 the Fund's yield,
distribution rate or total return may be in any future period.
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS
The Fund's fiscal year ends on 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. Copies may be obtained, without charge, upon
request to the Fund at the telephone number or address set forth
on the cover page of this Prospectus.
ORGANIZATION
The Trust, a Delaware business trust, was organized on January
25, 1991. 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. All shares have one vote, and, when issued,
are fully paid, non- assessable, and redeemable. Currently, the
Trust issues shares in seven series. The Board of Trustees may
from time to time issue other series, the assets and liabilities
of which will likewise be separate and distinct from any other
series.
VOTING RIGHTS
Shares of the Fund have equal rights as to voting and vote
separately (from other Funds in the Trust) as to issues affecting
the Fund, or the Trust, unless otherwise permitted by the 1940
Act. Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in any election of trustees
can, if they choose to do so, elect all of the trustees. The
Trust does not intend to hold annual shareholders' meetings. The
Trust may, however, hold a special shareholders' 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 the trustees, in their discretion,
or by shareholders holding at least ten percent of the shares of
the Trust 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.
Shares have no preemptive or subscription rights, and are fully
transferable. There are no conversion rights; however, holders of
shares of any fund in the Franklin Templeton Funds 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."
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.
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.
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 dealers 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 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: Suzanne Willoughby
Killea, Douglas Barton and Robert Mullin since inception.
Suzanne Willoughby Killea, Portfolio Manager of Advisers, holds a
Master of Business Administration degree from Stanford
University. She earned her Bachelor of Arts degree in
architecture from Princeton University. Prior to joining
Franklin, Ms. Killea worked as a summer intern with Dillion Read
& Co., Inc. (1990) and Dodge & Cox (1989), and for five years as
a broker with the Rubicon Group, a commercial real estate
services firm.
Douglas Barton, Portfolio Manager of Advisers, is a Chartered
Financial Analyst and holds a Master of Business Administration
degree from California State University in Hayward and a Bachelor
of Science degree from California State University in Chico. Mr.
Barton joined Franklin in July 1988.
Robert Mullin, Portfolio Manager of Advisers, holds a Bachelor of
Arts degree in economics and business from the University of
Colorado at Boulder. Mr. Mullin joined Franklin in 1993 and
prior thereto worked as a summer intern for the Silicon Valley
Bank (1990) and for Shearson Lehman Hutton (1989). He is
currently working toward his Chartered Financial Analyst
certification and is a member of several industry-related
associations.
APPENDIX
CORPORATE BOND RATINGS
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
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-edged." 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.
Ba - Bonds which are rated Ba are judged to have predominantly
speculative elements; their future cannot be considered well
assured. Often the protection of interest and principal payments
may be very moderate and thereby not well safeguarded during both
good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with
respect to principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay
principal and interest.
AA - Bonds rated AA also qualify as high-quality debt
obligations. Capacity to pay principal and interest is very
strong, and in the majority of instances 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.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on
balance, as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations. BB indicates the
lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
COMMERCIAL PAPER RATINGS:
A-1, A-2 AND PRIME-1, PRIME-2
Commercial paper rated by Standard & Poor's has the following
characteristics: Liquidity ratios are adequate to meet cash
requirements. Long-term senior debt is rated "A" or better.
The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend
with allowance made for unusual circumstances. Typically, the
issuer's industry is well established and the issuer has a
strong position within the industry. The reliability and
quality of management are unquestioned. Relative strength or
weakness of the above factors determines whether the issuer's
commercial paper is rated A-1 or A-2.
The ratings Prime-1 and Prime-2 are the two highest
commercial paper ratings assigned by Moody's. Among the
factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer;
(2) economic evaluation of the issuer's industry or
industries and an appraisal of speculative-type risks which
may be inherent in certain areas; (3) evaluation of the
issuer's products in relation to competition and customer
acceptance. (4) liquidity; (5) amount and quality of
long-term debt; (6) trend of earnings over a period of ten
years; (7) financial strength of a parent company and the
relationships which exist with the issuer, and (8)
recognition by the management of obligations which may be
present or may arise as a result of public interest questions
and preparations to meet such obligations. Relative strength
or weakness of the above factors determines whether the
issuer's commercial paper is rated Prime-1 or 2.
