Franklin
Blue Chip
Fund
Franklin Strategic Series
PROSPECTUS June 3, 1996
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
The Franklin Blue Chip Fund (the "Fund") is a diversified series of Franklin
Strategic Series (the "Trust"), an open-end management investment company. The
Fund's investment objective is long-term capital appreciation. In seeking to
meet this objective, the Fund primarily invests in equity securities of blue
chip companies. Blue chip companies are well-established companies with a long
record of revenue growth and profitability. These companies generally dominate
their respective markets, and have a reputation for quality management, as well
as superior products and services. Blue chip companies also tend to have
relatively large capitalization. The Fund may invest in both domestic and
foreign securities, as described under "How Does the Fund Invest Its Assets?"
The Fund may also seek current income incidental to long-term capital
appreciation, although this is not an objective of the Fund.
This prospectus is intended to set forth in a clear and concise manner
information about the Fund that you should know before investing. After reading
this prospectus, you should retain it for future reference; it contains
information about the purchase and sale of shares and other items that you will
find useful.
An SAI concerning the Fund, dated June 3, 1996, as may be amended from time to
time, provides a further discussion of certain areas in this prospectus and
other matters that may be of interest to you. It has been filed with the SEC and
is incorporated herein by reference. A copy is available without charge from the
Fund or Distributors, at the address or telephone number shown above.
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.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this prospectus. Further
information may be obtained from Distributors.
Contents Page
Expense Table.................... 2
What Is the Franklin Blue Chip Fund?4
How Does the Fund Invest Its Assets?4
What Are the Fund's Potential Risks?7
How You Participate in the
Results of the Fund's Activities 8
Who Manages the Fund?............ 8
What Distributions Might
I Receive from the Fund?........ 10
How Taxation Affects You and the Fund 12
How Do I Buy Shares?............. 13
What Programs and Privileges
Are Available to Me as a Shareholder? 18
What If My Investment Outlook Changes? -
Exchange Privilege.............. 20
How Do I Sell Shares?............ 22
Telephone Transactions........... 26
How Are Fund Shares Valued?...... 27
How Do I Get More Information
About My Investment?............ 27
How Does the Fund Measure Performance? 28
General Information.............. 29
Registering Your Account......... 30
Important Notice Regarding
Taxpayer IRS Certifications..... 31
Useful Terms and Definitions..... 31
Expense Table
The purpose of this table is to assist you in understanding the various costs
and expenses that you will bear directly or indirectly in connection with an
investment in the Fund. These figures are based on contractual management and
Rule 12b-1 fees and 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*
+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 of such investments. See "How Do I Sell Shares? Contingent Deferred Sales
Charge."
*$5.00 fee imposed only on Market Timers as described under "What If My
Investment Outlook Changes? - Exchange Privilege." All other exchanges are
processed without a fee.
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees.................................................... 0.57%**
Rule 12b-1 Fees.................................................... 0.35%***
Other Expenses
Shareholder servicing costs................................ 0.10%
Reports to shareholders.................................... 0.12%
Other...................................................... 0.11%
Total Other Expenses............................................... 0.33%
Total Fund Operating Expenses...................................... 1.25%**
**The Manager has agreed in advance to waive a portion of its management fee and
to make certain payments to reduce expenses of the Fund so that the Fund's
aggregate annual operating expenses do not exceed 1.25% of the Fund's average
net assets for the current fiscal year. Absent this reduction, contractual and
expected management fees and total operating expenses would have represented
0.75% and 1.43%, respectively, of the Fund's average net assets. After April 30,
1997, the 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.
You should be aware that the above table is not intended to reflect in precise
detail the fees and expenses associated with an investment in the Fund. Rather,
the table has been provided only to assist you in gaining a more complete
understanding of fees, charges and expenses. For a more detailed discussion of
these matters, you 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, 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
$57* $83
*Assumes that a contingent deferred sales charge will not apply.
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES SHOWN ABOVE AND
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES, WHICH MAY
BE MORE OR LESS THAN THOSE SHOWN. The operating expenses are borne by the Fund
and only indirectly by you as a result of your investment in the Fund. See "Who
Manages 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%.
What Is the Franklin Blue Chip Fund?
The Fund is a diversified series of the Trust, an open-end management investment
company commonly called a "mutual fund." The Trust was organized as a Delaware
business trust on January 25, 1991, and registered with the SEC under the 1940
Act. Shares of the Fund may be considered Class I shares, as described under
"Useful Terms and Definitions," for redemption, exchange and other purposes.
How Does the Fund Invest Its Assets?
The Fund's Investment Objective
The Fund's investment objective is long-term capital appreciation. The objective
is a fundamental policy of the Fund and may not be changed without shareholder
approval. Of course, there is no assurance that the Fund's objective will be
achieved.
The Fund may also seek current income incidental to long-term capital
appreciation, although this is not a fundamental policy of the Fund. Unless
otherwise noted, the Fund's investment policies discussed below are not
fundamental policies. This means they may be changed without shareholder
approval.
Types of Securities the Fund May Purchase
Blue Chip Equity Securities. Under normal market conditions, the Fund invests at
least 80%, and intends to try to invest up to 100%, of its total assets in a
diversified portfolio of equity securities of "blue chip companies." Blue chip
companies are well-established companies with a long record of revenue growth
and profitability. These companies generally dominate their respective markets,
and have a reputation for quality management, as well as superior products and
services. Blue chip companies also tend to have relatively large capitalization.
When selecting securities for the Fund's portfolio, the Manager tries to
identify quality blue chip companies based on a number of criteria.
Specifically, the Manager looks for companies that are leaders in their industry
with a dominant market position and a sustainable competitive advantage. The
Manager also looks for companies that exhibit consistent growth, a strong
financial record, and market capitalization of more than $1 billion. The Fund
intends to invest in a portfolio that is diversified across a large number of
industries.
The types of equity securities the Fund may buy include common stock, warrants
to buy common stock, and securities convertible into common stock. Although the
Fund may invest without limit in any of these types of securities, it intends to
invest primarily in common stock. For a description of warrants and convertible
securities, please see the discussion below.
Foreign Securities. The Fund seeks investment opportunities across all markets
in the world. Accordingly, the Fund may invest without limit in the equity
securities of blue chip companies located outside the U.S. This may include
companies in either developed or emerging markets, as certain companies in
emerging markets meet all the criteria of a blue chip company. The amount of the
Fund's assets invested in foreign securities may vary over time depending on the
Manager's outlook.
The Fund may buy foreign securities traded in the U.S. or directly in foreign
markets. The Fund may also invest in foreign securities by purchasing American
Depositary Receipts ("ADRs"). ADRs are certificates issued by U.S. banks. They
give their holders the right to receive the securities of a foreign issuer
deposited with the bank or a correspondent bank. The Fund may buy both sponsored
and unsponsored ADRs.
Foreign securities have risks that U.S. securities do not have. For more
information about foreign securities and their risks, please see "What Are
the Fund's Potential Risks?"
Convertible Securities and Warrants. The Fund may invest in convertible
securities and warrants without limit. It currently intends, however, to limit
these investments to no more than 5% of its net assets. A convertible security
is generally a debt obligation or a preferred stock that may be converted within
a specified period of time into a certain amount of common stock of the same or
a different issuer. A convertible security may also be subject to redemption by
the issuer but only after a specified date and under circumstances established
at the time the security is issued. Convertible securities provide a
fixed-income stream and the opportunity, through their conversion feature, to
participate in any capital appreciation resulting from a market price advance in
the convertible security's underlying common stock.
A warrant gives its holder the right to buy newly created securities of the
issuer of the warrant, or a related company, at a set price. The warrant usually
allows its holder to buy the new security on a specific date or during a set
period of time. If a warrant is not used or sold by its holder, it expires
worthless.
Futures and Options. The Fund may buy and sell futures contracts for securities
and currencies. A futures contract is an obligation to buy or sell a specified
security or currency at a set price on a specified future date. The Fund may
invest in futures contracts only to hedge against changes in the value of its
securities or currencies or those it intends to buy. The Fund will not enter
into a futures contract if the amounts paid for its open contracts, including
required initial deposits, would exceed 5% of the Fund's net assets.
For hedging purposes only, the Fund may buy or write (sell) put and call options
on securities listed on a national securities exchange. The options themselves
may be traded on an exchange or over-the-counter. An option on a security allows
its holder to buy a specified security (a call option) or to sell a specified
security (a put option) from or to the writer of the option at a set price
during the term of the option. All options written by the Fund will be covered,
as discussed in the SAI. The Fund will not buy an option if the amounts paid for
its open option positions exceed 5% of its net assets.
Futures and options are generally considered derivative securities. They may not
always be successful hedges. For a further discussion of these securities,
including their risks and special tax considerations that may apply, please see
the SAI.
Other Investment Policies of the Fund
Short-Term Investments. Occasionally, pending investment of proceeds from new
sales of the Fund's shares or for cash management or temporary defensive
purposes, the Fund may hold cash or invest in high quality money market
instruments of U.S. and foreign issuers. These include government securities,
commercial paper, bank certificates of deposit, bankers' acceptances and
repurchase agreements secured by any of these instruments. Any of these
securities purchased by the Fund will either be rated "A1" or "A2" by Standard &
Poor's Corporation ("S&P") or "P1" or "P2" by Moody's Investors Service
("Moody's") or unrated but of comparable quality. It is impossible to predict
when or for how long the Fund would employ these strategies.
Repurchase Agreements. A repurchase transaction is another type of short-term
investment. The Fund buys a U.S. government security subject to resale to a bank
or dealer at an agreed-upon price and date. The seller's obligation is secured
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. The value of the underlying securities is marked-to-market daily
to maintain coverage of at least 100%. If the seller defaults, the Fund may
experience a loss or delay when it tries to sell the securities securing the
repurchase agreement and may have to pay disposition costs. The Fund, however,
intends to enter into repurchase agreements only with financial institutions,
such as broker-dealers and banks, that the Manager believes are creditworthy.
A repurchase agreement is considered a loan by the Fund under the 1940 Act. The
U.S. government security subject to resale (the collateral) will be held on
behalf of the Fund by a custodian approved by the Board and will be held
pursuant to a written agreement.
Loans of Portfolio Securities. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors,
provided these loans do not exceed one-third of the value of the Fund's total
assets at the time of the most recent loan. The borrower must deposit with the
Fund's custodian bank collateral with an initial market value of at least 102%
of the initial market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain coverage of at least 100%. This collateral
shall consist of cash, securities issued by the U.S. government, its agencies or
instrumentalities, or irrevocable letters of credit.
The lending of securities is a common practice in the securities industry. The
Fund may engage in security loan arrangements with the primary objective of
increasing the Fund's income either through investing cash collateral in
short-term interest bearing obligations or by receiving a loan premium from the
borrower. Under the securities loan agreement, the Fund continues to be entitled
to all dividends or interest on any loaned securities. As with any extension of
credit, there are risks of delay in recovery and loss of rights in the
collateral should the borrower of the security fail financially.
Borrowing. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of its assets, except it may borrow up to 15% of its total assets
(including the amount borrowed) to meet redemption requests that might otherwise
require the untimely disposition of portfolio securities or for other temporary
or emergency purposes and may pledge its assets in connection with these
borrowings. The Fund will not make any additional investments while borrowings
exceed 5% of its total assets.
When-Issued and Standby Commitment Purchases. The Fund may buy equity securities
on a "when-issued" or "delayed delivery" basis. These transactions are
arrangements whereby the Fund buys securities with payment and delivery
scheduled for a future time, generally within 15 to 60 days. The Fund may also
buy equity securities under a standby commitment agreement. If the Fund enters
into a standby commitment agreement, it will be obligated, for a set period of
time, to buy a certain amount of a security that may be issued and sold to the
Fund at the option of the issuer. The price of the security is set at the time
of the agreement. The Fund will receive a commitment fee typically equal to 0.5%
of the purchase price of the security. The Fund will receive this fee regardless
of whether the security is actually issued.
Currency Transactions. In connection with the Fund's investment in foreign
securities, it may hold currencies other than the U.S. dollar and enter into
forward currency exchange transactions to facilitate settlements and to protect
against changes in exchange rates. In a forward currency transaction, the Fund
agrees to buy or sell a foreign currency at a set exchange rate. Payment and
delivery of the currency occurs on a future date. There is no assurance that
these strategies will be successful. The Fund's investment in foreign currencies
and forward currency exchange transactions will not exceed 10% of its net
assets. The Fund may also enter into futures contracts for currencies as
discussed above.
Illiquid Investments. The Fund may not invest more than 10% of its net assets,
at the time of purchase, in illiquid securities. Illiquid securities are
securities that cannot be sold within seven days in the normal course of
business at approximately the amount at which the Fund has valued them.
