PROSPECTUS & APPLICATION
Franklin
California Growth Fund
INVESTMENT STRATEGY
GROWTH
SEPTEMBER 1, 1996
Franklin Strategic Series
This prospectus describes the Franklin California Growth Fund (the "Fund"). It
contains information you should know before investing in the Fund. Please keep
it for future reference.
The Fund's SAI, dated September 1, 1996, as may be amended from time to time,
includes more information about the Fund's procedures and policies. It has been
filed with the SEC and is incorporated by reference into this prospectus. For a
free copy or a larger print version of this prospectus, call 1-800/DIAL BEN or
write the Fund at the address shown.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Shares of the Fund involve investment risks, including the possible
loss of principal.
LIKE ALL MUTUAL FUNDS, 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.
Franklin California Growth Fund
Franklin
California
Growth Fund
September 1, 1996
When reading this prospectus, you will see terms in capital letters. This means
the term is explained in our glossary section.
Table of Contents
About the Fund
Expense Summary............................. 2
Financial Highlights........................ 3
How Does the Fund Invest Its Assets?........ 4
What Are the Fund's Potential Risks?........ 10
Who Manages the Fund?....................... 13
How Does the Fund Measure Performance?...... 15
How Is the Trust Organized?................. 15
How Taxation Affects You and the Fund....... 16
About Your Account
How Do I Buy Shares?........................ 17
May I Exchange Shares for Shares of Another Fund? 24
How Do I Sell Shares?....................... 26
What Distributions Might I Receive From the Fund? 29
Transaction Procedures and Special Requirements 30
Services to Help You Manage Your Account.... 34
Glossary
Useful Terms and Definitions................ 37
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
Franklin California Growth Fund
About the Fund
Expense Summary
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of Class I shares for the fiscal
year ended April 30, 1996. Your actual expenses may vary.
A. Shareholder Transaction Expenses+
CLASS I CLASS II
Maximum Sales Charge Imposed on Purchases
(as a percentage of Offering Price) 4.50% 1.00%++
Deferred Sales Charge+++ NONE 1.00%
B. Annual Operating Expenses
(as a percentage of average net assets)
Management Fees 0.63%* 0.63%*
Rule 12b-1 Fees 0.15%** 1.00%**
Other Expenses 0.31% 0.31%
Total Fund Operating Expenses 1.09%* 1.94%*
C. Example
Assume the annual return for each class is 5% and operating expenses are as
described above. For each $1,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Class I $56*** $78 $102 $172
Class II $39 $70 $114 $234
For the same Class II investment, you would pay projected expenses of $29 if you
did not sell your shares at the end of the first year. Your projected expenses
for the remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of each class and are not directly charged to
your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? - Deciding Which Class to Buy."
+++A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more if you sell the shares within one year and any Class II purchase
if you sell the shares within 18 months. There is no front-end sales charge if
you invest $1 million or more in Class I shares. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*Advisers has agreed in advance to limit its management fees and make certain
payments to reduce the Fund's expenses. With this reduction, management fees
were 0.25% and total operating expenses for Class I were 0.71% and Class II
would be 1.56%.
**These fees may not exceed 0.25% for Class I. 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 charge permitted
under the NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
Financial Highlights
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent four years, and the period from
October 18, 1991 (the effective date of the registration statement for the Fund)
through April 30, 1992, appears in the financial statements in the Trust's
Annual Report to Shareholders for the fiscal year ended April 30, 1996. The
Annual Report to Shareholders also includes more information about the Fund's
performance. For a free copy, please call Fund Information.
<TABLE>
<CAPTION>
Year Ended April 30 1996 1995 1994 1993 1992++
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net Asset Value at Beginning of Year $14.03 $12.05 $10.21 $9.87 $10.04
Net Investment Income 0.20 0.16 0.14 0.12 0.07
Net Realized & Unrealized Gain
(Loss) on Securities 6.032 3.043 2.425 0.340 (0.168)
Total From Investment Operations 6.232 3.203 2.565 0.460 (0.098)
Distributions From Net Investment Income (0.227) (0.124) (0.145) (0.120) (0.072)
Distributions From Capital Gains (1.775) (1.099) (0.580) - -
Total Distributions (2.002) (1.223) (0.725) (0.120) (0.072)
Net Asset Value at End of Year 18.26 14.03 12.05 10.21 9.87
Total Return* 47.42% 29.09% 25.55% 4.72% (1.77)%**
Ratios/Supplemental Data
Net Assets at End of Year (in 000's) $81,175 $13,844 $4,646 $3,412 $3,091
Ratio of Expenses to Average Net Assets*** 0.71% 0.25% 0.09% -% -%
Ratio of Net Investment Income
to Average Net Assets 1.42% 1.63% 1.16% 1.23% 1.27%**
Portfolio Turnover Rate 61.82% 79.52% 135.12% 38.28% 13.73%
Average Commission Rate+ 0.0536 - - - -
</TABLE>
+Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
++For the period October 18, 1991 (effective date) to April 30, 1992.
*Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum front-end sales charge or Contingent
Deferred Sales Charge and assumes reinvestment of dividends and capital gains,
if any, at Net Asset Value.
**Annualized.
***During the periods indicated, Advisers agreed in advance to limit a portion
of its management fees and make payment of other expenses incurred by the Fund.
Had such action not been taken, the ratios of expenses to average net assets
would have been as follows:
Ratio of expenses
to average net assets
1992++ 1.61%**
1993 1.99
1994 1.89
1995 1.27
1996 1.09
How Does the Fund Invest Its Assets?
The Fund's Investment Objective
The Fund's investment objective is to seek 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.
Types of Securities the Fund May Invest In
Under normal market conditions, the Fund invests at least 65% of its assets in
the securities of companies headquartered or conducting a majority of their
operations, in the state of California. The Fund may invest in common stock,
preferred stock, warrants for the purchase of common stock, debt securities
convertible or exchangeable for common or preferred stock, and fixed-income
securities issued by these companies. The securities in which the Fund invests
are traded primarily on the New York or American stock exchanges or in
over-the-counter markets.
In attempting to achieve its objective, the Fund expects to invest a portion of
its assets in small to mid-size capitalization companies with market
capitalizations of up to $2.5 billion at the time of the Fund's investment. The
Fund may also invest in relatively well known, larger capitalization companies
in mature industries which Advisers believes have the potential for capital
appreciation.
Although the Fund's assets are invested primarily in securities of
California-linked companies, the Fund may invest up to 35% of its assets in the
securities of companies headquartered or conducting a majority of their
operations outside the state of California. The Fund may invest in common stock,
preferred stock, warrants for the purchase of common stock, debt securities
convertible or exchangeable for common or preferred stock, and fixed-income
securities issued by these companies. In this way, the Fund seeks to benefit
from its research into companies and industries within or beyond the Fund's
primary region.
The Fund may also invest up to 35% of its total assets in debt securities,
including bonds, notes and debentures, if Advisers believes the investment
presents a favorable investment opportunity consistent with the Fund's
objective. The Fund may invest up to 5% of its assets in fixed-income
securities, including convertible debt and preferred stocks, bonds, notes and
debentures rated below investment grade, but no lower than B by Moody's
Investors Services ("Moody's") or Standard & Poor's Corporation ("S&P"), or that
are not rated but determined by Advisers to be of comparable quality. The
remainder of the Fund's fixed-income securities (up to 30% of total assets) will
be limited to investment grade obligations and will be rated no lower than BBB
by S&P or Baa by Moody's. Investment grade securities are regarded as having an
adequate capacity to pay principal and interest but with greater vulnerability
to adverse economic conditions and some speculative characteristics. The Fund
may seek capital appreciation by investing in debt securities which Advisers
believes have the potential for capital appreciation as a result of improvement
in the creditworthiness of the issuer. The prices of these securities generally
increase when interest rates decline while the prices generally decrease when
interest rates rise. The receipt of income from such debt securities will be
incidental to the Fund's investment objective.
Fixed-income securities within the top three rating categories (AAA, AA and A by
S&P or Aaa, Aa or A by Moody's) are generally known as high-grade securities and
are regarded as having a strong capacity to pay interest or dividends, as the
case may be. Medium-grade securities (securities rated BBB by S&P or Baa by
Moody's) are regarded as having an adequate capacity to pay interest or
dividends but with greater vulnerability to adverse economic conditions and some
speculative characteristics. Lower rated (below investment grade) securities,
those rated BB or lower by S&P or Ba or lower by Moody's, are considered by S&P
and Moody's, on balance, to be predominantly speculative with respect to
capacity to pay in accordance with the terms of the obligation and will
generally involve more credit risk than securities in the higher rating
categories. These lower rated fixed-income securities are subject to credit and
other risks that are greater than those of higher rated securities while
typically offering relatively higher yields. Please see the SAI for more
information about the risks of investing in lower rated securities and a
description of these ratings.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities. A
convertible security is generally a debt obligation or preferred stock that may
be converted within a specified period of time into a certain amount of common
stock of the same or a different issuer. A convertible security provides a
fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance in
its underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Like a common stock, the
value of a convertible security also tends to increase as the market value of
the underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because its value can be influenced by both interest
rate and market movements, a convertible security is not as sensitive to
interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the Fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the Fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
OPTIONS AND FINANCIAL FUTURES. The Fund may write ("sell") covered put and call
options and buy put and call options on securities and securities indices that
trade on securities exchanges and in the over-the-counter market. The Fund may
buy and sell financial futures and options on financial futures with respect to
securities indices. Additionally, the Fund may buy and sell financial futures
and options to "close out" financial futures and options it has previously
entered into. The Fund will not enter into any financial futures contract or
related options (except for closing transactions) if, immediately thereafter,
the sum of the amount of its initial deposits and premiums on open contracts and
options would exceed 5% of the Fund's total assets (taken at current value). The
Fund will not engage in any stock options or stock index options if the option
premiums paid regarding its open option positions exceed 5% of the value of the
Fund's total assets. The Fund will not engage in transactions in options or
financial futures contracts or related options for speculation but only as a
hedge against changes resulting from market conditions in the values of its
securities or securities which it intends to buy and, to the extent consistent
therewith, to accommodate cash flows. Notwithstanding the Fund's ability to
enter into these transactions for hedging purposes, it is not obligated to hedge
its investment positions, but may do so when deemed prudent and consistent with
the Fund's objective and policies.
Options, futures and options on futures are generally considered "derivative
securities."
SMALL COMPANIES. To the extent that the Fund may invest in smaller
capitalization companies or other companies, the Fund may place greater emphasis
upon investments in relatively new or unseasoned companies that are in their
early stages of development, or in new and emerging industries where the
opportunity for rapid growth is expected to be above average. Securities of
unseasoned companies present greater risks than securities of larger, more
established companies. Please see "What Are the Fund's Potential Risks? - Small
Companies." Any investments in these types of companies, however, will be
limited in the case of issuers that have less than three years continuous
operation, including the operations of any predecessor companies, to no more
than 5% of the Fund's total assets.
Other Investment Policies of the Fund
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 that such loans do not exceed 10% 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 collateral 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 the cash collateral in short-term
interest bearing obligations or by receiving a loan premium from the borrower.
Under the securities loan agreement, the Fund continues to be entitled to all
dividends or interest on any loaned securities. As with any extension of credit,
there are risks of delay in recovery and loss of rights in the collateral should
the borrower of the security fail financially.
BORROWING. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of its assets, except that the Fund may borrow up to 10% of its
total assets to meet redemption requests and for other temporary or emergency
purposes. While borrowings exceed 5% of the Fund's total assets, the Fund will
not make any additional investments.
SECURITIES INDUSTRY RELATED INVESTMENTS. To the extent consistent with its
investment objective and certain limitations under the 1940 Act, the Fund may
invest its assets in securities issued by companies engaged in securities
related businesses, including companies that are securities brokers, dealers,
underwriters or investment advisors. These companies are considered part of the
financial services industry sector.
Under the 1940 Act, the Fund may not acquire a security or any interest in a
securities related business to the extent the acquisition would exceed certain
limitations. The Fund does not believe that these limitations will impede the
attainment of its investment objective.
SHORT-TERM INVESTMENTS. The Fund may invest its cash, including cash resulting
from purchases and sales of Fund shares, in short-term debt instruments,
including U.S. government securities, high grade commercial paper, repurchase
agreements and other money market equivalents and, subject to an order of
exemption from the SEC, the shares of affiliated money market funds that invest
primarily in short-term debt securities. Temporary investments may be made
either for liquidity purposes, to meet redemption requirements or as a temporary
defensive measure.
The Fund understands the current position of the staff of the SEC to be that
purchased OTC options are illiquid securities. The Fund and Advisers disagree
with this position. Nevertheless, pending a change in the staff's position, the
Fund will treat OTC options as subject to its limitation on illiquid securities.
Please see "Illiquid Investments" below.
The Fund's transactions in options and financial futures contracts may be
limited by the requirements of the Fund for qualification as a regulated
investment company. The Fund's investments in options and financial futures
contracts and certain security transactions (including loans of portfolio
securities) may also reduce the portion of the Fund's dividends which otherwise
would be eligible for the corporate dividends-received deduction. These
securities require the application of complex and special tax rules and
elections, more information about which is included in the SAI.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions in which
the Fund buys a U.S. government security subject to resale to a bank or dealer
at an agreed-upon price and date. The transaction requires the collateralization
of the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller might cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund might
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks which are deemed creditworthy by Advisers. A
repurchase agreement is deemed to be a loan by the Fund under the 1940 Act. The
U.S. government security subject to resale (the collateral) will be held on
behalf of the Fund by a custodian approved by the Board and will be held
pursuant to a written agreement.
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
generally securities that cannot be sold within seven days in the normal course
of business at approximately the amount at which the Fund has valued them.
Illiquid securities include illiquid equity securities, securities with legal or
contractual restriction on resale, repurchase agreements of more than seven days
duration, illiquid real estate investment trusts, securities of issuers with
less than three years continuous operation and other securities that are not
readily marketable. The Board has authorized the Fund to invest in restricted
securities (which might otherwise be considered illiquid) where the investment
is consistent with the Fund's investment objective and has authorized such
securities to be considered liquid (and thus not subject to the foregoing 10%
limitation), to the extent Advisers determines on a daily basis that there is a
liquid institutional or other market for the securities. The Board will review
Advisers' determinations of liquidity, retain ultimate responsibility for such
determinations and will consider appropriate action, consistent with the Fund's
objective and policies, if a security should become illiquid after its purchase.
DIVERSIFICATION. The Fund is non-diversified under the federal securities laws.
As a non-diversified Fund, there is no restriction under the 1940 Act on the
percentage of the Fund's assets that may be invested in the securities of any
one issuer. The Fund, however, intends to comply with the diversification and
other requirements of the Code applicable to regulated investment companies such
as the Fund, so that it will not be subject to U.S. federal income tax on income
and capital gain distributions to shareholders. Accordingly, the Fund will not
buy securities if, as a result, more than 25% of its total assets would be
invested in the securities of any one issuer and, with respect to 50% of its
total assets, more than 5% would be invested in the securities of any one issuer
or more than 10% would be invested in the outstanding voting securities of any
one issuer. To the extent the Fund is not fully diversified, it may be more
susceptible than a more fully diversified fund to adverse economic, political or
regulatory developments affecting a single issuer.
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 net
assets will not be considered a violation of any of the foregoing policies.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How Does the Fund Invest Its Assets?" and "Investment Restrictions" in the
SAI.
What Are the Fund's Potential Risks?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock market as a whole.
Risk Factors in California. The following information about certain California
risk factors is given to you in view of the Fund's policy of investing primarily
in companies currently headquartered or conducting a majority of their
operations in California. This information is only a brief discussion, does not
purport to be a complete description, and is based primarily upon information
derived from independent credit reports and historically reliable sources. It
has not been independently verified by the Fund.
Recently improved economic performance generated better-than-anticipated tax
revenues, which more than offsets the state's failure to receive a budgeted
increase in federal aid and other shortfalls. Gains in exports, entertainment,
tourism, and computer services helped drive the recent recovery. The state
legislative analyst's office identifies $2.6 billion in proposed 1996 and 1997
budget savings that are dependent on federal actions, mostly in health and
welfare reform. However, significant fiscal and structural pressures continue to
hamper the state's efforts to maintain financial stability, reflected in the
month-late passage of the 1996 budget, and likely difficult negotiations for the
governor's proposed 1997 budget.
Strong service sector growth in the southern part of the state supports the
state's budgeted 5.7% personal income growth for 1996 and 5.9% for 1997, after
earlier sluggish conditions. Unemployment, however, remains above the national
average, although the gap has narrowed and is projected to close within 1% of
the national average in 1997. Over 300,000 new jobs were added last year, and
the state is projecting to regain its pre-recession employment levels in the
first half of 1996. California is also likely to benefit from its strength in
computers and other high tech products, as well as from trading with Japan and
Western Europe.
The state's economy outperformed expectations in 1995, and continuing positive
trends are projected for 1996-97. California's recovery is picking up steam at
the same time that the more mature national economic recovery is slowing. This
past year was the first since 1989 that the rate of job growth in California
exceeded the nation. This pace is projected to continue in 1996 and 1997.
The outlook for California reflects brightening economic prospects offset by the
state's poor cash position and structural budget constraints. The wind-down of
military cutbacks, North American Free Trade Agreement (NAFTA) benefits, growth
in Pacific trade, high technology and a rebound in construction have helped pull
the state from its cyclical downturn.
The Fund's policy of investing primarily in the securities of California
companies does involve certain additional risks, versus a less concentrated
investment policy including the risk that an economic, business, political,
regulatory or other developments or changes affecting one portfolio security or
industry could affect other securities or industries.
OPTIONS AND FUTURES. The Fund's option and futures investments involve certain
risks. Such risks include the risks that the effectiveness of an options and
futures strategy depends on the degree to which price movements in the
underlying index or securities correlate with price movements in the relevant
portion of the Fund's portfolio. The Fund bears the risk that the prices of its
portfolio securities will not move in the same amount as the option or future it
has purchased, or that there may be a negative correlation that would result in
a loss on both the securities and the option or future.
Positions in exchange traded options and financial futures may be closed out
only on an exchange that provides a secondary market. There may not always be a
liquid secondary market for a futures or option contract at a time when the Fund
seeks to "close out" its position. If the Fund were unable to "close out" a
futures position, and if prices moved adversely, the Fund would have to continue
to make daily cash payments to maintain its required margin and, if the Fund had
insufficient cash, it might have to sell portfolio securities at a
disadvantageous time. In addition, the Fund might be required to deliver the
stocks underlying futures or options contracts it holds. Over-the-counter
("OTC") options may not be closed out on an exchange and the Fund may be able to
realize the value of an OTC option it has purchased only by exercising it or
entering into a closing sale transaction with the dealer that issued it. There
can be no assurance that a liquid secondary market will exist for any particular
option or financial futures contract at any specific time. Thus, it may not be
possible to close an option or financial futures position. The Fund will enter
into an option or financial futures position only if there appears to be a
liquid secondary market for option or financial futures.
In addition, adverse market movements could cause the Fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a financial futures contract that it has purchased.
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 financial
futures contract or option. Please see the SAI for more information on the
Fund's investments in options and financial futures, including the risks
associated with these investments.
SMALL COMPANIES. The Fund may invest in companies that have relatively small
revenues, limited product lines, and a small share of the market for their
products or services. Small companies may lack depth of management, they may be
unable to internally generate funds necessary for growth or potential
development or to generate such funds through external financing on favorable
terms, and they may be developing or marketing new products or services for
which markets are not yet established and may never become established. Due to
these and other factors, small companies may suffer significant losses, as well
as realize substantial growth.
Historically, small capitalization stocks have been more volatile than larger
capitalization stocks and are therefore more speculative than investments in
larger companies. Among the reasons for the greater price volatility are the
less certain growth prospects of smaller firms, the lower degree of liquidity in
the markets for such stocks, and the greater sensitivity of small companies to
changing economic conditions. Besides exhibiting greater volatility, small
company stocks may, to a degree, fluctuate independently of larger company
stocks. Small company stocks may decline in price as large company stocks rise,
or rise in price as large company stocks decline. You should therefore expect
that the value of the Fund's shares may be more volatile than the shares of a
fund that invests in larger capitalization stocks.
TECHNOLOGY COMPANIES AND CURRENCY RISK. Consistent with its investment
objective, the Fund expects to have a portion of its assets invested in
securities of companies involved in computing technologies or computing
technology-related companies. Typically, the Fund's investments in this sector
reflect companies whose products or services are marketed on a global, rather
than a predominantly domestic or regional basis. The technology sector as a
whole has historically been volatile and issues from this sector tend to be
subject to abrupt or erratic price movements. The Fund seeks to reduce such
risks through extensive research, and emphasis on more globally-competitive
companies. To the extent the Fund holds securities of companies whose products
or services are distributed globally, securities issued by such companies, and
companies such as the Fund, that hold such securities, may be subject to
fluctuations in value due to the effect of changes in the relative values of
currencies on such company's business. The history of these markets reflect both
decreases and increases in worldwide currency valuations, and these may reoccur
unpredictably in the future.
Who Manages the Fund?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
two classes of shares. While none is expected, the Board will act appropriately
to resolve any material conflict that may arise.
INVESTMENT MANAGER. Advisers is the investment manager of the Fund and other
funds with aggregate assets of over $81 billion. It is wholly owned by
Resources, a publicly owned company engaged in the financial services industry
through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the
principal shareholders of Resources.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is:
Conrad B. Herrmann, CFA
Portfolio Manager of Advisers
Mr. Herrmann has been involved with the management of the Fund since inception
and responsible for the day-to-day management of the Fund's portfolio since
July, 1993. Mr. Herrmann is a Chartered Financial Analyst and holds a Master of
Business Administration degree from Harvard University. He earned a Bachelor of
Arts degree from Brown University. Mr. Herrmann has been with Advisers or an
affiliate since 1989 and is a member of several securities industry-related
associations.
Nicholas Moore
Portfolio Manager of Advisers
Mr. Moore has been involved with the management of the Fund since inception and
responsible for the day-to-day management of the Fund's portfolio since July,
1993. Mr. Moore holds a Bachelor of Science degree in business administration
from Menlo College. He has been with Franklin since 1986 and with Advisers or an
affiliate since 1989.
Kei Yamamoto, CFA
Portfolio Manager of Advisers
Ms. Yamamoto has been responsible for the day-to-day management of the Fund's
portfolio since 1995. Ms. Yamamoto is a Chartered Financial Analyst and has a
Master of Science degree and a Bachelor of Science degree in material science
and engineering from the Massachusetts Institute of Technology. Prior to joining
Advisers in 1994, Ms. Yamamoto worked at Goldman Sachs & Co. as a financial
analyst and at Wasserstein Perella & Co. as an associate and vice president. Ms
Yamamoto has been in the securities industry since 1987.
Frank Felicelli, CFA
Portfolio Manager of Advisers
Mr. Felicelli has been generally involved with investment strategy of the Fund's
portfolio since its inception. Mr. Felicelli is a Chartered Financial Analyst
and has a Master of Business Administration degree from Golden Gate University.
He earned a Bachelor of Arts degree in economics from the University of
Illinois. He has been with Franklin since 1986. He is a member of several
securities industry-related associations.
SERVICES PROVIDED BY ADVISERS. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also provides certain administrative services and
facilities for the Fund and performs similar services for other funds. Please
see "Investment Advisory and Other Services" and "Miscellaneous Information" in
the SAI for information on securities transactions and a summary of the Fund's
Code of Ethics.
MANAGEMENT FEES. During the fiscal year ended April 30, 1996, management fees,
before any advance waiver, totaled 0.63% of the average daily net assets of the
Fund. Total operating expenses for Class I totaled 1.09%. Under an agreement by
Advisers to limit its fees, the Fund paid management fees totaling 0.25% and
operating expenses totaling 0.71% for Class I. Advisers may end this arrangement
at any time upon notice to the Board.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares when selecting a broker or dealer. Please see "How Does the Fund
Buy Securities For Its Portfolio?" in the SAI for more information.
The Rule 12b-1 Plans
Each class has a distribution plan or "Rule 12b-1 Plan" under which it may pay
or reimburse Distributors or others for activities primarily intended to sell
shares of the class. These expenses may include, among others, distribution or
service fees paid to Securities Dealers or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates, printing prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and advertisements, and a prorated portion of Distributors' overhead expenses.
Payments by the Fund under the Class I plan may not exceed 0.25% per year of
Class I's average daily net assets. All distribution expenses over this amount
will be borne by those who have incurred them.
Under the Class II plan, the Fund may pay Distributors up to 0.75% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the Class II
purchase.
The Fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
How Does the Fund Measure Performance?
From time to time, each class of the Fund advertises its performance. The more
commonly used measures of performance are total return, current yield and
current distribution rate. Performance figures are usually calculated using the
maximum sales charge, but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of each class will vary. Performance figures are always
based on past performance and do not indicate future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How Does the Fund Measure Performance?" in the SAI.
How Is the Trust Organized?
The Fund is a non-diversified series of Franklin Strategic Series (the "Trust"),
an open-end management investment company, commonly called a mutual fund. It was
organized as a Delaware business trust on January 25, 1991, and is registered
with the SEC under the 1940 Act. Before July 12, 1993, the Fund was named the
Franklin California 250 Growth Fund. On that date, the Fund's investment
objective and various investment policies were changed. Consistent with these
changes, the Fund's name was changed to the Franklin California Growth Fund. The
Fund began offering two classes of shares on September 1, 1996: Franklin
California Growth Fund - Class I and Franklin California Growth Fund - Class II.
All shares purchased before that time are considered Class I shares. Additional
classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state business trust law, or (3) required
to be voted on separately by the 1940 Act. Shares of each class of a series have
the same voting and other rights and preferences as the other classes and series
of the Trust for matters that affect the Trust as a whole. In the future,
additional series may be offered.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
electing or removing members of the Board.
How Taxation Affects You and the Fund
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund intends to continue to qualify 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.
For federal income tax purposes, any income dividends which 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.
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 Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
For corporate shareholders, 7.14% of the ordinary income distributions
(including short-term capital gain distributions) paid by the Fund for the
fiscal year ended April 30, 1996, qualified for the corporate dividends-received
deduction, subject to certain holding period and debt financing restrictions
imposed under the Code on the corporation claiming the deduction. These
restrictions are discussed in the SAI.
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 you received
them on December 31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred 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 received with respect to such shares.
The Fund will inform you of the source of its 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 such dividends
and distributions.
Each shareholder who is not a U.S. person for U.S. federal income tax purposes
should consult with their financial or tax advisor regarding the applicability
of U.S. withholding or other taxes on distributions received from the Fund and
the application of foreign tax laws to these distributions. You should also
consult your tax advisor with respect to the applicability of any state and
local intangible property or income taxes to your shares of the Fund and
distributions and redemption proceeds received from the Fund.
About Your Account
How Do I Buy Shares?
Opening Your Account
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. Please indicate which class of shares you want to buy. If you do not
specify a class, your purchase will be automatically invested in Class I shares.
MINIMUM
INVESTMENTS*
To Open Your Account $100
To Add to Your Account $ 25
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares. Currently, the Fund does not allow investments by Market Timers.
Deciding Which Class to Buy
You should consider a number of factors when deciding which class of shares to
buy. If you plan to buy $1 million or more in a single payment or you qualify to
buy Class I shares without a sales charge, you may not buy Class II shares.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds; and
o you plan to sell a substantial number of your shares within approximately six
years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
Purchase Price of Fund Shares
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS I
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
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Deciding Which
Class to Buy."
Sales Charge Reductions and Waivers
- - If you qualify to buy shares under one of the sales charge reduction or
waiver categories described below, please include a written statement with each
purchase order explaining which privilege applies. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
CUMULATIVE QUANTITY DISCOUNTS - CLASS I ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your Class I and Class II
shares in the Franklin Templeton Funds, as well as those of your spouse,
children under the age of 21 and grandchildren under the age of 21. If you are
the sole owner of a company, you may also add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
LETTER OF INTENT - CLASS I ONLY. You may buy Class I 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 on Class I 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 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES - CLASS I ONLY. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
SALES CHARGE WAIVERS. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 4:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds, Templeton Variable Annuity Fund, the
Templeton Variable Products Series Fund, or the Franklin Government
Securities Trust. You should contact your tax advisor for information on
any tax consequences that may apply.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the SAME CLASS of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares reinvested were subject
to a Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
5. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front-end or contingent deferred sales charges at the
time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to Class I purchases by:
6. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
7. Group annuity separate accounts offered to retirement plans
8. Retirement plans that (i) are sponsored by an employer with at least 100
employees, (ii) have plan assets of $1 million or more, or (iii) agree to
invest at least $500,000 in the Franklin Templeton Funds over a 13 month
period. Retirement plans that are not Qualified Retirement Plans or SEPS,
such as 403(b) or 457 plans, must also meet the requirements described
under "Group Purchases - Class I Only" above.
9. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments by the
Fund on arbitrage rebate calculations.
10. Broker-dealers and qualified registered investment advisors who have
entered into a supplemental agreement with Distributors for their clients
who are participating in comprehensive fee programs, sometimes known as
wrap fee programs
11. Registered Securities Dealers and their affiliates, for their investment
accounts only
12. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
13. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
14. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
15. Accounts managed by the Franklin Templeton Group
16. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
How Do I Buy Shares in Connection with Retirement Plans?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
Other Payments to Securities Dealers
The payments below apply to Securities Dealers who initiate and are responsible
for Class II purchases and certain Class I purchases made without a sales
charge. A Securities Dealer may only receive one of the following payments for
each qualifying purchase. The payments described below are paid by Distributors
or one of its affiliates, at its own expense, and not by the Fund or its
shareholders.
1. Securities Dealers may receive up to 1% of the purchase price for Class II
purchases. During the first year after the purchase, Distributors may keep
a part of the Rule 12b-1 fees associated with that purchase.
2. Securities Dealers will receive up to 1% of the purchase price for Class I
purchases of $1 million or more.
3. Securities Dealers may, in the sole discretion of Distributors, receive up
to 1% of the purchase price for Class I purchases made under waiver
category 8 above.