FRANKLIN NATURAL RESOURCES FUND
Franklin Strategic Series
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
INVESTMENT MANAGER
Franklin Advisers, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
PRINCIPAL UNDERWRITER
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
SHAREHOLDER SERVICES AGENT
Franklin/Templeton Investor Services, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young
2600 One Commerce Square
Philadelphia, Pennsylvania 19103
INDEPENDENT AUDITORS
Coopers & Lybrand L.L.P.
333 Market Street
San Francisco, California 94105
CUSTODIAN
Bank of America
555 California Street, 4th Floor
San Francisco, California 94104
For an enlarged version of this prospectus please call 1-
800/DIAL BEN
Your Representative Is:
FRANKLIN NATURAL RESOURCES FUND
FRANKLIN STRATEGIC SERIES
STATEMENT OF
ADDITIONAL INFORMATION
JUNE 5, 1995
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
CONTENTS PAGE
About the Fund (See also the Prospectus
"About the Fund" and "General Information")
The Fund's Investment Objective, Policies and
Restrictions (See also the Prospectus
"Investment Objective and Policies
of the Fund")
Risk Factors and Special Considerations
Officers and Trustees
Investment Advisory and Other Services
(See also the Prospectus "Management
of the Fund")
The Fund's Policies Regarding
Brokers Used on Portfolio Transactions
Additional Information Regarding
Fund Shares (See also the Prospectus
"How to Buy Shares of the Fund,"
"How to Sell Shares of the Fund," and
"Valuation of Fund Shares")
Additional Information
Regarding Taxation
The Fund's Underwriter
General Information
Financial Statement
Franklin Natural Resources Fund (the "Fund") is an open-end,
non-diversified series of Franklin Strategic Series (the "Trust")
a management investment company. The Fund seeks to provide high
total return through investment primarily in securities of
companies that own, produce, refine, process and market natural
resources, as well as those that provide support services for
natural resources companies (i.e. those that develop technologies
or provide services or supplies directly related to the
production of natural resources). The Fund may also invest in
securities of issuers outside the U.S.
A Prospectus for the Fund dated June 5, 1995, as may be amended
from time to time, provides the basic information an investor
should know before investing in the Fund and may be obtained
without charge from the Fund or from its principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors"), at the
address listed 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 FUNDS, AND SHOULD BE READ IN
CONJUNCTION WITH THE FUND'S PROSPECTUS.
ABOUT THE FUND
The Franklin Natural Resources Fund is an open-end,
non-diversified series of the Franklin Strategic Series, a
management investment company, commonly called a mutual fund, and
registered as such under the Investment Company Act of 1940
("1940 Act"). The Trust is a Delaware business trust organized on
January 25, 1991.
THE FUND'S INVESTMENT
OBJECTIVE, POLICIES AND RESTRICTIONS
As noted in the Prospectus, the Fund seeks to provide high total
return. The Fund seeks to accomplish its objective by investing
primarily in securities of companies that own, produce, refine,
process and market natural resources, as well as those that
provide support services for natural resources companies (i.e.
those that develop technologies or provide services or supplies
directly related to the production of natural resources). These
companies are concentrated in the natural resources sector, but
not limited to, the following industries: Integrated oil; oil
and gas exploration and production; gold and precious metals;
steel and iron ore production; aluminum production; forest
products; farming products; paper products; chemicals; building
materials; energy services and technology; and environmental
services. The Fund may also invest in securities of issuers
outside the U.S.
The Fund's objective is a fundamental policy and may not be
changed without shareholder approval.