Restricted Securities. The Board has authorized the Fund to invest in restricted
securities, if consistent with the Fund's investment objective. Restricted
securities are not registered with the SEC. If the Manager determines on a daily
basis that there is a liquid institutional or other market for these securities,
the Board has authorized them to be considered liquid securities and not subject
to the Fund's policy on illiquid investments. Notwithstanding the Manager's
determination, the Board remains responsible for liquidity determinations and
will consider appropriate action if a restricted security becomes illiquid after
its purchase. In this regard, if qualified institutional buyers are no longer
interested in buying restricted securities that were previously considered
liquid or if the market for these securities contracts, they will be
redesignated illiquid securities and subject to the Fund's illiquid investment
policy. This may reduce the general level of liquidity in the Fund.
Portfolio Turnover. The Fund anticipates its annual portfolio turnover rate
generally will not exceed 50%, but you should not consider this rate a limiting
factor in the operation of the Fund's portfolio.
Percentage Restrictions. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in value of portfolio securities or the amount of assets
will not be considered a violation of any of the foregoing policies.
Other Restrictions. The Fund is subject to a number of additional investment
restrictions. Some of these restrictions may be changed only with shareholder
approval. For a list of these restrictions and more information about the
investment policies discussed above, please see "How Does the Fund Invest Its
Assets?" and "Investment Restrictions" in the SAI.
What Are the Fund's Potential Risks?
The Fund is designed for long-term investors and not as a trading vehicle.
Before investing in the Fund, you should take into account your overall
financial plan, as well as how this Fund could aid in achieving your investment
objective.
Foreign Securities
Although the Fund invests primarily in quality blue chip securities, the Fund is
not restricted geographically in its security selection. The Manager believes
this can improve the Fund's ability to meet its objective of long-term capital
appreciation, as many of today's quality industry leaders are domiciled outside
the U.S. You should consider the risks of foreign securities before buying
shares of the Fund.
While foreign securities are subject to many of the same influences as U.S.
securities, such as general economic conditions and individual company and
industry earnings prospects, they involve additional risks that can increase the
potential for losses in the Fund. These risks can be significantly greater for
investments in emerging markets.
Currency fluctuations. The Fund's investments may be denominated in foreign
currencies. Fluctuations in foreign exchange rates may significantly increase or
decrease the value of the Fund's foreign investments. These fluctuations may
increase or offset any return on the underlying investment.
Costs. It is more expensive for the Fund to trade in foreign markets than in the
U.S. Brokerage and custodial costs are often higher, as are other costs. While
the Fund offers an efficient way for you to invest in quality blue chip
companies across the world, its overall expense ratio may be higher than funds
investing exclusively in U.S. securities.
Political and Economic Factors. The political, economic and social structures of
some countries in which the Fund invests may not compare favorably with the U.S.
and may be less stable and more volatile. The risks of investing in these
countries include, among others, the possibility of the imposition of exchange
controls, expropriation, restrictions on removal of currency or other assets,
nationalization of assets, and punitive taxes.
Legal, Regulatory and Operational Factors. There may be less publicly available
information about a foreign company than about a U.S. company. Certain countries
may not have uniform accounting, auditing and financial reporting standards and
may have less government supervision of financial markets. Foreign securities
markets may have substantially lower trading volumes than U.S. markets,
resulting in less liquidity and more volatility than experienced in the U.S.,
and may have settlement practices that result in delays.
Please see "What Are the Fund's Potential Risks?" in the SAI for more
information on the risks associated with an investment in the Fund.
How You Participate in the
Results of the Fund's Activities
If the securities owned by the Fund increase in value, the value of the shares
of the Fund which you own will increase. If the securities owned by the Fund
decrease in value, the value of your shares will also decline. In this way, you
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, you may anticipate that the value of Fund
shares will fluctuate with movements in the broader equity markets.
A decline in the stock market of any country in which the Fund is invested may
also be reflected in declines in the Fund's share price. Changes in currency
valuations will also affect the price of Fund shares. History reflects both
increases and decreases in worldwide stock markets and currency valuations and
these may reoccur unpredictably in the future.
Who Manages the Fund?
The Board 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.
Advisers serves as the Fund's investment manager. Advisers is a wholly-owned
subsidiary of 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 subsidiaries. Advisers acts as investment manager or administrator
to 36 U.S. registered investment companies (119 separate series) with aggregate
assets of over $80 billion.
The team responsible for the day-to-day management of the Fund's portfolio
since its inception is: Suzanne Willoughby Killea and Shan C. Green.
Suzanne Willoughby Killea
Portfolio Manager of Advisers
Ms. Killea holds a Master of Business Administration degree from Stanford
University and a Bachelor of Arts degree from Princeton University. She has been
with Advisers or an affiliate since earning her MBA degree in 1991. She is a
member of several securities industry-related associations.
Shan C. Green
Portfolio Manager of Advisers
Ms. Green holds a Master of Business Administration degree from the
University of California at Berkeley. She earned her Bachelor of Science
degree from State University of New York at Stony Brook. Ms. Green has been
with Advisers or an affiliate since 1994.
Pursuant to a management agreement, the Manager supervises and implements the
Fund's investment policies and provides certain administrative services and
facilities which are necessary to conduct the Fund's business. The Manager
performs similar services for other funds and there may be times when the
actions taken with respect to the Fund's portfolio will differ from those taken
by the Manager on behalf of other funds. Neither the Manager (including its
affiliates) nor its officers, directors or employees nor the officers and
trustees of the Fund are prohibited from investing in securities held by the
Fund or other funds which are managed or administered by the Manager to the
extent such transactions comply with the Fund's Code of Ethics. Please see
"Investment Advisory and Other Services" and "General Information" in the SAI
for further information on securities transactions and a summary of the Fund's
Code of Ethics.
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; and printing and
other expenses which are not expressly assumed by the Manager.
Under the management agreement, the Fund is obligated to pay the Manager a fee
computed daily and paid monthly equal to an annual rate of 0.75% of the Fund's
average daily net assets up to and including $500 million; 0.625% of the Fund's
average daily net assets over $500 million up to and including $1 billion; and
0.50% of the Fund's average daily net assets over $1 billion.
During the start-up period of the Fund, Advisers has agreed in advance to waive
a portion of its management fees and to make certain payments to reduce expenses
so that the Fund's aggregate annual operating expenses do not exceed 1.25% of
the Fund's average net assets for the current fiscal year. After April 30, 1997,
Advisers may terminate this arrangement at any time.
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 2.5% of the first $30 million in assets, 2% of the next $70
million, and 1.5% 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 "How
Does the Fund Purchase Securities For Its Portfolio?" in the SAI.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Investor Services, in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
Plan of Distribution
A plan of distribution has been approved and adopted for the Fund (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.
The amount which the Fund may reimburse Distributors or others for distribution
expenses is 0.25% per annum of its average daily net assets, payable on a
quarterly basis. 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
distribution expenses. All expenses of distribution in excess of 0.35% per annum
will be borne by Distributors, or 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
Fund's Underwriter" in the SAI.
What Distributions Might I Receive from the Fund?
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally 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 capital gains from the prior fiscal year. The Fund may
make more than one distribution derived from net short-term and net long-term
capital 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 without prior notice to or approval by
shareholders, the Fund's current policy is to declare income dividends annually
in December for shareholders of record on the first business day preceding the
15th of that month, payable on or about the last business day of that month.
The amount of income dividend payments by the Fund is dependent upon the amount
of net income received by the Fund from its portfolio holdings, is not
guaranteed and is subject to the discretion of the Board. Fund shares are quoted
ex-dividend on the first business day following the record date (generally the
15th day of the month or prior business day depending on 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, you must have acquired Fund shares prior
to the close of business on the record date. If you are considering purchasing
Fund shares shortly before the record date of a distribution, you 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 your investment, it may be taxable as
dividend income or capital gain.
Distribution Options
You may choose to receive your distributions from the Fund in any of these ways:
1. Purchase additional shares of the Fund - You may purchase additional shares
of the Fund (without a sales charge or imposition of a contingent deferred sales
charge) by reinvesting capital gain distributions, or both dividend and capital
gain distributions. This is a convenient way to accumulate additional shares and
maintain or increase your earnings base.
2. Purchase shares of other Franklin Templeton Funds - You may direct your
distributions to purchase the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a contingent deferred sales
charge). Many shareholders find this a convenient way to diversify their
investments.
3. Receive distributions in cash - You may choose to receive dividends, or both
dividend and capital gain distributions in cash. You may have the money sent
directly to you, to another person, or to a checking account. If you choose to
send the money to a checking account, please see "Electronic Fund Transfers"
under "What Programs and Privileges Are Available to Me as a Shareholder?"
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF NO OPTION IS SELECTED, DIVIDEND AND
CAPITAL GAIN DISTRIBUTIONS WILL BE AUTOMATICALLY REINVESTED IN THE FUND. You may
change the distribution option selected at any time by notifying the Fund by
mail or by telephone. Please allow at least seven days prior to the record date
for the Fund to process the new option.
How Taxation Affects You and the Fund
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For additional information on tax matters
relating to the Fund and its shareholders, see "Additional Information Regarding
Taxation" in the SAI.
The Fund intends to qualify and elect to be treated as a regulated investment
company under Subchapter M of the Code. By distributing all of its income and
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.
Foreign securities that meet the Code's definition of a passive foreign
investment company ("PFIC") may subject the Fund to an income tax and interest
charge with respect to those investments. To the extent possible, the Fund will
avoid that treatment by not investing in PFIC securities or by adopting other
tax strategies for any PFIC securities it does buy.
For federal income tax purposes, any income dividends that you receive 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 you have elected to receive them 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 you
until the following January, will be treated for tax purposes as if received by
you on December 31 of the calendar year in which they are declared.
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 you have owned shares of the Fund and whether the distributions
are received in cash or additional shares.
The Fund anticipates that a portion of the dividends that it will pay to you
will qualify for the dividends-received deduction, and may be treated by
corporate shareholders as qualifying dividends for this purpose, subject to
holding period and debt financing restrictions which are discussed in more
detail in the SAI.
Sales and exchanges of Fund shares are taxable events on which you may realize a
gain or loss. Any loss you incur on the sale or exchange of Fund shares, held
for six months or less, will be treated as a long-term capital loss to the
extent of capital gain dividends you received with respect to those shares.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid and will promptly after the close of each calendar year
advise you of the tax status for federal income tax purposes of those dividends
and distributions.
If you are not a U.S. person for purposes of federal income taxation, you should
consult with your financial or tax advisor regarding the applicability of U.S.
withholding or other taxes on distributions you receive from the Fund and the
application of foreign tax laws to those distributions.
You should consult your tax advisor with respect to the applicability of state
and local intangible property or income taxes to your shares in the Fund and
distributions and sale proceeds you receive from the Fund.
How Do I Buy Shares?
You may buy shares to open a Fund account with as little as $100 and make
additional investments at any time with as little as $25. These minimums may be
waived when shares are purchased by retirement plans. To open your account,
contact your investment representative or complete and sign the enclosed
Shareholder Application and return it to the Fund with your check.
Purchase Price of Fund Shares
You may buy shares at the public offering price, unless you qualify to purchase
shares at a discount or without a sales charge as discussed below. The offering
price will be calculated to two decimal places using standard rounding criteria.
Quantity Discounts in Sales Charges
The sales charge you pay when you buy shares may be reduced based upon the size
of your purchase, as shown in the table below.
Total Sales Charge
As a Percentage of
Amount Allowed to
Size of Transaction Net Amount Dealer as a Percentage
at Offering price Offering Price Invested of Offering Price*
Under $100,000........................ 4.50% 4.71% 4.00%
$100,000 but less than $250,000....... 3.75% 3.90% 3.25%
$250,000 but less than $500,000....... 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000..... 2.25% 2.30% 2.00%
$1,000,000 or more.................... None** None None***
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. Distributors may at times reallow
the entire sales charge to the securities dealer. A securities dealer who
receives 90% or more of the sales commission may be deemed an underwriter under
the Securities Act of 1933, as amended.
**A contingent deferred sales charge of 1% may be imposed on certain redemptions
of all or a part of an investment of $1 million or more. See "How Do I Sell
Shares? - Contingent Deferred Sales Charge."
***Please see "General - Other Payments to Securities Dealers" below for a
discussion of payments Distributors may make to securities dealers out of its
own resources.
Rights of Accumulation. To determine if you may pay a reduced sales charge, you
may add the cost or current value, whichever is higher, of your Class I and
Class II shares in other Franklin Templeton Funds, as well as those of your
spouse, children under the age of 21 and grandchildren under the age of 21, to
the amount of your current purchase. To receive the reduction, you or your
investment representative must notify Distributors that your investment
qualifies for a discount.
Letter of Intent. You may purchase shares at a reduced sales charge by
completing the Letter of Intent section of the Shareholder Application. A Letter
of Intent is a commitment by you to invest a specified dollar amount during a 13
month period. The amount you agree to invest determines the sales charge you
pay. You or your investment representative must inform us that the Letter is in
effect each time you purchase shares.