4. Securities Dealers may receive up to 0.25% of the purchase price for Class
I purchases made under waiver categories 6 and 9 above.
Please see "How Do I Buy, Sell and Exchange Shares - Other Payments to
Securities Dealers" in the SAI for any breakpoints that may apply.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. 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 NASD.
May I Exchange Shares for Shares of Another Fund?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums. Some
Franklin Templeton Funds do not offer Class II shares.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you're exchanging
By Phone Call Shareholder Services or TeleFACTS(R)
--If you do not want the ability to exchange by phone to
apply to your account, please let us know.
Through Your Dealer Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
Will Sales Charges Apply to My Exchange?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
CONTINGENT DEFERRED SALES CHARGE - CLASS I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
CONTINGENT DEFERRED SALES CHARGE - CLASS II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
CDSC, such as shares from the reinvestment of dividends and capital gains ("free
shares"), $2,000 in shares that are no longer subject to a CDSC because you have
held them for longer than 18 months ("matured shares"), and $3,000 in shares
that are still subject to a CDSC ("CDSC liable shares"). If you exchange $3,000
into a new fund, $500 will be exchanged from free shares, $1,000 from matured
shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. We believe the proportional method of exchanging Class II shares
more closely reflects the expectations of Class II shareholders if shares are
sold during the Contingency Period. The tax consequences of a sale or exchange
are determined by the Code and not by the method used by the Fund to transfer
shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
Exchange Restrictions
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class.
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically
registered money fund account requiring only one signature for all
transactions. PLEASE NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION TO
BE AVAILABLE ON YOUR ACCOUNT(S). Additional procedures may apply. Please
see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
How Do I Sell Shares?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts
under court jurisdiction may have additional requirements.
METHOD STEPS TO FOLLOW
By Phone Call Shareholder Services
(Only available if you have
completed and sent to us
the telephone redemption
agreement included with
this prospectus)
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts
may exceed $50,000 by completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for the shares you
want to sell or you have already returned them to the Fund
o Unless you are selling shares in a Trust Company retirement
plan account
o Unless the address on your account was changed by phone
within the last 30 days
Through Your Dealer Call your investment representative.
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
Trust Company Retirement Plan Accounts
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
Contingent Deferred Sales Charge
A Contingent Deferred Sales Charge may apply to Class I purchases of $1 million
or more if you sell all or a portion of the shares within one year and any Class
II purchase if you sell the shares within 18 months. The charge is 1% of the
value of the shares sold or the Net Asset Value at the time of purchase,
whichever is less. Distributors keeps the charge to recover payments made to
Securities Dealers.
We will first redeem shares not subject to the charge in the following order:
1) A calculated number of shares equal to the capital appreciation on shares
held less than the Contingency Period,
2) Shares purchased with reinvested dividends and capital gain distributions,
and
3) Shares held longer than the Contingency Period.
We then redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated dollar amount, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated number of shares, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before
February 1, 1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual balance of
$1 million in Class I shares, you can withdraw up to $120,000 annually through a
systematic withdrawal plan free of charge. Likewise, if you maintain an annual
balance of $10,000 in Class II shares, $1,200 may be withdrawn annually free of
charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to termination
or plan transfer
What Distributions Might I Receive From the Fund?
The Fund declares dividends from its net investment income semiannually to
shareholders of record on the first business day before the 15th of the month
and pays them on or about the last day of that month. Capital gains, if any, may
be distributed annually, usually in December. Dividends and capital gains are
calculated and distributed the same way for each class. The amount of any income
dividends per share will differ, however, generally due to the difference in the
Rule 12b-1 fees of each class.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution.
Distribution Options
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the
same class 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. If you own
Class II shares, you may also reinvest your distributions in Class I shares
of the Fund. This is a convenient way to accumulate additional shares and
maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a Contingent Deferred Sales
Charge). If you own Class II shares, you may also direct your distributions
to buy Class I shares of another Franklin Templeton Fund. Many shareholders
find this a convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to
another person or to a checking account, you may need a signature
guarantee. If you send the money to a checking account, please see
"Electronic Fund Transfers" under "Services to Help You Manage Your
Account."
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 you do not select an option, we will
automatically reinvest dividend and capital gain distributions in the same class
of the Fund. For Trust Company retirement plans, special forms are required to
receive distributions in cash. You may change your distribution option at any
time by notifying us by mail or phone. Please allow at least seven days prior to
the record date for us to process the new option.
Transaction Procedures and Special Requirements
How and When Shares Are Priced
The Fund is open for business each day the Exchange is open. We determine the
Net Asset Value per share of each class as of the scheduled close of the
Exchange, generally 1:00 p.m. Pacific time. You can find the prior day's closing
Net Asset Value and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.
The Price We Use When You Buy or Sell Shares
You buy shares at the Offering Price of the class you wish to purchase, unless
you qualify to buy shares at a reduced sales charge or with no sales charge. The
Offering Price of each class is based on the Net Asset Value per share of the
class and includes the maximum sales charge. We calculate it to two decimal
places using standard rounding criteria. You sell shares at Net Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
Proper Form
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
Written Instructions
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. You should
verify that the institution is an eligible guarantor prior to signing. A
notarized signature is not sufficient.
Share Certificates
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
Telephone Transactions
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
We may only be liable for losses resulting from unauthorized telephone
transactions if we do not follow reasonable procedures designed to verify the
identity of the caller. When you call, we will request personal or other
identifying information, and will also record calls. For your protection, we may
delay a transaction or not implement one if we are not reasonably satisfied that
telephone instructions are genuine. If this occurs, we will not be liable for
any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by telephone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. You may not sell shares or change
distribution options on Trust Company retirement plans by phone. While you may
exchange shares of Trust Company IRA and 403(b) retirement accounts by phone,
certain restrictions may be imposed on other retirement plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
Account Registrations and Required Documents
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
Corporation Corporate Resolution
Partnership 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
Trust 1. The pages from the trust document that identify
the trustees, or
2. A certification for trust
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
ELECTRONIC INSTRUCTIONS. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We can accept electronic instructions directly from your dealer or
representative without further inquiry. Electronic instructions may be processed
through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
Tax Identification Number
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
Services to Help You Manage Your Account
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can 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
included with this prospectus or contact your investment representative. 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
discontinue the program at any time by notifying Investor Services by mail or
phone.
Automatic Payroll Deduction
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
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 direct your payments to buy the same class of shares of another
Franklin Templeton Fund or 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.
You will generally receive your payment by the fifth business day of the month
in which a payment is scheduled. When you sell your shares under a systematic
withdrawal plan, it is a taxable transaction.
Because of the front-end sales charge, you may not want to set up a systematic
withdrawal plan if you plan to buy shares on a regular basis. Shares sold under
the plan may also be subject to a Contingent Deferred Sales Charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
Electronic Fund Transfers
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with 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. We will send any payments made during that time to the
address of record on your account.
TeleFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips.
You will need the code number for each class to use TeleFACTS. The code numbers
for Class I and Class II are 180 and 280.
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. Please verify the
accuracy of your statements when you receive them.
Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
Institutional Accounts
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. For further information, call Institutional
Services.
Availability of These Services
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
What If I Have Questions About My Account?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
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.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
Glossary
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
CD - Certificate of deposit
CLASS I AND CLASS II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
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., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
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.
NASD - National Association of Securities Dealers, Inc.
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.
NSCC - National Securities Clearing Corporation
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
QUALIFIED RETIREMENT PLAN(S) - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
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
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or another wholly owned
subsidiary of Resources.
PROSPECTUS & APPLICATION
Franklin Strategic Income Fund
INVESTMENT STRATEGY
GROWTH & INCOME
SEPTEMBER 1, 1996
Franklin Stategic Series This prospectus describes the Franklin Strategic Income
Fund (the "Fund"). It contains information you should know before investing in
the Fund. Please keep it for future reference.
The Fund's SAI, dated September 1, 1996, as may be amended from time to time,
includes more information about the Fund's procedures and policies. It has been
filed with the SEC and is incorporated by reference into this prospectus. For a
free copy or a larger print version of this prospectus, call 1-800/DIAL BEN or
write the Fund at the address shown.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Shares of the Fund involve investment risks, including the possible
loss of principal.
LIKE ALL MUTUAL FUNDS, 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.
The Fund may invest up to 100% of its net assets in non-investment grade bonds
of both U.S. and foreign issuers. These are commonly known as "junk bonds."
Their default and other risks are greater than those of higher rated securities.
You should carefully consider these risks before investing in the Fund. Please
see "What Are the Fund's Potential Risks?"
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.
The Fund may invest in both domestic and foreign securities.
Franklin Strategic Income Fund
September 1, 1996
When reading this prospectus, you will see certain terms in capital letters.
This means the term is explained in our glossary section.
Table of Contents
About the Fund
Expense Summary ............................ 2
Financial Highlights ....................... 3
How Does the Fund Invest Its Assets? ....... 4
What Are the Fund's Potential Risks? ....... 15
Who Manages the Fund? ...................... 21
How Does the Fund Measure Performance? ..... 22
How Is the Fund Organized? ................. 23
How Taxation Affects You and the Fund ...... 24
About Your Account
How Do I Buy Shares? ....................... 25
May I Exchange Shares for Shares of Another Fund? 30
How Do I Sell Shares? ...................... 32
What Distributions Might I Receive From the Fund? 34
Transaction Procedures and Special Requirements 35
Services to Help You Manage Your Account ... 40
Glossary
Useful Terms and Definitions ............... 43
Appendix
Description of Ratings ..................... 45
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
About the Fund
Expense Summary
This table is designed to help you understand the costs of investing in the
Fund. It is based on the Fund's historical expenses for the fiscal year ended
April 30, 1996. Your actual expenses may vary.
A. Shareholder Transaction Expenses+
Maximum Sales Charge Imposed on Purchases
(as a percentage of Offering Price) 4.25%
Deferred Sales Charge None++
Exchange Fee (per transaction) $5.00*
B. Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.63%**
Rule 12b-1 Fees 0.08%***
Other Expenses 0.37%
Total Fund Operating Expenses 1.08%**
C. Example
Assume the Fund's annual return is 5% and its operating expenses are as
described above. For each $1,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$53**** $75 $100 $169
This is just an example. It does not represent past or future expenses or
returns. Actual expenses and returns may be more or less than those shown. The
Fund pays its operating expenses. The effects of these expenses are reflected in
its Net Asset Value or dividends and are not directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more. A
Contingent Deferred Sales Charge of 1% may apply, however, if you sell the
shares within one year. See "How Do I Sell Shares? - Contingent Deferred Sales
Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**Advisers has agreed in advance to waive its management fees and make certain
payments to reduce the Fund's expenses. With this reduction, the Fund paid no
management fees and total Fund operating expenses were 0.25%.
***These fees may not exceed 0.25%. 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 charge permitted under the
NASD's rules.
****Assumes a Contingent Deferred Sales Charge will not apply.
Financial Highlights
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report appears in the financial statements in the Trust's Annual Report to
shareholders for the fiscal year ended April 30, 1996. The Annual Report to
Shareholders also includes more information about the Fund's performance. For a
free copy, please call Fund Information.
YEAR ENDED APRIL 30
1996 1995*
Per Share Operating Performance
Net Asset Value at Beginning of Year $10.18 $10.00
Net Investment Income 0.85 0.70
Net Realized & Unrealized Gain (Loss) on Securities 0.670 0.154
Total From Investment Operations 1.520 0.854
Distributions From Net Investment Income (0.823) (0.674)
Distributions From Capital Gains (0.107) -
Total Distributions (0.930) (0.674)
Net Asset Value at End of Year $10.77 $10.18
Total Return** 15.59% 8.94%
Ratios/Supplemental Data
Net Assets at End of Year (in 000's) $13,022 $6,736
Ratio of Expenses to Average Net Assets*** 0.25% 0.25%+
Ratio of Net Investment Income to Average Net Assets 8.53% 7.93%+
Portfolio Turnover Rate 73.95% 68.43%
Average Commission Rate++ 0.0514 -
*For the period May 24, 1994 (effective date) to April 30, 1995.
**Total return measures the change in value of an investment over the period
indicated. It is not annualized. It does not include the maximum front-end sales
charge or Contingent Deferred Sales Charge, and assumes reinvestment of
dividends and capital gains, if any, at net asset value.
*** Advisers agreed in advance to waive its management fees and make payments to
reduce the Fund's expenses. Had such action not been taken, the ratio of
operating expenses to average net assets for 1995 and 1996 would have been
1.38%+ and 1.08%, respectively.
+Annualized
++Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
How Does the Fund Invest Its Assets?
The Fund's Investment Objective
The Fund's primary investment objective is to obtain a high level of current
income, with capital appreciation over the long term as a secondary objective.
The objectives are fundamental policies of the Fund and may not be changed
without shareholder approval. Of course, there is no assurance that the Fund's
objectives will be achieved.
The Fund will seek to achieve its objectives by using an active asset allocation
process and a flexible policy of investing in securities of U.S. and foreign
governments, their agencies, authorities and instrumentalities; U.S. and foreign
corporate high yield fixed-income securities; various types of fixed or
adjustable rate mortgage securities; asset-backed securities; common stocks that
pay dividends; preferred stocks; and income producing securities that are
convertible into common stocks, generally with particular consideration to
current income but which may also be purchased for long-term capital
appreciation. Because of the Fund's ability to invest in lower rated U.S. and
foreign corporate bonds, an investment in the Fund is subject to a higher degree
of risk than an investment in a more conservative type of income fund.
Under normal circumstances, at least 65% of the Fund's assets will be invested
in U.S. and foreign debt securities which include bonds, notes, mortgage-backed
securities and asset-backed securities, U.S. and foreign corporate high yield
securities, convertible securities, and preferred stock. The Fund may invest the
remainder of its assets, up to 35%, in common stocks, generally with particular
consideration to current income but which may also be purchased for potential
long-term capital appreciation. There are no restrictions, other than those
above, as to the proportion of the Fund's assets that may be invested in a
particular type of security. This determination is entirely within the Managers'
discretion.
The Fund will use an active asset allocation strategy in order to maximize both
income and capital appreciation. This means the Fund will allocate its assets
among securities in various market sectors in anticipation of, and in response
to, varying economic, market, industry and issuer conditions. The Managers will
use a two-sided analysis to take advantage of varying sector reactions to
economic events. The Managers will use a "top-down" macroeconomic analysis
combined with a "bottom-up" fundamental sector, industry and issuer analysis.
Country risk, business cycles, yield curves and values between and within
markets will be evaluated.
Types of Securities the Fund May Invest In
HIGH YIELD CORPORATE SECURITIES. The Fund may invest in securities rated in any
category by Standard & Poor's Corporation ("S&P") or Moody's Investors Service,
Inc. ("Moody's"), two nationally recognized statistical rating agencies,
including, without limitation, lower rated, fixed-income U.S. and foreign
corporate high yield securities and unrated securities of comparable quality,
commonly called "junk bonds." Please see "High Yielding, Fixed-Income
Securities" and "Foreign Securities" under "What Are the Fund's Potential
Risks?" As an operating policy, the Fund will generally invest in securities
that are rated at least Caa by Moody's or CCC by S&P, or in unrated securities
of comparable quality as determined by the Managers. While unrated debt
securities are not necessarily of lower quality, they may not be as attractive
of an investment as rated securities to many buyers. Please see the appendix in
this prospectus and in the SAI for a description of the ratings assigned by S&P
and Moody's. Regardless of ratings, all debt securities considered for purchase
(whether rated or unrated) will be carefully analyzed by the Managers to insure,
to the extent possible, that the planned investment is consistent with the
Fund's investment objectives.
FOREIGN SECURITIES. The Fund may invest in foreign government and corporate debt
securities and in American Depositary Receipts ("ADRs"), which are certificates
issued by U.S. banks representing the right to receive securities of a foreign
issuer deposited with that bank or a correspondent bank. The Fund's investment
in ADRs may be sponsored and unsponsored. More information about ADRs is
included in the SAI. The Fund may buy foreign securities that are traded in the
U.S. and may buy the securities of foreign issuers directly in foreign markets.
The Fund may also buy securities of U.S. issuers that are denominated in a
foreign currency. See "What Are the Fund's Potential Risks? - Foreign
Securities."
GOVERNMENT SECURITIES. The Fund may invest in Treasury bills and bonds, which
are obligations of, or guaranteed by, the U.S. government and are supported by
the full faith and credit of the U.S. Treasury. The Fund may also invest in U.S.
government agency securities, which are obligations of, or guaranteed by, U.S.
government agencies or instrumentalities, such as Federal Home Loan Banks, and
are supported by the right of the issuer to borrow from the Treasury. Securities
of other agencies, such as those issued or guaranteed by the Federal National
Mortgage Association, which are supported only by the credit of the
instrumentality, may also be purchased by the Fund. See the discussion of
mortgage securities below.
MORTGAGE SECURITIES - GENERAL CHARACTERISTICS. The Fund may invest in mortgage
securities issued or guaranteed by the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC"), adjustable rate mortgage securities
("ARMs"), collateralized mortgage obligations ("CMOs"), and stripped
mortgage-backed securities, any of which may be privately issued. The Fund may
also invest in asset-backed securities. Please see the discussion below for a
description of the types of municipal or asset-backed securities in which the
Fund may invest.
A mortgage security is an interest in a pool of mortgage loans. The primary
issuers or guarantors of mortgage securities are GNMA, FNMA and FHLMC. GNMA
creates mortgage securities from pools of government guaranteed or insured
(Federal Housing Authority or Veterans Administration) mortgages originated by
mortgage bankers, commercial banks, and savings and loan associations. FNMA and
FHLMC issue mortgage securities from pools of conventional and federally insured
and/or guaranteed residential mortgages obtained from various entities,
including savings and loan associations, savings banks, commercial banks, credit
unions, and mortgage bankers. The principal and interest on GNMA securities are
guaranteed by GNMA and backed by the full faith and credit of the U.S.
government. Mortgage securities from FNMA and FHLMC are not backed by the full
faith and credit of the U.S. government. FNMA guarantees full and timely payment
of all interest and principal, and FHLMC guarantees timely payment of interest
and the ultimate collection of principal. Securities issued by FNMA are
supported by the agency's right to borrow money from the U.S. Treasury under
certain circumstances. Securities issued by FHLMC are supported only by the
credit of the agency. There is no guarantee that the government would support
government agency securities and, accordingly, they may involve a risk of
non-payment of principal and interest. Nonetheless, because FNMA and FHLMC are
instrumentalities of the U.S. government, these securities are generally
considered to be high quality investments having minimal credit risks.
Most mortgage securities are pass-through securities, which means that they
provide investors with monthly payments consisting of a pro rata share of both
regular interest and principal payments, as well as unscheduled early
prepayments, on the underlying mortgage pool. The Fund invests in both
"modified" and "straight" pass-through securities. For "modified pass-through"
type mortgage securities, principal and interest are guaranteed, whereas such
guarantee is not available for "straight pass-through" securities. CMOs and
stripped mortgage securities are not pass-through securities.
Guarantees as to the timely payment of principal and interest do not extend to
the value or yield of mortgage securities nor do they extend to the value of the
Fund's shares. In general, the value of fixed-income securities varies with
changes in market interest rates. Fixed-rate mortgage securities generally
decline in value during periods of rising interest rates, whereas interest rates
of ARMs move with market interest rates, and thus their value tends to fluctuate
to a lesser degree. In view of these factors, the ability of the Fund to obtain
a high level of total return may be limited under varying market conditions.
ADJUSTABLE RATE MORTGAGE SECURITIES. ARMs, like traditional mortgage securities,
are an interest in a pool of mortgage loans and are issued or guaranteed by a
federal agency or by private issuers. Unlike fixed-rate mortgages, which
generally decline in value during periods of rising interest rates, the interest
rates on the mortgages underlying ARMs are reset periodically and thus allow the
Fund to participate in increases in interest rates, resulting in both higher
current yields and lower price fluctuations. During periods of declining
interest rates, of course, the coupon rates may readjust downward, resulting in
lower current yields. Because of this feature, the value of an ARM is unlikely
to rise during periods of declining interest rates to the same extent as a
fixed-rate instrument. The rate of amortization of principal, as well as
interest payments, for certain types of ARMs change in accordance with movements
in a pre-specified, published interest rate index. There are several categories
of indices, including those based on U.S. Treasury securities, those derived
from a calculated measure, such as a cost of funds index, or a moving average of
mortgage rates and actual market rates. The amount of interest due to an ARM
security holder is calculated by adding a specified additional amount, the
"margin," to the index, subject to limitations or "caps" on the maximum and
minimum interest that is charged to the mortgagor during the life of the
mortgage or to maximum and minimum changes to that interest rate during a given
period. The interest rates paid on the ARMs in which the Fund may invest are
generally readjusted at intervals of one year or less, although instruments with
longer resets such as three years and five years are also permissible
investments.
The underlying mortgages that collateralize the ARMs in which the Fund may
invest will frequently have caps and floors which limit the maximum amount by
which the loan rate to the residential borrower may change up or down (1) per
reset or adjustment interval and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting interest
rate changes. These payment caps may result in negative amortization, which can
extend the average life of the securities. Since most ARMs in the Fund's
portfolio will generally have annual reset limits or caps of 100 to 200 basis
points, fluctuations in interest rates above these levels could cause the
mortgage securities to "cap out" and to behave more like long-term, fixed-rate
debt securities.
STRIPPED MORTGAGE-BACKED SECURITIES. The Fund may invest in stripped
mortgage-backed securities to achieve a higher yield than may be available from
fixed-rate mortgage securities. The stripped mortgage securities in which the
Fund may invest will not be limited to those issued or guaranteed by agencies or
instrumentalities of the U.S. government, although such securities are more
liquid than privately issued stripped mortgage securities. Stripped
mortgage-backed securities are usually structured with two classes, each
receiving different proportions of the interest and principal distributions on a
pool of mortgage assets. Typically, one class will receive some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity of an IO and PO class is
extremely sensitive not only to changes in prevailing interest rates but also to
the rate of principal payments (including prepayments) on the related underlying
mortgage assets.
Stripped mortgage-backed securities have greater market volatility than other
types of mortgage securities in which the Fund invests and are purchased and
sold by institutional investors, such as the Fund, through several investment
banking firms acting as brokers or dealers. As these securities were only
recently developed, traditional trading markets have not yet been established
for all stripped mortgage securities. Accordingly, some of these securities may
be illiquid. The staff of the SEC has indicated that only government-issued IO
or PO securities that are backed by fixed-rate mortgages may be deemed to be
liquid, if procedures with respect to determining liquidity are established by a
fund's board. The Board may, in the future, adopt procedures that would permit
the Fund to acquire, hold, and treat as liquid government-issued IO and PO
securities. At the present time, however, all such securities will continue to
be treated as illiquid and will, together with any other illiquid investments,
not exceed 10% of the Fund's net assets. This position may be changed in the
future, without notice to shareholders, in response to the staff's continued
reassessment of this matter, as well as to changing market conditions.
COLLATERALIZED MORTGAGE OBLIGATIONS. CMOs are fixed-income securities that are
collateralized by pools of mortgage loans created by commercial banks, savings
and loan institutions, private mortgage insurance companies, mortgage bankers
and other issuers in the U.S. Timely payment of interest and principal (but not
the market value) of some of these pools is supported by various forms of
insurance or guarantees issued by private issuers, those who pool the mortgage
assets and, in some cases, by U.S. government agencies. The Fund may buy CMOs
that are rated in any category by the rating agencies without insurance or
guarantee if, in the opinion of the Managers, the sponsor is creditworthy.
Prepayments of the mortgages underlying a CMO, which usually increase when
interest rates decrease, will generally reduce the life of the mortgage pool,
thus impacting the CMO's yield. Under these circumstances, the reinvestment of
prepayments will generally be at a rate lower than the rate applicable to the
original CMO.
With a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of a CMO, often referred to as a "tranche," is issued at a specified
coupon rate or adjustable rate and has a stated maturity or final distribution
date. Principal prepayments on collateral underlying a CMO, however, may cause
it to be retired substantially earlier than the stated maturities or final
distribution dates. Interest is paid or accrues on all classes of a CMO on a
monthly, quarterly or semiannual basis. The principal and interest on the
underlying mortgages may be allocated among several classes of a series in many
ways. In a common structure, payments of principal, including any principal
prepayments, on the underlying mortgages are applied to the classes of a series
of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class of
a CMO until all other classes having an earlier stated maturity or final
distribution date have been paid in full.
To the extent any privately issued CMOs in which the Fund invests are considered
by the SEC to be an investment company, the Fund will limit its investments in
such securities in a manner consistent with the provisions of the 1940 Act.
ASSET-BACKED SECURITIES. The Fund may invest in various asset-backed securities
rated in any category by the rating agencies. The underlying assets may include,
but are not limited to, receivables on home equity and credit card loans, and
automobile, mobile home and recreational vehicle loans and leases. There may be
other types of asset-backed securities that are developed in the future in which
the Fund may invest. Asset-backed securities are issued in either a pass-through
structure (similar to a mortgage pass-through structure) or in a pay-through
structure (similar to a CMO structure). In general, asset-backed securities
contain shorter maturities than bonds or mortgage loans and historically have
been less likely to experience substantial prepayment.
Asset-backed securities entail certain risks not presented by mortgage-backed
securities as they do not have the benefit of the same type of security
interests in the underlying collateral. Credit card receivables are generally
unsecured and a number of state and federal consumer credit laws give debtors
the right to set off certain amounts owed on the credit cards, thereby reducing
the outstanding balance. In the case of automobile receivables, there is a risk
that the holders may not have either a proper or first security interest in all
of the obligations backing such receivables due to the large number of vehicles
involved in a typical issuance and the technical requirements imposed under
state laws. Therefore, recoveries on repossessed collateral may not always be
available to support payments on securities backed by these receivables.
OPTIONS ON SECURITIES, INDICES AND FUTURES CONTRACTS. The Fund may write (sell)
covered put and call options and buy put and call options on securities,
securities indices or futures contracts that are traded on U. S. or foreign
exchanges or in the over-the-counter markets. An option on a security or futures
contract is a contract that grants the buyer of the option, in return for the
premium paid, the right to buy a specified security or futures contract (in the
case of a call option) or to sell a specified security or futures contract (in
the case of a put option) from or to the writer of the option at a designated
price during the term of the option. An option on a securities index grants the
buyer of the option, in return for the premium paid, the right to receive from
the seller cash equal to the difference between the closing price of the index
and the exercise price of the option. The Fund may write a call or put option
only if the option is "covered." This means that so long as the Fund is
obligated as the writer of a call option, it will own the underlying securities
or futures contracts subject to the call, or hold a call at the same or lower
exercise price, for the same exercise period, and on the same securities or
futures contracts as the written call. A put is covered if the Fund maintains
liquid assets with a value equal to the exercise price in a segregated account,
or holds a put on the same underlying securities or futures contracts at an
equal or greater exercise price. The Fund will not engage in any stock options
or stock index options if the option premiums paid on its open option positions
exceed 5% of the value of the Fund's total assets.
OPTIONS ON FOREIGN CURRENCIES. The Fund may buy and write put and call options
on foreign currencies traded on U.S. and foreign exchanges or in the
over-the-counter markets. The Fund will buy and write such options for hedging
purposes to protect against declines in the U.S. dollar value of foreign
portfolio securities and against increases in the U.S. dollar cost of foreign
securities or other assets to be acquired.
FUTURES CONTRACTS. For hedging purposes only, the Fund may buy and sell
financial futures contracts, stock and bond index futures contracts and foreign
currency futures contracts. A financial futures contract is an agreement between
two parties to buy or sell a specified debt security at a set price on a future
date. An index futures contract is an agreement to take or make delivery of an
amount of cash based on the difference between the value of the index at the
beginning and at the end of the contract period. A futures contract on a foreign
currency is an agreement to buy or sell a specified amount of a currency for a
set price on a future date. The Fund may not commit more than 5% of its total
assets to initial margin deposits on futures contracts. Please see "How Does the
Fund Invest Its Assets? - Futures Contracts" in the SAI for more information.
FORWARD CURRENCY EXCHANGE CONTRACTS. The Fund may enter into forward currency
exchange contracts to attempt to minimize the risk to the Fund from adverse
changes in the relationship between currencies or to enhance income. A forward
currency exchange contract is an obligation to buy or sell a specific currency
for an agreed price at a future date which is individually negotiated and
privately traded by currency traders and their customers.
The Fund's investment in options, forward currency exchange contracts and
futures contracts, as described above, may be limited by the requirements of the
Code for qualification as a regulated investment company and is subject to
special tax rules that may affect the amount, timing and character of
distributions to you. These securities require the application of complex and
special tax rules and elections. Please see the SAI for more information.
INVERSE FLOATERS. The Fund may invest up to 5% of its total assets in inverse
floaters. Inverse floaters are instruments with floating or variable interest
rates that move in the opposite direction, usually at an accelerated speed, to
short-term interest rates or interest rate indices.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities. 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 the capital appreciation resulting from a
market price advance in the convertible security's underlying common stock.
Though the Fund intends to invest in liquid convertible securities there can be
no assurance that this will always be achieved. For more information on
convertible securities, including liquidity issues, please see the SAI.
Other Investment Policies of the Fund
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may buy U.S. government
obligations on a "when issued" or "delayed delivery" basis. These transactions
are arrangements under which the Fund buys securities that have been authorized
but not yet issued with payment for and delivery of the security scheduled for a
future time, generally in 30 to 60 days. Purchases of U.S. government securities
on a when issued or delayed delivery basis are subject to the risk that the
value or yields at delivery may be more or less than the purchase price or the
yields available when the transaction was entered into. Although the Fund will
generally buy U.S. government securities on a when issued basis with the
intention of holding the securities, it may sell the securities before the
settlement date if it is deemed advisable. When the Fund is the buyer in this
type of transaction, it will maintain, in a segregated account with its
custodian bank, cash or high-grade marketable securities having an aggregate
value equal to the amount of the Fund's purchase commitments until payment is
made. To the extent the Fund engages in when issued and delayed delivery
transactions, it will do so only for the purpose of acquiring portfolio
securities consistent with its investment objectives and policies, and not for
the purpose of investment leverage. In when issued and delayed delivery
transactions, the Fund relies on the seller to complete the transaction. The
seller's failure to do so may cause the Fund to miss a price or yield considered
advantageous to the Fund. Securities purchased on a when issued or delayed
delivery basis do not generally earn interest until their scheduled delivery
date. Entering into a when issued or delayed delivery transaction is a form of
leverage that may affect changes in Net Asset Value to a greater extent.