SOME OF THE FUND'S OTHER INVESTMENT POLICIES
LOANS OF PORTFOLIO SECURITIES. As stated in the Prospectus, the
Fund may make loans of its portfolio securities up to 33% of its
total assets, in accordance with guidelines adopted by the Fund's
Board of Trustees. The lending of securities is a common practice
in the securities industry. The Fund will engage in security loan
arrangements with the primary objective of increasing the Fund's
income either through investing the collateral in short-term,
interest-bearing obligations or by receiving loan premiums from
the borrower. The Fund will continue to be entitled to all
dividends or interest on any loaned securities. As with any
extension of credit, there are risks of delay in recovery and
loss of rights in the collateral should the borrower of the
security fail financially. The Fund will not lend its portfolio
securities if such loans are not permitted by the laws or
regulations of any state in which its shares are qualified for
sale. Loans will be 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. Any gain
or loss in the market price of the borrowed securities which
occurs during the term of the loan inures to the Fund and its
shareholders. The Fund may pay reasonable finders', borrowers',
administrative and custodial fees in connection with a loan of
its 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 promptly 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,
except for Rule 144A restricted securities, and securities which
are not readily marketable, to 15% of the Fund's net assets.
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS. The Fund may
purchase securities on a "when-issued" or "delayed delivery"
basis. These transactions are arrangements under which the Fund
purchases securities with payment and delivery scheduled for a
future time. 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.
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. 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. In such an arrangement, 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. 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
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 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/or 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.
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 outstanding voting securities of
the Fund. Under the Investment Company Act of 1940 (the "1940
Act"), a "vote of a majority of the outstanding voting
securities" of the Fund means the affirmative vote of the lesser
of (1) more than 50% of the outstanding shares of the Fund, or
(2) 67% or more of the shares of the Fund present at a
shareholder's meeting if more than 50% of the outstanding shares
of the Fund are not represented at the meeting in person or by
proxy. 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 or similar
transaction 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 illiquid
securities with legal or contractual restrictions on resale
(although the Fund may invest in Rule 144A restricted securities
to the full extent permitted under the federal securities laws);
except that all or substantially all of the assets of the Fund
may be invested in another registered investment company having
the same investment objective and policies as the Fund.
4. Invest in securities for the purpose of exercising management
or control of the issuer; except that all or substantially all of
the assets of the Fund may be invested in another registered
investment company having the same investment objective and
policies as the Fund.
5. 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);
6. Invest directly in real estate, real estate limited
partnerships or illiquid securities issued by real estate
investment trusts (the Fund may, however, invest up to 10% of its
assets in marketable securities issued by real estate investment
trusts);
7. Invest directly in interests in oil, gas or other mineral
leases, exploration or development programs.
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; except that all or substantially
all of the assets of the Fund may be invested in another
registered investment company having the same investment
objective and policies as the Fund. 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, 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 under normal
circumstances the Fund will invest at least 25% of total assets
in the securities issued by domestic and foreign companies
operating within the natural resources sector; except that all or
substantially all of the assets of the Fund may be invested in
another registered investment company having the same investment
objective and policies as the Fund; 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;
except that all or substantially all of the assets of the Fund
may be invested in another registered investment company having
the same investment objective and policies as the Fund.
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.
RISK FACTORS AND SPECIAL CONSIDERATIONS
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 Fund may invest up to 15% of its net
assets in securities the disposition of which may be subject to
legal or contractual restrictions or the markets for which may be
illiquid. 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. 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 wide-spread 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. 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.
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.
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.
CURRENCY HEDGING TRANSACTIONS AND ASSOCIATED RISKS
In order to hedge against currency exchange rate risks, the Fund
may enter into forward currency exchange contracts and currency
futures contracts and options on such futures contracts, as well
as purchase put or call options and write covered put and call
options on currencies traded in U.S. or foreign markets.
Forward Foreign Currency Exchange Contracts. The Fund may enter
into forward foreign currency exchange contracts in certain
circumstances, as indicated in the Fund's Prospectus.
Additionally, when the Fund's investment manager believes that
the currency of a particular foreign country may suffer a
substantial decline against the U.S. dollar, the Fund may enter
into a forward contract to sell, for a fixed amount of dollars,
the amount of foreign currency approximating the value of some or
all of the Fund's portfolio securities denominated in such
foreign currency. The precise matching of the forward contract
amounts and the value of the securities involved is not generally
possible because the future value of such securities in foreign
currencies changes as a consequence of market movements in the
value of those securities between the date on which the contract
is entered into and the date it matures. Using forward contracts
to protect the value of the Fund's portfolio securities against a
decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. It
simply establishes a rate of exchange which each Fund can achieve
at some future point in time. The precise projection of short-
term currency market movements is not possible, and short-term
hedging provides a means of fixing the dollar value of only a
portion of the Fund's foreign assets.