By completing the Letter of Intent section of the Shareholder Application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve five percent (5%) of the amount of the
total intended purchase in Fund shares registered in your name.
o You grant Distributors a security interest in these shares and appoint
Distributors as attorney-in-fact with full power of substitution to redeem
any or all of these reserved shares to pay any unpaid sales charge if you do
not fulfill the terms of the Letter.
o We will include the reserved shares in the total shares you own as reflected
on your periodic statements.
o You will receive dividend and capital gain distributions on the reserved
shares; we will pay or reinvest these distributions as you direct.
o Although you may exchange your shares, you may not liquidate reserved shares
until you complete the Letter or pay the higher sales charge.
o Our policy of reserving shares does not apply to certain benefit plans
described under "Purchases at Net Asset Value."
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy and Sell Shares? - Letter of Intent" in the SAI or call our
Shareholder Services Department.
Group Purchases. If you are a member of a qualified group, you may purchase Fund
shares at the reduced sales charge applicable to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase. For example, if group
members previously invested and still hold $80,000 of Fund shares and invest
$25,000, the sales charge will be 3.75%.
We define a qualified group as 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.
In addition, a qualified group must have more than 10 members, and be available
to arrange for meetings between our representatives and group members. It must
also agree to include sales and other materials related to the Franklin
Templeton Funds in publications and mailings to its members at reduced or no
cost to Distributors, and arrange for payroll deduction or other bulk
transmission of investments to the Fund.
If you select a payroll deduction plan, your investments will continue
automatically until you notify the Fund and your employer to discontinue further
investments. Due to the varying procedures used by employers to handle payroll
deductions, there may be a delay between the time of the payroll deduction and
the time the money reaches the Fund. We invest your purchase at the applicable
offering price per share determined on the day that the Fund receives both the
check and the payroll deduction data in required form.
Purchases at Net Asset Value
You may invest money from the following sources in shares of the Fund without
paying front-end or contingent deferred sales charges:
(i) a distribution that you have received from a Franklin Templeton Fund or a
real estate investment trust ("REIT") sponsored or advised by Franklin
Properties, Inc., if the distribution is returned within 365 days of its payment
date. You may reinvest Class II distributions in either Class I or Class II
shares, but Class I distributions may only be invested in Class I shares under
this privilege. For more information, see "Distribution Options" under "What
Distributions Might I Receive from the Fund?" or call Shareholder Services at
1-800/632-2301;
(ii) a redemption from a mutual fund with investment objectives similar to those
of the Fund, if (a) your investment in that fund was subject to either a
front-end or contingent deferred sales charge at the time of purchase, (b) the
fund is not part of the Franklin Templeton Funds, and (c) your redemption
occurred within the past 60 days;
(iii) an annuity payment received under either an annuity option or from death
benefit proceeds, provided that the annuity contract offers as one underlying
investment option the Franklin Valuemark Funds, Templeton Variable Annuity Fund,
the Templeton Variable Products Series Fund, or the Franklin Government
Securities Trust. You must return the payment within 365 days of its payment
date. You should contact your tax advisor for information on any tax
consequences of these purchases; or
(iv) a distribution from an existing retirement plan already invested in the
Franklin Templeton Funds (including the Franklin Templeton Profit Sharing 401(k)
plan), up to the total amount of the distribution. The distribution must be
returned to the Fund within 365 days of the distribution date.
You may also reinvest the proceeds from a redemption of any of the Franklin
Templeton Funds at net asset value. To do so, you must (a) have paid a sales
charge on the purchase or sale of the original shares, (b) reinvest the
redemption money in the same class of shares, and (c) request the reinvestment
of the money within 365 days of the redemption date. You may reinvest up to the
total amount of the redemption proceeds under this privilege. 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. While you will receive credit for any
contingent deferred sales charge paid on the shares redeemed, a new contingency
period will begin. Shares that were no longer subject to a contingent deferred
sales charge will be reinvested at net asset value and will not be subject to a
new contingent deferred sales charge. Shares exchanged into other Franklin
Templeton Funds are not considered "redeemed" for this privilege (see "What If
My Investment Outlook Changes? - Exchange Privilege").
If you immediately reinvested your redemption proceeds in a Franklin Bank
Certificate of Deposit ("CD") but you would like to reinvest them back into the
Franklin Templeton Funds as described above, you will have 365 days from the
date the CD (including any rollover) matures to do so.
If your securities dealer or another financial institution reinvests your money
in the Fund at net asset value for you, that person or institution may charge
you a fee for this service.
A redemption is a taxable transaction, but reinvestment without a sales charge
may affect the amount of gain or loss you recognize and the tax basis of the
shares reinvested. If you have a loss on the redemption, the loss may be
disallowed if you reinvest in the same fund within a 30-day period. If you would
like more information regarding the possible tax consequences of such a
reinvestment, please see the tax section of this prospectus and the SAI.
Certain categories of investors also qualify to purchase shares of the Fund at
net asset value regardless of the source of the investment proceeds. If you or
your account is included in one of the categories below, none of the shares of
the Fund you purchase will be subject to front-end or contingent deferred sales
charges:
(i) registered securities dealers and their affiliates, for their investment
accounts only;
(ii) current employees of securities dealers and their affiliates and their
family members, in accordance with the internal policies and procedures of the
employing securities dealer and affiliate;
(iii) broker-dealers who have entered into a supplemental agreement with
Distributors, on behalf of their clients who are participating in comprehensive
fee programs. These programs, sometimes known as wrap fee programs, are
sponsored by the broker-dealer and either advised by the broker-dealer or by
another registered investment advisor affiliated with that broker;
(iv) 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").
IF YOU ARE SUCH AN INVESTOR, PLEASE CONSULT YOUR OWN LEGAL ADVISORS TO DETERMINE
WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS.
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 the Manager on arbitrage rebate
calculations. If you are a securities dealer who has executed a dealer agreement
with Distributors and, through your services, an eligible governmental authority
invests in the Fund at net asset value, Distributors or one of its affiliates
may make a payment, out of its own resources, to you in an amount not to exceed
0.25% of the amount invested. Please contact the Franklin Templeton
Institutional Services Department for additional information;
(v) officers, trustees, directors and full-time employees of the Franklin
Templeton Funds, or of the Franklin Templeton Group, and their family members,
in accordance with then-current rules of Resources for investments by its
employees and their families;
(vi) trust companies and bank trust departments that exercise exclusive
discretionary investment authority over funds held in a fiduciary, agency,
advisory, custodial or similar capacity and agree to invest at least $1 million
in Franklin Templeton Funds over a 13 month period. We will accept orders for
such accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with payment
by federal funds received by the close of business on the next business day
following such order;
(vii) group annuity separate accounts offered to retirement plans;
(viii) Designated Retirement Plans. Non-Designated Retirement Plans may also
qualify to purchase shares of the Fund under this privilege if they meet the
requirements for Designated Retirement Plans and those described under "Group
Purchases," above;
(ix) companies exchanging shares or selling assets pursuant to a merger,
acquisition or exchange offer;
(x) accounts managed by the Franklin Templeton Group; or
(xi) certain unit investment trusts and unit holders of these trusts reinvesting
distributions from the trusts in the Fund.
If you qualify to buy shares at net asset value as discussed in this section,
please specify in writing the privilege that applies to your purchase and
include that written statement with your purchase order. We will not be
responsible for purchases that are not made at net asset value if this written
statement is not included with your order.
If you would like more information, please see "How Do I Buy and Sell Shares?"
in the SAI.
How Do I Buy Shares in Connection
with Tax-Deferred Retirement Plans?
Your individual or employer-sponsored tax-deferred retirement plans may invest
in the Fund. You may use the Fund for an existing retirement plan, or, because
Trust Company can serve as custodian or trustee for retirement plans, you may
ask Trust Company to 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.
Brochures for Trust Company plans contain important information regarding
eligibility, contribution and deferral limits and distribution requirements.
Please note that you must use an application other than the one contained in
this prospectus to establish a retirement plan account with Trust Company. To
obtain a retirement plan brochure or application, please call 1-800/DIAL BEN
(1-800/342-5236).
Please see "How Do I Sell Shares?" for information regarding redemptions from
retirement plan accounts. You must complete specific forms in order to receive
distributions from Trust Company retirement plans.
Individuals and plan sponsors should consult with legal, tax or benefits and
pension plan consultants before choosing a retirement plan. In addition, if you
are a retirement plan investor, you should consider consulting your investment
representative or advisor about investment decisions within your plan.
General
The Fund continuously offers its shares through securities dealers who have an
agreement with Distributors. The Fund and Distributors may refuse any order for
the purchase of shares.
Securities laws of states in which the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required to register as securities dealers pursuant to state law.
Other Payments to Securities Dealers. Distributors will pay the following
commissions, out of its own resources, to securities dealers who initiate and
are responsible for purchases of $1 million or more: 1% on sales of $1 million
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. These breakpoints are reset every 12 months for purposes of
additional purchases.
Distributors or one of its affiliates may also pay up to 1% of the purchase
price to securities dealers who initiate and are responsible for purchases made
at net asset value by any of the entities described in paragraphs (vi) or (viii)
under "Purchases at Net Asset Value" above. These payments may not be made to
securities dealers or others in connection with the sale of Fund shares if the
payments might be used to offset administration or recordkeeping costs for
retirement plans or circumstances suggest that plan sponsors or administrators
might use or otherwise allow the use of Rule 12b-1 fees to offset such costs.
Please see "How Do I Buy and Sell Shares?" in the SAI for the breakpoints
applicable to these purchases.
Either Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with the
sale of shares of the Franklin Templeton Funds. In some cases, this compensation
may be available only to securities dealers whose representatives have sold or
are expected to sell significant amounts of shares of the Franklin Templeton
Funds. Compensation may include financial assistance and payments made in
connection with conferences, sales or training programs for employees of the
securities dealer, seminars for the public, advertising, sales campaigns and/or
shareholder services, programs regarding one or more of the Franklin Templeton
Funds and other programs or events sponsored by securities dealers, and payment
for travel expenses of invited registered representatives and their families,
including lodging, in connection with business meetings or seminars located
within or outside the U.S. Securities dealers may not use sales of the Fund's
shares to qualify for this compensation if prohibited by the laws of any state
or self-regulatory agency, such as the National Association of Securities
Dealers, Inc. None of this compensation is paid for by the Fund or its
shareholders.
For additional information about shares of the Fund, please see "How Do I Buy
and Sell Shares?" in the SAI. The SAI also includes a listing of the officers
and trustees of the Trust who are affiliated with Distributors. See "Officers
and Trustees."
What Programs and Privileges
Are Available to Me as a Shareholder?
Certain of the programs and privileges described in this section may not be
available directly from the Fund if your 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 "Registering Your
Account" in this prospectus).
Share Certificates
Shares from 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 you, can be 2% or more of the value of the lost,
stolen or destroyed certificate. A certificate will be issued if requested by
you or your securities dealer.
Confirmations
A confirmation statement will be sent to you annually to reflect the dividends
reinvested during the period and after each other transaction which affects your
account. This statement will also show the total number of shares you own,
including the number of shares in "plan balance" for your account.
Automatic Investment Plan
The Automatic Investment Plan offers a convenient way to invest in the Fund.
Under the plan, you can arrange to have money transferred automatically from
your checking account to the Fund each month to buy additional shares. If you
are interested in this program, please refer to the Automatic Investment Plan
Application at the back of this prospectus for the requirements of the program
or contact your investment representative. Of course, the market value of the
Fund's shares may fluctuate and a systematic investment plan such as this will
not assure a profit or protect against a loss. You may terminate the program at
any time by notifying Investor Services by mail or by phone.
Systematic Withdrawal Plan
The Systematic Withdrawal Plan allows you to receive regular payments from your
account on a monthly, quarterly, semiannual or annual basis. To establish a
Systematic Withdrawal Plan, the value of your account must be at least $5,000
and the minimum payment amount for each withdrawal must be at least $50. Please
keep in mind that $50 is merely the minimum amount and is not a recommended
amount. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply.
If you would like to establish a Systematic Withdrawal Plan, please complete the
Systematic Withdrawal Plan section of the Shareholder Application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to receive your payments in any of the following ways:
1. Purchase shares of other Franklin Templeton Funds - You may direct your
payments to purchase the same class of shares of another Franklin Templeton
Fund.
2. Receive payments in cash - You may choose to receive your payments in cash.
You may have the money sent directly to you, to another person, or to a checking
account. If you choose to have the money sent to a checking account, please see
"Electronic Fund Transfers" below.
There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once your plan is established, any distributions paid by the
Fund will be automatically reinvested in your account. Payments under the plan
will be made from the redemption of an equivalent amount of shares in your
account, generally on the first business day of the month in which a payment is
scheduled. You will generally receive your payments within three to five days
after the shares are redeemed.
Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Redemptions under a
Systematic Withdrawal Plan are considered a sale for federal income tax
purposes. Because the amount withdrawn under the plan may be more than your
actual yield or income, part of the payment may be a return of your investment.
While a Systematic Withdrawal Plan is in effect, shares must be held either in
plan balance or, where share certificates are outstanding, deposited with the
Fund. You should ordinarily not make additional investments in the Fund of less
than $5,000 or three times the amount of annual withdrawals under the plan
because of the sales charge on additional purchases. Shares redeemed under the
plan may also be subject to a contingent deferred sales charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may terminate a Systematic Withdrawal Plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying Investor Services in
writing at least seven business days prior to the end of the month preceding a
scheduled payment. The Fund may also terminate a Systematic Withdrawal Plan by
notifying you in writing and will automatically terminate a Systematic
Withdrawal Plan if all shares in your account are withdrawn or if the Fund
receives notification of the shareholder's death or incapacity.
Electronic Fund Transfers
You may choose to have distributions from the Fund or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the checking
account is maintained at a bank that is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
you choose this option, please allow at least fifteen days for initial
processing. Any payments made during that time will be sent to the address of
record on your account.
Institutional Accounts
There may be additional methods of buying, selling or exchanging shares of
the Fund available to institutional accounts. For further information,
contact the Franklin Templeton Institutional Services Department at
1-800/321-8563.
What If My Investment Outlook Changes? -
Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these funds are
offered to the public with a sales charge. If your investment objective or
outlook for the securities markets changes, Fund shares may be exchanged for the
same class of shares of another Franklin Templeton Fund eligible for sale in
your state of residence and in conformity with that fund's stated eligibility
requirements and investment minimums.
No exchanges between different classes of shares will be allowed. You may choose
to sell your shares of the Fund and buy Class II shares of another Franklin
Templeton Fund but such purchase will be subject to that fund's Class II
front-end and contingent deferred sales charges. Although there are no exchanges
between different classes of shares, Class II shareholders of a Franklin
Templeton Fund may elect to direct their dividends and capital gain
distributions to the Fund at net asset value.
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 the
contingency period, a contingent deferred sales charge will be imposed.
Before making an exchange, you should review the prospectus of the fund you wish
to exchange from and the fund you wish to exchange into for all specific
requirements or limitations on exercising the exchange privilege, for example,
limitations on a fund's sale of its shares, minimum holding periods for
exchanges at net asset value, or applicable sales charges.
You may exchange shares in any of the following ways:
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.
By Telephone
You or your investment representative of record, if any, may exchange shares of
the Fund by call- ing Investor Services at 1-800/632-2301 or the automated
TeleFACTS(R) system (day or night) at 1-800/247-1753. If you do not wish this
privilege extended to a particular account, you should notify the Fund or
Investor Services.
The telephone exchange privilege allows you to effect exchanges from the Fund
into an identically registered account of the same class of shares in one of the
other available Franklin Templeton Funds. The telephone exchange privilege is
available only for uncertificated shares or those which have previously been
deposited in your account. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Please see "Telephone Transactions - Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, you should follow the other exchange
procedures discussed in this section, including the procedures for processing
exchanges through securities dealers.
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 "By Telephone" above.
Such a dealer-ordered exchange will be effective only for uncertificated shares
on deposit in your account or for which certificates have previously been
deposited. A securities dealer may charge a fee for handling an exchange.
Additional Information Regarding Exchanges
Exchanges are made on the basis of the net asset value 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 original
investment in the Franklin Templeton Funds was made pursuant to the privilege
permitting purchases at net asset value, as discussed under "How Do I Buy
Shares?" 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, unless the shares were held in the Fund for at least six months
prior to executing the exchange.
The contingency period during which a contingent deferred sales charge may be
assessed will be tolled (or stopped) for the period shares are exchanged into
and held in a Franklin or Templeton money market fund. If your 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 "How Do I Sell
Shares? - Contingent Deferred Sales Charge" for a discussion of investments
subject to a contingent deferred sales charge.
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be transferred to
the fund being exchanged into and will be invested at net asset value. Because
the exchange is considered a redemption and purchase of shares, you 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 under "Additional Information Regarding Taxation" in the SAI.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing money market
instruments, unless it is felt that attractive investment opportunities
consistent with the Fund's investment 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 Plan Accounts
Franklin Templeton IRA and 403(b) retirement plan accounts may exchange
shares directly. Certain restrictions may apply, however, to other types of
retirement plans. See "Restricted Accounts" under "Telephone Transactions."
Market Timers
Market Timers will be charged a $5.00 administrative service fee for each
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
Market Timers.
The Fund reserves the right to temporarily or permanently terminate the exchange
privilege or reject any specific purchase order for any Market Timer, group or
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, (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 by Market Timers, 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 Market Timer, 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.
The purchase side of an exchange 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, as indicated in "How Do I Buy Shares?" reserve the
right to refuse any order for the purchase of shares.
How Do I Sell Shares?
You may sell (redeem) your shares at any time and receive from the Fund the
value of the shares. You may sell shares in any of the following ways:
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. You 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 will receive
the price calculated on the following business day. The net asset value per
share is determined as of the scheduled close of the Exchange (generally 1:00
p.m. Pacific time) each day that the Exchange is open for trading. You are
requested to provide a telephone number where you may be reached during business
hours, or in the evening if preferred. Investor Services' ability to contact you
promptly when necessary will speed the processing of the redemption.
To be considered in proper form, signatures 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 owners of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
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.
Signatures 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
that are members of a national securities exchange or a clearing agency or that
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.
When 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 owners exactly as the account is
registered, with the signatures guaranteed as referenced above. You are advised,
for your 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
officers 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 trustees and (2)
a copy of the pertinent pages of the trust document listing the trustees or a
Certification for Trust if the trustees 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 applicable state
law since these accounts have varying requirements, depending upon the state of
residence.
Payment for redeemed shares will be sent to you within seven days after receipt
of the request in proper form.
By Telephone
If you complete the Franklin Templeton Telephone Redemption Authorization
Agreement (the "Agreement"), included with this prospectus, you may redeem
shares of the Fund by telephone, subject to the Restricted Account exception
noted under "Telephone Transactions - Restricted Accounts." You may obtain
additional information about telephone redemptions 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. You, however, bear
the risk of loss in certain cases as described under "Telephone Transactions -
Verification Procedures."
If your account has a completed Agreement on file, redemptions of uncertificated
shares or shares which have previously been deposited with the Fund or Investor
Services may be made for up to $50,000 per day per Fund account. Telephone
redemption requests received before the scheduled close of the Exchange
(generally 1:00 p.m. Pacific time) on any business day will be processed that
same day. The redemption check will be sent within seven days, made payable to
all the registered owners on the account, and will be sent only to the address
of record.
Redemption requests by telephone will not be accepted within 30 days following
an address change by telephone. In that case, you should follow the other
redemption procedures set forth in this prospectus. Institutional accounts
(certain corporations, bank trust departments, qualified retirement plans and
government entities that qualify to purchase shares at net asset value pursuant
to the terms of this prospectus) that 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
calling 1-800/321-8563.
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 you redeem
shares through a dealer, the redemption price will be the net asset value next
calculated after your dealer receives the order which is promptly transmitted to
the Fund, rather than on the day the Fund receives your written request in
proper form. The documents described under "By Mail" above, as well as a signed
letter of instruction, are required regardless of whether you redeem shares
directly or submit such shares to a securities dealer for repurchase. Your
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 your 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 your best interest to have the required
documentation completed and forwarded to the Fund as soon as possible. Your
dealer may charge a fee for handling the order. See "How Do I Buy and Sell
Shares?" in the SAI for more information on the redemption of shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers, all or a portion of
investments of $1 million or more redeemed within the contingency period of 12
months of the calendar month of such investment will be assessed a contingent
deferred sales charge, unless one of the exceptions described below applies. The
charge is 1% of the lesser of the value of the shares redeemed (exclusive of
reinvested dividends and capital gain distributions) or the net asset value at
the time of purchase of such shares, and is retained by Distributors. The
contingent deferred sales charge is waived in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation on shares held less than the contingency
period; (ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than the contingency period.
Shares subject to a contingent deferred sales charge will then be redeemed 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, as applicable, for: specified
net asset value purchases discussed under "How Do I Buy Shares? - Purchases at
Net Asset Value"; exchanges; any account fees; distributions from an individual
retirement plan account due to death or disability or upon periodic
distributions based on life expectancy; tax-free returns of excess contributions
from employee benefit plans; distributions from employee benefit plans,
including those due to termination or plan transfer; redemptions initiated by
the Fund due to an account falling below the minimum specified account size;
redemptions following the death of the shareholder or beneficial owner; and
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). 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% contingent deferred sales charge.
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.
Unless otherwise specified, requests for redemptions of a specified dollar
amount 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.
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 you invested, 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, you or your 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 Information
Distribution or redemption checks sent to you 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 caused by your failure to cash such
checks.
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
For any information required about a proposed liquidation, you may call
Franklin's Shareholder Services Department. Securities dealers may call
Franklin's Dealer Services Department.
Telephone Transactions
By calling Investor Services at 1-800/632-2301, you or your investment
representative of record, if any, may be able to execute various telephone
transactions, including 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, (iv) request
the issuance of certificates (to be sent to the address of record only) and (v)
exchange Fund shares as described in this prospectus by telephone. In addition,
if you complete and file an Agreement as described under "How Do I Sell Shares?
- - By Telephone" you will be able to redeem shares of the Fund.
Verification Procedures
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to you 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. You 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 redemption, distribution or
dividend payment changes. While the telephone exchange privilege is extended to
Franklin Templeton IRA and 403(b) retirement accounts, certain restrictions may
apply to other types of retirement plans.
To obtain further information regarding distribution or transfer procedures,
including any required forms, retirement account shareholders may call to speak
to a Retirement Plan Specialist at 1-800/527-2020.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privilege will be difficult to execute because of heavy
telephone volume. In these situations, you may wish to contact your investment
representative for assistance or 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 your inability to execute a telephone transaction.
How Are Fund Shares Valued?
The net asset value per share of the Fund is determined as of the scheduled
close of the Exchange (generally 1:00 p.m. Pacific time) each day that the
Exchange is open for trading. Many newspapers carry daily quotations of the
prior trading day's closing "bid" (net asset value) and "ask" (offering price).
The net asset value per share of the Fund is determined by deducting the
aggregate gross value of all liabilities from the aggregate gross value of all
assets, and then dividing the difference by the number of shares outstanding.
Assets in the Fund's portfolio are valued as described under "How Are Fund
Shares Valued?" in the SAI.
How Do I Get More Information
About My Investment?
Any questions or communications regarding your account should be directed to
Investor Services at the address shown on the back cover of this prospectus.
From a touch-tone phone, you may access TeleFACTS(R). By calling the TeleFACTS
system (day or night) at 1-800/247-1753, you may obtain account information,
current price and, if available, yield or other performance information specific
to the Fund or any Franklin Templeton Fund. In addition, you may process an
exchange, within the same class, into an identically registered Franklin account
and request duplicate confirmation or year-end statements and deposit slips.
The Fund code, which will be needed to access system information, is 283. The
system's automated operator will prompt you with easy to follow step-by-step
instructions from the main menu. Other features may be added in the future.
To assist you and securities dealers wishing to speak directly with a
representative, the following list of Franklin departments, telephone numbers
and hours of operation is provided.
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00p.m.
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
How Does the Fund Measure Performance?
Advertisements, sales literature and communications to you may contain several
measures of the Fund's performance, including current yield, various expressions
of total return and current distribution rate. They may also occasionally cite
statistics to reflect the Fund's 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 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.
Current yield for the Fund, which is calculated according to a formula
prescribed by the SEC (see "General Information" in the SAI), is not indicative
of the dividends or distributions which were or will be paid to the Fund's
shareholders. Dividends or distributions paid to shareholders of the Fund are
reflected in the current distribution rate, which may be quoted to you. The
current distribution rate is usually computed by annualizing the dividends paid
per share during a certain period and dividing that amount by the current
maximum offering price. 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 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 performance may be in any future period.
General Information
Reports to Shareholders
The Fund's fiscal year ends April 30. Annual Reports containing audited
financial statements of the Fund, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to each household, as
well as to reduce Fund expenses, Investor Services will attempt to identify
related shareholders within a household and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to the Fund at
the telephone number or address set forth on the cover page of this prospectus.
Additional information on Fund performance is included in the Trust's Annual
Report to Shareholders and under "General Information" in the SAI.
Organization and Voting Rights
The Agreement and Declaration of Trust permits the trustees to issue an
unlimited number of full and fractional shares of beneficial interest of $.01
par value, which may be issued in any number of series and classes. Shares
issued will be fully paid and non-assessable and will have no preemptive,
conversion, or sinking rights. Shares of each series have equal and exclusive
rights as to dividends and distributions as declared by such series and the net
assets of such series upon liquidation or dissolution. Additional series or
classes may be added in the future by the Board.