MORTGAGE DOLLAR ROLLS. The Fund may enter into mortgage dollar rolls in which
the Fund sells mortgage-backed securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (name, type, coupon
and maturity) securities on a specified future date. During the period between
the sale and repurchase, the Fund forgoes principal and interest paid on the
mortgage-backed securities. The Fund is compensated by the difference between
the current sale price and the lower price for the future purchase (often
referred to as the "drop"), as well as by the interest earned on the cash
proceeds of the initial sale. A "covered roll" is a specific type of mortgage
dollar roll for which there is an offsetting cash position or a cash equivalent
security position. The Fund could suffer a loss if the contracting party fails
to perform the future transaction in that the Fund may not be able to buy back
the mortgage-backed securities it initially sold. The Fund intends to enter into
mortgage dollar rolls only with government securities dealers recognized by the
Federal Reserve Board or with member banks of the Federal Reserve System.
INTEREST RATE AND CURRENCY SWAPS. Interest rate swaps involve an exchange
between the Fund and another party of their respective commitments to pay or
receive interest, such as an exchange of fixed rate payments for floating rate
payments. Currency swaps involve the exchange of the parties' respective rights
to make or receive payments in specified currencies. Since interest rate and
currency swaps are individually negotiated, the Fund expects to achieve an
acceptable degree of correlation between its portfolio investments and its
interest rate or currency swap positions.
The use of interest rate and currency swaps is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. If the Managers are incorrect
in their forecasts of market values, interest rates and currency exchange rates,
the investment performance of the Fund would be less favorable than it would
have been if this investment technique was not used.
LOAN PARTICIPATIONS AND DEFAULTED DEBT SECURITIES. Loan participations are
interests in floating or variable rate senior loans to U.S. corporations,
partnerships and other entities. While loan participations generally trade at
par value, the Fund will acquire those selling at a discount because of the
borrower's credit problems. To the extent the borrower's credit problems are
resolved, the loan participation may appreciate in value. The Managers may
acquire loan participations for the Fund when they believe, over the long term,
appreciation will occur. An investment in these securities, however, carries
substantially the same risks associated with an investment in defaulted debt
securities and may result in the loss of the Fund's entire investment. The Fund
will buy defaulted debt securities if, in the opinion of the Managers, it
appears the issuer may resume interest payments or other advantageous
developments appear likely in the near future. Loan participations and defaulted
debt securities may be considered illiquid and, if so, will be included in the
10% limitation discussed under "Illiquid Investments." See also "What Are the
Fund's Potential Risks? - High Yielding, Fixed-Income Securities."
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 that such loans do not exceed 331/3% of the value of the Fund's total
assets at the time of the most recent loan. The Fund currently intends, however,
not to exceed 10% 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
collateral 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
the cash collateral in short-term interest bearing obligations or by receiving a
loan premium from the borrower. Under the securities loan agreement, the Fund
continues to be entitled to all dividends or interest on any loaned securities.
As with any extension of credit, there are risks of delay in recovery and loss
of rights in the collateral should the borrower of the security fail
financially.
BORROWING. The Fund does not borrow money or mortgage or pledge any of its
assets, except that the Fund may borrow for temporary or emergency purposes, in
an amount not to exceed 5% of its total assets.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions in which
the Fund buys a U.S. government security subject to resale to a bank or dealer
at an agreed-upon price and date. The transaction requires the collateralization
of the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller might cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund might
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks which are deemed creditworthy by the Managers.
A repurchase agreement is deemed to be a loan by the Fund under the 1940 Act.
The U.S. government security subject to resale (the collateral) will be held on
behalf of the Fund by a custodian approved by the Board and will be held
pursuant to a written agreement.
SHORT-TERM INVESTMENTS. The Fund may invest its cash, including cash resulting
from purchases and sales of Fund shares, in short-term debt instruments,
including U.S. government securities, high grade commercial paper, repurchase
agreements and other money market equivalents and, subject to the terms of an
order of exemption from the SEC, the shares of affiliated money market funds
that invest primarily in short-term debt securities. These temporary investments
may be made either for liquidity purposes, to meet shareholder redemption
requirements or as a temporary defensive measure.
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
generally securities that cannot be sold within seven days in the normal course
of business at approximately the amount at which the Fund has valued them.
Subject to this limitation, the Board has authorized the Fund to invest in
restricted securities where such investments are consistent with the Fund's
investment objectives and has authorized such securities to be considered liquid
to the extent the Managers determine on a daily basis that there is a liquid
institutional or other market for such securities.
NON-DIVERSIFICATION. The Fund is non-diversified under the federal securities
laws. As a non-diversified Fund, there is no restriction under the 1940 Act on
the percentage of the Fund's assets that may be invested in the securities of
any one issuer. The Fund, however, intends to comply with the diversification
and other requirements of the Code applicable to regulated investment companies,
such as the Fund, so that it will not be subject to U.S. federal income tax on
income and capital gain distributions to shareholders. Accordingly, the Fund
will not buy securities if, as a result, more than 25% of its total assets would
be invested in the securities of a single issuer, or with respect to 50% of its
total assets, more than 5% of those assets would be invested in the securities
of a single issuer. To the extent the Fund is not fully diversified, it may be
more susceptible to adverse economic, political or regulatory developments
affecting a single issuer than if it were more fully diversified.
In addition, it is the present policy of the Fund (which may be changed without
shareholder approval) not to invest more than 5% of its total assets in
companies that have a record of less than three years continuous operation,
including predecessors. These investments, together with any illiquid
securities, may not exceed 10% of the Fund's net assets. In addition the Fund
may not engage in joint or joint and several trading accounts in securities,
except that an order to purchase or sell may be combined with orders from other
persons to obtain lower brokerage commissions and except that the Fund may
engage in joint repurchase agreement arrangements.
The Fund will not invest more than 25% of its total assets in any one industry.
To the extent required by and in conformance with an interpretive position taken
by the SEC, securities issued by a foreign government, its agencies or
instrumentalities are deemed to be an "industry" for purposes of this
limitation.
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 net
assets will not be considered a violation of any of the foregoing policies.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How Does the Fund Invest Its Assets?" and "Investment Restrictions" in the
SAI.
What Are the Fund's Potential Risks?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
HIGH YIELDING, FIXED-INCOME SECURITIES. Because of the Fund's policy of
investing in higher yielding, higher risk securities, an investment in the Fund
is accompanied by a higher degree of risk than is present with an investment in
higher rated, lower yielding securities. Accordingly, an investment in the Fund
should not be considered a complete investment program and should be carefully
evaluated for its appropriateness in light of your overall investment needs and
goals. If you are on a fixed income or retired, you should also consider the
increased risk of loss to principal that is present with an investment in higher
risk securities such as those in which the Fund invests.
The market value of lower rated, fixed-income securities and unrated securities
of comparable quality, commonly known as junk bonds, tends to reflect individual
developments affecting the issuer to a greater extent than the market value of
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Lower rated securities also tend to be more sensitive
to economic conditions than higher rated securities. These lower rated
fixed-income securities are considered by the rating agencies, on balance, to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation and will
generally involve more credit risk than securities in the higher rating
categories. Even securities rated triple B by S&P or Moody's, ratings which are
considered investment grade, possess some speculative characteristics.
Issuers of high yielding, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with acquiring the securities of such issuers is generally
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of high yielding securities may experience financial stress.
During these periods, such issuers may not have sufficient cash flow to meet
their interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific developments affecting
the issuer, the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss due
to default by the issuer may be significantly greater for the holders of high
yielding securities because such securities are generally unsecured and are
often subordinated to other creditors of the issuer. Current prices for
defaulted bonds are generally significantly lower than their purchase price, and
the Fund may have unrealized losses on such defaulted securities that are
reflected in the price of the Fund's shares. In general, securities that default
lose much of their value in the time period prior to the actual default so that
the Fund's net assets are impacted prior to the default. The Fund may retain an
issue that has defaulted because the issue may present an opportunity for
subsequent price recovery.
High yielding, fixed-income securities frequently have call or buy-back features
that permit an issuer to call or repurchase the securities from the Fund.
Although such securities are typically not callable for a period from three to
five years after their issuance, if a call were exercised by the issuer during
periods of declining interest rates, the Managers may find it necessary to
replace the securities with lower yielding securities, which could result in
less net investment income to the Fund. The premature disposition of a high
yielding security due to a call or buy-back feature, the deterioration of the
issuer's creditworthiness, or a default may also make it more difficult for the
Fund to manage the timing of its receipt of income, which may have tax
implications. The Fund may be required under the Code and U.S. Treasury
regulations to accrue income for income tax purposes on defaulted obligations
and to distribute the income to the Fund's shareholders even though the Fund is
not currently receiving interest or principal payments on such obligations. In
order to generate cash to satisfy any or all of these distribution requirements,
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.
The Fund may have difficulty disposing of certain high yielding securities
because there may be a thin trading market for a particular security at any
given time. The market for lower rated, fixed-income securities generally tends
to be concentrated among a smaller number of dealers than is the case for
securities that trade in a broader secondary retail market. Generally,
purchasers of these securities are predominantly dealers and other institutional
buyers, rather than individuals. To the extent the secondary trading market for
a particular high yielding, fixed-income security does exist, it is generally
not as liquid as the secondary market for higher rated securities. Reduced
liquidity in the secondary market may have an adverse impact on market price and
the Fund's ability to dispose of particular issues, when necessary, to meet the
Fund's liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of the issuer. Reduced liquidity in the
secondary market for certain securities may also make it more difficult for the
Fund to obtain market quotations based on actual trades for purposes of valuing
the Fund's portfolio. Current values for these high yield issues are obtained
from pricing services and/or a limited number of dealers and may be based upon
factors other than actual sales. Please see "How Are Fund Shares Valued?" in the
SAI.
The Fund is authorized to acquire high yielding, fixed-income securities that
are sold without registration under the federal securities laws and therefore
carry restrictions on resale. While many high yielding securities have been sold
with registration rights, covenants and penalty provisions for delayed
registration, if the Fund is required to sell restricted securities before the
securities have been registered, it may be deemed an underwriter of the
securities under the Securities Act of 1933, which entails special
responsibilities and liabilities. The Fund may incur special costs in disposing
of restricted securities; however, the Fund will generally incur no costs when
the issuer is responsible for registering the securities.
The Fund may acquire high yielding, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. The Managers will carefully review their credit and other
characteristics. The Fund has no arrangement with its underwriter or any other
person concerning the acquisition of these securities.
The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yielding securities and adversely affected the
value of outstanding securities and the ability of issuers of such securities to
meet their obligations. Although the economy has improved considerably and high
yielding securities have performed more consistently since that time, there is
no assurance that the adverse effects previously experienced will not reoccur.
For example, the highly publicized defaults of some high yield issuers during
1989 and 1990 and concerns regarding a sluggish economy which continued into
1993, depressed the prices for many of these securities. While market prices may
be temporarily depressed due to these factors, the ultimate price of any
security will generally reflect the true operating results of the issuer.
Factors adversely impacting the market value of high yielding securities will
adversely impact the Fund's Net Asset Value. In addition, the Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
in the payment of principal or interest on its portfolio holdings. The Fund will
rely on the Managers' judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, the Managers will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
ASSET COMPOSITION TABLE. A credit rating by a rating agency evaluates only the
safety of principal and interest of a bond, and does not consider the market
value risk associated with an investment in such a bond. The table below shows
the percentage of the Fund's assets invested in securities rated in each of the
specific rating categories shown and those that are not rated by the rating
agency but deemed by the Managers to be of comparable credit quality. The
information was prepared based on a dollar weighted average of the Fund's
portfolio composition as of April 30, 1996. Please see the appendix in this
prospectus and in the SAI for a description of these rating.
AVERAGE WEIGHTED
S&P RATING PERCENTAGE OF ASSETS
AAA 18.49%
AA+ 10.08%
AA 8.99%
A* 1.5%
A- 1.61%
BBB- 1.48%
BB+ 2.32%
BB 7.07%
BB* 1.23%
BB- 5.28%
B+ 11.00%
B+* 1.71%
B 10.30%
B* 3.27%
B- 3.92%
B-* 4.64%
N/R 0.12%
N/A (Cash equivalents & Other) 6.97%
*Not rated by the rating agency. Indicates an internal rating by Advisers.
FOREIGN SECURITIES. Investments in the securities of companies organized outside
the U.S. or whose securities are principally traded outside the U.S. ("foreign
issuers") or investments in securities denominated or quoted in a foreign
currency ("non-dollar securities") may offer potential benefits not available
from investments solely in securities of U.S. issuers or U.S. dollar denominated
securities. Such benefits may include the opportunity to invest in foreign
issuers that appear, in the opinion of the Managers, to offer more potential for
long-term capital appreciation or current earnings than investments in U.S.
issuers, the opportunity to invest in foreign countries with economic policies
or business cycles different from those of the U.S. and the opportunity to
reduce fluctuations in portfolio value by taking advantage of foreign securities
markets that do not necessarily move in a manner parallel to U.S. markets.
Investments in non-dollar securities or in the securities of foreign issuers
involve significant risks that are not typically associated with investments in
U.S. dollar denominated securities or in securities of U.S. issuers. These
risks, which may involve possible losses, include political, social or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of the imposition of exchange
controls, expropriation, limits on removal of currency or other assets,
nationalization of assets, foreign withholding and income taxation and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Changes in government administrations and economic or
monetary policies in the U.S. or abroad, circumstances surrounding dealings
between nations, and currency convertibility or exchange rates could result in
investment losses for the Fund. In addition, public information may not be as
available for a foreign company as it is for a U.S. domiciled company, foreign
companies are generally not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to U.S. companies,
and there is usually less government regulation of securities exchanges, brokers
and listed companies. Confiscatory taxation or diplomatic developments could
also affect these investments.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with applicable U.S. and foreign currency
restrictions and other laws limiting the amount and types of foreign
investments. Investments may be in securities of foreign issuers located in
developed, emerging or developing countries, but investments will not be made in
any securities issued without stock certificates or comparable stock documents.
Foreign securities may be subject to greater fluctuations in price than U.S.
corporate debt or U.S. government securities. The markets on which foreign
securities trade may have less volume and liquidity, and may be more volatile
than securities markets in the U.S. Under certain market conditions, these
investments may be less liquid than U.S. debt securities and are certainly less
liquid than U.S. government securities. Finally, in the event of a default of
any foreign debt obligations, it may be more difficult for the Fund to obtain or
to enforce a judgment against the issuer of the security.
Securities that may be acquired by the Fund outside the U.S. and which are
publicly traded in the U.S. or on a foreign securities exchange or in a foreign
securities market will not be considered an illiquid asset so long as the Fund
acquires and holds the security with the intention of reselling the security in
the foreign trading market, the Fund reasonably believes it can readily dispose
of the security for cash in the U.S. or foreign market, and current market
quotations are readily available.
The Fund may buy securities in any foreign country, developed, emerging or
developing. Investors should consider carefully the substantial risks involved
in investing in securities issued by companies and governments of foreign
countries, risks that are often heightened for investments in developing or
emerging markets. For example, the small size, inexperience and limited volume
of trading of securities markets in certain countries may make the Fund's
investments illiquid and more volatile than investments in more developed
countries, and the Fund may be required to establish special custody or other
arrangements before making certain investments in such countries. The laws of
some foreign countries may also limit the ability of the Fund to invest in
securities of certain issuers located in those countries.
MORTGAGE SECURITIES. Mortgage securities differ from conventional bonds in that
principal is paid back over the life of the mortgage security rather than at
maturity. As a result, the holder of a mortgage security (i.e., the Fund)
receives scheduled monthly payments of principal and interest, and may receive
unscheduled principal payments representing prepayments on the underlying
mortgages. When the holder reinvests the payments and any unscheduled
prepayments of principal it receives, it may receive a rate of interest which is
lower than the rate on the existing mortgage security. For this reason, mortgage
securities may be less effective than other types of U.S. government securities
as a means of "locking in" long-term interest rates.
The market value of mortgage securities, like other U.S. government securities,
will generally vary inversely with changes in market interest rates, declining
when interest rates rise and rising when interest rates decline. Mortgage
securities may have less potential for capital appreciation than other
investments of comparable maturities due to the likelihood of increased
prepayments of mortgages as interest rates decline. In addition, to the extent
mortgage securities are purchased at a premium, unscheduled principal
prepayments, including prepayments resulting from mortgage foreclosures, may
result in some loss of the holder's principal investment to the extent of the
premium paid. On the other hand, if mortgage securities are purchased at a
discount, both a scheduled payment of principal and an unscheduled prepayment of
principal will increase current and total returns and will accelerate the
recognition of income which, when distributed to you, will be taxable as
ordinary income.
OPTIONS AND FUTURES CONTRACTS. The purchase and sale of futures contracts and
options thereon, as well as the purchase and writing of options on securities
and securities indices and currencies, involve risks different from those
involved with direct investments in securities. A liquid secondary market for a
futures or options contract may not be available when a futures or options
position is sought to be closed and the inability to close a position may have
an adverse impact on the Fund's ability to effectively hedge securities or
foreign currency exposure. In addition, there may be an imperfect correlation
between movements in the securities or foreign currency on which the futures or
options contract is based and movements in the securities or currency in the
Fund's portfolio. Successful use of futures or options contracts is further
dependent on the Managers' ability to correctly predict movements in the
securities or foreign currency markets and no assurance can be given that their
judgment will be correct. In addition, by writing covered call options, the Fund
gives up the opportunity to profit from any price increase in the underlying
security above the option exercise price, while the option is in effect.
Options, futures and options on futures are generally considered derivative
securities.
INTEREST RATE, MARKET AND CURRENCY RISK. To the extent the Fund invests in debt
securities, changes in interest rates in any country where the Fund is invested
will affect the value of the Fund's portfolio and its share price. Rising
interest rates, which often occur during times of inflation or a growing
economy, are likely to have a negative effect on the value of the Fund's shares.
To the extent the Fund invests in common stocks, a general market decline in any
country where the Fund is invested, may also cause the Fund's share price to
decline. The value of worldwide stock markets and interest rates has increased
and decreased in the past. Changes in currency valuations will also affect the
price of Fund shares. Worldwide interest rates and currency valuations have
increased and decreased in the past. These changes are unpredictable and may
happen again in the future.
Who Manages the Fund?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations.
INVESTMENT MANAGER. Advisers is the investment manager of the Fund and other
funds with aggregate assets of over $81 billion. It is wholly owned by
Resources, a publicly owned company engaged in the financial services industry
through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the
principal shareholders of Resources. TICI is employed by Advisers to act as
sub-adviser to the Fund.
TICI is an indirect subsidiary of Templeton Worldwide, Inc., which, operating
through its subsidiaries, is a major investment management organization with
approximately $62.2 billion of assets currently under management and a long
history of global investing.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is: Mr. Molumphy since inception and Mr. Dickson since June
1995.
Chris Molumphy
Portfolio Manager of Advisers
Mr. Molumphy is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of Chicago. He earned his Bachelor of
Arts degree in economics from Stanford University. He has been with Advisers or
an affiliate since 1988. Mr. Molumphy is a member of several securities
industry-related associations.
Thomas J. Dickson
Portfolio Manager of TICI
Mr. Dickson received his Bachelor of Science degree in managerial economics from
the University of California at Davis. Mr. Dickson joined Franklin in 1992 and
Templeton in 1994.
SERVICES PROVIDED BY THE MANAGERS. The Managers manage the Fund's assets and
makes its investment decisions. The Managers also provide certain administrative
services and facilities for the Fund and perform similar services for other
funds. Please see "Investment Advisory and Other Services" and "Miscellaneous
Information" in the SAI for information on securities transactions and a summary
of the Fund's Code of Ethics.
MANAGEMENT FEES. During the fiscal year ended April 30, 1996, management fees
and total operating expenses, before any advance waiver, totaled 0.63% and 1.08%
of the average daily net assets of the Fund. Under an agreement by Advisers to
waive its fees, the Fund paid no management fees and total operating expenses
totaling 0.25%. The Managers may end this arrangement at any time upon notice to
the Board.
PORTFOLIO TRANSACTIONS. The Managers try to obtain the best execution on all
transactions. If the Managers believe more than one broker or dealer can provide
the best execution, they may consider research and related services and the sale
of Fund shares when selecting a broker or dealer. Please see "How Does the Fund
Buy Securities For Its Portfolio?" in the SAI for more information.
The Fund's Rule 12b-1 Plan
The Fund has a distribution plan or "Rule 12b-1 Plan" under which it may
reimburse Distributors or others for activities primarily intended to sell
shares of the Fund. These expenses may include, among others, distribution or
service fees paid to Securities Dealers or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates, printing prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and advertisements, and a prorated portion of Distributors' overhead expenses.
Payments by the Fund under the plan may not exceed 0.25% per year of the Fund's
average daily net assets. All distribution expenses over this amount will be
borne by those who have incurred them. For more information, please see "The
Fund's Underwriter" in the SAI.
How Does the Fund Measure Performance?
From time to time, the Fund advertises its performance. The more commonly used
measures of performance are total return, current yield and current distribution
rate. Performance figures are usually calculated using the maximum sales charge,
but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield shows the
income per share earned by the Fund. The current distribution rate shows the
dividends or distributions paid to shareholders by the Fund. This rate is
usually computed by annualizing the dividends paid per share during a certain
period and dividing that amount by the current Offering Price. Unlike current
yield, the current distribution rate may include income distributions from
sources other than dividends and interest received by the Fund.
The Fund's investment results will vary. Performance figures are always based on
past performance and do not indicate future results. For a more detailed
description of how the Fund calculates its performance figures, please see "How
Does the Fund Measure Performance?" in the SAI.
How Is the Fund Organized?
The Fund is a nondiversified series of Franklin Strategic Series (the "Trust"),
an open-end management investment company, commonly called a mutual fund. It was
organized as a Delaware business trust on January 25, 1991 and is registered
with the SEC under the 1940 Act. Shares of each series of the Trust have equal
and exclusive rights to dividends and distributions declared by that series and
the net assets of the series in the event of liquidation or dissolution. Shares
of the Fund are considered Class I shares for redemption, exchange and other
purposes. In the future, additional series and classes of shares may be offered.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
electing or removing members of the Board.
As of July 19, 1996, Resources owned of record and beneficially more than 25% of
the outstanding shares of the Fund.
Conversion to a Master/Feeder Structure
The Fund currently invests directly in securities. Certain Franklin Templeton
Funds, however, are "feeder funds" in a master/feeder fund structure. This means
they invest their assets in a "master fund" that, in turn, invests its assets
directly in securities. The Fund's investment objective and other fundamental
policies allow it to invest either directly in securities or indirectly in
securities through a master fund. In the future, the Board may decide to convert
the Fund to a master/feeder structure.
Various states have adopted certain guidelines for registering master/feeder
funds. If the Board decides to convert the Fund to a master/feeder structure,
the Fund will seek shareholder approval before the conversion if required by the
applicable guidelines or law at that time. If shareholder approval is not
required, your purchase of Fund shares will be considered your consent to a
conversion and we will not seek further shareholder approval. We will, however,
notify you in advance of the conversion. If the Fund converts to a master/feeder
structure, its fees and total operating expenses are not expected to increase.
How Taxation Affects You and the Fund
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund intends to continue to qualify 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.
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.
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 Fund shares and regardless of whether you receive
such distributions in cash or in additional shares.
Pursuant to the Code, certain distributions that 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.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred 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 received with respect to such shares.
For corporate investors, 5.25% of the ordinary income distributions (including
short-term capital gains) paid by the Fund for the fiscal year ended April 30,
1996, qualified for the corporate dividends-received deduction because of the
Fund's principal investment in debt securities. The availability of the
deduction is subject to certain holding period and debt financing restrictions
imposed under the Code on the corporation claiming the deduction. These
restrictions are discussed under "Additional information on Distribution and
Taxes" in the SAI.
The Fund will inform you of the source of its 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 such dividends
and distributions.
If you are not considered a U.S. person for federal income tax purposes, you
should consult with your financial or tax advisor regarding the applicability of
U.S. withholding or other taxes to distributions received by you from the Fund
and the application of foreign tax laws to these distributions.
You should also consult your tax advisor with respect to the applicability of
any state and local intangible property or income taxes on your shares of the
Fund and distributions and redemption proceeds received from the Fund.
About Your Account
How Do I Buy Shares?
Opening Your Account
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.
MINIMUM
INVESTMENTS*
To Open Your Account $100
To Add to Your Account $ 25
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares.
Sales Charge Reductions and Waivers
- - If you qualify to buy shares under one of the sales charge reduction or
waiver categories described below, please include a written statement with each
purchase order explaining which privilege applies. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
QUANTITY DISCOUNTS. The sales charge you pay depends on the dollar amount you
invest, as shown in the table below.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
Under $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more* None None None
*If you invest $1 million or more, a Contingent Deferred Sales Charge may be
imposed on an early redemption. Please see "How Do I Sell Shares? - Contingent
Deferred Sales Charge." Please also see "Other Payments to Securities Dealers"
below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases.
CUMULATIVE QUANTITY DISCOUNTS. To determine if you may pay a reduced sales
charge, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your Class I and Class II shares in the Franklin
Templeton Funds, as well as those of your spouse, children under the age of 21
and grandchildren under the age of 21. If you are the sole owner of a company,
you may also add any company accounts, including retirement plan accounts.
Companies with one or more retirement plans may add together the total plan
assets invested in the Franklin Templeton Funds to determine the sales charge
that applies.
LETTER OF INTENT. You may buy 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.
By completing the Letter of Intent section of the shareholder application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Fund shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Fund
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
SALES CHARGE WAIVERS. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying shares with money from
the following sources:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares reinvested were subject
to a Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
5. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within
the past 60 days, you may invest the proceeds without any sales charge if (a)
the investment objectives were similar to the Fund's, and (b) your shares in
that fund were subject to any front-end or contingent deferred sales charges at
the time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to purchases by:
6. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following the order.
7. Group annuity separate accounts offered to retirement plans
8. Retirement plans that (i) are sponsored by an employer with at least 100
employees, (ii) have plan assets of $1 million or more, or (iii) agree to invest
at least $500,000 in the Franklin Templeton Funds over a 13 month period.
Retirement plans that are not Qualified Retirement Plans or SEPS, such as 403(b)
or 457 plans, must also meet the requirements described under "Group Purchases"
above.
9. An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is permissible and suitable
for you and the effect, if any, of payments by the Fund on arbitrage rebate
calculations.
10. Broker-dealers and qualified registered investment advisors who have entered
into a supplemental agreement with Distributors for their clients who are
participating in comprehensive fee programs, sometimes known as wrap fee
programs
11. Registered Securities Dealers and their affiliates, for their investment
accounts only
12. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
13. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
14. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
15. Accounts managed by the Franklin Templeton Group
16. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
How Do I Buy Shares in Connection with Retirement Plans?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
Other Payments to Securities Dealers
The payments below apply to Securities Dealers who initiate and are responsible
for certain purchases made without a sales charge. A Securities Dealer may only
receive one of the following payments for each qualifying purchase. The payments
described below are paid by Distributors or one of its affiliates, at its own
expense, and not by the Fund or its shareholders.
1. Securities Dealers will receive up to 0.75% of the purchase price for
purchases of $1 million or more.
2. Securities Dealers may, in the sole discretion of Distributors, receive up to
1% of the purchase price for purchases made under waiver category 8 above.
3. Securities Dealers may receive up to 0.25% of the purchase price for
purchases made under waiver categories 6 and 9 above.
Please see "How Do I Buy, Sell and Exchange Shares - Other Payments to
Securities Dealers" in the SAI for any breakpoints that may apply.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. 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 NASD.
May I Exchange Shares for Shares of Another Fund?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you're exchanging
By Phone Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone to apply
to your account, please let us know.
Through Your Dealer Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
Will Sales Charges Apply to My Exchange?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred Sales
Charge when you exchange shares. Any shares subject to a Contingent Deferred
Sales Charge at the time of exchange, however, will remain so in the new fund.
For accounts with shares subject to a Contingent Deferred Sales Charge, shares
are exchanged into the new fund in the order they were purchased. If you
exchange shares into one of our money funds, the time your shares are held in
that fund will not count towards the completion of any Contingency Period. For
more information about the Contingent Deferred Sales Charge, please see that
section under "How Do I Sell Shares?"
Exchange Restrictions
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class.
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically registered
money fund account requiring only one signature for all transactions. PLEASE
NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON YOUR
ACCOUNT(S). Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you: (i) request an exchange out
of the Fund within two weeks of an earlier exchange request, (ii) exchange
shares out of the Fund more than twice in a calendar quarter, or (iii) exchange
shares equal to at least $5 million, or more than 1% of the Fund's net assets.
Shares under common ownership or control are combined for these limits. If you
exchange shares as described in this paragraph, you will be considered a Market
Timer. Each exchange by a Market Timer, if accepted, will be charged $5.00. Some
of our funds do not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
How Do I Sell Shares?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all account
owners
2. Include any outstanding share certificates for the
shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need
to send additional documents. Accounts
under court jurisdiction may have additional
requirements.
By Phone
(Only available if you
have completed and
sent to us the
telephone redemption
agreement included
with this prospectus)
Call Shareholder Services
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional
accounts may exceed $50,000 by completing a
separate agreement. Call Institutional Services to
receive a copy.