The Fund may engage in cross-hedging by using forward contracts
in one currency to hedge against fluctuations in the value of
securities denominated in a different currency if the Fund's
investment manager determines that there is a pattern of
correlation between the two currencies. The Fund may also
purchase and sell forward contracts (to the extent they are not
deemed "commodities") for non-hedging purposes when the Fund's
investment manager anticipates that the foreign currency will
appreciate or depreciate in value, but securities denominated in
that currency do not present attractive investment opportunities
and are not held in the Fund's portfolio.
The Fund's custodian will place cash or liquid high grade debt
securities (i.e., securities rated in one of the top three
ratings categories by Moody's Investors Service ("Moody's") or
Standard & Poor's Corporation ("S&P") or, if unrated, deemed by
the Fund's investment manager to be of comparable credit quality)
into a segregated account of the Fund in an amount equal to the
value of the Fund's total assets committed to the consummation of
forward foreign currency exchange contracts requiring the Fund to
purchase foreign currencies. If the value of the securities
placed in the segregated account declines, additional cash or
securities is placed in the account on a daily basis so that the
value of the account equals the amount of the Fund's commitments
with respect to such contracts. The segregated account is marked-
to-market on a daily basis. Although the contracts are not
presently regulated by the Commodity Futures Trading Commission
(the "CFTC"), the CFTC may in the future assert authority to
regulate these contracts. In such event, a Fund's ability to
utilize forward foreign currency exchange contracts may be
restricted.
The Fund generally will not enter into a forward contract with a
term of greater than one year.
While the Fund may enter into forward contracts to reduce
currency exchange rate risks, transactions in such contracts
involve certain other risks. Thus, while the Fund may benefit
from such transactions, unanticipated changes in currency prices
may result in a poorer overall performance for the Fund than if
it had not engaged in any such transactions. Moreover, there may
be imperfect correlation between the Fund's portfolio holdings of
securities denominated in a particular currency and forward
contracts entered into by the Fund. Such imperfect correlation
may cause the Fund to sustain losses which will prevent the Fund
from achieving a complete hedge or expose the Fund to risk of
foreign exchange loss.
Writing and Purchasing Currency Call and Put Options. The Fund
may write covered put and call options and purchase put and call
options on foreign currencies for the purpose of protecting
against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be
acquired. The Fund may use options on currency to cross-hedge,
which involves writing or purchasing options on one currency to
hedge against changes in exchange rates for a different currency
with a pattern of correlation. In addition, the Fund may purchase
call options on currency for non-hedging purposes when the Fund's
investment manager anticipates that the currency will appreciate
in value, but the securities denominated in that currency do not
present attractive investment opportunities and are not included
in the Fund's portfolio.
A call option written by the Fund obligates the Fund to sell
specified currency to the holder of the option at a specified
price at any time before the expiration date. A put option
written by the Fund would obligate the Fund to purchase specified
currency from the option holder at a specified time before the
expiration date. The writing of currency options involves a risk
that the Fund will, upon exercise of the option, be required to
sell currency subject to a call at a price that is less than the
currency's market value or be required to purchase currency
subject to a put at a price that exceeds the currency's market
value.
The Fund may terminate its obligations under a call or put option
by purchasing an option identical to the one it has written. Such
purchases are referred to as "closing purchase transactions." The
Fund would also be able to enter into closing sale transactions
in order to realize gains or minimize losses on options purchased
by the Fund.
The Fund would normally purchase call options in anticipation of
an increase in the dollar value of the currency in which
securities to be acquired by the Fund are denominated. The
purchase of a call option would entitle the Fund, in return for
the premium paid, to purchase specified currency at a specified
price during the option period. The Fund would ordinarily realize
a gain if, during the option period, the value of such currency
exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no
gain or a loss on the purchase of the call option.