Voting rights are noncumulative, so that in any election of trustees, the
holders of more than 50% of the shares voting can elect all of the trustees, if
they choose to do so, and in such event the holders of the remaining shares
voting will not be able to elect any person or persons to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust may,
however, hold a special shareholders' meeting of a series 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 outstanding
shares. 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.
Conversion to Master/Feeder Structure
The Board 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. Certain funds administered by the 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, provided that a
superseding contrary provision has not been adopted. If it is determined by the
requisite regulatory authorities that such approval is not required, you will be
deemed to have consented to such conversion by your purchase of Fund shares and
no further shareholder approval will be sought or needed. You 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 you or the Fund. 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.
Redemptions by the Fund
The Fund reserves the right to redeem your shares, at net asset value, if your
account has a value of less than $50, but only where the value of your account
has been reduced by the prior voluntary redemption of shares and has been
inactive (except for the reinvestment of distributions) for a period of at least
six months, provided you are given advance notice. For more information, see
"How Do I Buy and Sell Shares?" in the SAI.
Registering Your Account
An account registration should reflect your 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, you may transfer an account in the Fund carried in "street"
or "nominee" name by your 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 your
delivering securities dealer. To effect the transfer, you should instruct the
securities dealer to transfer the account to a receiving securities dealer and
sign any documents required by the securities dealers 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 your delivering securities dealer. Account transfers may be
effected electronically through the services of the NSCC.
The Fund may conclusively accept instructions from you or your nominee listed in
publicly available nominee lists, regardless of whether the account was
initially registered in the name of or by you, your nominee, or both. If a
securities dealer or other representative is of record on your account, you 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 Investor Services, 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. You may also
be subject to backup withholding if the IRS or a securities dealer notifies the
Fund that the number furnished by you is incorrect or that you are 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 you 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.
Useful Terms and Definitions
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Trustees of the Trust
Class I and Class II - "Classes" of shares represent proportionate interests in
the same portfolio of investment securities but with different rights,
privileges and attributes, as determined by the trustees. Certain funds in the
Franklin Templeton Funds currently offer their shares in two classes, designated
"Class I" and "Class II." Because the Fund's sales charge structure and plan of
distribution are similar to those of Class I shares, shares of the Fund may be
considered Class I shares for redemption, exchange and other purposes.
Code - Internal Revenue Code of 1986, as amended
Designated Retirement Plans - certain retirement plans, including
profit-sharing, pension, 401(k) and simplified employee pension plans, that: (i)
are sponsored by an employer with at least 200 employees; (ii) have aggregate
plan assets of at least $1 million; or (iii) agree to invest at least $1 million
in any of the Franklin Templeton Funds over a 13 month period. Distributors
determines the qualifications for Designated Retirement Plans.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
Exchange - New York Stock Exchange
Franklin Funds - the mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust
Franklin Templeton Funds - the Franklin Funds and the Templeton Funds
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Investor Services - Franklin/Templeton Investor Services, Inc.
Letter - Letter of Intent
Manager - Franklin Advisers, Inc., the Fund's investment manager
Market Timer(s) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
Net asset value (NAV) - the value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding. When you buy, sell or exchange shares, we will use
the NAV per share next calculated after we receive your request in proper form.
Non-Designated Retirement Plans - employee benefit plans not included as
"Designated Retirement Plans" and not qualified under Section 401 of the Code
Offering Price - The public offering price is equal to the net asset value per
share plus the 4.50% sales charge.
Proper Form (Purchases) - generally, the Fund must receive a completed
Shareholder Application accompanied by a negotiable check.
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - Securities and Exchange Commission
Securities Dealer - financial institutions which, either directly or through
affiliates, have an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TeleFACTS(R) - Franklin Templeton's automated customer servicing system
Templeton Funds - 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
Trust Company - Franklin Templeton Trust Company. Trust Company is an
affiliate of Distributors and both are wholly-owned subsidiaries of Resources.
U.S. - United States
FRANKLIN
BLUE CHIP
FUND
FRANKLIN STRATEGIC SERIES
STATEMENT OF
ADDITIONAL INFORMATION
JUNE 3, 1996
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
Contents.......................... Page
How Does the Fund Invest Its Assets? 2
What Are the Fund's Potential Risks? 5
Investment Restrictions........... 6
Officers and Trustees............. 7
Investment Advisory and Other Services 10
How Does the Fund Purchase Securities
For Its Portfolio?.............. 11
How Do I Buy and Sell Shares?..... 12
How Are Fund Shares Valued?....... 15
Additional Information Regarding Taxation 16
The Fund's Underwriter............ 18
General Information............... 20
Useful Terms and Definitions...... 23
Appendix.......................... 23
The Franklin Blue Chip Fund (the "Fund") is a diversified series of Franklin
Strategic Series (the "Trust"), an open-end management investment company. The
Fund's investment objective is long-term capital appreciation. In seeking to
meet this objective, the Fund primarily invests in equity securities of blue
chip companies. The Fund may also seek current income incidental to long-term
capital appreciation, although this is not a fundamental policy of the Fund.
A prospectus for the Fund, dated June 3, 1996, as may be amended from time to
time (the "Prospectus"), provides the basic information you should know before
investing in the Fund and may be obtained without charge from the Fund or
Distributors, at the address or telephone number shown above.
THIS 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 YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
How Does the Fund Invest Its Assets?
The following provides more detailed information about some of the securities
the Fund may buy and the Fund's investment policies. You should read it together
with the section in the Prospectus entitled "How Does the Fund Invest Its
Assets?"
American Depositary Receipts. The Fund may buy sponsored or unsponsored American
Depositary Receipts ("ADRs"). With a sponsored ADR, the issuing facility is
established by the participation of the issuer and the depositary institution
under a deposit agreement that sets out the rights and responsibilities of the
issuer, the depositary and the ADR holder. Under the terms of most sponsored
arrangements, depositaries agree to distribute notices of shareholder meetings
and voting instructions. This ensures ADR holders will be able to exercise
voting rights through the depositary with respect to the deposited securities.
An unsponsored ADR has no sponsorship by the issuing facility and more than one
depositary institution may be involved in its issuance. An unsponsored ADR
typically clears through a depositary, such as the Depository Trust Company, so
there should be no additional delays in selling the security or in obtaining
dividends. Although not required, the depositary normally requests a letter of
non-objection from the issuer and is not required to distribute notices of
shareholder meetings or financial information to the ADR holder.
Forward Currency Exchange Transactions. The Fund may enter into forward currency
exchange transactions in order to (i) "lock-in" the U.S. dollar price of a
security in its portfolio denominated in a foreign currency; (ii) sell an amount
of a foreign currency approximating the value of some or all of its portfolio
securities denominated in that foreign currency when Advisers believes the
foreign currency may decline substantially against the U.S. dollar; or (iii) buy
a foreign currency for a fixed dollar amount when Advisers believes the U.S.
dollar may substantially decline against that foreign currency.
The value of securities denominated in a foreign currency may change during the
time between when a forward transaction is entered into and the time it settles.
It is therefore generally not possible to match precisely the forward
transaction amount and the value of the securities in the Fund's portfolio
denominated in the currency involved. Using a forward currency transaction 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 that the Fund can
achieve at some future time. The precise projection of short-term currency
market movements is not possible and short-term hedging provides a way to fix
the dollar value of only a portion of the Fund's foreign securities.
To limit the potential risks of buying currency under forward currency
transactions, the Fund will keep cash, cash equivalents or readily marketable
high-grade debt securities equal to the amount of the purchase in a segregated
account with its custodian bank to be used to pay for the commitment. The Fund
will cover any commitments under these transactions to sell currency by owning
the underlying currency or an absolute right to acquire the underlying currency.
The segregated account will be marked-to-market daily.
Convertible Securities. A convertible security is usually issued either by an
operating company or an investment bank. If it's issued by an operating company,
it tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security. If the parity price
of the convertible security is less than the call price, however, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of that bank and is
convertible through the bank. The holder of a convertible security has recourse
only to the issuer. Therefore, the issuer may be important in determining the
security's true value.
The Fund uses the same criteria to rate a convertible debt security that it uses
to rate a more conventional debt security and treats a convertible preferred
stock as a preferred stock for the Fund's financial reporting, credit rating,
and investment limitation purposes. A preferred stock is subordinated to all
debt obligations in the event of an issuer's insolvency. An issuer's failure to
make a dividend payment is generally not an event of default entitling the
holder of preferred stock to take action. A preferred stock generally has no
maturity date, so its market value is dependent on the issuer's business
prospects for an indefinite period of time. Distributions from preferred stock
are dividends, not interest payments, and are usually treated as dividends for
corporate tax purposes.
Options. The Fund may buy or write (sell) put and call options on securities
listed on a national securities exchange for portfolio hedging purposes. All
options written by the Fund will be covered. This means so long as the Fund is
obligated as the writer of a call option, it will own the underlying security
subject to the call or an absolute right to acquire the security without
additional cash consideration (or for additional cash consideration if the
amount is held in a segregated account with its custodian bank) upon conversion
of other securities in its portfolio. A call option is also covered if the Fund
holds a call on the same security and in the same principal amount as the call
written where the exercise price of the call held is (a) equal to or less than
the exercise price of the call written or (b) greater than the exercise price of
the call written if the difference is held in cash or high-grade debt securities
in a segregated account with the Fund's custodian bank.
A put option written by the Fund is covered if the Fund maintains cash or
high-grade debt securities with a value equal to the exercise price of the
written put in a segregated account with its custodian bank. A put is also
covered if the Fund holds a put on the same security and in the same principal
amount as the put written where the exercise price of the put held is equal to
or greater than the exercise price of the put written.
The premium paid by the buyer of an option will reflect, among other things, the
relationship of the exercise price to the market price and volatility of the
underlying security, the remaining term of the option, supply and demand, and
interest rates.
The writer of an option may have no control over when the underlying securities
must be sold, in the case of a call option, or purchased, in the case of a put
option, since the writer may be assigned an exercise notice at any time prior to
the termination of the obligation. Whether or not an option expires unexercised,
the writer retains the amount of the premium. This amount may, in the case of a
covered call option, be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised, the
writer experiences a profit or loss from the sale of the underlying security. If
a put option is exercised, the writer must fulfill the obligation to buy the
underlying security at the exercise price, which will usually exceed the market
value of the underlying security at that time.
If the writer of an option wants to terminate its obligation, the writer may
effect a "closing purchase transaction." This is done by buying an option of the
same series as the option previously written. The effect of the purchase is that
the writer's position will be canceled by the clearing corporation. However, a
writer may not effect a closing purchase transaction after being notified of the
exercise of an option. Likewise, the holder of an option may liquidate its
position by effecting a "closing sale transaction." This is done by selling an
option of the same series as the option previously purchased. There is no
guarantee that either a closing purchase or a closing sale transaction may be
made at the time desired by the Fund.
Effecting a closing transaction in the case of a written call option allows the
Fund to write another call option on the underlying security with a different
exercise price, expiration date or both. In the case of a written put option, a
closing transaction allows the Fund to write another covered put option.
Effecting a closing transaction also allows the cash or proceeds from the sale
of any securities subject to the option to be used for other Fund investments.
If the Fund wants to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing transaction prior to or at
the same time as the sale of the security.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to buy the option. Likewise, the Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to buy
the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
The writing of covered put options involves certain risks. For example, if the
market price of the underlying security rises or otherwise is above the exercise
price, the put option will expire worthless and the Fund's gain will be limited
to the premium received. If the market price of the underlying security declines
or otherwise is below the exercise price, the Fund may elect to close the
position or take delivery of the security at the exercise price and the Fund's
return will be the premium received from the put option minus the amount by
which the market price of the security is below the exercise price.
The Fund may buy call options on securities it intends to buy in order to limit
the risk of a substantial increase in the market price of the security before
the purchase is effected. The Fund may also buy call options on securities held
in its portfolio and on which it has written call options. Prior to its
expiration, a call option may be sold in a closing sale transaction. Profit or
loss from the sale will depend on whether the amount received is more or less
than the premium paid for the call option plus any related transaction costs.
The Fund may buy put options on securities to protect against a decline in the
market value of the underlying security below the exercise price less the
premium paid for the option. The ability to buy put options allows the Fund to
protect the unrealized gain in an appreciated security in its portfolio without
actually selling the security. In addition, the Fund continues to receive
interest or dividend income on the security. The Fund may sell a put option it
has previously purchased prior to the sale of the security underlying the
option. The sale of the option will result in a net gain or loss depending on
whether the amount received on the sale is more or less than the premium and
other transaction costs paid for the put option. Any gain or loss may be wholly
or partially offset by a change in the value of the underlying security that the
Fund owns or has the right to acquire.