METHOD STEPS TO FOLLOW
By Phone o If there are no share certificates issued for the
shares you want to sell or you have already returned
them to the Fund
o Unless you are selling shares in a Trust Company
retirement plan account
o Unless the address on your account was changed by
phone within the last 30 days
Through Your Dealer Call your investment representative
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
Trust Company Retirement Plan Accounts
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
Contingent Deferred Sales Charge
If you did not pay a front-end sales charge because you invested $1 million or
more, a Contingent Deferred Sales Charge may apply if you sell all or a part of
your investment within the Contingency Period. The charge is 1% of the value of
the shares sold or the Net Asset Value at the time of purchase, whichever is
less. Distributors keeps the charge to recover payments made to Securities
Dealers. We will first redeem shares not subject to the charge in the following
order:
1) A calculated number of shares equal to the capital appreciation on shares
held less than the Contingency Period,
2) Shares purchased with reinvested dividends and capital gain distributions,
and
3) Shares held longer than the Contingency Period.
We then redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated dollar amount, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated number of shares, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before
February 1, 1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual balance of
$1 million, you can withdraw up to $120,000 annually through a systematic
withdrawal plan free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to
termination or plan transfer
What Distributions Might I Receive From the Fund?
The Fund declares dividends from its net investment income monthly to
shareholders of record on the last business day of that month and pays them on
or about the 15th day of the next month.
Capital gains, if any, may be distributed annually, usually in December.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution.
Distribution Options
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy 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. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy 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 receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
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 you do not select an option, we will
automatically reinvest dividend and capital gain distributions in the Fund. For
Trust Company retirement plans, special forms are required to receive
distributions in cash. You may change your distribution option at any time by
notifying us by mail or phone. Please allow at least seven days prior to the
record date for us to process the new option.
Transaction Procedures and Special Requirements
How and When Shares Are Priced
The Fund is open for business each day the Exchange is open. We determine the
Net Asset Value per share as of the scheduled close of the Exchange, generally
1:00 p.m. Pacific time. You can find the prior day's closing Net Asset Value and
Offering Price of the Fund in many newspapers.
To calculate Net Asset Value per share, the Fund's assets are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares outstanding. The Fund's assets are valued as
described under "How Are Fund Shares Valued?" in the SAI.
The Price We Use When You Buy or Sell Shares
You buy shares at the Offering Price, unless you qualify to buy shares at a
reduced sales charge or with no sales charge. The Offering Price is based on the
Net Asset Value per share and includes the maximum sales charge. We calculate it
to two decimal places using standard rounding criteria. You sell shares at Net
Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
Proper Form
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
Written Instructions
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. You should
verify that the institution is an eligible guarantor prior to signing. A
notarized signature is not sufficient.
Share Certificates
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
Telephone Transactions
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
We may only be liable for losses resulting from unauthorized telephone
transactions if we do not follow reasonable procedures designed to verify the
identity of the caller. When you call, we will request personal or other
identifying information, and will also record calls. For your protection, we may
delay a transaction or not implement one if we are not reasonably satisfied that
telephone instructions are genuine. If this occurs, we will not be liable for
any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by telephone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. You may not sell shares or change
distribution options on Trust Company retirement plans by phone. While you may
exchange shares of Trust Company IRA and 403(b) retirement accounts by phone,
certain restrictions may be imposed on other retirement plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
Account Registrations and Required Documents
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
Corporation Corporate Resolution
Partnership 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
Trust 1. The pages from the trust document that identify
the trustees, or
2. A certification for trust
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
ELECTRONIC INSTRUCTIONS. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We can accept electronic instructions directly from your dealer or
representative without further inquiry. Electronic instructions may be processed
through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
Tax Identification Number
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
Services to Help You Manage Your Account
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can 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
included with this prospectus or contact your investment representative. 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
discontinue the program at any time by notifying Investor Services by mail or
phone.
Automatic Payroll Deduction
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
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 direct your payments to buy the same class of shares of another
Franklin Templeton Fund or 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.
You will generally receive your payment by the fifth business day of the month
in which a payment is scheduled. When you sell your shares under a systematic
withdrawal plan, it is a taxable transaction.
Because of the Fund's front-end sales charge, you may not want to set up a
systematic withdrawal plan if you plan to buy shares on a regular basis. Shares
sold under the plan may also be subject to a Contingent Deferred Sales Charge.
Please see "Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
Electronic Fund Transfers
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with 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. We will send any payments made during that time to the
address of record on your account.
TeleFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips.
You will need the Fund's code number to use TeleFACTS. The Fund's code is 194.
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. Please verify the
accuracy of your statements when you receive them.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
Institutional Accounts
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. For further information, call Institutional
Services.
Availability of These Services
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you.
Please contact your investment representative.
What If I Have Questions About My Account?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. TICI is
located at Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida
33394-3091. You may also contact us by phone at one of the numbers listed below.
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.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
Glossary
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
CD - Certificate of deposit
CLASS I AND CLASS II - Certain funds in the Franklin Templeton Funds offer two
classes of shares, designated "Class I" and "Class II." The two classes have
proportionate interests in the same portfolio of investment securities. They
differ, however, primarily in their sales charge structures and Rule 12b-1
plans. Because the Fund's sales charge structure and Rule 12b-1 plan are similar
to those of Class I shares, shares of the Fund are considered Class I shares for
redemption, exchange and other purposes.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - The 12 month period during which a Contingent Deferred
Sales Charge may apply. Regardless of when during the month you purchased
shares, they will age one month on the last day of that month and each following
month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
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., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MANAGERS - Franklin Advisers, Inc., the Fund's Investment Manager, and Templeton
Investment Counsel, Inc., the Fund's subadvisor
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.
NASD - National Association of Securities Dealers, Inc.
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.
NSCC - National Securities Clearing Corporation
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the 4.25% sales charge.
QUALIFIED RETIREMENT PLAN(S) - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
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
TICI - Templeton Investment Counsel, Inc., the Fund's Subadvisor
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
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or another wholly owned
subsidiary of Resources.
Appendix
Description of Ratings
Corporate Bond Ratings
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Commercial Paper Ratings
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.
PROSPECTUS & APPLICATION
Franklin
MidCap Growth Fund
INVESTMENT STRATEGY
GROWTH
SEPTEMBER 1, 1996
Franklin Strategic Series
This prospectus describes the Franklin MidCap Growth Fund (the "Fund"). It
contains information you should know before investing in the Fund. Please keep
it for future reference.
The Fund's SAI, dated September 1, 1996, as may be amended from time to time,
includes
more information about the Fund's procedures and policies. It has been filed
with the SEC and is incorporatedby reference into this prospectus. For a free
copy or a larger print version of this prospectus, call 1-800/DIAL BEN or write
the Fund at the address shown.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Shares of the Fund involve investment risks, including the possible
loss of principal.
LIKE ALL MUTUAL FUNDS, 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.
Franklin MidCap Growth Fund
Franklin
MidCap
Growth Fund
September 1, 1996
When reading this prospectus, you will see certain terms in capital letters.
This means the term is explained in our glossary section.
Table of Contents
About the Fund
Expense Summary............................. 2
Financial Highlights........................ 3
How Does the Fund Invest Its Assets?........ 3
What Are the Fund's Potential Risks?........ 12
Who Manages the Fund?....................... 13
How Does the Fund Measure Performance?...... 16
How Is the Trust Organized?................. 16
How Taxation Affects You and the Fund....... 17
About Your Account
How Do I Buy Shares?........................ 19
May I Exchange Shares for Shares of Another Fund? 24
How Do I Sell Shares?....................... 26
What Distributions Might I Receive From the Fund? 28
Transaction Procedures and Special Requirements 29
Services to Help You Manage Your Account.... 33
Glossary
Useful Terms and Definitions................ 36
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
Franklin MidCap Growth Fund
About the Fund
Expense Summary
This table is designed to help you understand the costs of investing in the
Fund. It is based on the Fund's contractual management and Rule 12b-1 fees and
estimated expenses for the current fiscal year. Your actual expenses may vary.
A. 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*
B. Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees................................................. 0.65%
Rule 12b-1 Fees................................................. 0.35%**
Other Expenses.................................................. 0.38%
Total Fund Operating Expenses................................... 1.38%
C. Example
Assume the Fund's annual return is 5% and its operating expenses are as
described above. For each $1,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$58*** $87 $117 $203
This is just an example. It does not represent past or future expenses or
returns. Actual expenses and returns may be more or less than those shown. The
Fund pays its operating expenses. The effects of these expenses are reflected in
its Net Asset Value or dividends and are not directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more. A
Contingent Deferred Sales Charge of 1% may apply, however, if you sell the
shares within one year. See "How Do I Sell Shares? - Contingent Deferred Sales
Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**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 charge permitted under the NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
Financial Highlights
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report appears in the financial statements in the Fund's SAI.
Year Ended April 30 1996++ 1995 1994+
Per Share Operating Performance
Net Asset Value at Beginning of Year $10.81 $10.05 $10.00
Net Investment Income. .18 .21 .15
Net Realized & Unrealized Gain (Loss) on Securities 3.585 .769 .014
Total From Investment Operations 3.765 .979 .164
Distributions From Net Investment Income (.208) (.204) (.079)
Distributions From Capital Gains (.127) (.015) (.035)
Total Distributions (.335) (.219) (.114)
Net Asset Value at End of Year $14.24 $10.81 $10.05
Total Return* 35.40% 10.06% 1.62%
Ratios/Supplemental Data
Net Assets at End of Year (in 000's) $7,574 $5,591 $5,079
Ratios of Expenses to Average Net Assets*** 0.16% -- --
Ratio of Net Investment Income to Average Net Assets 1.42% 2.12% 2.21%**
Portfolio Turnover Rate 102.65% 163.54% 70.53%
Average Commission Rate 0.0467 -- --
+For the period August 17, 1993 (effective date) to April 30, 1994.
++On January 2, 1996, the investment manager changed to Advisers.
*Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum front-end sales
charge or the Contingent Deferred Sales Charge, if applicable. The total return
for the Fund also assumes reinvestment of dividends and capital gains, if any,
at Net Asset Value.
**Annualized.
***During the periods indicated, the investment manager agreed in advance to
waive a portion or all of its management fees and make payments of certain
operating expenses of the Fund. Had such action not been taken, the ratios of
operating expenses to average net assets would have been as follows:
Ratio of expenses
to average net assets
1994+ 0.91%**
1995 0.98%
1996++ 0.96%
How Does the Fund Invest Its Assets?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective of the Fund is long-term capital growth. 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 seeks to accomplish its objective by investing
primarily in equity securities of medium capitalization companies that Advisers
believes to be positioned for rapid growth in revenues or earnings and assets,
characteristics that may provide for significant capital appreciation. Medium
capitalization companies in which the Fund will invest have a market
capitalization range between $200 million and $5 billion. Market capitalization
is defined as the total market value of a company's outstanding stock. The
securities of medium capitalization companies are traded on the New York and
American stock exchanges and in the over-the-counter market. Investing in medium
capitalization stocks may involve greater risk than investing in large
capitalization stocks, since they can be subject to more abrupt or erratic
movements. However, they tend to involve less risk than stocks of small
capitalization companies. Medium capitalization companies may offer greater
potential for capital appreciation as these companies are often growing more
rapidly than larger companies, but tend to be more stable and established than
small capitalization or emerging companies. Selection of medium capitalization
equity securities for the Fund will be based on characteristics such as the
financial strength of the company, the expertise of management, the growth
potential of the company within its industry and the growth potential of the
industry itself.
TYPES OF SECURITIES THE FUND MAY INVEST IN
Under normal market conditions, the Fund will invest at least 65% of its total
assets in equity securities of medium capitalization growth companies. Equity
securities of such companies consist of:
o common or preferred stock;
o warrants for the purchase of common or preferred stock; and
o debt securities convertible into or exchangeable for common or preferred
stock.
The Fund may also buy options on stocks and stock indices, and futures and
options on futures contracts on stock indices as a hedge against changes
resulting from market conditions in the values of its securities, securities
that it intends to buy and to accommodate cash flows. Options, futures and
options on futures are generally considered "derivative securities."
Consistent with its objective, the Fund attempts to be fully invested at all
times in equity securities and, under normal market conditions, its assets will
be invested primarily in a diversified portfolio of medium capitalization
stocks.
The Fund may invest up to 35% of its total assets in equity securities that are
outside the medium market capitalization range but with similar potential for
capital appreciation, or in corporate debt securities, if the Fund believes the
investment to present a favorable investment opportunity. The corporate debt
securities in which the Fund may invest include bonds, notes and debentures. The
Fund will invest in debt securities that Advisers believes present an
opportunity for capital appreciation as a result of improvement in the
creditworthiness of the issuer. The receipt of income from debt securities is
incidental to the Fund's objective. The Fund will invest in debt securities
rated B or above by Moody's Investors Service ("Moody's") or Standard and Poor's
Corporation ("S&P") or in securities that are unrated if, in Advisers' opinion,
the securities are comparable to securities rated B or above by Moody's or S&P.
The Fund will not invest more than 5% of its assets in debt securities rated
lower than BBB or Baa. Securities rated below BBB or Baa are regarded, on
balance, as predominantly speculative with respect to the capacity to pay
interest and repay principal in accordance with the terms of the obligation. A
description of these ratings is included in the "Appendix" in the SAI.
WARRANT. A warrant is a security that gives the holder the right, but not the
obligation, to subscribe for newly created securities of the issuer or a related
company at a fixed price either at a certain date or during a set period.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities. A
convertible security is generally a debt obligation or preferred stock that may
be converted within a specified period of time into a certain amount of common
stock of the same or a different issuer. A convertible security provides a
fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance in
its underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Like a common stock, the
value of a convertible security also tends to increase as the market value of
the underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because its value can be influenced by both interest
rate and market movements, a convertible security is not as sensitive to
interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the Fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the Fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
The Fund may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stocks ("PERCS"), which
provide an investor, such as the Fund, with the opportunity to earn higher
dividend income than is available on a company's common stock. PERCS are
preferred stocks that generally feature a mandatory conversion date, as well as
a capital appreciation limit which is usually expressed in terms of a stated
price. Most PERCS expire three years from the date of issue, at which time they
are convertible into common stock of the issuer. PERCS are generally not
convertible into cash at maturity. Under a typical arrangement, after three
years, PERCS convert into one share of the issuer's common stock if the issuer's
common stock is trading at a price below that set by the capital appreciation
limit, and into less than one full share if the issuer's common stock is trading
at a price above that set by the capital appreciation limit. The amount of that
fractional share of common stock is determined by dividing the price set by the
capital appreciation limit by the market price of the issuer's common stock.
PERCS can be called at any time prior to maturity, and hence do not provide call
protection. If called early, however, the issuer must pay a call premium over
the market price to the investor. This call premium declines at a preset rate
daily, up to the maturity date.
The Fund may also invest in other enhanced convertible securities. These include
but are not limited to ACES (Automatically Convertible Equity Securities), PEPS
(Participating Equity Preferred Stock), PRIDES (Preferred Redeemable Increased
Dividend Equity Securities), SAILS (Stock Appreciation Income Linked
Securities), TECONS (Term Convertible Notes), QICS (Quarterly Income Cumulative
Securities), and DECS (Dividend Enhanced Convertible Securities). ACES, PEPS,
PRIDES, SAILS, TECONS, QICS, and DECS all have the following features: they are
issued by the company, the common stock of which will be received in the event
the convertible preferred stock is converted, unlike PERCS they do not have a
capital appreciation limit, they seek to provide the investor with high current
income with some prospect of future capital appreciation, they are typically
issued with three to four-year maturities, they typically have some built-in
call protection for the first two to three years, investors have the right to
convert them into shares of common stock at a preset conversion ratio or hold
them until maturity, and upon maturity they will automatically convert to either
cash or a specified number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked as
senior or subordinated debt in the issuer's corporate structure according to the
terms of the debt indenture. There may be additional types of convertible
securities not specifically referred to herein which may be similar to those
described above in which a Fund may invest, consistent with its objectives and
policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the Fund. The Fund may have difficulty disposing of
such securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the Fund's ability to dispose of particular securities, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the credit worthiness of an issuer.
Reduced liquidity in the secondary market for certain securities may also make
it more difficult for the Fund to obtain market quotations based on actual
trades for purposes of valuing the Fund's portfolio. The Fund, however, intends
to acquire liquid securities, though there can be no assurances that this will
be achieved.
OPTIONS AND FINANCIAL FUTURES. The Fund may write (sell) covered put and call
options and buy put and call options that trade on securities exchanges and in
the over-the-counter market. The Fund may buy and sell futures and options on
futures with respect to securities indices and enter into futures and options to
close-out futures and options it may have purchased or sold. The Fund will not
enter into any futures contract or related options (except for closing
transactions) if, immediately thereafter, the sum of the amount of its initial
deposits and premiums on open contracts and options would exceed 5% of the
Fund's total assets. The Fund will not engage in any stock options or stock
index options if the option premiums paid regarding its open option positions
exceed 5% of the value of the Fund's total assets.
A call option written by the Fund is covered if the Fund owns the underlying
security that is subject to the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian bank) upon
conversion or exchange of other securities held in its portfolio. A call option
is also covered if the Fund holds a call on the same security and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash and high grade debt securities in a segregated
account with its custodian bank. A put option written by the Fund is covered if
the Fund maintains cash and high grade debt securities with a value equal to the
exercise price in a segregated account with its custodian bank, or 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.
SECURITIES INDUSTRY RELATED INVESTMENTS. To the extent it is consistent with its
investment objective and certain limitations under the 1940 Act, the Fund may
invest its assets in securities issued by companies engaged in securities
related businesses, including companies that are securities brokers, dealers,
underwriters or investment advisors. These companies are considered part of the
financial services industry sector.
Under the 1940 Act, the Fund may not acquire a security or any interest in a
securities related business, to the extent such acquisition would exceed certain
limitations. The Fund does not believe that these limitations will impede the
attainment of its investment objective.
OTHER INVESTMENT POLICIES OF THE FUND
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 that such loans do not exceed 20% 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 collateral 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 the cash collateral in short-term
interest bearing obligations or by receiving a loan premium from the borrower.
Under the securities loan agreement, the Fund continues to be entitled to all
dividends or interest on any loaned securities. As with any extension of credit,
there are risks of delay in recovery and loss of rights in the collateral should
the borrower of the security fail financially.
BORROWING. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of its assets, except that the Fund may borrow from banks up to
10% of its total asset value to meet redemption requests and for other temporary
or emergency purposes. While borrowings exceed 5% of the Fund's total assets,
the Fund will not make any additional investments.
SHORT-TERM INVESTMENTS. The Fund may invest its cash, including cash resulting
from purchases and sales of Fund shares, temporarily in short-term debt
instruments, including high grade commercial paper, repurchase agreements and
other money market equivalents and, subject to the terms of an exemption order
from the SEC, the shares of affiliated money market funds that invest primarily
in short-term debt securities. Temporary investments will be made with cash held
to maintain liquidity to meet redemption requirements or pending investment and
will be consistent with the Fund's overall policy of being fully invested. In
addition, for temporary defensive purposes in the event of or when Advisers
anticipates a general decline in the market prices of stocks in which the Fund
invests, the Fund may invest an unlimited amount of its assets in short-term
debt instruments.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions in which
the Fund buys a U.S. government security subject to resale to a bank or dealer
at an agreed-upon price and date. The transaction requires the collateralization
of the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller might cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund might
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks which are deemed creditworthy by Advisers. A
repurchase agreement is deemed to be a loan by the Fund under the 1940 Act. The
U.S. government security subject to resale (the collateral) will be held on
behalf of the Fund by a custodian approved by the Board and will be held
pursuant to a written agreement.
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
generally securities with legal or contractual restriction on resale, repurchase
agreements of more than seven days duration, illiquid real estate investment
trusts, securities of issuers with less than three years continuous operation
and securities that cannot be disposed of within seven days in the normal course
of business at approximately the amount at which the Fund has valued them.
PORTFOLIO TURNOVER. The Fund anticipates its annual portfolio turnover rate
generally will not exceed 100%, 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 net
assets will not be considered a violation of any of the foregoing policies.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How Does the Fund Invest Its Assets?" and "Investment Restrictions" in the
SAI.
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE. On January 2, 1996, Advisers became
the Fund's investment manager. On such date, the Fund's investment objective
changed to "seeking long-term capital growth" from seeking total return (capital
growth plus income) exceeding the total return of the aggregate U.S. medium
capitalization stocks, as measured by the Standard & Poor's MidCap 400
Index(R)." For more information about the change in the investment manager,
please see "Who Manages the Fund? - Prior Services."
Advisers uses both quanititative methods and qualitative analysis to find
companies it believes to be well-positioned for possible rapid growth in
revenues, earnings or cash flow. By following this strategy, Advisers attempts
to identify leaders in growing industries as well as companies with
differentiated products or services that are not easily replicated and which can
provide sustainable competitive advantages.
During most of the fiscal year, the U.S. economy experienced moderate growth and
subdued inflation. By the end of the period, retail sales growth improved,
employment growth was sharply higher, and even production began accelerating.
Despite brewing fears of potential inflation and higher interest rates, the
domestic equity market ended the period with a strong finish.
By April 30, 1996, the number of positions in the Fund's portfolio was pared
significantly with investments diversified across a broad range of industries,
including electronic technology, semiconductors, technology services, health
services, industrial services, and consumer services. As the investment adviser
continued to see the evolution to a technology-based economy, a significant
portion of the Fund's investments were made in the technology sector. Companies
are developing products and services that are continually revolutionizing the
way we work and play, providing an ongoing stream of exciting potential
investment opportunities. New positions included Newbridge Networks, for
instance, a leading manufacturer of wide area networking equipment used in
public and private networks.
Advisers' focus on leaders in growing industries has led the Fund to excellent
opportunities in other industries, as well. For example, positions in Varco
International, a leading provider of drilling rig components for the offshore
oilfield service segment, and CUC International, the leader in membership-based
retailing were initiated for the Fund.
The long-term outlook for medium capitalization stocks remains positive. Mid cap
stocks can offer attractive features of both small and large cap companies. Like
small cap companies, mid cap stocks often have rapid growth potential. And like
large cap companies, mid caps are often more established and can offer greater
stability than small cap or emerging companies.
The Fund posted a total return of 35.40% for the fiscal year ended April 30,
1996. Total return reflects a $3.43 per share increase in the Fund's Net Asset
Value to $14.24 on April 30, 1996, from $10.81 on April 30, 1995, and assumes
reinvestment of dividends and capital gains at Net Asset Value. During the
reporting period, shareholders received distributions totaling 9.8 cents per
share in income dividends and 12.7 cents per share in long-term capital gains.
Distributions will vary depending on income earned by the Fund, as well as any
capital gains realized from the sale of indivual holdings in the portfolio.
Franklin MidCap Growth Fund
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING
(PURSUANT TO ITEM 304 (a) of REGULATION S- T)
GRAPHIC MATERIAL (1)
The following line graph hypothetically compares the cumulative total return of
the Franklin MidCap Growth Fund to that of the S&P MidCap 400 Stock Index, from
8/31/93 to 4/30/96.
<TABLE>
<CAPTION>
Date Franklin S&P MidCap 400
<S> <C> <C>
Aug-93 10000 10000
Sep-93 10380 10106
Oct-93 10290 10139
Nov-93 9989 9915
Dec-93 10486 10375
Jan-94 10718 10617
Feb-94 10496 10466
Mar-94 10031 9982
Apr-94 10162 10056
May-94 10021 9960
Jun-94 9666 9617
Jul-94 9954 9943
Aug-94 10550 10465
Sep-94 10283 10269
Oct-94 10448 10381
Nov-94 10037 9913
Dec-94 10183 10004
Jan-95 10245 10108
Feb-95 10742 10637
Mar-95 10959 10823
Apr-95 11187 11040
May-95 11477 11306
Jun-95 12089 11766
Jul-95 12810 12381
Aug-95 13092 12610
Sep-95 13394 12915
Oct-95 13248 12583
Nov-95 13665 13133
Dec-95 13549 13100
Jan-96 13773 13290
Feb-96 13996 13742
Mar-96 14114 13907
Apr-96 15145 14331
</TABLE>
Past performance is not indicative of future results.
What Are the Fund's Potential Risks?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
INTEREST RATE AND MARKET RISK. To the extent the Fund invests in debt
securities, changes in interest rates will affect the value of the Fund's
portfolio and its share price. Rising interest rates, which often occur during
times of inflation or a growing economy, are likely to have a negative effect on
the value of the Fund's shares. To the extent the Fund invests in common stocks,
a general market decline, shown for example by a drop in the Dow Jones
Industrials or other equity based index, may also cause the Fund's share price
to decline. The value of worldwide stock markets and interest rates has
increased and decreased in the past. These changes are unpredictable and may
happen again in the future.
MEDIUM AND SMALL CAPITALIZATION RISK. Historically, medium market capitalization
stocks, which constitute the majority of the investments of the Fund, have been
more volatile in price than larger capitalization stocks. Among the reasons for
greater price volatility of these securities are the less certain growth
prospects of smaller firms, the lower degree of liquidity in the market for such
stocks, and the greater sensitivity of small and medium size companies to
changing economic conditions. Besides exhibiting greater volatility, medium and
small company stocks may fluctuate independently of larger company stocks.
Medium and small company stocks may decline in price as large company stocks
rise or vice versa. You should therefore expect that the value of the Fund's
shares may be more volatile than the shares of a fund that invests in larger
capitalization stocks. In addition, medium size companies in which the Fund
invests may have products and management that have not been thoroughly tested by
time or by the marketplace. These companies may also be more dependent on a
limited number of key personnel and their financial resources may not be as
substantial as those of more established companies. Adversity that leads to a
decline in the value of such a security will have a negative impact on the
Fund's share price as well.
OPTIONS AND FUTURES RISK. The Fund's option and futures investments involve
certain risks. These include the risks that the effectiveness of an options and
futures strategy depends on the degree to which price movements in the
underlying index or securities correlate with price movements in the relevant
portion of the Fund's portfolio. The Fund bears the risk that the prices of its
portfolio securities will not move in the same amount as the option or future it
has purchased, or that there may be a negative correlation that would result in
a loss on both the securities and the option or future.
Positions in exchange traded options and futures may be closed out only on an
exchange that provides a secondary market. There may not always be a liquid
secondary market for a futures or option contract at a time when the Fund seeks
to close out its position. If the Fund were unable to close out a futures or
option position, and if prices moved adversely, the Fund would have to continue
to make daily cash payments to maintain its required margin, and if the Fund had
insufficient cash, it might have to sell portfolio securities at a
disadvantageous time. In addition, the Fund might be required to deliver the
stocks underlying futures or options contracts it holds. Over-the-counter
("OTC") options may not be closed out on an exchange and the Fund may be able to
realize the value of an OTC option it has purchased only by exercising it or
entering into a closing sale transaction with the dealer that issued it. There
can be no assurance that a liquid secondary market will exist for any particular
option or futures contract at any specific time. Thus, it may not be possible to
close an option or futures position. The Fund will enter into an option or
futures position only if there appears to be a liquid secondary market for the
option or futures.
The Fund understands the current position of the staff of the SEC to be that
purchased OTC options are illiquid securities and that the assets used to cover
the sale of an OTC option are considered illiquid. The Fund and Advisers
disagree with this position. Nevertheless, pending a change in the staff's
position, the Fund will treat OTC options and cover assets as subject to the
Fund's limitation on illiquid securities.
In addition, adverse market movements could cause the Fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a futures contract. There is also the risk of loss by
the Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a futures contract or option.
The Fund's option and futures investments may be limited by the requirements of
the Code for qualification as a regulated investment company. These investments
and certain securities transactions, including loans of portfolio securities may
reduce the portion of the Fund's dividends that is eligible for the corporate
dividends-received deduction. These transactions are also subject to special tax
rules that may affect the amount, timing and character of certain distributions
to you. For more information please see the tax section of the SAI.
Who Manages the Fund?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations.
INVESTMENT MANAGER. Advisers is the investment manager of the Fund and other
funds with aggregate assets of over $81 billion. It is wholly owned by
Resources, a publicly owned company engaged in the financial services industry
through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the
principal shareholders of Resources.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is: Edward B. Jamieson, Catherine Roberts Bowman and Dan
Prislin since January 2, 1996.
Edward B. Jamieson
Senior Vice President of Advisers
Mr. Jamieson holds a Master's degree in accounting and finance from the
University of Chicago Graduate School of Business and a Bachelor of Arts degree
from Bucknell University. He has been with Advisers since 1987. Mr. Jamieson is
a member of several securities industry-related committees and associations.
Catherine Roberts Bowman
Portfolio Manager of Advisers
Ms. Bowman holds a Master of Business Administration degree from the J.L.
Kellogg Graduate School of Management at Northwestern University. She received
her Bachelor of Arts degree from Princeton University. She joined Franklin in
1990.
Dan Prislin
Portfolio Manager of Advisers
Mr. Prislin is a Level II candidate in the CFA program. He holds a Master of
Business Administration degree from University of California in Berkeley and a
Bachelor of Science degree from University of California at Berkeley. Mr.
Prislin joined Franklin in July 1994. Before July 1994, he was a real estate
salesperson with Blickman.
SERVICES PROVIDED BY ADVISERS. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also provides certain administrative services and
facilities for the Fund and performs similar services for other funds. Please
see "Investment Advisory and Other Services" and "Miscellaneous Information" in
the SAI for information on securities transactions and a summary of the Fund's
Code of Ethics.
MANAGEMENT FEES. The Fund pays its own operating expenses. These expenses
include Advisers' management fees; taxes, if any; custodian, legal and auditing
fees; the fees and expenses of Board members who are not members of, affiliated
with, or interested persons of Advisers; salaries of any personnel not
affiliated with Advisers; insurance premiums; trade association dues; expenses
of obtaining quotations for calculating the Fund's Net Asset Value; and printing
and other expenses that are not expressly assumed by Advisers.
Under its management agreement, the Fund pays Advisers a management fee equal to
an annual rate of 0.65% of the average daily net assets of the Fund. The fee is
computed and accrued daily and paid monthly.
The management fee will be reduced as necessary to comply with the most
stringent limits on Fund expenses of any state where the Fund offers it shares.
Currently, the most restrictive limitation on a fund's allowable expenses for
each fiscal year, as a percentage of its average net assets, is 2.5% of the
first $30 million in assets, 2% of the next $70 million, and 1.5% of assets over
$100 million.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares when selecting a broker or dealer. Please see "How Does the Fund
Buy Securities For Its Portfolio?" in the SAI for more information.