The Fund would normally purchase put options in anticipation of a
decline in the dollar value of currency in which securities in
its portfolio are denominated ("protective puts"). The purchase
of a put option would entitle the Fund, in exchange for the
premium paid, to sell specific currency at a specified price
during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the
dollar value of the Fund's portfolio securities due to currency
exchange rate fluctuations. The Fund would ordinarily realize a
gain if, during the option period, the value of the underlying
currency decreased below the exercise price sufficiently to more
than cover the premium and transaction costs; otherwise the Fund
would realize either no gain or a loss on the purchase of the put
option. Gains and losses on the purchase of protective put
options would tend to be offset by countervailing changes in the
value of the underlying currency.
Special Risks Associated With Options on Currency. An exchange-
traded options position may be closed out only on an options
exchange which provides a secondary market for an option of the
same series. Although the Fund will generally purchase or write
only those options for which there appears to be an active
secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option or at
any particular time. For some options, no secondary market on an
exchange may exist. In such event, it might not be possible to
effect closing transactions in particular options, with the
result that the Fund would have to exercise its options in order
to realize any profit and would incur transaction costs upon the
sale of underlying securities pursuant to the exercise of put
options. If the Fund as a covered call option writer is unable to
effect a closing purchase transaction in a secondary market, it
will not be able to sell the underlying currency (or security
denominated in that currency) until the option expires or it
delivers the underlying currency upon exercise.
There is no assurance that higher than anticipated trading
activity or other unforeseen events might not, at times, render
certain of the facilities of the OCC inadequate, and thereby
result in the institution by an exchange of special procedures
which may interfere with the timely execution of customers'
orders.
The Fund may purchase and write over-the-counter options to the
extent consistent with its limitation on investments in
restricted securities, as described in its Prospectus. Trading in
over-the-counter options is subject to the risk that the other
party will be unable or unwilling to close-out options purchased
or written by a Fund.
The amount of the premiums which the Fund may pay or receive may
be adversely affected as new or existing institutions, including
other investment companies, engage in or increase their option
purchasing and writing activities.
Futures Contracts and Options on Futures Contracts. The Fund's
investment manager may choose to hedge against changes in
interest rates, securities prices or currency exchange rates, by
purchasing and selling various kinds of futures contracts. The
Fund may also enter into closing purchase and sale transactions
with respect to any such contracts and options. The futures
contracts may be based on foreign currencies. The Fund will
engage in futures and related options transactions only for bona
fide hedging or other appropriate risk management purposes as
defined below. All futures contracts entered into by the Fund are
traded on U.S. exchanges or boards of trade that are licensed and
regulated by the CFTC or on foreign exchanges.
Futures Contracts. A futures contract may generally be described
as an agreement between two parties to buy and sell particular
financial instruments for an agreed price during a designated
month (or to deliver the final cash settlement price, in the case
of a contract relating to an index or otherwise not calling for
physical delivery at the end of trading in the contract).
The Fund can sell futures contracts on a specified currency to
protect against a decline in the value of such currency and its
portfolio securities which are denominated in such currency. The
Fund can purchase futures contracts on foreign currency to fix
the price in U.S. dollars of a security denominated in such
currency that the Fund has acquired or expects to acquire.
Although futures contracts by their terms generally call for the
actual delivery or acquisition of underlying securities, in most
cases the contractual obligation is fulfilled before the date of
the contract without having to make or take such delivery. The
contractual obligation is offset 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
or the cash value of the index underlying the contractual
obligations. The Fund may incur brokerage fees when it purchases
or sells futures contracts.
Positions taken in the futures markets are not normally held to
maturity, but are instead liquidated through offsetting
transactions which may result in a profit or a loss. While the
Fund's futures contracts on currency will usually be liquidated
in this manner, the Fund may instead make or take delivery of the
currency whenever it appears economically advantageous for it to
do so. A clearing corporation associated with the exchange on
which futures on currency are traded guarantees that, if still
open, the sale or purchase will be performed on the settlement
date.
Hedging Strategies With Futures. Hedging by use of futures
contracts seeks to establish with more certainty than would
otherwise be possible with respect to the effective price,
currency exchange rate on portfolio securities or securities that
a Fund owns or proposes to acquire. The Fund may sell futures
contracts on currency in which its portfolio securities are
denominated or in one currency to hedge against fluctuations in
the value of securities denominated in a different currency if
there is an established historical pattern of correlation between
the two currencies.