The Fund may write covered put and call options and buy put and call options
that trade in the over-the-counter ("OTC") market to the same extent that it may
engage in exchange traded options. Like exchange traded options, OTC options
give the holder the right to buy, in the case of OTC call options, or sell, in
the case of OTC put options, an underlying security from or to the writer at a
stated exercise price. However, OTC options differ from exchange traded options
in certain material respects.
OTC options are arranged directly with dealers and not with a clearing
corporation. Thus, there is a risk of non-performance by the dealer. Because
there is no exchange, pricing is typically done based on information from market
makers. OTC options are available for a greater variety of securities and in a
wider range of expiration dates and exercise prices, however, than exchange
traded options and the writer of an OTC option is paid the premium in advance by
the dealer.
Futures. The Fund may buy and sell futures contracts for securities and
currencies. The Fund may also enter into closing purchase and sale transactions
with respect to these futures contracts. The Fund will engage in futures
transactions only for bona fide hedging or other appropriate risk management
purposes. All futures contracts entered into by the Fund are traded on U.S.
exchanges or boards of trade licensed and regulated by the Commodities Futures
Trading Commission ("CFTC") or on foreign exchanges.
When securities prices are falling, the Fund may offset a decline in the value
of its current portfolio securities through the sale of futures contracts. When
prices are rising, the Fund can attempt to secure better prices than might be
available when it intends to buy securities through the purchase of futures
contracts. Similarly, the Fund can sell futures contracts on a specified
currency to protect against a decline in the value of that currency and its
portfolio securities denominated in that currency. The Fund can buy futures
contracts on a foreign currency to fix the price in U.S. dollars of a security
denominated in that currency that the Fund has purchased or expects to buy.
Although futures contracts by their terms generally call for the actual delivery
or acquisition of underlying securities or currency, in most cases the
contractual obligation is fulfilled before the date of the contract without
having to make or take 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. This transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the securities or currency underlying the contractual obligation.
The Fund may incur brokerage fees when it buys or sells futures contracts.
Positions taken in the futures markets are not normally held to maturity, but
are liquidated through offsetting transactions that may result in a profit or a
loss. While the Fund's futures contracts on securities and currencies will
usually be liquidated in this manner, the Fund may instead make or take delivery
of the underlying securities or currencies whenever it appears economically
advantageous for it to do so. A clearing corporation associated with the
exchange on which futures on securities or currencies are traded guarantees
that, if still open, the sale or purchase will be performed on the settlement
date.
To the extent the Fund enters into a futures contract, it will deposit in a
segregated account with its custodian cash or U.S. Treasury obligations equal to
a specified percentage of the value of the futures contract (the "initial
margin"), as required by the relevant contract market and futures commission
merchant. The futures contract will be marked-to-market daily. Should the value
of the futures contract decline relative to the Fund's position, the Fund will
be required to pay the futures commission merchant an amount equal to the change
in value.
When-Issued or Delayed Delivery Transactions. If the Fund buys securities on a
when-issued basis, it will do so for the purpose of acquiring securities
consistent with its investment objective and polices and not for investment
leverage. The Fund may sell securities purchased on a when-issued basis before
the settlement date, however, if Advisers believes it is advisable to do so.
When the Fund is the buyer in one of these transactions, it relies on the seller
to complete the transaction. If the seller fails to do so, the Fund may miss an
advantageous price or yield for the underlying security. When the Fund is the
buyer, it will keep cash or high-grade marketable securities in a segregated
account with its custodian bank until payment is made. The amount held in the
account will equal the amount the Fund must pay for the securities at delivery.
Standby Commitment Agreements. The Fund may enter into a standby commitment
agreement to invest in the security underlying the commitment at a yield or
price that Advisers believes is advantageous to the Fund. The Fund will not
enter into a standby commitment if the remaining term of the commitment is more
than 45 days. If the Fund enters into a standby commitment, it will keep cash or
high-grade marketable securities in a segregated account with its custodian bank
in an amount equal to the purchase price of the securities underlying the
commitment.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the Fund's books on the date the
security can reasonably be expected to be issued. The value of the security will
then be reflected in the calculation of the Fund's net asset value. The cost
basis of the security will be adjusted by the amount of the commitment fee. If
the security is not issued, the commitment fee will be recorded as income on the
expiration date of the standby commitment.
Restricted Securities. The Board has authorized the Fund to invest in restricted
securities, if consistent with the Fund's investment objective. If Advisers
determines on a daily basis that there is a liquid institutional or other market
for these securities, the Board has authorized them to be considered liquid
securities and not subject to the Fund's policy on illiquid investments. When
determining whether a restricted security is properly considered a liquid
security, Advisers and the Board will consider: (i) the frequency of trades and
quotes for the security; (ii) the number of dealers willing to buy or sell the
security and the number of other potential buyers; (iii) dealer undertakings to
make a market in the security; and (iv) the nature of the security and the
marketplace trades, for example the time needed to sell the security, the method
of soliciting offers, and the mechanics of transfer.
What Are the Fund's Potential Risks?
Forward Currency Exchange Transactions. While the Fund may enter into forward
currency transactions to reduce currency exchange rate risks, these transactions
involve certain other risks. Forward currency exchange transactions may limit
the potential gain to the Fund from a positive change in the relationship
between the U.S. dollar and foreign currencies or between foreign currencies.
Unanticipated changes in currency exchange rates may result in poorer overall
performance for the Fund than if it had not entered into these transactions.
Furthermore, there may be imperfect correlation between the Fund's portfolio
securities denominated in a particular currency and forward currency
transactions entered into by the Fund. This may cause the Fund to sustain losses
that will prevent the Fund from achieving a complete hedge or expose the Fund to
the risk of foreign exchange loss.
Convertible Securities. The value of a convertible debt security may be
influenced by both interest rate and market movements. Like a regular debt
security, it tends to increase in market value when interest rates decline and
decrease in value when interest rates rise. Like a common stock, it also tends
to increase as the market value of the underlying stock rises and decrease as
the market value of the underlying stock declines. Because its value is
influenced by both these factors, a convertible security is not as sensitive to
interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock.
Options and Futures. The Fund's options and futures investments involve certain
risks. These risks include, among others, the risk that the effectiveness of an
options and futures strategy depends on the degree that price movements in the
underlying securities or currency, in the case of the Fund's futures
transactions, correlate with price movements in the relevant portion of the
Fund's portfolio. The Fund bears the risk that the prices of its portfolio
securities will not move in the same amount as the option or future it has
purchased, or that there may be a negative correlation that would result in a
loss on both the securities and the option or futures contract. There is also
the risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or option.
Positions in exchange traded options and futures may be closed out only on an
exchange that provides a secondary market. There can be no assurance that a
liquid secondary market will exist for any particular option or futures contract
at any specific time. Thus, it may not be possible to close an option or futures
position. The inability to close options or futures positions may have an
adverse impact on the Fund's ability to effectively hedge its securities.
Furthermore, if the Fund is unable to close out a futures or options position
and if prices move adversely, the Fund will have to continue to make daily cash
payments to maintain its required margin. If the Fund does not have sufficient
cash to do this, it may have to sell portfolio securities at a disadvantageous
time. Of course, the Fund will enter into an option or futures position only if
there appears to be a liquid secondary market for those options or futures.
Similarly, there can be no assurance that a continuous liquid secondary market
will exist for any particular OTC option at any specific time. Consequently, the
Fund may be able to realize the value of an OTC option it has purchased only by
exercising it or by entering into a closing sale transaction with the dealer
that issued it. When the Fund writes an OTC option, it generally can close out
that option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it.
When-Issued or Delayed Delivery Transactions. The securities underlying these
transactions are subject to market fluctuation prior to delivery and generally
do not earn interest until their scheduled delivery date. There is the risk that
the value or yield of the security at the time of delivery may be more or less
than the price paid for the security or the yield available when the transaction
was entered into.
Standby Commitment Agreements. There can be no assurance that the securities
underlying a standby commitment agreement will be issued. If issued, the value
of the security may be more or less than its purchase price. Since the issuance
of the security is at the option of the issuer, the Fund may bear the risk of a
decline in value of the security and may not benefit if the security appreciates
in value during the commitment period.
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 1940 Act, a "vote of a
majority of the outstanding voting securities" of the Fund means the affirmative
vote of the lesser of (i) more than 50% of the outstanding shares of the Fund or
(ii) 67% or more of the shares of the Fund present at a shareholder meeting if
more than 50% of the outstanding shares of the Fund are represented at the
meeting in person or by proxy. The Fund may not:
1. Borrow money or mortgage or pledge any of its assets, except it may borrow up
to 15% of its total assets (including the amount borrowed) to meet redemption
requests that might otherwise require the untimely disposition of portfolio
securities or for other temporary or emergency purposes and may pledge its
assets in connection with these borrowings. The Fund may borrow from banks,
other Franklin Templeton Funds or other persons to the extent permitted by
applicable law. The Fund will not make any additional investments while
borrowings exceed 5% of its total assets.
2. Underwrite securities of other issuers, except insofar as the Fund may be
technically deemed an underwriter under the federal securities laws in
connection with the disposition of portfolio securities. This does not preclude
the Fund from obtaining short-term credit necessary for the clearance of
purchases and sales of its portfolio securities.
3. Invest directly in interests in real estate, oil, gas or other mineral
leases, exploration or development programs, including limited partnership
interests. This restriction does not preclude investments in marketable
securities of issuers engaged in these activities.
4. Loan money, except as is consistent with the Fund's investment objective, and
except that the Fund may (a) buy a portion of an issue of publicly distributed
bonds, debentures, notes and other evidences of indebtedness, (b) enter into
repurchase agreements, (c) lend its portfolio securities, and (d) participate in
an interfund lending program with other Franklin Templeton Funds to the extent
permitted by the 1940 Act and any rules or orders thereunder.
5. Buy or sell commodities or commodity contracts, except that the Fund may
enter into financial futures contracts, options thereon, and forward contracts.
6. Invest more than 25% of the Fund's assets (at the time of the most recent
investment) in any industry, 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.
7. Issue securities senior to the Fund's presently authorized shares of
beneficial interest, except that the Fund may borrow as permitted by these
restrictions.
Additional Restrictions. The Fund has adopted the following additional
restrictions. These restrictions are not fundamental and may be changed
without shareholder approval. Under these restrictions, the Fund may not:
1. Invest in any company for the purpose of exercising control or management,
except that all or substantially all of the assets of the Fund may be invested
in another registered investment company having the same investment objective
and policies as the Fund.
2. Buy securities on margin or sell securities short, except that the Fund may
make margin payments in connection with futures, options and currency
transactions.
3. Buy or retain securities of any company in which officers, trustees or
directors of the Fund or its investment manager individually own more than
one-half of 1% of the securities of such company, and in the aggregate own more
than 5% of the securities of such company.
4. Buy securities of open-end or closed-end investment companies, except that
securities of an open-end or closed-end investment company may be acquired (i)
in compliance with the 1940 Act, (ii) to the extent that the Fund may invest all
or substantially all of its assets in another registered investment company
having the same investment objective and policies as the Fund, and (iii) to the
extent the Fund's shares are qualified for sale in the state of Ohio and
notwithstanding (i) and (ii) above, by purchase in the open market where no
commission or profit to a sponsor or dealer results from the purchase other than
the customary broker's commission, or except when the purchase is part of a plan
of merger, consolidation, reorganization or acquisition.
5. Invest more than 5% of its assets in securities of issuers with less than
three years continuous operation, including the operations of any predecessor
companies, 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.
6. Hold or purchase the securities of any issuer if, as a result, in the
aggregate, more than 10% of the value of the Fund's net assets would be invested
in (i) securities that are not readily marketable or (ii) repurchase agreements
maturing in more than seven days. The Fund may, however, invest all or
substantially all of its assets in another registered investment company having
the same investment objective and policies as the Fund.
7. Invest directly in warrants (valued at the lower of cost or market) in excess
of 5% of the value of the Fund's net assets. No more than 2% of the value of the
Fund's net assets may be invested in warrants (valued at the lower of cost or
market) that are not listed on the New York or American Stock Exchange.
As a diversified fund, with respect to 75% of its total assets, the Fund may not
invest more than 5% in any one issuer nor may it own more than 10% of the
outstanding voting securities of any one 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.
If a percentage restriction contained herein is adhered to at the time of
investment, a later increase or decrease in the percentage resulting from a
change in the value of portfolio securities or amount of net assets will not be
considered a violation of any of the foregoing restrictions.
Officers and Trustees
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
trustees, in turn, elect the officers of the Trust who are responsible for
administering day-to-day operations of the Fund. The affiliations of the
officers and trustees and their principal occupations for the past five years
are listed below. Trustees who are deemed to be "interested persons" of the
Fund, as defined in the 1940 Act, are indicated by an asterisk (*).
Positions and Offices Principal Occupation
Name, Age and Address with the Trust During Past Five Years
Frank H. Abbott, III (75)
1045 Sansome St.
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); Director,
Mother Lode Gold Mines Consolidated; and director, trustee or managing general
partner, as the case may be, of 31 of the investment companies in the Franklin
Group of Funds.