PRIOR SERVICES. Before January 2, 1996, Franklin Institutional Services
Corporation ("FISCO"), also a wholly owned subsidiary of Resources, served as
the Fund's investment manager under a management agreement with the Fund which
provided for the payment of management fees by the Fund of 0.65% annually of its
average daily net assets. FISCO employed its affiliate, Templeton Quantitative
Advisors, Inc. ("TQA"), to implement some of the investment activities of the
Fund. TQA's fees were paid fully by FISCO. During the fiscal year ended April
30, 1996, management fees and total operating expenses, before any advance
waiver, totaled 0.65% and 0.96% of the average daily net assets of the Fund.
Under an agreement by Advisers to waive its fees, the Fund paid no management
fees and total operating expenses of 0.16%. Advisers may end this arrangement at
any time upon notice to the Board.
THE FUND'S RULE 12B-1 PLAN
The Fund has a distribution plan or "Rule 12b-1 Plan" under which it may
reimburse Distributors or others for activities primarily intended to sell
shares of the Fund. These expenses may include, among others, distribution or
service fees paid to Securities Dealers or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates, printing prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and advertisements, and a prorated portion of Distributors' overhead expenses.
Payments by the Fund under the plan may not exceed 0.35% per year of the Fund's
average daily net assets. Of this amount, the Fund may reimburse up to 0.25% to
Distributors or others and may reimburse an additional 0.10% to Distributors for
distribution expenses. All distribution expenses over this amount will be borne
by those who have incurred them. For more information, please see "The Fund's
Underwriter" in the SAI.
How Does the Fund Measure Performance?
From time to time, the Fund advertises its performance. The more commonly used
measures of performance are total return, current yield and current distribution
rate. Performance figures are usually calculated using the maximum sales charge,
but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield shows the
income per share earned by the Fund. The current distribution rate shows the
dividends or distributions paid to shareholders by the Fund. This rate is
usually computed by annualizing the dividends paid per share during a certain
period and dividing that amount by the current Offering Price. Unlike current
yield, the current distribution rate may include income distributions from
sources other than dividends and interest received by the Fund.
The Fund's investment results will vary. Performance figures are always based on
past performance and do not indicate future results. For a more detailed
description of how the Fund calculates its performance figures, please see "How
Does the Fund Measure Performance?" in the SAI.
How Is the Trust Organized?
The Fund is a diversified series of Franklin Strategic Series (the "Trust"), an
open-end management investment company, commonly called a mutual fund. It was
organized as a Delaware business trust on January 25, 1991, and is registered
with the SEC under the 1940 Act. The Fund changed its name from FISCO MidCap
Growth Fund to Franklin Institutional MidCap Growth Fund on September 1, 1994
and to its current name on April 18, 1996. Shares of each series of the Trust
have equal and exclusive rights to dividends and distributions declared by that
series and the net assets of the series in the event of liquidation or
dissolution. Shares of the Fund are considered Class I shares for redemption,
exchange and other purposes. In the future, additional series and classes of
shares may be offered.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
electing or removing members of the Board.
As of July 19, 1996, Resources owned of record and beneficially more than 25% of
the outstanding shares of the Fund.
CONVERSION TO A MASTER/FEEDER STRUCTURE
The Fund currently invests directly in securities. Certain Franklin Templeton
Funds, however, are "feeder funds" in a master/feeder fund structure. This means
they invest their assets in a "master fund" that, in turn, invests its assets
directly in securities. The Fund's investment objective and other fundamental
policies allow it to invest either directly in securities or indirectly in
securities through a master fund. In the future, the Board may decide to convert
the Fund to a master/feeder structure.
Various states have adopted certain guidelines for registering master/feeder
funds. If the Board decides to convert the Fund to a master/feeder structure,
the Fund will seek shareholder approval before the conversion if required by the
applicable guidelines or law at that time. If shareholder approval is not
required, your purchase of Fund shares will be considered your consent to a
conversion and we will not seek further shareholder approval. We will, however,
notify you in advance of the conversion. If the Fund converts to a master/feeder
structure, its fees and total operating expenses are not expected to increase.
How Taxation Affects You and the Fund
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund intends to continue to qualify 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.
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.
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 Fund shares and whether you 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 you received
them on December 31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred 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 received with respect to the shares. You
should consult your tax advisor concerning the tax rules applicable to the
redemption or exchange of Fund shares.
For the fiscal year ended April 30, 1996, 72.91% of the ordinary income
distributions (including short-term capital gain distributions) paid by the Fund
qualified for the corporate dividends-received deduction, subject to certain
holding period, hedging and debt financing restrictions imposed under the Code
on the corporation claiming the deduction.
If you are a corporate shareholder, you should note that dividends paid by the
Fund from sources other than the qualifying dividends it receives will not
qualify for the dividends-received deduction. For example, any interest income
and net short-term capital gain (in excess of any net long-term capital loss or
capital loss carryover) included in investment company taxable income and
distributed by the Fund as a dividend will not qualify for the
dividends-received deduction.
The Fund will inform you of the source of its 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.
If you are not considered a U.S. person for federal income tax purposes, you
should consult with your financial or tax advisor regarding the applicability of
U.S. withholding or other taxes to distributions you receive from the Fund and
the application of foreign tax laws to these distributions. You should also
consult your tax advisor with respect to the applicability of any state and
local intangible property or income taxes to your Fund shares and distributions
and redemption proceeds received from the Fund.
About Your Account
How Do I Buy Shares?
OPENING YOUR ACCOUNT
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.
MINIMUM
INVESTMENTS*
To Open Your Account $100
To Add to Your Account $ 25
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares.
SALES CHARGE REDUCTIONS AND WAIVERS
- -If you qualify to buy shares under one of the sales charge reduction or
waiver categories described below, please include a written statement with each
purchase order explaining which privilege applies. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
QUANTITY DISCOUNTS. The sales charge you pay depends on the dollar amount you
invest, as shown in the table below.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED 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
*If you invest $1 million or more, a Contingent Deferred Sales Charge may be
imposed on an early redemption. Please see "How Do I Sell Shares? - Contingent
Deferred Sales Charge." Please also see "Other Payments to Securities Dealers"
below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases.
CUMULATIVE QUANTITY DISCOUNTS. To determine if you may pay a reduced sales
charge, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your Class I and Class II shares in the Franklin
Templeton Funds, as well as those of your spouse, children under the age of 21
and grandchildren under the age of 21. If you are the sole owner of a company,
you may also add any company accounts, including retirement plan accounts.
Companies with one or more retirement plans may add together the total plan
assets invested in the Franklin Templeton Funds to determine the sales charge
that applies.
LETTER OF INTENT. You may buy 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.
By completing the Letter of Intent section of the shareholder application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Fund shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Fund
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
SALES CHARGE WAIVERS. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying shares with money from
the following sources:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares reinvested were subject
to a Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
5. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front-end or contingent deferred sales charges at the
time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to purchases by:
6. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following the order.
7. Group annuity separate accounts offered to retirement plans
8. Retirement plans that (i) are sponsored by an employer with at least 100
employees, (ii) have plan assets of $1 million or more, or (iii) agree to invest
at least $500,000 in the Franklin Templeton Funds over a 13 month period.
Retirement plans that are not Qualified Retirement Plans or SEPS, such as 403(b)
or 457 plans, must also meet the requirements described under "Group Purchases"
above.
9. An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is permissible and suitable
for you and the effect, if any, of payments by the Fund on arbitrage rebate
calculations.
10. Broker-dealers and qualified registered investment advisors who have entered
into a supplemental agreement with Distributors for their clients who are
participating in comprehensive fee programs, sometimes known as wrap fee
programs.
11. Registered Securities Dealers and their affiliates, for their investment
accounts only
12. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
13. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
14. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
15. Accounts managed by the Franklin Templeton Group
16. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments below apply to Securities Dealers who initiate and are responsible
for certain purchases made without a sales charge. A Securities Dealer may only
receive one of the following payments for each qualifying purchase. The payments
described below are paid by Distributors or one of its affiliates, at its own
expense, and not by the Fund or its shareholders.
1. Securities Dealers will receive up to 1% of the purchase price for purchases
of $1 million or more.
2. Securities Dealers may, in the sole discretion of Distributors, receive up to
1% of the purchase price for purchases made under waiver category 8 above.
3. Securities Dealers may receive up to 0.25% of the purchase price for
purchases made under waiver categories 6 and 9 above.
Please see "How Do I Buy, Sell and Exchange Shares - Other Payments to
Securities Dealers" in the SAI for any breakpoints that may apply.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. 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 NASD.
May I Exchange Shares for Shares of Another Fund?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you're exchanging
By Phone Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone,
please let us know.
Through Your Dealer Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred Sales
Charge when you exchange shares. Any shares subject to a Contingent Deferred
Sales Charge at the time of exchange, however, will remain so in the new fund.
For accounts with shares subject to a Contingent Deferred Sales Charge, shares
are exchanged into the new fund in the order they were purchased. If you
exchange shares into one of our money funds, the time your shares are held in
that fund will not count towards the completion of any Contingency Period. For
more information about the Contingent Deferred Sales Charge, please see that
section under "How Do I Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class.
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically registered
money fund account requiring only one signature for all transactions. Please
notify us in writing if you do not want this option to be available on your
account(s). Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you: (i) request an exchange out
of the Fund within two weeks of an earlier exchange request, (ii) exchange
shares out of the Fund more than twice in a calendar quarter, or (iii) exchange
shares equal to at least $5 million, or more than 1% of the Fund's net assets.
Shares under common ownership or control are combined for these limits. If you
exchange shares as described in this paragraph, you will be considered a Market
Timer. Each exchange by a Market Timer, if accepted, will be charged $5.00. Some
of our funds do not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund. How Do I Sell
Shares?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares you are
selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to
send additional documents. Accounts
under court jurisdiction may have additional requirements.
By Phone
Call Shareholder Services
have completed and
sent to us the telephone
redemption agreement
included with this
prospectus) Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional
accounts may exceed $50,000 by completing a
separate agreement. Call Institutional Services to
receive a copy.
o If there are no share certificates issued for the
shares you want to sell or you have already
returned them to the Fund
o Unless you are selling shares in a Trust Company
retirement plan account
o Unless the address on your account was changed by
phone within the last 30 days
Through Your Dealer Call your investment representative.
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
CONTINGENT DEFERRED SALES CHARGE
If you did not pay a front-end sales charge because you invested $1 million or
more, a Contingent Deferred Sales Charge may apply if you sell all or a part of
your investment within the Contingency Period. The charge is 1% of the value of
the shares sold or the Net Asset Value at the time of purchase, whichever is
less. Distributors keeps the charge to recover payments made to Securities
Dealers.
We will first redeem shares not subject to the charge in the following order:
1) A calculated number of shares equal to the capital appreciation on shares
held less than the Contingency Period,
2) Shares purchased with reinvested dividends and capital gain distributions,
and
3) Shares held longer than the Contingency Period.
We then redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated dollar amount, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated number of shares, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before
February 1, 1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual balance of
$1 million, you can withdraw up to $120,000 annually through a systematic
withdrawal plan free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to termination
or plan transfer
What Distributions Might I Receive From the Fund?
The Fund declares dividends from its net investment income semiannually in June
and December to shareholders of record on the first business day before the 15th
of the month and pays them on or about the last day of that month. Capital
gains, if any, may be distributed annually, usually in December.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy 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. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy 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 receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
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 you do not select an option, we will
automatically reinvest dividend and capital gain distributions in the Fund. For
Trust Company retirement plans, special forms are required to receive
distributions in cash. You may change your distribution option at any time by
notifying us by mail or phone. Please allow at least seven days prior to the
record date for us to process the new option.
Transaction Procedures and Special Requirements
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the Exchange is open. We determine the
Net Asset Value per share as of the scheduled close of the Exchange, generally
1:00 p.m. Pacific time. You can find the prior day's closing Net Asset Value and
Offering Price of the Fund in many newspapers.
To calculate Net Asset Value per share, the Fund's assets are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares outstanding. The Fund's assets are valued as
described under "How Are Fund Shares Valued?" in the SAI.
THE PRICE WE USE WHEN YOU BUY OR SELL SHARES
You buy shares at the Offering Price, unless you qualify to buy shares at a
reduced sales charge or with no sales charge. The Offering Price is based on the
Net Asset Value per share and includes the maximum sales charge. We calculate it
to two decimal places using standard rounding criteria. You sell shares at Net
Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. You should
verify that the institution is an eligible guarantor prior to signing. A
notarized signature is not sufficient.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
We may only be liable for losses resulting from unauthorized telephone
transactions if we do not follow reasonable procedures designed to verify the
identity of the caller. When you call, we will request personal or other
identifying information, and will also record calls. For your protection, we may
delay a transaction or not implement one if we are not reasonably satisfied that
telephone instructions are genuine. If this occurs, we will not be liable for
any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by telephone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. You may not sell shares or change
distribution options on Trust Company retirement plans by phone. While you may
exchange shares of Trust Company IRA and 403(b) retirement accounts by phone,
certain restrictions may be imposed on other retirement plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
Corporation Corporate Resolution
Partnership 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
Trust 1. The pages from the trust document that identify
the trustees, or
2. A certification for trust
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
ELECTRONIC INSTRUCTIONS. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We can accept electronic instructions directly from your dealer or
representative without further inquiry. Electronic instructions may be processed
through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(R) System.
TAX IDENTIFICATION NUMBER
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
Services to Help You Manage Your Account
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can 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
included with this prospectus or contact your investment representative. 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
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
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 direct your payments to buy the same class of shares of another
Franklin Templeton Fund or 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.
You will generally receive your payment by the fifth business day of the month
in which a payment is scheduled. When you sell your shares under a systematic
withdrawal plan, it is a taxable transaction.
Because of the Fund's front-end sales charge, you may not want to set up a
systematic withdrawal plan if you plan to buy shares on a regular basis. Shares
sold under the plan may also be subject to a Contingent Deferred Sales Charge.
Please see "Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with 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. We will send any payments made during that time to the
address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips.
You will need the Fund's code number to use TeleFACTS. The Fund's code is 196.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. Please verify the
accuracy of your statements when you receive them.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. For further information, call Institutional
Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you.
Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
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.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
Glossary
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
CD - Certificate of deposit
CLASS I AND CLASS II - Certain funds in the Franklin Templeton Funds offer two
classes of shares, designated "Class I" and "Class II." The two classes have
proportionate interests in the same portfolio of investment securities. They
differ, however, primarily in their sales charge structures and Rule 12b-1
plans. Because the Fund's sales charge structure and Rule 12b-1 plan are similar
to those of Class I shares, shares of the Fund are considered Class I shares for
redemption, exchange and other purposes.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - The 12 month period during which a Contingent Deferred
Sales Charge may apply. Regardless of when during the month you purchased
shares, they will age one month on the last day of that month and each following
month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
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., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
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.
NASD - National Association of Securities Dealers, Inc.
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.
NSCC - National Securities Clearing Corporation
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the 4.50% sales charge.
QUALIFIED RETIREMENT PLAN(S) - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
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
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or another wholly owned
subsidiary of Resources.
PROSPECTUS & APPLICATION
Franklin Global Utilities Fund
INVESTMENT STRATEGY
GLOBAL GROWTH
AND INCOME
SEPTEMBER 1, 1996
Franklin Strategic Series
This prospectus describes the Franklin Global Utilities Fund (the "Fund"). It
contains information you should know before investing in the Fund. Please keep
it for future reference.
The Fund's SAI, dated September 1, 1996 as may be amended from time to time,
includes more information about the Fund's procedures and policies. It has been
filed with the SEC and is incorporated by reference into this prospectus. For a
free copy or a larger print version of this prospectus, call 1-800/DIAL BEN or
write the Fund at the address shown.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Shares of the Fund involve investment risks, including the possible
loss of principal.
LIKE ALL MUTUAL FUNDS, 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.
The Fund may invest in both domestic and foreign securities.
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.
The Fund may invest in both domestic and foreign securities.
Franklin Global Utilities Fund
Franklin
Global
Utilities
Fund
September 1, 1996
When reading this prospectus, you will see certain terms in capital letters.
This means the term is explained in our glossary section.
Table of Contents
About the Fund
Expense Summary............................. 2
Financial Highlights........................ 3
How Does the Fund Invest Its Assets?........ 4
What Are the Fund's Potential Risks?........ 11
Who Manages the Fund?....................... 13
How Does the Fund Measure Performance?...... 15
How Is the Trust Organized?................. 16
How Taxation Affects You and the Fund....... 17
About Your Account
How Do I Buy Shares?........................ 18
May I Exchange Shares for Shares of Another Fund? 24
How Do I Sell Shares?....................... 27
What Distributions Might I Receive From the Fund? 29
Transaction Procedures and Special Requirements 30
Services to Help You Manage Your Account.... 35
Glossary
Useful Terms and Definitions................ 38
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
Franklin Global Utilities Fund
About the Fund
Expense Summary
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of each class for the fiscal year
ended April 30, 1996. Your actual expenses may vary.
CLASS I CLASS II
A. Shareholder Transaction Expenses+
Maximum Sales Charge Imposed on Purchases
(as a percentage of Offering Price) 4.50% 1.00%++
Deferred Sales Charge+++ None 1.00%
Redemption Fee 1.00* None
B. Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.60% 0.60%
Rule 12b-1 Fees 0.24%** 1.00%**
Other Expenses 0.20% 0.20%
Total Fund Operating Expenses 1.04% 1.80%
C. Example
Assume the annual return for each class is 5% and operating expenses are as
described above. For each $1,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Class I $55*** $77 $100 $166
Class II $38 $66 $107 $219
For the same Class II investment, you would pay projected expenses of $28 if
you did not sell your shares at the end of the first year. Your projected
expenses for the remaining periods would be the same.
This is just an example. It does not represent past or future expenses or
returns. Actual expenses and returns may be more or less than those shown. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of each class and are not directly charged to
your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? - Deciding Which Class to Buy."
+++A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more if you sell the shares within one year and any Class II purchase
if you sell the shares within 18 months. There is no front-end sales charge if
you invest $1 million or more in Class I shares. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*On March 29, 1996, the assets and certain liabilities of Templeton Global
Utilities, Inc. were acquired by the Fund in exchange for Class I shares of the
Fund. Any Class I shares acquired as a result of the transfer of assets and
certain liabilities, which are redeemed or exchanged within six months of March
29, 1996, will be charged a redemption fee.
**These fees may not exceed 0.25% for Class I. 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 charge permitted
under the NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
Financial Highlights
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent three years and the period from
July 2, 1992 (the effective date of the registration statement for Class I)
through April 30, 1993, appears in the financial statements in the Trust's
Annual Report to Shareholders for the fiscal year ended April 30, 1996. The
Annual Report to Shareholders also includes more information about the Fund's
performance. For a free copy, please call Fund Information.
<TABLE>
<CAPTION>
Class I
<S> <C> <C> <C> <C>
Year Ended April 30 1996 1995 1994 19931
Per Share Operating Performance
Net Asset Value at Beginning of Period $12.23 $12.60 $11.36 $10.00
Net Investment Income .37 .42 .30 .22
Net Realized & Unrealized Gain
(loss) on Securities 2.395 (.067) 1.280 1.270
Total From Investment Operations 2.765 .353 1.580 1.490
Distributions From Net Investment Income (.391) (.365) (.299) (.130)
Distributions From Realized Capital Gains (.324) (.358) (.042) -
Total Distributions (.715) (.723) (.341) (.130)
Net Asset Value at End of Period $14.28 $12.23 $12.60 $11.36
Total Return* 23.27% 3.17% 14.04% 18.08%**
Ratios/Supplemental Data
Net Assets at End of Period (in 000's) $167,225 $119,250 $124,188 $14,227
Ratio of Expenses to Average Net Assets*** 1.04% 1.12% .84% -
Ratio of Net Investment Income
to Average Net Assets 2.85% 3.47% 2.95% 3.89%**
Portfolio Turnover Rate 50.51% 16.65% 16.28% -
Average Commission Rate+ $.0313 - - -
</TABLE>
Class II
Period Ended April 30 1996
Per Share Operating Performance
Net Asset Value at Beginning of Period $12.23
Net Investment Income .37
Net Realized & Unrealized
Gain (loss) on Securities 2.322
Total From Investment Operations 2.692
Distributions From Net Investment Income (.358)
Distributions From Realized Capital Gains (.324)
Total Distributions (.682)
Net Asset Value at End of Period $14.24
Total Return* 22.63%
Ratios/Supplemental Data
Net Assets at End of Period (in 000's) $2,727
Ratio of Expenses to Average Net Assets 1.81%
Ratio of Net Investment Income
to Average Net Assets 2.10%
Portfolio Turnover Rate 50.51%
Average Commission Rate+ $.0313
1For the period July 2, 1992 (effective date) to April 30, 1993.
*Total return measures the change in value of an investment over the periods
indicated. It is not annualized except where indicated. It does not include the
maximum front-end sales charge or Contingent Deferred Sales Charge, and assumes
reinvestment of dividends and capital gains, if any, at Net Asset Value.
**Annualized.
+Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
***During the periods indicated, Advisers agreed in advance to waive a portion
or all of its management fees and made payments of other expenses incurred by
the Fund. Had such action not been taken, the ratios of operating expenses to
average net assets would have been as follows:
Ratio of expenses
to average net assets
Class I shares
19931 1.51%**
1994 1.28
How Does the Fund Invest Its Assets?
The Fund's Investment Objective
The Fund seeks to provide total return, without incurring undue risk, by
investing at least 65% of its total assets in securities issued by companies
that are, in the opinion of Advisers, primarily engaged in the ownership or
operation of facilities used to generate, transmit or distribute electricity,
telephone communications, cable and other pay television services, wireless
telecommunications, gas or water. The Fund's total return consists of both
capital appreciation and current dividend and interest income.
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.
Types of Securities the Fund May Invest In
The Fund invests in common stocks, preferred stocks and debt securities
including preferred or debt securities convertible into common stocks. The
mixture of common stocks, debt securities and preferred stocks varies from time
to time based upon Advisers' assessment as to whether investments in each
category will contribute to meeting the Fund's investment objective. The Fund
may invest, without percentage limitation, in fixed-income securities having at
the time of purchase one of the four highest ratings of Moody's Investors
Service ("Moody's") (Aaa, Aa, A, Baa) or Standard & Poor's Corporation ("S&P")
(AAA, AA, A, BBB), or in unrated in securities of comparable quality. Securities
rated within the four highest ratings are considered to be "investment grade"
securities, although securities rated Baa are regarded as having an adequate
capacity to pay principal and interest but with greater vulnerability to adverse
economic conditions and some speculative characteristics. The Fund's commercial
paper investments will be rated "A-1" or "A-2" by S&P or "Prime-1" or "Prime-2"
by Moody's at the time of purchase or, if not rated, will be of comparable
quality. The Fund may also invest up to 5% of its total assets at the time of
purchase in lower rated fixed-income securities and unrated securities of
comparable quality. These investments will be rated no lower than Caa by Moody's
or CCC by S&P. (See the SAI for a more complete discussion of these
investments.) In the event the rating on an issue held in the Fund's portfolio
is changed by Moody's and S&P, it will be considered by the Fund in its
evaluation of the overall investment merits of that security but will not
necessarily result in an automatic sale of the security. A description of these
ratings is included in the Appendix to the SAI.
Under normal circumstances, the Fund will invest at least 65% of its total
assets in issuers domiciled in at least three different countries, one of which
may be the U.S., although Advisers expects the Fund's portfolio to be more
geographically diversified. Under normal conditions, it is anticipated that the
percentage of assets invested in U.S. securities will be higher than that
invested in securities of any other single country. It is possible that at times
the Fund may have 65% or more of its total assets invested in foreign
securities. The Fund at all times, except during temporary defensive periods,
will maintain at least 65% of its total assets invested in securities issued by
companies in the utilities industries. The Fund may invest up to 35% of its
assets in securities of issuers that are outside the utilities industries. These
investments will consist of common stocks, debt securities or preferred stocks
and will be selected to meet the Fund's investment objective of providing total
return without incurring undue risk. These securities may be issued by either
U.S. or non-U.S. companies, governments, or governmental instrumentalities. Some
of these issuers may be in industries related to utility industries and,
therefore, may be subject to similar risks. Securities that are issued by
foreign companies or are denominated in foreign currencies are subject to
certain risks outlined below. See "What Are the Fund's Potential Risks?"
The Fund reserves the right to hold, as a temporary defensive measure or as a
reserve for redemptions, short-term U.S. government securities, high quality
money market securities, including repurchase agreements, or cash in such
proportions as, in the opinion of Advisers, prevailing market or economic
conditions warrant.
Utility Industries. Under normal circumstances, the Fund will invest at least
65% of its total assets in common stocks, debt securities and preferred stocks,
including preferred or debt securities convertible into common stocks, of
companies in the utility industries. These companies may be domestic or foreign.
To meet its objective, the Fund may invest in domestic utility companies that
pay higher than average dividends, but have less potential for capital
appreciation. There can be no assurance that the historically positive relative
returns on utility securities will continue to occur in the future. Advisers
believes that the average dividend yields of common stocks issued by foreign
utility companies have also historically exceeded those of foreign industrial
companies' common stocks. To meet its objective, the Fund may invest in foreign
utility companies that pay lower than average dividends, but have a greater
potential for capital appreciation.
The utility companies in which the Fund invests include companies primarily
engaged in the ownership or operation of facilities used to provide electricity,
telephone communications, cable and other pay television services, wireless
telecommunications, gas or water. "Primarily engaged," for this purpose, means
that (1) more than 50% of the company's assets are devoted to the ownership or
operation of one or more facilities as described above or (2) more than 50% of
the company's operating revenues are derived from the business or combination of
businesses described above. See "The Fund's Investment Restrictions" in the SAI.
American Depositary Receipts. The Fund may invest in the securities of foreign
issuers in the form of sponsored or unsponsored American Depositary Receipts
("ADRs") or other securities convertible into securities of foreign issuers.
ADRs are receipts typically issued by a U.S. bank or trust company which
evidence ownership of underlying securities issued by a foreign corporation.
These securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. Generally, ADRs, which are issued
in registered form, are designed for use in the U.S. securities markets. The
issuers of unsponsored ADRs are not obligated to disclose material information
in the U.S. and, therefore, there may be less information available to the
investing public than with sponsored ADRs. Advisers will attempt to
independently accumulate and evaluate information with respect to the issuers of
the underlying securities of sponsored and unsponsored ADRs to attempt to limit
the Fund's exposure to the market risk associated with these investments. For
purposes of the Fund's investment policies, investments in ADRs will be deemed
to be investments in the equity securities of the foreign issuers into which
they may be converted.
Foreign government securities. The Fund may invest in securities issued or
guaranteed by foreign governments. The foreign government securities in which
the Fund intends to invest generally will consist of obligations issued by
national, state or local governments or similar political subdivisions. Foreign
government securities also include debt obligations of supranational entities,
including international organizations designed or supported by governmental
entities to promote economic reconstruction or development and international
banking institutions and related government agencies. Examples include the
International Bank of Reconstruction and Development (the World Bank), the
European Investment Bank, the Asian Development Bank and the Inter-American
Development Bank. These securities are typically denominated in foreign
currencies and are subject to currency fluctuation and other risks of foreign
securities investments. Please see "What Are the Fund's Potential Risks?"
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units. An example of a multinational currency unit is the European
Currency Unit. A European Currency Unit represents specified amounts of the
currencies of certain of the 12 member states of the European Economic
Community. Debt securities of quasi-governmental agencies are issued by entities
owned by either a national or local government or are obligations of a political
unit that is not backed by the national government's full faith and credit and
general taxing powers. Foreign government securities also include
mortgage-related securities issued or guaranteed by national or local
governmental instrumentalities, including quasi-governmental agencies.
U.S. government securities. The Fund may invest in securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities ("U.S.
government securities"), including U.S. Treasury bills, notes and bonds as well
as certain agency securities and mortgage-backed securities issued or guaranteed
by the Government National Mortgage Association ("GNMA"), may be backed by the
"full faith and credit" of the U.S. government or carry a guarantee that is
backed by the U.S. government. Any guarantee will extend to the payment of
interest and principal due on the securities and will not provide any protection
from fluctuations in either the securities' yield or value or to the yield or
value of the Fund's shares. Other securities issued by U.S. government agencies
or instrumentalities are not necessarily backed by the "full faith and credit"
of the U.S. government, such as certain securities issued by the Federal
National Mortgage Association (FNMA), the Federal Home Loan Mortgage
Corporation, the Student Loan Marketing Association and the Farm Credit Bank.
Convertible Securities. The Fund may invest in convertible securities. 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 the capital appreciation resulting from a
market price advance in the convertible security's underlying common stock.
Though the Fund intends to invest in liquid convertible securities there can be
no assurance that this will always be achieved. For more information on
convertible securities, including liquidity issues, please see the SAI.
Other Investment Policies of the Fund
The Fund may use a variety of strategies to enhance income and to hedge against
market and currency risk, as described more fully under "How Does the Fund
Invest Its Assets - Transactions in Options, Future and Options on Financial
Futures" in the SAI. Options, futures and options on futures are generally
considered "derivative securities."
When-Issued or Delayed Delivery Transactions. The Fund may buy debt obligations
on a "when-issued" or "delayed delivery" basis. These securities are subject to
market fluctuation before delivery to the Fund and generally do not earn
interest until their scheduled delivery date. Therefore, the value or yields at
delivery may be more or less than the purchase price or the yields available
when the transaction was entered into. When the Fund is the buyer, it will
maintain, in a segregated account with its custodian bank, cash or high-grade
marketable securities having an aggregate value equal to the amount of its
purchase commitments until payment is made. To the extent the Fund engages in
when-issued and delayed delivery transactions, it will do so only for the
purpose of acquiring portfolio securities consistent with its investment
objective and policies, and not for the purpose of investment leverage. See the
SAI for a more complete discussion regarding when-issued and delayed delivery
transactions.