The CFTC and U.S. commodities 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 its strategies for hedging its securities.
Options on Futures Contracts. The acquisition of put and call
options on futures contracts will give the Fund the right (but
not the obligation), for a specified price, to sell or to
purchase, respectively, the underlying futures contract at any
time during the option period. As the purchaser of an option on a
futures contract, a Fund obtains the benefit of the futures
position if prices move in a favorable direction but limits its
risk of loss in the event of an unfavorable price movement to the
loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a
premium which may partially offset a decline in the value of the
Fund's assets. By writing a call option, the Fund becomes
obligated, in exchange for the premium, to sell a futures
contract, which may have a value higher than the exercise price.
Conversely, the writing of a put option on a futures contract
generates a premium which may partially offset an increase in the
price of securities that a Fund intends to purchase. However, the
Fund becomes obligated to purchase a futures contract, which may
have a value lower than the exercise price. Thus, the loss
incurred by the Fund in writing options on futures is potentially
unlimited and may exceed the amount of the premium received. The
Fund will incur transaction costs in connection with the writing
of options on futures.
The holder or writer of an option on a futures contract may
terminate its position by selling or purchasing an offsetting
option on the same series. There is no guarantee that such
closing transactions can be effected. The Fund's ability to
establish and close out positions on such options will be subject
to the development and maintenance of a liquid market.
While transactions in futures contracts and options on futures
may reduce certain risks, such transactions themselves entail
certain other risks. Thus, while the Fund may benefit from the
use of futures and options on futures, unanticipated changes in
interest rates, securities prices or currency exchange rates may
result in a poorer overall performance for the Fund than if it
had not entered into any futures contracts or options
transactions. In the event of an imperfect correlation between a
future position and portfolio position which is intended to be
protected, the desired protection may not be obtained and the
Fund may be exposed to risk of loss.
Transactions in options and forward and futures contracts and
options related thereto are generally considered "derivative
securities" by the popular media.
RISK FACTORS RELATING TO HIGH
YIELDING, FIXED-INCOME SECURITIES
The Fund may invest up to 15% 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 values of 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
and 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 or Baa by S&P and Moody's, respectively, 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.
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 high yield 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" in the Prospectus.)
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. 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
NRSROs, 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.
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 the
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 (*).
Positions and Offices
Name, Address & Age with the Trust Principal
Occupations During Past
Five Years
Frank H. Abbott, III (74)
1045 Sansome St.
San Francisco, CA 94111
Trustee
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 (62)
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
Trustee
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 55 of the investment companies in the Franklin Templeton
Group of Funds.
*Harmon E. Burns (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
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 42 of the investment companies in the
Franklin Templeton Group of Funds.
S. Joseph Fortunato (62)
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Trustee
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 57 of the investment
companies in the Franklin Templeton Group of Funds.
David W. Garbellano (80)
111 New Montgomery St., #402
San Francisco, CA 94105
Trustee
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)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board 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 56 of the investment companies in the Franklin Templeton
Group of Funds.
*Rupert H. Johnson, Jr. (54)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Trustee
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)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
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 (66)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
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 52 of the investment companies in the
Franklin Templeton Group of Funds; formerly Chairman, Hambrecht
and Quist Group; Director, H & Q Healthcare Investors; and
formerly President, National Association of Securities Dealers,
Inc.
Kenneth V. Domingues (62)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President - Financial 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 (34)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief 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)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
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 (38)
777 Mariners Island Blvd.
San Mateo CA 94404
Vice President
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)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the
investment companies in the Franklin Group of Funds.
Edward V. McVey (57)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
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 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(Registered Trademark) and the Templeton
Group of Funds (the "Franklin Templeton Group of Funds"). The
following table indicates the total fees paid to the Trust's
nonaffiliated trustees by other funds in the Franklin Templeton
Group of Funds.
Name Total Fees Received From Number of Boards In The
The Franklin Templeton Franklin Templeton Group
Group of Funds* of Funds on Which Each
Serves**
Mr. Abbott $176,870 31
Mr. Ashton $319,925 55
Mr. Fortunato $336,065 57
Mr. Garbellano $153,300 30
Mr. LaHaye $150,817 26
Mr. Macklin $303,685 52
* 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 112 U.S.
based mutual funds or series.