Harris J. Ashton (63)
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 56 of the investment companies in the Franklin
Templeton Group of Funds.
*Harmon E. Burns (51)
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 61 of the investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (63)
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 0796945
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 58 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (81)
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 (63)
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 57 of the investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (55)
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 61 of the investment companies
in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (67)
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, trustee or managing general
partner, as the case may be, of 26 of the investment companies in the Franklin
Group of Funds.
Gordon S. Macklin (68)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., MCI Communications, Inc., MedImmune, Inc.
(biotechnology), InfoVest Corporation (information services), Fusion Systems
Corporation (industrial technology), and Source One Mortgage Services
Corporation (information services); and director, trustee or managing general
partner, as the case may be, of 53 of the investment companies in the Franklin
Templeton Group of Funds; and formerly held the following positions: Chairman,
Hambrecht and Quist Group; Director, H & Q Healthcare Investors; and President,
National Association of Securities Dealers, Inc.
Kenneth V. Domingues (63)
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 (35)
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, director and/or trustee of 61 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (47)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; Vice President, Franklin
Advisers, Inc. and officer of 61 of the investment companies in the Franklin
Templeton Group of Funds.
Charles E. Johnson (39)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
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 40 of the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (57)
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 (58)
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.
The preceding table indicates those officers and trustees who are also
affiliated persons of Distributors and Advisers. As of February 1, 1996,
nonaffiliated trustees are paid fees of $300 for each regularly scheduled
meeting and $300 per meeting attended. 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 Templeton Group
of Funds from which they may receive fees for their services. The following
table indicates the total fees paid to nonaffiliated trustees by the Trust and
by other funds in the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
NUMBER OF BOARDS
TOTAL FEES IN THE FRANKLIN
TOTAL FEES RECEIVED FROM THE TEMPLETON GROUP
RECEIVED FROM TEMPLETON GROUP OF FUNDS ON WHICH
NAME THE TRUST* GROUP OF FUNDS** EACH SERVES***
<S> <C> <C> <C>
Frank H. Abbott, III.................. $1,200 $162,420 31
Harris J. Ashton...................... 1,200 327,925 56
S. Joseph Fortunato................... 1,200 344,745 58
David Garbellano...................... 1,200 146,100 30
Frank W.T. LaHaye..................... 900 143,200 26
Gordon S. Macklin..................... 1,200 321,525 53
</TABLE>
*For the fiscal year ended April 30, 1996.
**For the calendar year ended December 31, 1995.
***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 approximately 165
U.S. based funds or series.
Nonaffiliated 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. No officer or trustee received any other compensation directly from the
Trust. Certain officers or trustees who are shareholders of Resources may be
deemed to receive indirect remuneration by virtue of their participation, if
any, in the fees paid to its subsidiaries. Charles B. Johnson and Rupert H.
Johnson, Jr. are brothers and the father and uncle, respectively, of Charles E.
Johnson.
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.
Investment Advisory and Other Services
The investment manager of the Fund is Advisers. Advisers is a wholly-owned
subsidiary of Resources, a publicly owned holding company whose shares are
listed on the Exchange. Resources owns several other subsidiaries that are
involved in investment management and shareholder services.
Pursuant to the management agreement, the Manager provides investment research
and portfolio management services, including the selection of securities for the
Fund to buy, 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 Board to whom the Manager renders periodic reports
of the Fund's investment activities. Under the terms of the management
agreement, the Manager provides office space and office furnishings, facilities
and equipment required for managing the business affairs of the Fund; maintains
all internal bookkeeping, clerical, secretarial and administrative personnel and
services; and provides certain telephone and other mechanical services. The
Manager is covered by fidelity insurance on its officers, directors and
employees for the protection of the Fund.
The Manager also provides management services to numerous other investment
companies or funds pursuant to management agreements with each fund. The Manager
may give advice and take action with respect to any of the other funds it
manages, or for its own account, which may differ from action taken by the
Manager on behalf of the Fund. Similarly, with respect to the Fund, the Manager
is not obligated to recommend, buy or sell, or to refrain from recommending,
buying or selling any security that the Manager and access persons, as defined
by the 1940 Act, may buy or sell for its or their own account or for the
accounts of any other fund. Furthermore, the Manager is not obligated to refrain
from investing in securities held by the Fund or other funds which it manages or
administers. Of course, any transactions for the accounts of the Manager and
other access persons will be made in compliance with the Fund's Code of Ethics.
The management agreement is in effect until February 13, 1998. Thereafter, it
may continue in effect for successive annual periods providing such continuance
is specifically approved at least annually by a vote of the Board 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 management agreement or interested persons of any such party (other than as
trustees of the Trust), cast in person at a meeting called for that purpose. The
management agreement may be terminated without penalty at any time by the Board
or by a vote of the holders of a majority of the Fund's outstanding voting
securities, or by the Manager on 60 days' written notice and will automatically
terminate in the event of its assignment, as defined in the 1940 Act.
Investor Services, 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 New York, Mutual Funds Division, 90 Washington Street, New York, New
York, 10286, acts as custodian of the securities and other assets of the Fund.
Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian for cash received in connection with the
purchase of Fund shares. 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.
How Does the Fund Purchase Securities For Its Portfolio?
Under the current management agreement, 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 Board may give.
When placing a portfolio transaction, the Manager attempts to obtain the best
net price and execution of the transaction. On portfolio transactions 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 that are felt to be
capable of efficient execution of the transactions. The determination and
evaluation of the reasonableness of the brokerage commissions paid in connection
with portfolio transactions are based to a large degree on the professional
opinions of the persons responsible for the placement and review of such
transactions. These opinions are formed on the basis of, among other things, the
experience of these individuals in the securities industry and information
available to them concerning the level of commissions being paid by other
institutional investors of comparable size. The Manager will ordinarily place
orders for the purchase and sale of over-the-counter securities on a principal
rather than agency basis with a principal market maker unless, in the opinion of
the Manager, a better price and execution can otherwise be obtained. Purchases
of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask price. The Fund seeks to obtain
prompt execution of orders at the most favorable net price.
The amount of commission is not the only relevant factor to be considered in the
selection of a broker to execute a trade. If it is felt to be in the Fund's best
interest, the Manager may place portfolio transactions with brokers who provide
the types of services described below, even if it means the Fund will pay a
higher commission than 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 services 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 the Manager from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits the Manager 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.
How Do I Buy and Sell Shares?
All checks, drafts, wires and other payment mediums used for buying or selling
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 your account for the transaction as of a date and with a
foreign currency exchange factor determined by the drawee bank.
In connection with exchanges, it should be noted that since the proceeds from
the sale of shares of an investment company are generally not available until
the fifth business day following the redemption, the funds into which you 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 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. Please see "What If My Investment Outlook Changes? - Exchange
Privilege" in the Prospectus.
If, in connection with the purchase of Fund shares, you submit a check or a
draft that is returned unpaid to the Fund, the Fund may impose a $10 charge
against your account for each returned item.
Dividend checks returned to the Fund marked "unable to forward" by the postal
service will be deemed to be a request to change your dividend option to
reinvest all distributions and the proceeds will be reinvested in additional
shares at net asset value until new instructions are received.
The Fund may deduct from your account the costs of its efforts to locate you if
mail is returned as undeliverable or the Fund is otherwise unable to locate you
or verify your 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 one of its affiliates to help defray expenses of
maintaining a service office in Taiwan, including expenses related to local
literature fulfillment and communication facilities.
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 may be
offered with the following schedule of sales charges:
SALES
SIZE OF PURCHASE - U.S. DOLLARS CHARGE
- ---------------------------------------
Under $30,000.................. 3.0%
$30,000 but less than $50,000.. 2.5%
$50,000 but less than $100,000. 2.0%
$100,000 but less than $200,000 1.5%
$200,000 but less than $400,000 1.0%
$400,000 or more............... 0%
Purchases and Redemptions through Securities Dealers
Orders for the purchase of shares of the Fund received in proper form prior to
the scheduled close of the Exchange (generally 1:00 p.m. Pacific time) any
business day that the Exchange is open for trading and promptly transmitted to
the Fund will be based upon the public offering price determined that day.
Purchase orders received by securities dealers or other financial institutions
after the scheduled close of the Exchange will be effected at the Fund's public
offering price on the day it is next calculated.
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 you resulting from the failure to do so must be settled between you
and the securities dealer.
Other Payments to Securities Dealers
As discussed in the Prospectus under "How Do I Buy Shares? - General," either
Distributors or one of its affiliates may make payments, out of its own
resources, to securities dealers who initiate and are responsible for purchases
made at net asset value by certain trust companies and trust departments of
banks, certain designated retirement plans (excluding IRA and IRA Rollovers) and
certain non-designated plans, as described 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 shares are redeemed within 12 months of the calendar month
of purchase. Other conditions may apply. All terms and conditions may be imposed
by an agreement between Distributors, or one of its affiliates, and the
securities dealer.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to securities dealers who initiate and are responsible for
purchases made at net asset value by certain retirement plans (excluding IRA and
IRA rollovers): 1% 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. 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, either Distributors or one of its affiliates, out of
its own resources, may pay up to 1% of the amount invested.
Letter of Intent
You 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 you want to qualify for a reduced sales charge, you may file
with the Fund a signed shareholder application with the Letter of Intent section
completed. After the Letter 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. Your holdings in the
Franklin Templeton Funds, including Class II shares, acquired more than 90 days
before the Letter is filed, will be counted towards completion of the Letter but
will not be entitled to a retroactive downward adjustment in the sales charge.
Any redemptions you make, unless by certain retirement plans, during the
13-month period will be subtracted from the amount of the purchases for purposes
of determining whether the terms of the Letter have been completed. If the
Letter 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
certain retirement plans. If you execute a Letter prior to a change in the sales
charge structure for the Fund, you will be entitled to complete the Letter at
the lower of the new sales charge structure or the sales charge structure in
effect at the time the Letter was filed.
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 your
name. This policy of reserving shares does not apply to certain retirement
plans. If the total purchases, less redemptions, equal the amount specified
under the Letter, the reserved shares will be deposited to an account in your
name or delivered to you or as you direct. If the total purchases, less
redemptions, exceed the amount specified under the Letter 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 (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, you 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 that would have applied to
the aggregate purchases if the total of such purchases had been made at a single
time. Upon such remittance, the reserved shares held for your account will be
deposited to an account in your name or delivered to you or as you direct. If
within 20 days after written request the difference in sales charge is not paid,
the redemption of an appropriate number of reserved shares to realize the
difference will be made. In the event of a total redemption of the account prior
to fulfillment of the Letter, the additional sales charge due will be deducted
from the proceeds of the redemption, and the balance will be forwarded to you.
If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These 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 these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
Redemptions in Kind
The Fund has committed itself to pay in cash (by check) all requests for
redemption by any shareholder of record, limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Fund's net
assets at the beginning of the 90-day period. This commitment is irrevocable
without the prior approval of the SEC. In the case of redemption requests in
excess of these amounts, the trustees reserve the right to make payments in
whole or in part in securities or other assets of the Fund, in case of an
emergency, or if the payment of such a redemption in cash would be detrimental
to the existing shareholders of the Fund. In such circumstances, the securities
distributed would be valued at the price used to compute the Fund's net assets.
Should the Fund do so, you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. Should
it happen, however, you may not be able to recover your investment in a timely
manner and you may incur brokerage costs in selling the securities.
Redemptions by the Fund
Due to the relatively high cost of handling small investments, the Fund reserves
the right to involuntarily redeem your shares at net asset value if your account
has a value of less than one-half of your initial required minimum investment,
but only where the value of your account has been reduced by the prior voluntary
redemption of shares. Until further notice, it is the present policy of the Fund
not to exercise this right if your account has a value of $50 or more. In any
event, before the Fund redeems your shares and sends you the proceeds, it will
notify you that the value of the shares in your account is less than the minimum
amount and allow you 30 days to make an additional investment in an amount which
will increase the value of your account to at least $100.
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 the "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 Fund sends annual and semiannual reports regarding its performance and
portfolio holdings to shareholders. If you would like to receive an interim
quarterly report, you may phone Fund Information at 1-800/DIAL BEN.
Special Services
The Franklin Templeton Institutional Services Department 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 that maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such owners. For each beneficial owner in
the omnibus account, the Fund may reimburse Investor Services an amount not to
exceed the per account fee which the Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
How Are Fund Shares Valued?
As noted in the Prospectus, the Fund calculates net asset value as of the
scheduled close of the Exchange (generally 1:00 p.m. Pacific time) each day that
the Exchange is open for trading. As of the date of this SAI, the Fund is
informed that the Exchange observes the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
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 are
valued 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 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.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the scheduled 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, New York
time, on the day the value of the foreign security is determined. If no sale is
reported at that time, the mean between the current bid and ask prices is used.