Standby Commitment Agreements. The Fund may from time to time enter into standby
commitment agreements. These agreements commit the Fund, for a stated period of
time, to buy a stated amount of a fixed-income security that may be issued and
sold to the Fund at the option of the issuer. The price and coupon of the
security is fixed at the time of the commitment. At the time the Fund enters
into the agreement, the Fund is paid a commitment fee, regardless of whether the
security is ultimately issued, which is typically approximately 0.5% of the
aggregate purchase price of the security that the Fund has committed to buy. The
Fund will enter into these agreements only for the purpose of investing in the
security underlying the commitment at a yield and price that is considered
advantageous to the Fund. The Fund will not enter into a standby commitment with
a remaining term in excess of 45 days and will limit its investment in these
commitments so that the aggregate purchase price of the securities subject to
these commitments, together with the value of portfolio securities subject to
legal restrictions on resale, will not exceed 15% of its assets, at the time of
purchase. The Fund will at all times maintain, in a segregated account with its
custodian bank, cash, cash equivalents, U.S. Government Securities or other high
grade liquid debt securities denominated in U.S. dollars or non-U.S. currencies
in an aggregate amount equal to the purchase price of the securities underlying
the commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued, and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, the Fund may bear the
risk of a decline in the value of the security and may not benefit from an
appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will 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. In the event
the security is not issued, the commitment fee will be recorded as income on the
expiration date of the standby commitment.
Loans of Portfolio Securities. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors,
provided that such loans do not exceed one-third of the value of the Fund's
total assets at the time of the most recent loan. The borrower must deposit with
the Fund's custodian 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 collateral 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 the cash collateral in short-term
interest bearing obligations or by receiving a loan premium from the borrower.
Under the securities loan agreement, the Fund continues to be entitled to all
dividends or interest on any loaned securities. As with any extension of credit,
there are risks of delay in recovery and loss of rights in the collateral should
the borrower of the security fail financially.
Borrowing. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of its assets, except that the Fund may enter into reverse
repurchase agreements or borrow money from banks in an amount up to 33% of its
total asset value (computed at the time the loan is made) for temporary or
emergency purposes. While borrowings exceed 5% of the Fund's total assets, the
Fund will not make any additional investments.
Short-Term Investments. The Fund may invest its cash, including cash resulting
from purchases and sales of Fund shares, temporarily in short-term debt
instruments, including high grade commercial paper, repurchase agreements and
other money market equivalents and, pursuant to an exemption from the
requirements of the 1940 Act, the shares of affiliated money market funds, which
invest primarily in short-term debt securities. To the extent the Fund invests
in affiliated money market funds, such as the Franklin Money Fund, Advisers has
agreed to waive its management fee on any portion of the Fund's assets invested
in an affiliated fund. Temporary investments will only be made with cash held to
maintain liquidity or pending investment. In addition, for temporary defensive
purposes in the event of, or when Advisers anticipates, a general decline in the
market prices of stocks in which the Fund invests, the Fund may invest an
unlimited amount of its assets in short-term debt instruments.
Repurchase Agreements. The Fund may engage in repurchase transactions in which
the Fund buys a U.S. government security subject to resale to a bank or dealer
at an agreed-upon price and date. The transaction requires the collateralization
of the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller might cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund might
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks which are deemed creditworthy by Advisers. A
repurchase agreement is deemed to be a loan by the Fund under the 1940 Act. The
U.S. government security subject to resale (the collateral) will be held on
behalf of the Fund by a custodian approved by the Board and will be held
pursuant to a written agreement.
The Fund may also enter into reverse repurchase agreements. These transactions
involve the sale of securities held by the Fund pursuant to an agreement to
repurchase the securities at an agreed upon price, date and interest payment.
Cash or high grade liquid debt securities of a dollar amount equal in value to
the Fund's obligation under the agreement, including accrued interest, will be
maintained in a segregated account with the Fund's custodian bank, and the
securities subject to the reverse repurchase agreement will be marked-to-market
each day. Although reverse repurchase agreements are borrowings under the 1940
Act, the Fund does not treat these arrangements as borrowings under investment
restriction 2 so long as the segregated account is properly maintained.
Illiquid Investments. The Fund may not invest more than 15% of its net assets,
at the time of purchase, in illiquid securities. Illiquid securities are
generally securities that cannot be sold within seven days in the normal course
of business at approximately the amount at which the Fund has valued them.
Notwithstanding the above policy and the federal securities laws, which permit
investments in illiquid securities up to 15% of the Fund's portfolio, the Fund
is aware that the securities laws in various states impose more restrictive
limits upon these investments. To comply with applicable state restrictions, the
Fund will limit its investments in illiquid securities, including securities of
unseasoned issuers, equity securities deemed not readily marketable and
securities subject to legal or contractual restrictions to 10% of the Fund's
Portfolio.
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 net
assets will not be considered a violation of any of the foregoing policies.
Other Policies and Restrictions. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How Does the Fund Invest Its Assets?" and "Investment Restrictions" in the
SAI.
What Are the Fund's Potential Risks?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
Foreign Risk. Foreign securities involve certain risks that you should consider
carefully. These risks include political, social or economic instability in the
country of the issuer, the difficulty of predicting international trade
patterns, the possibility of the imposition of exchange controls, expropriation,
restrictions on removal of currency or other assets, nationalization of assets,
foreign withholding and income taxation, and foreign trading practices
(including higher trading commissions, custodial charges and delayed
settlements). Foreign securities may be subject to greater fluctuations in price
than securities issued by U.S. corporations or issued or guaranteed by the U.S.
government, its instrumentalities or agencies. The markets on which foreign
securities trade may have less volume and liquidity, and may be more volatile
than securities markets in the U.S. In addition, there may be less publicly
available information about a foreign company than about a U.S. domiciled
company. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
U.S. domestic companies. There is generally less government regulation of
securities exchanges, brokers and listed companies abroad than in the U.S.
Confiscatory taxation or diplomatic developments could also affect investment in
foreign securities.
In many instances, foreign debt securities may provide higher yields than
securities of domestic issuers that have similar maturities and quality. Under
certain market conditions, these investments may be less liquid than the
securities of U.S. corporations and are certainly less liquid than securities
issued or guaranteed by the U.S. government, its instrumentalities or agencies.
Finally, in the event of a default of any foreign debt obligation, it may be
more difficult for the Fund to obtain or to enforce a judgment against the
issuer of the security.
The operating expense ratio of the Fund can be expected to be higher than that
of an investment company investing exclusively in U.S. securities because of the
additional expenses of the Fund attributable to its foreign investment activity,
such as custodial costs, valuation costs and communication costs, although the
Fund's expenses are expected to be similar to expenses of other investment
companies investing in a mix of U.S. securities and securities of one or more
foreign countries.
Investments of the Fund may be denominated in foreign currencies. Changes in the
relative values of these foreign currencies and the U.S. dollar, therefore, will
affect the value of investments in the Fund. However, the Fund will utilize
forward futures and options contracts to attempt to minimize these changes. For
a discussion of forward futures and options contracts, please see the SAI.
Industry Risk. Utility companies in the U.S. and in foreign countries are
generally subject to substantial regulations. These regulations are intended to
ensure appropriate standards of service and adequate ability to meet public
demand. The nature of regulations of utility industries is evolving both in the
U.S. and in foreign countries. Although certain companies may develop more
profitable opportunities, others may be forced to defend their core businesses
and may be less profitable. Electric utility companies have historically been
subject to the risks associated with increases in fuel and other operating
costs, high interest costs on borrowings, costs associated with compliance with
environmental, nuclear facility and other safety regulations and changes in the
regulatory climate. Increased scrutiny of electric utilities might result in
higher costs and higher capital expenditures, with the risk that regulators may
disallow inclusion of these costs in rate authorizations. Increasing competition
due to past regulatory changes in the telephone communications industry
continues and, whereas certain companies have benefited, many companies may be
adversely affected in the future. The cable television industry is regulated in
most countries and, although such companies typically have a local monopoly,
emerging technologies and pro-competitive legislation are combining to threaten
these monopolies and could change the future outlook. The wireless
telecommunications industry is in its early developmental stages, and is
predominantly characterized by emerging, rapidly growing companies. Gas
transmission and distribution companies continue to undergo significant changes
as well. Many companies have diversified into oil and gas exploration and
development, making returns more sensitive to energy prices. The water supply
industry is highly fragmented due to local ownership. Generally, these companies
are more mature and expect little or no per capita volume growth. There is no
assurance that favorable developments will occur in the utility industries
generally or that investment opportunities will continue to undergo significant
changes or growth. Please see "What Are The Fund's Potential Risks?" in the SAI
for more information.
Non-Diversification Risk. The Fund is non-diversified under the federal
securities laws. As a non-diversified Fund, there is no restriction under the
1940 Act on the percentage of its assets that may be invested at any time in the
securities of any one issuer. However, the Fund intends to comply with the
diversification and other requirements of the Code, applicable to "regulated
investment companies" so that it will not be subject to U.S. federal income tax
on income and capital gains. Accordingly, the Fund will not buy securities if,
as a result, more than 25% of its total assets would be invested in the
securities of a single issuer or, with respect to 50% of its total assets, more
than 5% of such assets would be invested in the securities of a single issuer.
Because the Fund is non-diversified and concentrates its investments in a
limited group of related industries, the value of the Fund's shares may
fluctuate more widely, and the Fund may present greater risk than other
investments.
Interest Rate and Market Risk. To the extent the Fund invests in debt
securities, changes in interest rates in any country where the Fund is invested
will affect the value of the Fund's portfolio and its share price. Rising
interest rates, which often occur during times of inflation or a growing
economy, are likely to have a negative effect on the value of the Fund's shares.
To the extent the Fund invests in common stocks, a general market decline, shown
for example by a drop in the Dow Jones Industrials or other equity based index,
in any country where the Fund is invested, may also cause the Fund's share price
to decline. The value of worldwide stock markets and interest rates has
increased and decreased in the past. These changes are unpredictable and may
happen again in the future.
Who Manages the Fund?
The Board. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
two classes of shares. While none is expected, the Board will act appropriately
to resolve any material conflict that may arise.
Investment Manager. Advisers is the investment manager of the Fund and other
funds with aggregate assets of over $81 billion. It is wholly owned by
Resources, a publicly owned company engaged in the financial services industry
through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the
principal shareholders of Resources.
Management Team. The team responsible for the day-to-day management of the
Fund's portfolio is: Sally Edwards Haff and Gregory Johnson since the Fund's
inception in 1992, and Ian Link since February 1995.
Sally Edwards Haff
Portfolio Manager of Advisers Ms. Haff holds a B.A. degree in economics from the
University of California at Santa Barbara and joined Advisers in 1986. She is a
Chartered Financial Analyst and a member of industry-related associations.
Gregory Johnson
Vice President of Advisers Mr. Johnson has a B.S. degree in accounting and
business administration from Washington and Lee University and holds a
certificate as a Certified Public Accountant. He joined Advisers in 1986.
Ian Link
Portfolio Manager of Advisers Mr. Link has a Bachelor of Arts degree in
economics from the University of California at Davis and recently became a
Chartered Financial Analyst. Mr. Link joined Advisers in 1989. He is a member of
several securities industry-related committees and associations.
Services Provided by Advisers. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also provides certain administrative services and
facilities for the Fund and performs similar services for other funds. Please
see "Investment Advisory and Other Services" and "Miscellaneous Information" in
the SAI for information on securities transactions and a summary of the Fund's
Code of Ethics.
Management Fees. During the fiscal year ended April 30, 1996, management fees
totaling 0.60% of the average daily net assets of the Fund were paid to
Advisers. Total expenses of Class I and Class II shares, including fees paid to
Advisers, were 1.04% and 1.80%.
Portfolio Transactions. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares when selecting a broker or dealer. Please see "How Does the Fund
Buy Securities For Its Portfolio?" in the SAI for more information.
The Rule 12b-1 Plans
Each class has a distribution plan or "Rule 12b-1 Plan" under which it may pay
or reimburse Distributors or others for activities primarily intended to sell
shares of the class. These expenses may include, among others, distribution or
service fees paid to Securities Dealers or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates, printing prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and advertisements, and a prorated portion of Distributors' overhead expenses.
Payments by the Fund under the Class I plan may not exceed 0.25% per year of
Class I's average daily net assets. All distribution expenses over this amount
will be borne by those who have incurred them.
Under the Class II plan, the Fund may pay Distributors up to 0.75% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the Class II
purchase.
The Fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
How Does the Fund Measure Performance?
From time to time, each class of the Fund advertises its performance. The more
commonly used measures of performance are total return, current yield and
current distribution rate. Performance figures are usually calculated using the
maximum sales charge, but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of each class will vary. Performance figures are always
based on past performance and do not indicate future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How Does the Fund Measure Performance?" in the SAI.
How Is the Trust Organized?
The Fund is a non-diversified series of Franklin Strategic Series (the "Trust"),
an open-end management investment company, commonly called a mutual fund. It was
organized as a Delaware business trust on January 22, 1991, and is registered
with the SEC under the 1940 Act. The Fund began offering two classes of shares
on May 1, 1995: Franklin Global Utilities Fund - Class I and Franklin Global
Utilities Fund - Class II. All shares purchased before that time are considered
Class I shares. Additional classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state business trust law, or (3) required
to be voted on separately by the 1940 Act. Shares of each class of a series have
the same voting and other rights and preferences as the other classes and series
of the Trust for matters that affect the Trust as a whole. In the future,
additional series may be offered.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
electing or removing members of the Board.
How Taxation Affects You and the Fund
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund intends to continue to qualify 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.
For federal income tax purposes, any income dividends which 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.
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 Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December, but which, for operational reasons, may not be paid to 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.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on sale or exchange of the Fund's
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to such shares.
For corporate investors, 53.29% of the ordinary income dividends (including
short-term capital gain distributions) paid by the Fund for the fiscal year
ended April 30, 1996, qualified for the corporate dividends-received deduction,
subject to certain holding period and debt financing restrictions imposed under
the Code on the corporation claiming the deduction. These restrictions are
discussed in the SAI.
The Fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of the total assets of the Fund at the
end of its fiscal year are invested in securities of foreign corporations, the
Fund may elect to pass-through to you the pro rata share of foreign taxes paid
by the Fund. If this election is made, you will be (i) required to include in
your gross income your pro rata share of foreign source income (including any
foreign taxes paid by the fund), and (ii) entitled either to deduct your share
of such foreign taxes in computing your taxable income or to claim a credit for
such taxes against your U.S. income tax, subject to certain limitations under
the Code. You will be informed by the Fund at the end of each calendar year
regarding the availability of any credits and the amount of foreign source
income (including any foreign taxes paid by the Fund) to be included on your
income tax returns.
The Fund will inform you of the source of its dividends and distributions at the
time they are paid and, after the close of each calendar year, will promptly
advise you of the tax status for federal income tax purposes of such dividends
and distributions.
If you are not considered a U.S. person for federal income tax purposes, you
should consult with your financial or tax advisor regarding the applicability of
U.S. withholding or other taxes to distributions received by you from the Fund
and the application of foreign tax laws to these distributions. You should also
consult your tax advisor with respect to the applicability of any state and
local intangible property or income taxes to your shares of the Fund and
distributions and redemption proceeds received from the Fund.
About Your Account
How Do I Buy Shares?
Opening Your Account
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. Please indicate which class of shares you want to buy. If you do not
specify a class, your purchase will be automatically invested in Class I shares.
MINIMUM INVESTMENTS*
To Open Your Account $100
To Add to Your Account $ 25
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares. Currently, the Fund does not allow investments by Market Timers.
Deciding Which Class to Buy
You should consider a number of factors when deciding which class of shares to
buy. If you plan to buy $1 million or more in a single payment or you qualify to
buy Class I shares without a sales charge, you may not buy Class II shares.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds; and
o you plan to sell a substantial number of your shares within approximately six
years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
Purchase Price of Fund Shares
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS I
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
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Deciding Which
Class to Buy."
Sales Charge Reductions and Waivers
- - If you qualify to buy shares under one of the sales charge reduction or
waiver categories described below, please include a written statement with each
purchase order explaining which privilege applies. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
Cumulative Quantity Discounts - Class I Only. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your Class I and Class II
shares in the Franklin Templeton Funds, as well as those of your spouse,
children under the age of 21 and grandchildren under the age of 21. If you are
the sole owner of a company, you may also add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
Letter of Intent - Class I Only. You may buy Class I 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 on Class I 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 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
Group Purchases - Class I Only. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
Sales Charge Waivers. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 4:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares reinvested were subject
to a Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
5. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within
the past 60 days, you may invest the proceeds without any sales charge if
(a) the investment objectives were similar to the Fund's, and (b) your
shares in that fund were subject to any front-end or contingent deferred
sales charges at the time of purchase. You must provide a copy of the
statement showing your redemption.
The Fund's sales charges will also not apply to Class I purchases by:
6. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following the order.
7. Group annuity separate accounts offered to retirement plans
8. Retirement plans that (i) are sponsored by an employer with at least 100
employees, (ii) have plan assets of $1 million or more, or (iii) agree to invest
at least $500,000 in the Franklin Templeton Funds over a 13 month period.
Retirement plans that are not Qualified Retirement Plans or SEPS, such as 403(b)
or 457 plans, must also meet the requirements described under "Group Purchases -
Class I Only" above.
9. An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is permissible and suitable
for you and the effect, if any, of payments by the Fund on arbitrage rebate
calculations.
10. Broker-dealers and qualified registered investment advisors who have entered
into a supplemental agreement with Distributors for their clients who are
participating in comprehensive fee programs, sometimes known as wrap fee
programs.
11. Registered Securities Dealers and their affiliates, for their investment
accounts only
12. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
13. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
14. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
15. Accounts managed by the Franklin Templeton Group
16. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
How Do I Buy Shares in Connection with Retirement Plans?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
Other Payments to Securities Dealers
The payments below apply to Securities Dealers who initiate and are responsible
for Class II purchases and certain Class I purchases made without a sales
charge. A Securities Dealer may only receive one of the following payments for
each qualifying purchase. The payments described below are paid by Distributors
or one of its affiliates, at its own expense, and not by the Fund or its
shareholders.
1. Securities Dealers may receive up to 1% of the purchase price for Class II
purchases. During the first year after the purchase, Distributors may keep a
part of the Rule 12b-1 fees associated with that purchase.
2. Securities Dealers will receive up to 1% of the purchase price for Class I
purchases of $1 million or more.
3. Securities Dealers may, in the sole discretion of Distributors, receive up to
1% of the purchase price for Class I purchases made under waiver category 8
above.
4. Securities Dealers may receive up to 0.25% of the purchase price for Class I
purchases made under waiver categories 6 and 9 above.
Please see "How Do I Buy, Sell and Exchange Shares - Other Payments to
Securities Dealers" in the SAI for any breakpoints that may apply.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. 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 NASD.
May I Exchange Shares for Shares of Another Fund?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums. Some
Franklin Templeton Funds do not offer Class II shares.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the
shares you're exchanging
By Phone Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone to
apply to your account, please let us know.
Through Your Dealer Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
Will Sales Charges Apply to My Exchange?
You generally will not pay a front-end sales charge on exchanges.
If you have held your shares less than six months, however, you will pay the
percentage difference between the sales charge you previously paid and the
applicable sales charge of the new fund. If you have never paid a sales charge
on your shares because, for example, they have always been held in a money fund,
you will pay the Fund's applicable sales charge no matter how long you have held
your shares. These charges may not apply if you qualify to buy shares without a
sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
Contingent Deferred Sales Charge - Class I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
Contingent Deferred Sales Charge - Class II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
CDSC, such as shares from the reinvestment of dividends and capital gains ("free
shares"), $2,000 in shares that are no longer subject to a CDSC because you have
held them for longer than 18 months ("matured shares"), and $3,000 in shares
that are still subject to a CDSC ("CDSC liable shares"). If you exchange $3,000
into a new fund, $500 will be exchanged from free shares, $1,000 from matured
shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. We believe the proportional method of exchanging Class II shares
more closely reflects the expectations of Class II shareholders if shares are
sold during the Contingency Period. The tax consequences of a sale or exchange
are determined by the Code and not by the method used by the Fund to transfer
shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
Exchange Restrictions
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class.
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically registered
money fund account requiring only one signature for all transactions. Please
notify us in writing if you do not want this option to be available on your
account(s). Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
How Do I Sell Shares?
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all account
owners
2. Include any outstanding share certificates for the
shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need
to send additional documents. Accounts under court\
jurisdiction may have additional requirements.
By Phone
(Only available if you have completed and sent to us the
telephone redemption agreement included with this prospectus)
Call Shareholder Services
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts may
exceed $50,000 by completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for the shares you want
to sell or you have already returned them to the Fund
o Unless you are selling shares in a Trust Company retirement plan
account
o Unless the address on your account was changed by phone within
the last 30 days
Through Your Dealer Call your investment representative
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
Trust Company Retirement Plan Accounts
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
Contingent Deferred Sales Charge
A Contingent Deferred Sales Charge may apply to Class I purchases of $1 million
or more if you sell all or a portion of the shares within one year and any Class
II purchase if you sell the shares within 18 months. The charge is 1% of the
value of the shares sold or the Net Asset Value at the time of purchase,
whichever is less. Distributors keeps the charge to recover payments made to
Securities Dealers.
We will first redeem shares not subject to the charge in the following order:
1) A calculated number of shares equal to the capital appreciation on shares
held less than the Contingency Period,
2) Shares purchased with reinvested dividends and capital gain distributions,
and
3) Shares held longer than the Contingency Period.
We then redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated dollar amount, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated number of shares, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
Waivers. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual balance of
$1 million in Class I shares, you can withdraw up to $120,000 annually through a
systematic withdrawal plan free of charge. Likewise, if you maintain an annual
balance of $10,000 in Class II shares, $1,200 may be withdrawn annually free of
charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to termination
or plan transfer
What Distributions Might I Receive From the Fund?
The Fund declares dividends from its net investment income semiannually in June
and December to shareholders of record on the first business day before the 15th
of the month and pays them on or about the last day of that month.
Capital gains, if any, may be distributed annually, usually in December.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of each class.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution.
Distribution Options
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy additional shares of the same
class 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. If you own Class II shares, you may also reinvest
your distributions in Class I shares of the Fund. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge). If
you own Class II shares, you may also direct your distributions to buy Class I
shares of another Franklin Templeton Fund. Many shareholders find this a
convenient way to diversify their investments.
3. Receive distributions in cash - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
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 you do not select an option, we will
automatically reinvest dividend and capital gain distributions in the same class
of the Fund. For Trust Company retirement plans, special forms are required to
receive distributions in cash. You may change your distribution option at any
time by notifying us by mail or phone. Please allow at least seven days prior to
the record date for us to process the new option.
Transaction Procedures and Special Requirements
How and When Shares Are Priced
The Fund is open for business each day the Exchange is open. We determine the
Net Asset Value per share of each class as of the scheduled close of the
Exchange, generally 1:00 p.m. Pacific time. You can find the prior day's closing
Net Asset Value and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.
The Price We Use When You Buy or Sell Shares
You buy shares at the Offering Price of the class you wish to purchase, unless
you qualify to buy shares at a reduced sales charge or with no sales charge. The
Offering Price of each class is based on the Net Asset Value per share of the
class and includes the maximum sales charge. We calculate it to two decimal
places using standard rounding criteria. You sell shares at Net Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
Proper Form
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
Written Instructions
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. You should
verify that the institution is an eligible guarantor prior to signing. A
notarized signature is not sufficient.
Share Certificates
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
Telephone Transactions
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
We may only be liable for losses resulting from unauthorized telephone
transactions if we do not follow reasonable procedures designed to verify the
identity of the caller. When you call, we will request personal or other
identifying information, and will also record calls. For your protection, we may
delay a transaction or not implement one if we are not reasonably satisfied that
telephone instructions are genuine. If this occurs, we will not be liable for
any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by telephone, we will not be liable for any loss.
Trust Company Retirement Plan Accounts. You may not sell shares or change
distribution options on Trust Company retirement plans by phone. While you may
exchange shares of Trust Company IRA and 403(b) retirement accounts by phone,
certain restrictions may be imposed on other retirement plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
Account Registrations and Required Documents
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
Joint Ownership. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Trusts. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
Required Documents. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
Corporation Corporate Resolution
Partnership 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
Trust 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
Street or Nominee Accounts. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
Electronic Instructions. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We can accept electronic instructions directly from your dealer or
representative without further inquiry. Electronic instructions may be processed
through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(R) System.
Tax Identification Number
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
Services to Help You Manage Your Account
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can 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
included with this prospectus or contact your investment representative. 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
discontinue the program at any time by notifying Investor Services by mail or
phone.
Automatic Payroll Deduction
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
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 direct your payments to buy the same class of shares of another
Franklin Templeton Fund or 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.
You will generally receive your payment by the fifth business day of the month
in which a payment is scheduled. When you sell your shares under a systematic
withdrawal plan, it is a taxable transaction.
Because of the front-end sales charge, you may not want to set up a systematic
withdrawal plan if you plan to buy shares on a regular basis. Shares sold under
the plan may also be subject to a Contingent Deferred Sales Charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
Electronic Fund Transfers
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with 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. We will send any payments made during that time to the
address of record on your account.
TeleFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/24753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips.
You will need the code number for each class to use TeleFACTS. The code numbers
for Class I and Class II are 197 and 297.
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. Please verify the
accuracy of your statements when you receive them.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
Institutional Accounts
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. For further information, call Institutional
Services.
Availability of These Services
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you.
Please contact your investment representative.
What If I Have Questions About My Account?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
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.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
Glossary
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
CD - Certificate of deposit
Class I and Class II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
Code - Internal Revenue Code of 1986, as amended
Contingency Period - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
Contingent Deferred Sales Charge (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
Eligible Governmental Authority - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
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., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
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.
NASD - National Association of Securities Dealers, Inc.
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.
NSCC - National Securities Clearing Corporation
Offering Price - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
Qualified Retirement Plan(s) - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
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
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or another wholly owned
subsidiary of Resources.
Prospectus & Application
Franklin Small Cap
Growth Fund
INVESTMENT STRATEGY
GROWTH
September 1, 1996
Franklin Strategic Series
This prospectus describes the Franklin Small Cap Growth Fund (the "Fund"). It
contains information you should know before investing in the Fund. Please keep
it for future reference.
The Fund's SAI, dated September 1, 1996, as may be amended from time to time,
includes more information about the Fund's procedures and policies. It has been
filed with the SEC and is incorporated by reference into this prospectus. For a
free copy or a larger print version of this prospectus, call 1-800/DIAL BEN or
write the Fund at the address shown.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Shares of the Fund involve investment risks, including the possible
loss of principal.
LIKE ALL MUTUAL FUNDS, 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.
The Fund may invest in both domestic and foreign securities.
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.
The Fund may invest in both domestic and foreign securities.
Franklin Small Cap Growth Fund
Franklin
Small Cap
Growth Fund
September 1, 1996
When reading this prospectus, you will see certain terms in capital
letters. This means the term is
explained in our glossary section.
Table of Contents
About the Fund
Expense Summary............................. 2
Financial Highlights........................ 3
How Does the Fund Invest Its Assets?........ 5
What Are the Fund's Potential Risks?........ 12
Who Manages the Fund?....................... 15
How Does the Fund Measure Performance?...... 17
How Is the Trust Organized?................. 17
How Taxation Affects You and the Fund....... 18
About Your Account
How Do I Buy Shares?........................ 19
May I Exchange Shares for Shares of Another Fund? 26
How Do I Sell Shares?....................... 28
What Distributions Might I Receive From the Fund? 31
Transaction Procedures and Special Requirements 32
Services to Help You Manage Your Account.... 36
Glossary
Useful Terms and Definitions................ 39
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
About the Fund
Expense Summary
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of each class for the fiscal year
ended April 30, 1996. Your actual expenses may vary.
Class I Class II
A. Shareholder Transaction Expenses+
Maximum Sales Charge Imposed on Purchases
(as a percentage of Offering Price) 4.50% 1.00%++
Deferred Sales Charge+++ None 1.00%
B. Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.57%* 0.57%*
Rule 12b-1 Fees 0.21%** 1.00%**
Other Expenses 0.22% 0.22%
Total Fund Operating Expenses 1.00%* 1.79%*
C. Example
Assume the annual return for each class is 5% and operating expenses are as
described above. For each $1,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.
1 Year 3 Years 5 Years 10 Years
Class I $54*** $75 $ 96 $159
Class II $38 $65 $104 $215
For the same Class II investment, you would pay projected expenses of $28 if
you did not sell your shares at the end of the first year. Your projected
expenses for the remaining periods would be the same.
This is just an example. It does not represent past or future expenses or
returns. Actual expenses and returns may be more or less than those shown. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of each class and are not directly charged to
your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? - Deciding Which Class to Buy." +++A Contingent
Deferred Sales Charge of 1% may apply to Class I purchases of $1 million or more
if you sell the shares within one year and any Class II purchase if you sell the
shares within 18 months. There is no front-end sales charge if you invest $1
million or more in Class I shares. See "How Do I Sell Shares? - Contingent
Deferred Sales Charge" for details.
*Advisers has agreed in advance to limit its management fees and make certain
payments to reduce the Fund's expenses. With this reduction, management fees
were 0.54% and total operating expenses for Class I and Class II were 0.97% and
1.76%.
** These fees may not exceed 0.25% for Class I. 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 charge permitted
under the NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
Financial Highlights
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report appears in the financial statements in the Trust's Annual Report to
Shareholders for the fiscal year ended April 30, 1996. The Annual Report to
Shareholders also includes more information about the Fund's performance. For a
free copy, please call Fund Information.