Nonafilliated trustees are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each
fund in the Franklin Templeton Group of Funds for which they
serve as director, trustee or managing general partner. 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. For additional information concerning trustee
compensation and expenses, please see the Trust's Annual Report
to Shareholders.
From time to time, the number of Fund shares held in the "street
name" accounts of various securities dealers for the benefit of
their clients or in centralized securities depositories may
exceed 5% of the total shares outstanding. As of the date of
this document, Franklin Resources, Inc. owned substantially all
of the outstanding shares of the Fund as a result of having
provided the Fund's initial capitalization. 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
The investment manager of the Fund is Franklin Advisers, Inc.
("Advisers" or "Manager"). 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 ("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 $118 billion in assets for more than 3.7
million shareholders. The preceding table indicates those
officers and trustees who are also affiliated persons of
Distributors and Advisers.
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. The Manager, at its own expense,
furnishes the Fund with 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. The Fund
bears all of its expenses not assumed by the Manager.
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.
During the start-up period of the Fund, Advisers has elected to
reduce the fees payable under the management agreement and to
assume responsibility for making payments, if necessary, to
offset certain operating expenses otherwise payable by the Fund
so that total ordinary operating expenses do not exceed 1.00% of
the Fund's average net assets. This arrangement is in effect
until April 30, 1996, and then may be continued or terminated by
the Manager at any time. In addition, 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.
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 Fund), 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.
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. As a general rule, the Fund does not purchase
bonds in underwritings where it is not given any choice, or only
limited choice, in the designation of dealers to receive the
commission. 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.
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 funds into which the Fund shareholders are seeking to
exchange reserve 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 for shares of any of the
investment companies 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.
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.
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.
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, shares of the Fund will be offered with the
following schedule of sales charges:
SIZE OF PURCHASE SALES
CHARGE
Up to U.S. $100,000 3%
U.S. $100,000 to U.S. $1,000,000 2%
Over U.S. $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 closing 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 closing of the Exchange (generally 1:00 p.m. Pacific
time) 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. 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 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 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 will
be effective only after notification to Distributors that the
investment qualifies for a discount. The shareholder's holdings
in the Franklin Templeton Funds, including Class II shares,
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 Securities and Exchange Commission
("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 closing 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.
As stated in the Prospectus, the net asset value per share for
the Fund is determined in the following manner: The aggregate of
all liabilities, including, without limitation, the current
market value of any outstanding options written by the Fund,
accrued expenses and taxes and any necessary reserves is deducted
from the aggregate gross value of all assets, and the difference
is divided by the number of shares 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. 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.
The value of a foreign security is determined in its national
currency as of the close of trading on the foreign exchange on
which it is traded or as of the schedule close 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, Eastern time, on the day the value of the foreign
security is determined. Occasionally, events which affect the
values of foreign securities and foreign exchange rates may occur
between the times at which they are determined and the close of
the exchange and will, therefore, not be reflected in the
computation of the Fund's net asset value. If events which
materially affect the value of these foreign securities occur
during such period, then these securities will be valued at fair
value as determined by management and approved in good faith 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 (sometimes known as "ex-dividend
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 Trust sends annual and semiannual reports to its shareholders
regarding the Fund's performance and its portfolio holdings.
SPECIAL SERVICES
Franklin Institutional Services Corporation ("FISCO") 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 be treated as a
regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (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 taxable 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 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
such dividends, if any, in December and to pay these dividends in
December or January 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 received, 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 Franklin/Templeton Funds 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.
Any loss realized upon the redemption of shares within six months
from the date of their purchase will be treated as a long-term
capital loss to the extent of amounts treated as distributions of
net long-term capital gain during such six-month period.
The Fund's investment in options and forward contracts are
subject to many complex and special tax rules. For example,
over-the-counter 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 contacts and certain foreign currency contacts
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 both the amount, character and
timing 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.