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 values of
these foreign securities occur during such period, then these securities will be
valued in accordance with procedures established by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times prior to
the scheduled close of the Exchange. The value of these securities used in
computing the net asset value of the Fund's shares is determined as of such
times. Occasionally, events affecting the values of such securities may occur
between the times at which they are determined and the scheduled close of the
Exchange which will not be reflected in the computation of the Fund's net asset
value. If events materially affecting the values of these securities occur
during such period, then the securities will be valued at their fair value as
determined in good faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of trustees, the
Fund may utilize a pricing service, bank or securities dealer to perform any of
the above described functions.
Additional Information Regarding Taxation
As stated in the Prospectus, the Fund intends to qualify and elect to be treated
as a regulated investment company under Subchapter M of the Code. The trustees
reserve the right not to maintain the qualification of the Fund as a regulated
investment company if they determine such course of action to be beneficial to
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 that 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 provided 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 the Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividend-received deduction. For example, any interest income and net short-term
capital gain (in excess of any net long-term capital loss or capital loss
carryover) included in investment company taxable income and distributed by the
Fund as a dividend will not qualify for the dividends-received deduction.
Corporate shareholders should also note that the availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless 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 federal 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 advisor
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 you until the following January, will be treated for
tax purposes as if paid by the Fund and received by you 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 your basis in the shares
and the amount received, subject to the rules described below. If such shares
are a capital asset in your hands, 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 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 long-term capital loss to the extent of
amounts treated as distributions of net long-term capital gain during such
six-month period.
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. You should consult
with your tax advisor concerning the tax rules applicable to the redemption or
exchange of Fund shares.
The Fund's investment in options, futures and forward contracts, including
transactions involving actual or deemed short sales, or foreign exchange gains
or losses are subject to many complex and special tax rules. For example, OTC
options on debt securities and equity options, including options on stock and on
narrow-based stock indexes, will be subject to tax under Section 1234 of the
Code, generally producing a long-term or short-term capital gain or loss upon
exercise, lapse, or closing out of the option or sale of the underlying stock or
security. By contrast, the Fund's treatment of certain other options, futures
and forward contracts entered into by the Fund is generally governed by Section
1256 of the Code. These "Section 1256" positions generally include listed
options on debt securities, options on broad-based stock indexes, options on
securities indexes, options on futures contracts, regulated futures contracts
and certain foreign currency contracts and options thereon.
Absent a tax election to the contrary, each such Section 1256 position held by
the Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Fund's fiscal year, and all gain
or loss associated with fiscal year transactions and mark-to-market positions at
fiscal year end (except certain foreign currency gain or loss covered by Section
988 of the Code) will generally be treated as 60% long-term capital gain or loss
and 40% short-term capital gain or loss. The effect of Section 1256
mark-to-market rules may be to accelerate income or to convert what otherwise
would have been long-term capital gains into short-term capital gains or
short-term capital losses into long-term capital losses within the Fund. The
acceleration of income on Section 1256 positions may require the Fund to accrue
taxable income without the corresponding receipt of cash. In order to generate
cash to satisfy the distribution requirements of the Code, the Fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares. In these ways, any or all of these rules may affect the amount,
character and timing of income distributed to shareholders by the Fund.
When the Fund holds an option or contract that 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.
As a regulated investment company, the Fund is also subject to the requirement
that less than 30% of its annual gross income be derived from the sale or other
disposition of securities and certain other investments held for less than three
months ("short-short income"). This requirement may limit the Fund's ability to
engage in options and hedging transactions because these transactions are often
consummated in less than three months, may require the sale of portfolio
securities held less than three months and may, as in the case of short sales of
portfolio securities, reduce the holding periods of certain securities within
the Fund, resulting in additional short-short income for the Fund.
The Fund will monitor its transactions in such options and contracts and may
make certain other tax elections in order to mitigate the effect of the above
rules and prevent disqualification of the Fund as a regulated investment company
under Subchapter M of the Code.
Gain realized by the Fund from transactions that are deemed to constitute
"conversion transactions" under the Code and which would otherwise produce
capital gain may be recharacterized as ordinary income to the extent that such
gain does not exceed an amount defined by the Code as the "applicable imputed
income amount." A conversion transaction is any transaction in which
substantially all of the Fund's expected return is attributable to the time
value of the Fund's net investment in such transaction and any one of the
following criteria are met: 1) there is an acquisition of property with a
substantially contemporaneous agreement to sell the same or substantially
identical property in the future; 2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the Fund on the basis that it would
have the economic characteristics of a loan but would be taxed as capital gain;
or 4) the transaction is specified in Treasury regulations to be promulgated in
the future. The applicable imputed income amount, which represents the deemed
return on the conversion transaction based upon the time value of money, is
computed using a yield equal to 120 percent of the applicable federal rate,
reduced by any prior recharacterizations under this provision or Section 263(g)
of the Code concerning capitalized carrying costs.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currencies, foreign currency payables or
receivables, or 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.
In order for the Fund to qualify as a regulated investment company, at least 90%
of the Fund's annual gross income must consist of dividends, interest and
certain other types of qualifying income, and no more than 30% of its annual
gross income may be derived from the sale or other disposition of securities or
certain other instruments held for less than three months. Foreign exchange
gains are presently treated as qualifying income for purposes of this 90%
limitation. Foreign exchange gains derived by the Fund with respect to the
Fund's business of investing in stock or securities or options or futures with
respect to such stock or securities is qualifying income for purposes of this
90% limitation.
If the Fund owns shares in a foreign corporation that constitutes a "passive
foreign investment company" (a "PFIC") for federal income tax purposes and the
Fund does not elect to treat the foreign corporation as a "qualified electing
fund" within the meaning of the Code, the Fund may be subject to U.S. federal
income taxation on a portion of any "excess distribution" it receives from the
PFIC or any gain it derives from the disposition of such shares, even if such
income is distributed as a taxable dividend by the Fund to its U.S.
shareholders. The Fund may also be subject to additional interest charges with
respect to deferred taxes arising from such distributions or gains. Any tax paid
by the Fund as a result of its ownership of shares in a PFIC will not give rise
to a deduction or credit to the Fund or to any shareholder. A PFIC means any
foreign corporation if, for the taxable year involved, either (i) it derives at
least 75 percent of its gross income from "passive income" (including, but not
limited to, interest, dividends, royalties, rents and annuities), or (ii) on
average, at least 50 percent of the value (or adjusted basis, if elected) of the
assets held by the corporation produce "passive income."
On April 1, 1992, proposed U.S. Treasury regulations were issued regarding a
special mark-to-market election for regulated investment companies. Under these
regulations, the annual mark-to-market gain, if any, on shares held by the Fund
in a PFIC would be treated as an excess distribution received by the Fund in the
current year, eliminating the deferral and the related interest charge. These
excess distribution amounts are treated as ordinary income, which the Fund will
be required to distribute to shareholders even though the Fund has not received
any cash to satisfy this distribution requirement. These regulations would be
effective for taxable years ending after the promulgation of the proposed
regulations as final regulations.
The Fund's Underwriter
Pursuant to an underwriting agreement in effect until April 30, 1997,
Distributors acts as principal underwriter in a continuous public offering for
shares of the Fund. 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 Board or by a vote of the holders of a
majority of the Fund's outstanding voting securities, and in either event by a
majority vote of the Trust's trustees who are not parties to the underwriting
agreement or interested persons of any such party (other than as trustees of the
Trust), cast in person at a meeting called for that purpose. The underwriting
agreement terminates automatically in the event of its assignment and may be
terminated by either party on 90 days' written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Distribution Plan
The Fund has adopted a distribution plan pursuant to Rule 12b-1 under the 1940
Act (the "Plan") whereby the Fund may pay up to a maximum of 0.25% per annum of
its average daily net assets, payable quarterly, for expenses incurred in the
promotion and distribution of its shares. In addition, 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 (up to the maximum stated above) 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 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.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the Plan as a result of applicable federal law
prohibiting 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 you are a
customer of a bank that is prohibited from providing such services, you would be
permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In such an event, changes in the
services provided might occur and you might no longer be able to avail yourself
of any automatic investment or other services then being provided by the bank.
It is not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
The Plan has been approved in accordance with the provisions of Rule 12b-1. The
Plan is effective through June 2, 1997 and renewable annually by a vote of the
Board, including a majority vote of the trustees who are non-interested persons
of the Fund 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 penalty, by vote of a majority of the
non-interested trustees on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with the Manager, or by
vote of a majority of 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 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 with such other information as may
reasonably be requested in order to enable the Board 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 and 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 total return quotations
used by the Fund are based on the 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
rates of return over one-, five- and ten-year periods, or fractional portion
thereof, that would equate an initial hypothetical $1,000 investment to its
ending redeemable value. The calculation assumes the maximum front-end sales
charge is deducted from the initial $1,000 purchase order, and income dividends
and capital gains are reinvested at net asset value. The quotation assumes the
account was completely redeemed at the end of each one-, five- and ten-year
period and the deduction of all applicable charges and fees. If a change is made
to the sales charge structure, historical performance information will be
restated to reflect the maximum front-end sales charge currently in effect.
The average annual rates of return for the Fund will be calculated according to
the SEC formula:
n
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of 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 its cumulative total return
in addition to its average annual total return. These quotations are computed in
the same manner as the Fund's average annual rate, except they 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.
Current Yield
Current yield reflects the income per share earned by the Fund's portfolio
investments and 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
Current 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 shareholders of
the Fund. Amounts paid to shareholders are reflected in the quoted current
distribution rate. The current distribution rate is usually computed by
annualizing the dividends paid per share during a certain period and dividing
that amount by the current maximum offering price. The current distribution rate
differs from the current yield computation because it may include distributions
to shareholders from sources other than dividends and interest, such as premium
income from option writing and short-term capital gains and is calculated over a
different period of time.
Volatility
Occasionally statistics may be used to specify Fund volatility or risk. Measures
of volatility or risk are generally used to compare Fund net asset value or
performance relative to a market index. One measure of volatility is beta. Beta
is the volatility of a fund relative to the total market, as represented by an
index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of net asset value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
Other Performance Quotations
For investors who are permitted to buy shares of the Fund at net asset value,
sales literature pertaining to the Fund may quote a current distribution rate,
yield, cumulative 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 advisors and
underwriter of both the Franklin Group of Funds and Templeton Group of Funds.
Comparisons
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials regarding the Fund may
discuss certain 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. These
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 - an unmanaged
index 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 total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
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) Financial publications: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.
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) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
l) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
m) Standard & Poor's 100 Stock Index - an unmanaged index based on the prices of
100 blue-chip stocks, including 92 industrials, one utility, two transportation
companies, and 5 financial institutions. The S&P 100 Stock Index is a smaller
more flexible index for options trading.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. These advertisements or information may include symbols, headlines, or
other material which highlights or summarizes 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. You should be aware,
however, that an investment in the Fund involves the risk of fluctuation of
principal value, a risk generally not present in an investment in a 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 comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition,
there can be no assurance that the Fund will continue its performance as
compared to such other averages.
Other Features and Benefits
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and/or
other long-term goals. The Franklin College Costs Planner may assist you 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 you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that such goals will be met.
Miscellaneous Information
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., 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 48 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 $143
billion in assets under management for more than 4.1 million U.S. based mutual
fund shareholder and other accounts. The Franklin Group of Funds and the
Templeton Group of Funds offer to the public 115 U.S. based mutual funds. The
Fund may identify itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one
in service quality for five of the past eight years.
Employees of Resources or its subsidiaries who are access persons under the 1940
Act are permitted to engage in personal securities transactions subject to the
following general restrictions and procedures: (i) the trade must receive
advance clearance from a compliance officer and must be completed within 24
hours after clearance; (ii) copies of all brokerage confirmations must be sent
to a 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; and (iii) access persons involved in preparing and making
investment decisions must, in addition to (i) and (ii) above, file annual
reports of their securities holdings each January and 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 your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, 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.
Useful Terms and Definitions
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Trustees of the Trust
Code - Internal Revenue Code of 1986, as amended
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
Exchange - New York Stock Exchange
Franklin Funds - the mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust
Franklin Templeton Funds - the Franklin Funds and the Templeton Funds
Franklin Templeton Group of Funds - all U.S. registered mutual funds in the
Franklin Group of Funds(R) and the Templeton Group of Funds
Investor Services - Franklin/Templeton Investor Services, Inc.
Letter - Letter of Intent
Manager - Franklin Advisers, Inc., the Fund's investment manager
Nonaffiliated Trustees - Trustees not affiliated with Advisers
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
Securities Dealer - financial institutions that, either directly or through
affiliates, have an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
Templeton Funds - 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
U.S. - United States
Appendix
Description of Commercial Paper Ratings
Moody's Investors Service ("Moody's")
Moody's commercial paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Fund, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
Standard & Poor's Corporation ("S&P")
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