<TABLE>
<CAPTION>
Class I Shares
Year Ended April 30 1996 1995 1994 1993 1992++
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net Asset Value at Beginning of Year $14.90 $12.75 $10.22 $9.58 $10.00
Net Investment Income 0.01 0.03 0.03 0.07 0.04
Net Realized & Unrealized
Gain (Loss) on Securities 6.230 3.138 2.944 0.657 (0.460)
Total From Investment Operations 6.240 3.168 2.974 0.727 (0.420)
Distributions From Net Investment Income (0.014) (0.021) (0.043) (0.087) -
Distributions From Capital Gains (1.376) (0.997) (0.401) - -
Total Distributions (1.390) (1.018) (0.444) (0.087) -
Net Asset Value at End of Year $19.75 $14.90 $12.75 $10.22 $9.58
Total Return* 44.06% 27.05% 29.26% 7.66% (19.96)%**
Ratios/Supplemental Data
Net Assets at End of Year (in 000's) $444,912 $63,010 $23,915 $6,026 $1,268
Ratio of Expenses to Average Net Assets***0.97% 0.69% 0.30% - -
Ratio of Net Investment Income
to Average Net Assets 0.09%** 0.25% 0.24% 0.84% 2.45%**
Portfolio Turnover Rate 87.92% 104.84% 89.60% 63.15% 2.41%
Average Commission Rate+ 0.505 - - - -
</TABLE>
Class II Shares
Year Ended April 30 1996+++
Per Share Operating Performance
Net Asset Value at Beginning of Year $17.94
Net Investment Income (0.03)
Net Realized & Unrealized
Gain (Loss) on Securities 2.714
Total From Investment Operations 2.684
Distributions From Net Investment Income -
Distributions From Capital Gains (0.964)
Total Distributions (0.964)
Net Asset Value at End of Year $19.66
Total Return* 15.98%
Ratios/Supplemental Data
Net Assets at End
of Period (in 000's) $24,102
Ratio of Expenses to
Average Net Assets*** 1.76%**
Ratio of Net Investment
Income to Average Net Assets (0.69)%**
Portfolio Turnover Rate 87.92%
Average Commission Rate+ 0.505
+Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
++For the period February 14, 1992 (effective date) to April 30, 1992.
+++For the period October 1, 1995 to April 30, 1996.
*Total return measures the change in value of an investment over the periods
indicated. It is not annualized except where indicated. It does not include the
maximum front-end sales charge or Contingent Deferred Sales Charge, and assumes
reinvestment of dividends and capital gains, if any, at Net Asset Value.
**Annualized
***During the periods indicated, Advisers agreed in advance to waive a portion
of its management fees and made payments of other expenses incurred by the Fund.
Had such action not been taken, the ratios of expenses to average net assets
would have been as follows:
Ratio of expenses
to average net assets
1992 1.74%++,**
1993 1.95
1994 1.58
1995 1.16
1996 1.00
How Does the Fund Invest Its Assets?
The Fund's Investment Objective
The Fund's investment objective is long-term capital growth. 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 seeks to achieve its objective by investing primarily in equity
securities of small capitalization growth companies. Small capitalization growth
companies typically are companies with relatively small market capitalization
which Advisers believes to be positioned for rapid growth in revenues or
earnings and assets, characteristics that may provide for significant capital
appreciation. Small companies often pay no dividends and current income is not a
factor in the selection of stocks. In general, companies in which the Fund will
invest have a market capitalization of less than $1 billion at the time of the
Fund's investment. Market capitalization is defined as the total market value of
a company's outstanding common stock. The securities of small capitalization
companies are traded on the New York and American stock exchanges and in the
over-the-counter market.
Types of Securities the Fund May Invest In
Under normal market conditions, the Fund will invest at least 65% of its total
assets in equity securities of small capitalization growth companies. Equity
securities of these companies consist of common stock, preferred stock, warrants
for the purchase of common stock and debt securities convertible into or
exchangeable for common or preferred stock. A warrant is a security that gives
the holder the right, but not the obligation, to subscribe for newly created
securities of the issuer or a related company at a fixed price either at a
certain date or during a set period. A convertible security is a security that
may be converted either at a stated price or rate within a specified period of
time into a specified number of shares of common or preferred stock. By
investing in convertible securities, the Fund seeks to participate in the
capital appreciation of the common stock into which the securities are
convertible through the conversion feature.
In addition, the Fund seeks to invest at least one-third of its assets in
companies with a market capitalization of $550 million or less. There is no
assurance, however, that it will always be able to find suitable companies to
include in this one-third portion. Advisers will monitor the availability of
securities suitable for investment by the Fund and recommend appropriate action
to the Board if it appears that the goal of investing one-third of the Fund's
assets in companies with market capitalization of $550 million or less may not
be attainable under the Fund's current objective and policies. The Board will
review the availability of suitable investments quarterly, including Advisers'
assessment of the availability of suitable investments. Advisers will also
present to the Board Advisers' views and recommendations regarding the Fund's
ability to meet this goal in the future. If the Board should determine, based
upon one or more quarterly periods, that under the circumstances it is not
likely that sufficient suitable investments will be available to permit the Fund
to meet its goal of investing one-third of its assets in companies with market
capitalization of $550 million or less, it may determine to take appropriate
remedial action. Any changes will be consistent with the requirements of the
1940 Act and the rules adopted thereunder.
Although the Fund's assets will be invested primarily in equity securities of
small companies, the Fund may invest up to 35% (measured at the time of
purchase) of its total assets in equity securities of larger capitalization
companies which Advisers believes have strong growth potential, in relatively
well-known, larger companies in mature industries which Advisers believes have
the potential for capital appreciation, or in corporate debt securities
including bonds, notes and debentures, if the Fund deems the investment to
present a favorable investment opportunity consistent with the Fund's objective.
The Fund may invest in debt securities which Advisers believes have the
potential for capital appreciation as a result of improvement in the
creditworthiness of the issuer. The receipt of income from such debt securities
is incidental to the Fund's investment objective of capital growth. The Fund
will invest in debt securities rated B or above by Moody's Investors Service
("Moody's") or Standard & Poor's Corporation ("S&P"), or in securities which are
unrated if, in Advisers opinion, the securities are comparable in quality to
securities rated B or above by Moody's or S&P. The Fund will not invest more
than 5% of its assets in debt securities rated lower than BBB or Baa. Securities
rated B are regarded, on balance, as predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation. For a description of ratings, please see the appendix
in the SAI.
The Fund may also invest in short-term money market instruments for liquidity
purposes to meet redemption requirements. Short-term investments that the Fund
may hold include U.S. government securities, CDs, high grade commercial paper
and repurchase agreements.
The Fund has been designed to provide investors with potentially greater
long-term rewards by investing in securities of small companies that may offer
greater potential for capital appreciation since they are often overlooked by
investors or undervalued in relation to their earnings power. Small companies
generally are not as well known to the investing public and have less of an
investor following than larger companies, and therefore may provide greater
opportunities for long-term capital growth as a result of relative
inefficiencies in the marketplace. These companies may be undervalued because
they are part of an industry that is out of favor with investors, although the
individual companies may have high rates of earning growth and be financially
sound. Selection of small company equity securities for the Fund will be based
on characteristics such as the financial strength of the company, the expertise
of management, the growth potential of the company within its industry and the
growth potential of the industry itself.
Foreign Securities. The Fund may invest up to 25% of its total assets in foreign
securities, including those of developing or undeveloped markets, and sponsored
or unsponsored American Depositary Receipts ("ADRs"), which are certificates
issued by U.S. banks representing the right to receive securities of a foreign
issuer deposited with that bank or a correspondent bank.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with applicable U.S. and foreign currency
restrictions and other laws limiting the amount and types of foreign
investments. Investments may be in securities of foreign issuers located in both
developed or undeveloped countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents.
Securities that are acquired by the Fund outside the U.S. and that are publicly
traded in the U.S. or on a foreign securities exchange or in a foreign
securities market are not considered to be an illiquid asset so long as the Fund
acquires and holds the security with the intention of reselling the security in
the foreign trading market, the Fund reasonably believes it can readily dispose
of the security for cash in the U.S. or foreign market, and current market
quotations are readily available.
Other Investment Policies of the Fund
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 that such loans do not exceed 20% 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 collateral 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 the cash collateral in short-term
interest bearing obligations or by receiving a loan premium from the borrower.
Under the securities loan agreement, the Fund continues to be entitled to all
dividends or interest on any loaned securities. As with any extension of credit,
there are risks of delay in recovery and loss of rights in the collateral should
the borrower of the security fail financially.
Borrowing. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of its assets, except that the Fund may enter into reverse
repurchase agreements or borrow from banks up to 10% of its total asset value to
meet redemption requests and for other temporary or emergency purposes. While
borrowings exceed 5% of the Fund's total assets, the Fund will not make any
additional investments.
Securities Industry Related Investments. To the extent it is consistent with the
Fund's investment objective and certain limitations under the 1940 Act, the Fund
may invest its assets in securities issued by companies engaged in securities
related businesses, including companies that are securities brokers, dealers,
underwriters or investment advisors. These companies are considered part of the
financial services industry sector. The Fund does not believe that these
limitations will impede the attainment of its investment objective.
Short-Term Investments. The Fund may invest its cash, including cash resulting
from purchases and sales of Fund shares, temporarily in short-term debt
instruments, including high grade commercial paper, repurchase agreements and
other money market equivalents and the shares of money market funds managed by
Advisers which invest primarily in short-term debt securities. These temporary
investments will only be made with cash held to maintain liquidity or pending
investment. In addition, for temporary defensive purposes in the event of, or
when Advisers anticipates, a general decline in the market prices of stocks in
which the Fund invests, the Fund may invest an unlimited amount of its assets in
short-term debt instruments.
Options and Financial Futures. The Fund may write (sell) covered put and call
options and buy put and call options on securities and indices that trade on
securities exchanges and in the over-the-counter market. The Fund may buy and
sell futures and options on futures with respect to securities, indices and
currencies. Additionally, the Fund may sell futures and options to "close out"
futures and options it may have purchased and it may buy futures and options to
"close out" futures and options it may have sold. The Fund will not enter into
any futures contract or related options (except for closing transactions) if,
immediately thereafter, the sum of the amount of its initial deposits and
premiums on open contracts and options would exceed 5% of the Fund's total
assets (taken at current value). The Fund will not engage in any stock options
or stock index options if the option premiums paid regarding its open option
positions exceed 5% of the value of the Fund's total assets.
The Fund's option and futures investments may be limited by the requirements of
the Code for qualification as a regulated investment company and may reduce the
portion of the Fund's dividends that is eligible for the corporate
dividends-received deduction. These transactions are also subject to special tax
rules that may affect the amount, timing and character of certain distributions
to shareholders. Please see "Additional Information on Distributions and Taxes"
in the SAI.
The Fund understands the current position of the staff of the SEC to be that
purchased OTC options are illiquid securities and that the assets used to cover
the sale of an OTC option are considered illiquid. The Fund and Advisers
disagree with this position. Nevertheless, pending a change in the staff's
position, the Fund will treat OTC options and "cover" assets as subject to the
Fund's limitation on illiquid securities. Please see "Illiquid Investments"
below.
Warrants and Rights. The Fund may invest up to 5% of its total assets in
warrants or rights (other than those acquired in units or attached to other
securities) which entitle the holder to buy equity securities at a specific
price during or at the end of a specific period of time. The Fund will not
invest more than 2% of its total assets in warrants or rights which are not
listed on the New York or American stock exchanges.
Repurchase Agreements. The Fund may engage in repurchase transactions in which
the Fund buys a U.S. government security subject to resale to a bank or dealer
at an agreed-upon price and date. The transaction requires the collateralization
of the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller might cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund might
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks which are deemed creditworthy by Advisers. A
repurchase agreement is deemed to be a loan by the Fund under the 1940 Act. The
U.S. government security subject to resale (the collateral) will be held on
behalf of the Fund by a custodian approved by the Board and will be held
pursuant to a written agreement.
The Fund may also enter into reverse repurchase agreements. These agreements
involve the sale of securities held by the Fund pursuant to an agreement to
repurchase the securities at an agreed-upon price, date and interest payment.
When effecting reverse repurchase transactions, cash or high grade liquid debt
securities of a dollar amount equal in value to the Fund's obligation under the
agreement, including accrued interest, will be maintained in a segregated
account with the Fund's custodian bank, and the securities subject to the
reverse repurchase agreement will be marked-to-market each day. Although reverse
repurchase agreements are borrowings under the 1940 Act, the Fund does not treat
these arrangements as borrowings under investment restriction 3 in the SAI so
long as the segregated account is properly maintained.
Convertible Securities. The Fund may invest in convertible securities. A
convertible security is generally a debt obligation or preferred stock that may
be converted within a specified period of time into a certain amount of common
stock of the same or a different issuer. A convertible security provides a
fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance in
its underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Like a common stock, the
value of a convertible security also tends to increase as the market value of
the underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because its value can be influenced by both interest
rate and market movements, a convertible security is not as sensitive to
interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the Fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the Fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
The Fund may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stocks ("PERCS"), which
provide an investor, such as the Fund, with the opportunity to earn higher
dividend income than is available on a company's common stock. PERCS are
preferred stocks that generally feature a mandatory conversion date, as well as
a capital appreciation limit which is usually expressed in terms of a stated
price. Most PERCS expire three years from the date of issue, at which time they
are convertible into common stock of the issuer. PERCS are generally not
convertible into cash at maturity. Under a typical arrangement, after three
years PERCS convert into one share of the issuer's common stock if the issuer's
common stock is trading at a price below that set by the capital appreciation
limit, and into less than one full share if the issuer's common stock is trading
at a price above that set by the capital appreciation limit. The amount of that
fractional share of common stock is determined by dividing the price set by the
capital appreciation limit by the market price of the issuer's common stock.
PERCS can be called at any time prior to maturity, and hence do not provide call
protection. If called early, however, the issuer must pay a call premium over
the market price to the investor. This call premium declines at a preset rate
daily, up to the maturity date.
The Fund may also invest in other enhanced convertible securities. These include
but are not limited to ACES (Automatically Convertible Equity Securities), PEPS
(Participating Equity Preferred Stock), PRIDES (Preferred Redeemable Increased
Dividend Equity Securities), SAILS (Stock Appreciation Income Linked
Securities), TECONS (Term Convertible Notes), QICS (Quarterly Income Cumulative
Securities), and DECS (Dividend Enhanced Convertible Securities). ACES, PEPS,
PRIDES, SAILS, TECONS, QICS, and DECS all have the following features: they are
issued by the company, the common stock of which will be received in the event
the convertible preferred stock is converted, unlike PERCS they do not have a
capital appreciation limit, they seek to provide the investor with high current
income with some prospect of future capital appreciation, they are typically
issued with three to four-year maturities, they typically have some built-in
call protection for the first two to three years, investors have the right to
convert them into shares of common stock at a preset conversion ratio or hold
them until maturity, and upon maturity they will automatically convert to either
cash or a specified number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked as
senior or subordinated debt in the issuer's corporate structure according to the
terms of the debt indenture. There may be additional types of convertible
securities not specifically referred to herein which may be similar to those
described above in which a Fund may invest, consistent with its objectives and
policies.
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
generally securities that cannot be sold within seven days in the normal course
of business at approximately the amount at which the Fund has valued them. The
Board has authorized the Fund to invest in restricted securities (securities not
registered with the SEC, which might otherwise be considered illiquid) where
such investment is consistent with the Fund's investment objective and has
authorized these securities to be considered liquid (and thus not subject to the
foregoing 10% limitation), to the extent Advisers determines on a daily basis
that there is a liquid institutional or other market for these securities.
Notwithstanding Advisers determination in this regard, the Board will remain
responsible for these determinations and will consider appropriate action,
consistent with the Fund's objective and policies, if a security should become
illiquid after its purchase. In this regard, if qualified institutional buyers
are no longer interested in buying restricted securities previously designated
as liquid or if the market for these securities contracts, these securities will
be redesignated as illiquid and subject to the 10% limitation. See "How Does the
Fund Invest Its Assets? - Illiquid Securities" in the SAI.
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 net
assets will not be considered a violation of any of the foregoing policies.
Other Policies and Restrictions. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How Does the Fund Invest Its Assets?" and "Investment Restrictions" in the
SAI.
What Are the Fund's Potential Risks?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock market as a whole.
Smaller Companies. The Fund may invest in relatively new or unseasoned companies
that are in their early stages of development, or small companies positioned in
new and emerging industries where the opportunity for rapid growth is expected
to be above average. Securities of unseasoned companies present greater risks
than securities of larger, more established companies. The Fund may not invest
more than 10% of its net assets in securities of issuers with less than three
years continuous operation. The companies in which the Fund may invest may have
relatively small revenues, limited product lines, and may have a small share of
the market for their products or services. Small companies may lack depth of
management, they may be unable to internally generate funds necessary for growth
or potential development or to generate such funds through external financing on
favorable terms, or they may be developing or marketing new products or services
for which markets are not yet established and may never become established. Due
to these and other factors, small companies may suffer significant losses as
well as realize substantial growth, and investments in small companies tend to
be volatile and are therefore speculative.
Historically, small capitalization stocks have been more volatile in price than
larger capitalization stocks. Among the reasons for the greater price volatility
of these securities are the less certain growth prospects of smaller firms, the
lower degree of liquidity in the markets for such stocks, and the greater
sensitivity of small companies to changing economic conditions. Besides
exhibiting greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks. Small company stocks may decline in
price as large company stocks rise, or rise in price as large company stocks
decline. You should therefore expect that the value of the Fund's shares may be
more volatile than the shares of a fund that invests in larger capitalization
stocks.
The Fund should not be considered suitable for investors who are unable or
unwilling to assume the risks of loss inherent in such a program, nor should
investment in the Fund be considered a balanced or complete investment program.
Foreign Securities. Investing in securities of foreign issuers involves risks
that are not typically associated with investing in U.S. dollar denominated
securities or in securities of domestic issuers. These risks can be
significantly greater for investments in emerging markets. These risks, which
may involve possible losses, include political, social or economic instability
in the country of the issuer, the difficulty of predicting international trade
patterns, the possibility of the imposition of exchange controls, expropriation,
limits on removal of currency or other assets, foreign investment controls on
daily stock market movements, nationalization of assets, foreign withholding and
income taxation and foreign trading practices (including higher trading
commissions, custodial charges and delayed settlements). Changes of governmental
administrations or of economic or monetary policies, in the U.S. or abroad, or
changed circumstances in dealings between nations or currency convertibility or
exchange rates could result in investment losses for the Fund. In addition,
there may be less publicly available information about a foreign company than
about a U.S. domiciled company. Foreign companies generally are not subject to
uniform accounting, auditing and financial reporting standards comparable to
those applicable to U.S. domestic companies. The Fund may also encounter
difficulties or be unable to vote proxies, exercise shareholder rights, pursue
legal remedies and obtain judgments in foreign courts. There is generally less
government supervision and regulation of business and industry practices,
securities exchanges, brokers and listed companies abroad than in the U.S.
Options and Financial Futures. The Fund's option and futures investments involve
certain risks. These risks include the risk that the effectiveness of an options
and futures strategy depends on the degree to which price movements in the
underlying index, securities or currencies correlate with price movements in the
relevant portion of the Fund's portfolio. The Fund bears the risk that the
prices of its portfolio securities will not move in the same amount as the
option or future it has purchased, or that there may be a negative correlation
which would result in a loss on both the securities and the option or future.
Positions in exchange traded options and futures may be closed out only on an
exchange that provides a secondary market. There may not always be a liquid
secondary market for a futures or option contract at a time when the Fund seeks
to "close out" its position. If the Fund were unable to "close out" a futures or
option position, and if prices moved adversely, the Fund would have to continue
to make daily cash payments to maintain its required margin, and if the Fund had
insufficient cash, it might have to sell portfolio securities at a
disadvantageous time. In addition, the Fund might be required to deliver the
stocks underlying futures or option contracts it holds.
Over-the-counter ("OTC") options may not be closed out on an exchange and the
Fund may be able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer that
issued it. There can be no assurance that a liquid secondary market will exist
for any particular option or futures contract at any specific time. Thus, it may
not be possible to close such an option or futures position. The Fund will enter
into an option or futures position only if there appears to be a liquid
secondary market for such option or futures.
Adverse market movements could cause the Fund to lose up to its full investment
in a call option contract and/or to experience substantial losses on an
investment in a futures contract. There is also the risk of loss by the Fund of
margin deposits in the event of bankruptcy of a broker with whom the Fund has an
open position in a futures contract or option. Options, futures and options on
futures are generally considered "derivative securities." Derivatives are
broadly defined as financial instruments whose performance is derived, at least
in part, from the performance of an underlying asset, such as stock prices or
indices of securities, interest rates, currency exchange rates, or commodity
prices. Please see "How Does the Fund Invest Its Assets? - Options, Futures and
Options on Financial Futures" in the SAI for more information on the Fund's
investments in options and futures, including the risks associated with these
activities.
Enhanced Convertible Securities. An investment in an enhanced convertible
security or any other security may involve additional risks to the Fund. The
Fund may have difficulty disposing of such securities because there may be a
thin trading market for a particular security at any given time. Reduced
liquidity may have an adverse impact on market price and the Fund's ability to
dispose of particular securities, when necessary, to meet the Fund's liquidity
needs or in response to a specific economic event, such as the deterioration in
the credit worthiness of an issuer. Reduced liquidity in the secondary market
for certain securities may also make it more difficult for the Fund to obtain
market quotations based on actual trades for purposes of valuing the Fund's
portfolio. The Fund, however, intends to acquire liquid securities, though there
can be no assurances that this will be achieved.
Market and Currency Risk. If there is a general market decline in any country
where the Fund is invested, the Fund's share price may also decline. Changes in
currency valuations will also affect the price of Fund shares. The value of
worldwide stock markets and currency valuations has increased and decreased in
the past. These changes are unpredictable and may happen again in the future.
Who Manages the Fund?
The Board. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
two classes of shares. While none is expected, the Board will act appropriately
to resolve any material conflict that may arise.
Investment Manager. Advisers is the investment manager of the Fund and other
funds with aggregate assets of over $81 billion. It is wholly owned by
Resources, a publicly owned company engaged in the financial services industry
through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the
principal shareholders of Resources.
Management Team. The team responsible for the day-to-day management of the
Fund's portfolio is: Mr. Jamieson and Mr. Moore since inception and Mr. McCarthy
since March 1993.
Edward B. Jamieson
Senior Vice President of Advisers
Mr. Jamieson holds a Master's degree in accounting and finance from the
University of Chicago Graduate School of Business and a Bachelor of Arts degree
from Bucknell University. He has been with Advisers since 1987. Mr. Jamieson is
a member of several securities industry-related committees and associations.
Nicholas Moore
Portfolio Manager of Advisers
Mr. Moore holds a Bachelor of Science degree in business administration from
Menlo College. He has been with Advisers since 1989.
Michael McCarthy
Portfolio Manager of Advisers
Mr. McCarthy holds a Bachelor of Arts degree in history from the University of
California at Los Angeles. He has been with Franklin since 1992.
Services Provided by Advisers. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also provides certain administrative services and
facilities for the Fund and performs similar services for other funds. Please
see "Investment Advisory and Other Services" and "Miscellaneous Information" in
the SAI for information on securities transactions and a summary of the Fund's
Code of Ethics.
Management Fees. During the fiscal year ended April 30, 1996, management fees,
before any advance waiver, totaled 0.57% of the average daily net assets of the
Fund. Total operating expenses for Class I and Class II totaled 1.00% and 1.79%.
Under an agreement by Advisers to limit its fees, the Fund paid management fees
totaling 0.54% and operating expenses totaling 0.97% and 1.76% for Class I and
Class II. Advisers may end this arrangement at any time upon notice to the
Board.
Portfolio Transactions. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares when selecting a broker or dealer. Please see "How Does the Fund
Buy Securities For Its Portfolio?" in the SAI for more information.
The Rule 12b-1 Plans
Each class has a distribution plan or "Rule 12b-1 Plan" under which it may pay
or reimburse Distributors or others for activities primarily intended to sell
shares of the class. These expenses may include, among others, distribution or
service fees paid to Securities Dealers or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates, printing prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and advertisements, and a prorated portion of Distributors' overhead expenses.
Payments by the Fund under the Class I plan may not exceed 0.25% per year of
Class I's average daily net assets. All distribution expenses over this amount
will be borne by those who have incurred them.
Under the Class II plan, the Fund may pay Distributors up to 0.75% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the Class II
purchase.
The Fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
How Does the Fund Measure Performance?
From time to time, each class of the Fund advertises its performance. The more
commonly used measures of performance are total return, current yield and
current distribution rate. Performance figures are usually calculated using the
maximum sales charge, but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of each class will vary. Performance figures are always
based on past performance and do not indicate future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How Does the Fund Measure Performance?" in the SAI.
How Is the Fund Organized?
The Fund is a diversified series of Franklin Strategic Series (the "Trust"), an
open-end management investment company, commonly called a mutual fund. It was
organized as a Delaware business trust on January 25, 1991, and is registered
with the SEC under the 1940 Act. The Fund began offering two classes of shares
on October 2, 1995: Franklin Small Cap Growth Fund - Class I and Franklin Small
Cap Growth Fund - Class II. All shares purchased before that time are considered
Class I shares. Additional classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state business trust law, or (3) required
to be voted on separately by the 1940 Act. Shares of each class of a series have
the same voting and other rights and preferences as the other classes and series
of the Trust for matters that affect the Trust as a whole. In the future,
additional series may be offered.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
electing or removing members of the Board.
How Taxation Affects You and the Fund
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund intends to continue to qualify 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.
For federal income tax purposes, any income dividends which 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.
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 Fund shares and regardless of whether you receive
distributions 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 you received
them on December 31 of the calendar year in which they are declared.
For corporate shareholders, 1.75% of the ordinary income distributions
(including short-term capital gain distributions) paid by the Fund for the
fiscal year ended April 30, 1996 qualified for the corporate dividends-received
deduction, subject to certain holding period and debt financing restrictions
imposed under the Code on the corporation claiming the deduction. These
restrictions are discussed in the SAI.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred 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 received with respect to such shares.
All or a portion of the sales charge incurred in buying 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
of the Franklin Templeton Funds and a sales charge which would otherwise apply
to the reinvestment is reduced or eliminated. Any portion of the 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.
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 such dividends
and distributions.
If you are not considered a U.S. person for federal income tax purposes, you
should consult with your financial or tax advisor regarding the applicability of
U.S. withholding or other taxes on distributions received by you from the Fund
and the application of foreign tax laws to these distributions. You should also
consult your tax advisor with respect to the applicability of any state and
local intangible property or income taxes to your shares of the Fund and
distributions and redemption proceeds received from the Fund.
About Your Account
How Do I Buy Shares?
Opening Your Account
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. Please indicate which class of shares you want to buy. If you do not
specify a class, your purchase will be automatically invested in Class I shares.
Minimum
Investments*
To Open Your Account $100
To Add to Your Account $ 25
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares. Currently, the Fund does not allow investments by Market Timers.
Deciding Which Class to Buy
You should consider a number of factors when deciding which class of shares to
buy. If you plan to buy $1 million or more in a single payment or you qualify to
buy Class I shares without a sales charge, you may not buy Class II shares.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds; and
o you plan to sell a substantial number of your shares within approximately six
years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
Purchase Price of Fund Shares
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
Total Sales Charge Amount Paid
as a Percentage of to Dealer as a
Amount of Purchase Offering Net Amount Percentage of
at Offering Price Price Invested Offering Price
CLASS I
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
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Deciding Which
Class to Buy."
Sales Charge Reductions and Waivers
- - If you qualify to buy shares under one of the sales charge reduction or
waiver categories described below, please include a written statement with each
purchase order explaining which privilege applies. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
Cumulative Quantity Discounts - Class I Only. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your Class I and Class II
shares in the Franklin Templeton Funds, as well as those of your spouse,
children under the age of 21 and grandchildren under the age of 21. If you are
the sole owner of a company, you may also add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
Letter of Intent - Class I Only. You may buy Class I 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 on Class I 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 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see
"How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or call
Shareholder Services.
Group Purchases - Class I Only. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
o A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
Sales Charge Waivers. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 4:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares reinvested were subject
to a Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
5. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within
the past 60 days, you may invest the proceeds without any sales charge if (a)
the investment objectives were similar to the Fund's, and (b) your shares in
that fund were subject to any front-end or contingent deferred sales charges at
the time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to Class I purchases by:
6. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following the order.
7. Group annuity separate accounts offered to retirement plans
8. Retirement plans that (i) are sponsored by an employer with at least 100
employees, (ii) have plan assets of $1 million or more, or (iii) agree to invest
at least $500,000 in the Franklin Templeton Funds over a 13 month period.
Retirement plans that are not Qualified Retirement Plans or SEPS, such as 403(b)
or 457 plans, must also meet the requirements described under "Group Purchases -
Class I Only" above.
9. An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is permissible and suitable
for you and the effect, if any, of payments by the Fund on arbitrage rebate
calculations.
10. Broker-dealers and qualified registered investment advisors who have entered
into a supplemental agreement with Distributors for their clients who are
participating in comprehensive fee programs, sometimes known as wrap fee
programs.
11. Registered Securities Dealers and their affiliates, for their investment
accounts only
12. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
13. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
14. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
15. Accounts managed by the Franklin Templeton Group
16. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
How Do I Buy Shares in Connection with Retirement Plans?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
Other Payments to Securities Dealers
The payments below apply to Securities Dealers who initiate and are responsible
for Class II purchases and certain Class I purchases made without a sales
charge. A Securities Dealer may only receive one of the following payments for
each qualifying purchase. The payments described below are paid by Distributors
or one of its affiliates, at its own expense, and not by the Fund or its
shareholders.
1. Securities Dealers may receive up to 1% of the purchase price for Class II
purchases. During the first year after the purchase, Distributors may keep a
part of the Rule 12b-1 fees associated with that purchase.
2. Securities Dealers will receive up to 1% of the purchase price for Class I
purchases of $1 million or more.
3. Securities Dealers may, in the sole discretion of Distributors, receive up to
1% of the purchase price for Class I purchases made under waiver category 8
above.
4. Securities Dealers may receive up to 0.25% of the purchase price for Class I
purchases made under waiver categories 6 and 9 above.
Please see "How Do I Buy, Sell and Exchange Shares - Other Payments to
Securities Dealers" in the SAI for any breakpoints that may apply.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. 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 NASD.
May I Exchange Shares for Shares of Another Fund?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums. Some
Franklin Templeton Funds do not offer Class II shares.
Method Steps to Follow
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you're exchanging
By Phone Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone to
apply to your account, please let us know.