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 3 months. Foreign
exchange gains derived by a Fund with respect to the Fund's
business 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
business of investing in stock or securities and related options
or forwards. Under current law, non-directly-related gains rising
from foreign currency positions or instruments held for less than
3 months are treated as derived from the disposition of
securities held less than 3 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.
The Fund is authorized to invest in foreign securities (see the
discussion in the prospectus under Investment Objectives and
Policies of the Fund). Such investments, if made, will have the
following tax consequences.
The Fund may be subject to foreign withholding taxes on income
from certain of its foreign securities. Because the Fund will
likely invest 50% or less of its total assets in securities of
foreign corporations, the Fund will not be entitled under the
Code to pass-through to its shareholders their pro-rata share of
the foreign taxes paid by the Fund. These taxes will be taken as
a deduction by the Fund.
Foreign exchange gains and losses realized by the Fund in
connection with certain transactions involving foreign
currencies, foreign currency payables or receivables, foreign
currency-denominated debt securities, foreign currency forward
contracts, and options or futures contracts on foreign currencies
are subject to special tax rules which may cause such gains and
losses to be treated as ordinary income and losses rather than
capital gains and losses and may affect the amount and timing of
the Fund's income or loss from such transactions and in turn its
distributions to shareholders. Additionally, investments in
foreign securities pose special issues to the Fund in meeting its
asset diversification and income tests as a regulated investment
company. The Fund will limit its investments in foreign
securities to the extent necessary to comply with these
requirements.
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 shares of the Fund.
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.
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.
DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1
under the 1940 Act (the "Plan"). Under the Plan, the Fund may
pay to Distributors or others up to 0.25% per annum of its
average daily net assets for expenses incurred in the promotion
and distribution of its shares. Under the Plan, the Fund is
permitted to pay Distributors up to an additional 0.10% per annum
of its average daily net assets for reimbursement of such
distribution expenses.
Pursuant to the Plan, Distributors or others will be entitled to
be reimbursed each quarter for actual expenses incurred in the
distribution and promotion of the Fund's shares, including, but
not limited to, the printing of prospectuses and reports used for
sales purposes, expenses of preparing and distributing of 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.
In addition to the payments to which Distributors or others are
entitled under the Plan, the Plan also provides that to the
extent the Fund, the Manager or Distributors or other parties on
behalf of the Fund, the Manager or Distributors, make payments
that are deemed to be payments for the financing of any activity
primarily intended to result in the sale 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 Plan.
In no event shall the aggregate asset-based sales charges which
include payments made under the Plan, plus any other payments
deemed to be made pursuant to the Plan, exceed the amount
permitted to be paid 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
Plan does not permit unreimbursed expenses incurred in a
particular year to be carried over to 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 Plan 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 Board of Trustees has determined that a consistent cash flow
resulting from the sale of new shares is necessary and
appropriate to meet redemptions and to take advantage of buying
opportunities of portfolio securities without having to make
unwarranted liquidations of other portfolio securities. The Board
of Trustees, therefore, felt that it would benefit the Fund to
have monies available for the direct distribution activities of
Distributors or others in promoting the sale of its shares. The
Board of Trustees, including the non-interested trustees,
concluded that, in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
The Plan has been approved by Resources, the initial shareholder
of the Trust, and by the trustees of the Trust, including those
trustees who are not interested persons, as defined in the 1940
Act. The Plan is 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 Plan, 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 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 the Fund'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.
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 Plan 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 Plan
should be continued.
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 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.
In considering the quotations of total return by the Fund,
investors should remember that the 4.50% maximum initial sales
charge reflected in each quotation is a one-time fee (charged on
all direct purchases) which will have its greatest impact during
the early stages of 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.
Quotation figures will be calculated according to the following
SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of 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.
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.
Current yield figures will be obtained using the following SEC
formula:
6
Yield = 2 [(a-b + 1) -1]
------
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
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 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
Standard & Poor'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 underwriter
of both the Franklin Group of Funds 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) Standard & Poor'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 New York Stock Exchange composite or component indices -
unmanaged indices of all industrial, utilities, transportation,
and finance stocks listed on the New York Stock 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 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, 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 $118 billion in assets under
management for more than 3.7 million shareholder accounts and
offers 112 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.
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.