Through Your Dealer Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
Will Sales Charges Apply to My Exchange?
You generally will not pay a front-end sales charge on exchanges.
If you have held your shares less than six months, however, you will pay the
percentage difference between the sales charge you previously paid and the
applicable sales charge of the new fund. If you have never paid a sales charge
on your shares because, for example, they have always been held in a money fund,
you will pay the Fund's applicable sales charge no matter how long you have held
your shares. These charges may not apply if you qualify to buy shares without a
sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
Contingent Deferred Sales Charge - Class I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
Contingent Deferred Sales Charge - Class II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
CDSC, such as shares from the reinvestment of dividends and capital gains ("free
shares"), $2,000 in shares that are no longer subject to a CDSC because you have
held them for longer than 18 months ("matured shares"), and $3,000 in shares
that are still subject to a CDSC ("CDSC liable shares"). If you exchange $3,000
into a new fund, $500 will be exchanged from free shares, $1,000 from matured
shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. We believe the proportional method of exchanging Class II shares
more closely reflects the expectations of Class II shareholders if shares are
sold during the Contingency Period. The tax consequences of a sale or exchange
are determined by the Code and not by the method used by the Fund to transfer
shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
Exchange Restrictions
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class.
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically registered
money fund account requiring only one signature for all transactions. Please
notify us in writing if you do not want this option to be available on your
account(s). Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
How Do I Sell Shares?
Method Steps to Follow
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares you
are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts
under court jurisdiction may have additional requirements.
By Phone
(Only available
if you have completed and
sent to us the telephone
redemption agreement
included with this prospectus)
Call Shareholder Services
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts may exceed
$50,000 by completing a separate agreement. Call Institutional
Services to receive a copy.
o If there are no share certificates issued for the shares you want to
sell or you have already returned them to the Fund
o Unless you are selling shares in a Trust Company retirement plan
account
o Unless the address on your account was changed by phone within the
last 30 days
Through Your Dealer Call your investment representative
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
Trust Company Retirement Plan Accounts
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
Contingent Deferred Sales Charge
A Contingent Deferred Sales Charge may apply to Class I purchases of $1 million
or more if you sell all or a portion of the shares within one year and any Class
II purchase if you sell the shares within 18 months. The charge is 1% of the
value of the shares sold or the Net Asset Value at the time of purchase,
whichever is less. Distributors keeps the charge to recover payments made to
Securities Dealers.
We will first redeem shares not subject to the charge in the following order:
1) A calculated number of shares equal to the capital appreciation on shares
held less than the Contingency Period,
2) Shares purchased with reinvested dividends and capital gain distributions,
and
3) Shares held longer than the Contingency Period.
We then redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated dollar amount, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated number of shares, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
Waivers. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual balance of
$1 million in Class I shares, you can withdraw up to $120,000 annually through a
systematic withdrawal plan free of charge. Likewise, if you maintain an annual
balance of $10,000 in Class II shares, $1,200 may be withdrawn annually free of
charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to
termination or plan transfer
What Distributions Might I Receive From the Fund?
The Fund declares dividends from its net investment income semiannually to
shareholders of record on the first business day before the 15th of the month
and pays them on or about the last day of that month.
Capital gains, if any, may be distributed annually, usually in December.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of each class.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution.
Distribution Options
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy additional shares of the same
class 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. If you own Class II shares, you may also reinvest
your distributions in Class I shares of the Fund. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge). If
you own Class II shares, you may also direct your distributions to buy Class I
shares of another Franklin Templeton Fund. Many shareholders find this a
convenient way to diversify their investments.
3. Receive distributions in cash - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
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 you do not select an option, we will
automatically reinvest dividend and capital gain distributions in the same class
of the Fund. For Trust Company retirement plans, special forms are required to
receive distributions in cash. You may change your distribution option at any
time by notifying us by mail or phone. Please allow at least seven days prior to
the record date for us to process the new option.
Transaction Procedures and Special Requirements
How and When Shares Are Priced
The Fund is open for business each day the Exchange is open. We determine the
Net Asset Value per share of each class as of the scheduled close of the
Exchange, generally 1:00 p.m. Pacific time. You can find the prior day's closing
Net Asset Value and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.
The Price We Use When You Buy or Sell Shares
You buy shares at the Offering Price of the class you wish to purchase, unless
you qualify to buy shares at a reduced sales charge or with no sales charge. The
Offering Price of each class is based on the Net Asset Value per share of the
class and includes the maximum sales charge. We calculate it to two decimal
places using standard rounding criteria. You sell shares at Net Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
Proper Form
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
Written Instructions
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. You should
verify that the institution is an eligible guarantor prior to signing. A
notarized signature is not sufficient.
Share Certificates
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
Telephone Transactions
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
We may only be liable for losses resulting from unauthorized telephone
transactions if we do not follow reasonable procedures designed to verify the
identity of the caller. When you call, we will request personal or other
identifying information, and will also record calls. For your protection, we may
delay a transaction or not implement one if we are not reasonably satisfied that
telephone instructions are genuine. If this occurs, we will not be liable for
any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by telephone, we will not be liable for any loss.
Trust Company Retirement Plan Accounts. You may not sell shares or change
distribution options on Trust Company retirement plans by phone. While you may
exchange shares of Trust Company IRA and 403(b) retirement accounts by phone,
certain restrictions may be imposed on other retirement plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
Account Registrations and Required Documents
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
Joint Ownership. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Trusts. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
Required Documents. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
Type of Account Documents Required
Corporation Corporate Resolution
Partnership 1. The pages from the partnership agreement that identify
the general partners, or
2. A certification for a partnership agreement
Trust 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
Street or Nominee Accounts. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
Electronic Instructions. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We can accept electronic instructions directly from your dealer or
representative without further inquiry. Electronic instructions may be processed
through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
Tax Identification Number
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
Services to Help You Manage Your Account
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can 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
included with this prospectus or contact your investment representative. 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
discontinue the program at any time by notifying Investor Services by mail or
phone.
Automatic Payroll Deduction
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
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 direct your payments to buy the same class of shares of another
Franklin Templeton Fund or 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.
You will generally receive your payment by the fifth business day of the month
in which a payment is scheduled. When you sell your shares under a systematic
withdrawal plan, it is a taxable transaction.
Because of the front-end sales charge, you may not want to set up a systematic
withdrawal plan if you plan to buy shares on a regular basis. Shares sold under
the plan may also be subject to a Contingent Deferred Sales Charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
Electronic Fund Transfers
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with 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. We will send any payments made during that time to the
address of record on your account.
TeleFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/24753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips.
You will need the code number for each class to use TeleFACTS. The code numbers
for Class I and Class II are 198 and 298.
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. Please verify the
accuracy of your statements when you receive them.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
Institutional Accounts
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. For further information, call Institutional
Services.
Availability of These Services
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you.
Please contact your investment representative.
What If I Have Questions About My Account?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
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.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
Glossary
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
CD - Certificate of deposit
Class I and Class II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
Code - Internal Revenue Code of 1986, as amended
Contingency Period - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
Contingent Deferred Sales Charge (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
Eligible Governmental Authority - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
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., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
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.
NASD - National Association of Securities Dealers, Inc.
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.
NSCC - National Securities Clearing Corporation
Offering Price - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.5% for Class I and 1% for Class II.
Qualified Retirement Plan(s) - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
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
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or another wholly owned
subsidiary of Resources.
PROSPECTUS & APPLICATION
Franklin
Global Health
Care Fund
INVESTMENT STRATEGY
GLOBAL GROWTH
- ------------------------------------------------------------------------------
SEPTEMBER 1, 1996
Franklin Strategic Series
This prospectus describes the Franklin Global Health Care Fund (the "Fund"). It
contains information you should know before investing in the Fund. Please keep
it for future reference.
The Fund's SAI, dated September 1, 1996, as may be amended from time to time,
includes more information about the Fund's procedures and policies. It has been
filed with the SEC and is incorporated by reference into this prospectus. For a
free copy or a larger print version of this prospectus, call 1-800/DIAL BEN or
write the Fund at the address shown.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Shares of the Fund involve investment risks, including the possible
loss of principal.
LIKE ALL MUTUAL FUNDS, 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.
The Fund may invest in both domestic and foreign securities.
Franklin Global Health Care Fund
Franklin
Global Health
Care Fund
- --------------------------------------------------------------------------------
September 1, 1996
When reading this prospectus,
you will see terms that are
capitalized. This means the term
is explained in our glossary section.
Table of Contents
About the Fund
Expense Summary................................... 2
Financial Highlights.............................. 3
How Does the Fund Invest Its Assets?.............. 4
What Are the Fund's Potential Risks?.............. 8
Who Manages the Fund?............................. 10
How Does the Fund Measure Performance?............ 12
How Is the Trust Organized?....................... 13
How Taxation Affects You and the Fund............. 13
About Your Account
How Do I Buy Shares?.............................. 15
May I Exchange Shares for Shares of Another Fund?. 21
How Do I Sell Shares?............................. 24
What Distributions Might I Receive From the Fund?. 26
Transaction Procedures and Special Requirements... 27
Services to Help You Manage Your Account.......... 32
Glossary
Useful Terms and Definitions...................... 34
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
Franklin Global Health Care Fund
About the Fund
Expense Summary
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of Class I shares for the fiscal
year ended April 30, 1996. Your actual expenses may vary.
A. Shareholder Transaction Expenses+
CLASS I CLASS II
- --------------------------------------------------------------------------------
Maximum Sales Charge Imposed on
Purchases (as a percentage of Offering Price) 4.5% 1.00%++
Deferred Sales Charge+++ NONE 1.00%
B. Annual Operating Expenses (as a percentage of average net assets)
Management Fees 0.63%* 0.63%*
Rule 12b-1 Fees 0.23%** 1.00%**
Other Expenses 0.30% 0.30%
- --------------------------------------------------------------------------------
Total Fund Operating Expenses 1.16%* 1.93%*
- --------------------------------------------------------------------------------
C. Example
Assume the annual return for each class is 5% and operating expenses are as
described above. For each $1,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Class I $56**** $80 $106 $180
Class II $39 $70 $113 $233
For the same Class II investment, you would pay projected expenses of $29 if you
did not sell your shares at the end of the first year. Your projected expenses
for the remaining periods would be the same.
This is just an example. It does not represent past or future expenses or
returns. Actual expenses and returns may be more or less than those shown. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of each class and are not directly charged to
your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer may charge a fee for this service.
++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? - Deciding Which Class to Buy."
+++A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more if you sell the shares within one year and any Class II purchase
if you sell the shares within 18 months. There is no front-end sales charge if
you buy $1 million or more in Class I shares. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*Advisers has agreed in advance to limit its management fees and make certain
payments to reduce the Fund's expenses. With this reduction, management fees
were 0.20% and total operating expenses for Class I were 0.73% and would have
been 1.50% for Class II.
**These fees may not exceed 0.25% for Class I. 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 charge permitted
under the NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
Financial Highlights
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent four years, and the period from
February 14, 1992 (the effective date of the registration statement for Class I)
through April 30, 1992, appears in the financial statements in the Trust's
Annual Report to Shareholders for the fiscal year ended April 30, 1996. The
Annual Report to Shareholders also includes more information about the Fund's
performance. For a free copy, please call Fund Information.
<TABLE>
<CAPTION>
Class I
<S> <C> <C> <C> <C> <C>
Year Ended April 30 1996 1995 1994 1993 1992(1)
Per Share Operating Performance
Net Asset Value at Beginning of Period $11.45 $10.43 $8.88 $8.84 $10.00
Net Investment Income .11 .08 .07 .09 .02
Net Realized & Unrealized Gain (loss)
on Securities 8.955 1.560 1.856 .037 (1.180)
Total From Investment Operations 9.065 1.640 1.926 .127 (1.160)
Distributions From Net Investment Income (.124) (.061) (.078) (.087) --
Distributions From Realized Capital Gains (1.051) (.559) (.298) -- --
Total Distributions (1.175) (.620) (.376) (.087) --
Ratios/Supplemental Data
Net Asset Value at End of Period $19.34 $11.45 $10.43 $8.88 $8.84
Total Return* 82.78% 16.33% 21.93% 1.41% (55.14)%**
Net Assets at End of Period
(in 000's) $108,914 $12,906 $5,795 $3,422 $1,368
Ratio of Expenses to
Average Net Assets*** .73% .25% .10% -- --
Ratio of Net
Investment income to Average Net Assets .50% .80% .68% 1.13% 1.68%**
Portfolio Turnover Rate 54.78% 93.79% 110.82% 62.74% 41.01%
Average Commission Rate+ $.0709 -- -- -- --
</TABLE>
1For the period February 14, 1992 (effective date) to April 30, 1992.
*Total return measures the change in value of an investment over the periods
indicated. It is not annualized except where indicated. It does not include the
maximum front-end sales charge or Contingent Deferred Sales Charge, and assumes
reinvestment of dividends and capital gains, if any, at Net Asset Value.
**Annualized.
***During the periods indicated, Advisers agreed in advance to waive a portion
or all of its management fees and made payments of other expenses incurred by
the Fund. Had such action not been taken, the ratios of operating expenses to
average net assets would have been as follows:
Ratio of expenses
to average net assets
- --------------------------------------------------------------------------------
19921 1.62%**
1993 2.16
1994 1.74
1995 1.37
1996 1.16
+Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
How Does the Fund Invest Its Assets?
The Fund's Investment Objective
The Fund's investment objective is to seek capital appreciation by investing
primarily in the equity securities of health care companies located throughout
the world. The Fund will seek to invest in companies that have, in the opinion
of Advisers, the potential for above average growth in revenues and/or earnings.
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.
Types of Securities the Fund May Invest In
Health Care Companies. The Fund will invest at least 70% of its total assets in
the equity securities of health care companies. A "health care" company is one
that derives at least 50% of its earnings or revenues from health care
activities, or has devoted at least 50% of its assets to such activities, based
upon the company's most recently reported fiscal year. Health care activities
include research, development, production or distribution of products and
services in industries such as pharmaceutical, biotechnology, health care
facilities, medical supplies, medical technology, managed care companies, health
care related information systems and personal health care products.
Equity securities consist of common stocks, preferred stocks, convertible
preferred stocks, securities convertible into common stocks, rights and
warrants. A warrant is a security that gives the holder the right, but not the
obligation, to subscribe for newly created securities of the issuer or a related
company at a fixed price either at a certain date or during a set period. A
convertible security is a security that may be converted either at a stated
price or rate within a specified period of time into a specified number of
shares of common stock. By investing in convertible securities, the Fund seeks
to participate in the capital appreciation of the common stock into which the
securities are convertible through the conversion feature.
Foreign Securities. The Fund will mix its investments globally by investing 70%
of its assets in securities of issuers in at least three different countries.
The Fund, however, will not invest more than 40% of its net assets in any one
country (other than the U.S.). Advisers believes that by investing globally, the
Fund can minimize currency, political and economic risks associated with
investing in a single country. Global investing does entail certain risks,
however, which are discussed under "What Are the Fund's Potential Risks?" The
Fund expects from time to time that a significant portion of its investments
will be in securities of domestic issuers.
The Fund may also invest up to 30% of its assets in domestic and foreign debt
securities, consisting of bonds, notes and debentures as well as debt securities
convertible into equity securities. These securities may be issued by any type
of issuer, such as foreign and domestic corporations and foreign and domestic
governments and their political subdivisions. The Fund may seek capital
appreciation through changes in relative foreign currency exchange rates or
improvement in the creditworthiness of the issuer related to investments in debt
securities. The receipt of income from debt securities is incidental to the
Fund's investment objective of capital appreciation. The Fund will invest in
debt securities rated B or above by Moody's Investors Service ("Moody's") or
Standard & Poor's Corporation ("S&P"), two nationally recognized statistical
ratings agencies, or in unrated securities of comparable quality. Securities
rated B are considered to be below investment grade and are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation.
It is the Fund's current intention to invest less than 5% in debt securities
considered to be below investment grade. For a description of these ratings,
please see the SAI.
Many major developments in health care come from companies based abroad. Thus,
in the opinion of Advisers, a portfolio of only U.S. based health care companies
is not sufficiently diversified to participate in global developments and
discoveries in the field of health care. Advisers believes that health care is
becoming an increasingly globalized industry and that many important investment
opportunities exist abroad. Therefore, Advisers believes that a portfolio of
global securities may provide a greater potential for investment participation
in present and future opportunities that may present themselves in the health
care related industries. Advisers also believes that the U.S. health care
industry may be subject to increasing regulation and government control, thus a
global portfolio may reduce the risk of a single government's actions on the
portfolio. The Fund concentrates its investments in a limited group of related
industries and is not intended to be a complete investment program.
As a global fund, the Fund may invest in securities issued in any currency and
may hold foreign currency. Securities of issuers within a given country may be
denominated in the currency of another country, or in multinational currency
units such as the European Currency Unit. Investments will not be made in
securities of foreign issuers issued without stock certificates or comparable
evidence of ownership. Securities which are acquired by the Fund outside the
U.S. and which are publicly traded in the U.S. or on a foreign securities
exchange or in a foreign securities market are not considered by the Fund to be
an illiquid asset so long as the Fund acquires and holds the security with the
intention of reselling the security in the foreign trading market, the Fund
reasonably believes it can readily dispose of the security for cash at
approximately the amount at which the Fund has valued the security in the U.S.
or foreign market, and current market quotations are readily available.
American Depositary Receipts. The Fund may buy securities of foreign issuers in
the form of sponsored and unsponsored American Depositary Receipts ("ADRs").
ADRs are receipts typically issued by a U.S. bank or trust company that evidence
ownership of underlying securities issued by a foreign corporation. ADRs in
registered form are designed for use in U.S. securities markets. For purposes of
the Fund's investment policies, investments in ADRs will be deemed to be
investments in the equity securities of the foreign issuers into which they may
be converted.
Short-Term Investments. The Fund may invest its cash, including cash resulting
from purchases of Fund shares and sales of portfolio securities, temporarily in
short-term debt instruments. These include high grade commercial paper,
repurchase agreements and other money market equivalents, as well as the shares
of money market funds with the same investment advisor as the Fund, and that
invest primarily in short-term debt securities. Temporary investments will only
be made with cash held to maintain liquidity or pending investment. In addition,
for temporary defensive purposes, if or when Advisers anticipates a general
decline in the market prices of stocks in which the Fund invests, the Fund may
invest an unlimited amount of its assets in short-term debt instruments.
When Advisers believes that no attractive investment opportunities exist, the
Fund may maintain a significant portion of its assets in cash.
Forward Currency Exchange Contracts, Futures Contracts and Options. The Fund may
seek to protect capital through the use of forward currency exchange contracts,
options and futures contracts. The Fund may buy foreign currency futures
contracts and options if not more than 5% of the Fund's assets are then invested
as initial or variation margin deposits on contracts or options. The Fund may
buy and sell forward currency contracts in order to hedge against changes in the
level of future currency rates. Foreign Currency Contracts are an agreement to
buy or sell a specific currency at a future date at a price set in the contract.
Options, futures and options on futures are generally considered "derivative
securities."
Other Investment Policies of the Fund
Repurchase Agreements. The Fund may engage in repurchase transactions in which
the Fund buys a U.S. government security subject to resale to a bank or dealer
at an agreed upon price and date. The transaction requires the collateralization
of the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller might cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund might
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks which are deemed creditworthy by Advisers. A
repurchase agreement is deemed to be a loan by the Fund under the 1940 Act. The
U.S. government security subject to resale (the collateral) will be held on
behalf of the Fund by a custodian approved by the Board and will be held
pursuant to a written agreement.
The Fund may also enter into reverse repurchase agreements. These transactions
involve the sale of securities held by the Fund pursuant to an agreement to
repurchase the securities at an agreed-upon price, date and interest payment.
Cash or high grade liquid debt securities of a dollar amount equal in value to
the Fund's obligation under the agreement, including accrued interest, will be
maintained in a segregated account with the Fund's custodian bank, and the
securities subject to the reverse repurchase agreement will be marked-to-market
each day. Although reverse repurchase agreements are borrowings under the 1940
Act, the Fund does not treat these arrangements as borrowings under its
fundamental investment restriction against borrowing so long as the segregated
account is properly maintained.
Borrowing. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of its assets, except that the Fund may enter into reverse
repurchase agreements or borrow from banks up to 10% of its total asset value to
meet redemption requests and for other temporary or emergency purposes. While
borrowings exceed 5% of the Fund's total assets, the Fund will not make any
additional investments.
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
generally securities that cannot be sold within seven days in the normal course
of business at approximately the amount at which the Fund has valued them.
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 net
assets will not be considered a violation of any of the foregoing policies.
Other Policies and Restrictions. The investment policies of the Fund, except as
otherwise specifically indicated herein or in the SAI, are not fundamental
policies of the Fund and may be changed without shareholder approval. The Fund
has a number of additional investment restrictions that limit its activities to
some extent. Some of these restrictions may only be changed with shareholder
approval. For a list of these restrictions and more information about the Fund's
investment policies, please see "How Does the Fund Invest Its Assets?" and
"Investment Restrictions" in the SAI.
What Are the Fund's Potential Risks?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
Foreign Risk. Foreign securities involve certain risks that you should consider
carefully. These risks include political, social or economic instability in the
country of the issuer, the difficulty of predicting international trade
patterns, the possibility of the imposition of exchange controls, expropriation,
restrictions on removal of currency or other assets, nationalization of assets,
foreign withholding and income taxation, and foreign trading practices
(including higher trading commissions, custodial charges and delayed
settlements). Foreign securities may be subject to greater fluctuations in price
than securities issued by U.S. corporations or issued or guaranteed by the U.S.
government, its instrumentalities or agencies. The markets on which foreign
securities trade may have less volume and liquidity, and may be more volatile
than securities markets in the U.S. In addition, there may be less publicly
available information about a foreign company than about a U.S. domiciled
company. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
U.S. domestic companies. There is generally less government regulation of
securities exchanges, brokers and listed companies abroad than in the U.S.
Confiscatory taxation or diplomatic developments could also affect investment in
foreign securities.
In many instances, foreign debt securities may provide higher yields than
securities of domestic issuers that have similar maturities and quality. Under
certain market conditions, these investments may be less liquid than the
securities of U.S. corporations and are certainly less liquid than securities
issued or guaranteed by the U.S. government, its instrumentalities or agencies.
Finally, in the event of a default of any foreign debt obligation, it may be
more difficult for the Fund to obtain or to enforce a judgment against the
issuer of the security.
The operating expense ratio of the Fund can be expected to be higher than that
of an investment company investing exclusively in U.S. securities because of the
additional expenses of the Fund, such as custodial costs, valuation costs and
communication costs. The Fund's expenses, however, are expected to be similar to
expenses of other investment companies investing in a mix of U.S. securities and
securities of one or more foreign countries.
Investments of the Fund may be denominated in foreign currencies. Changes in the
relative values of these foreign currencies and the U.S. dollar, therefore, will
affect the value of investments in the Fund. The Fund, however, may utilize
forward currency contracts to attempt to minimize these changes. By entering
into forward currency contracts, the Fund is able to protect against a loss
resulting from an adverse change in the relationship between the U.S. dollar and
a foreign currency occurring between the trade and settlement dates of a
securities transaction. Forward contracts, however, also tend to limit the
potential gains that might result from a positive change in currency
relationships.
While the Fund may invest in foreign securities, it is generally not its
intention to invest in foreign equity securities of an issuer that meets the
definition in the Code of a passive foreign investment company ("PFIC").
However, to the extent that the Fund invests in these securities the Fund may be
subject to both an income tax and an additional tax in the form of an interest
charge with respect to its investment. To the extent possible, the Fund will
avoid the taxes by not investing in PFIC securities or by adopting other tax
strategies for any PFIC securities it does buy. Please see the SAI for more
information.
Non-Diversification Risk. The Fund is non-diversified under the federal
securities laws. As a non-diversified Fund, there is no restriction under the
1940 Act on the percentage of the Fund's assets that may be invested at any time
in the securities of any one issuer. However, the Fund intends to comply with
the diversification and other requirements of the Code applicable to "regulated
investment companies" so that it will not be subject to U.S. federal income tax
on income and capital gains. Accordingly, the Fund will not buy securities if,
as a result, more than 25% of its total assets would be invested in the
securities of a single issuer or, with respect to 50% of its total assets, more
than 5% of such assets would be invested in the securities of a single issuer.
Because the Fund is non-diversified and concentrates its investments in a
limited group of related industries, the value of the Fund's shares may
fluctuate more widely, and the Fund may present greater risk than other
investments.
Industry Risk. Unlike more widely diversified mutual funds, the Fund is subject
to industry risk. Industry risk is the possibility that a particular group of
related stocks will decline in price. The activities of health care companies
may be funded or subsidized by federal and state governments. Consequently,
discontinuance of government subsidies could adversely affect the profitability
of these companies. Stocks held by the Fund will be affected by government
policies on health care reimbursements, regulatory approval for new drugs and
medical instruments, and similar matters. Health care companies are also subject
to legislative risk, the risk of a reform of the health care system through
legislation. Health care companies may face lawsuits related to product
liability issues. Also, many products and services provided by health care
companies are subject to rapid obsolescence. The value of an investment in the
Fund may fluctuate significantly over relatively short periods of time.
Interest Rate and Market Risk. To the extent the Fund invests in debt
securities, changes in interest rates in any country where the Fund is invested
will affect the value of the Fund's portfolio and its share price. Rising
interest rates, which often occur during times of inflation or a growing
economy, are likely to have a negative effect on the value of the Fund's shares.
To the extent the Fund invests in common stocks, a general market decline, shown
for example by a drop in the Dow Jones Industrials or other equity based index,
in any country where the Fund is invested, may also cause the Fund's share price
to decline. The value of worldwide stock markets and interest rates has
increased and decreased in the past. These changes are unpredictable and may
happen again in the future.
Who Manages the Fund?
The Board. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
two classes of shares. While none is expected, the Board will act appropriately
to resolve any material conflict that may arise.
Investment Manager. Advisers is the investment manager of the Fund and other
funds with aggregate assets of over $81 billion. It is wholly owned by
Resources, a publicly owned company engaged in the financial services industry
through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the
principal shareholders of Resources.
Management Team. The team responsible for the day-to-day management of the
Fund's portfolio is: Rupert H. Johnson, Jr. and Kurt von Emster since the Fund's
inception in 1992, and Evan McCulloch since September 1994.
Rupert H. Johnson, Jr.
President of Advisers
Mr. Johnson is a graduate of Washington and Lee University. He has been with
Advisers or an affiliate since 1965 and prior thereto was an officer in the U.S.
Marine Corps. Mr. Johnson is a member of several securities industry-related
associations.
Kurt von Emster
Portfolio Manager of Advisers
Mr. von Emster is a Chartered Financial Analyst and holds a Bachelor of Arts
degree in business and economics from University of California at Santa Barbara.
He has been with Advisers or an affiliate since 1989.
Evan McCulloch
Portfolio Manager of Advisers
Mr. McCulloch holds a Bachelor of Science degree in economics from the
University of California at Berkeley. He has been with Franklin Resources, Inc.
since 1992 and with Advisers or an affiliate since 1993. He is a member of the
Association for Investment Management and Research.
Services Provided by Advisers. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also provides certain administrative services and
facilities for the Fund and performs similar services for other funds. Please
see "Investment Advisory and Other Services" and "Miscellaneous Information" in
the SAI for information on securities transactions and a summary of the Fund's
Code of Ethics.
Management Fees. During the fiscal year ended April 30, 1996, management fees,
before any advance waiver, totaled 0.63% of the average daily net assets of the
Fund. Total operating expenses for Class I and Class II totaled 1.16% and 1.93%.
Under an agreement by Advisers to limit its fees, the Fund paid management fees
totaling 0.20% and operating expenses totaling 0.73% and 1.50% for Class I and
Class II. Advisers may end this arrangement at any time upon notice to the
Board.
Portfolio Transactions. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares when selecting a broker or dealer. Please see "How Does the Fund
Buy Securities For Its Portfolio?" in the SAI for more information.
The Rule 12b-1 Plans
Each class has a distribution plan or "Rule 12b-1 Plan" under which it may pay
or reimburse Distributors or others for activities primarily intended to sell
shares of the class. These expenses may include, among others, distribution or
service fees paid to Securities Dealers or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates, printing prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and advertisements, a prorated portion of Distributors' overhead expenses, and
distribution or service fees paid to Securities Dealers or others who have
executed a servicing agreement with the Fund, Distributors or its affiliates.
Payments by the Fund under the Class I plan may not exceed 0.25% per year of
Class I's average daily net assets. All distribution expenses over this amount
will be borne by those who have incurred them.
Under the Class II plan, the Fund may pay Distributors up to 0.75% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the Class II
purchase.
The Fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
How Does the Fund Measure Performance?
From time to time, each class of the Fund advertises its performance. The more
commonly used measures of performance are total return, current yield and
current distribution rate. Performance figures are usually calculated using the
maximum sales charge, but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of each class will vary. Performance figures are always
based on past performance and do not indicate future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How Does the Fund Measure Performance?" in the SAI.
How Is the Trust Organized?
The Fund is a non-diversified series of Franklin Strategic Series (the "Trust"),
an open-end management investment company, commonly called a mutual fund. It was
organized as a Delaware business trust on January 22, 1991, and is registered
with the SEC under the 1940 Act. The Fund began offering two classes of shares
on September 1, 1996: Franklin Global Health Care Fund - Class I and Franklin
Global Health Care Fund - Class II. All shares purchased before that time are
considered Class I shares. Additional classes of shares may be offered in the
future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state business trust law, or (3) required
to be voted on separately by the 1940 Act. Shares of each class of a series have
the same voting and other rights and preferences as the other classes and series
of the Trust for matters that affect the Trust as a whole. In the future,
additional series may be offered.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
electing or removing members of the Board.
How Taxation Affects You and the Fund
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund intends to continue to qualify 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.
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.
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 Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to 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.
If you are a corporate investor, 2.28% of the ordinary income dividends
(including short-term capital gain distributions) paid by the Fund for the
fiscal year ended April 30, 1996, qualified for the corporate dividends-received
deduction, subject to certain holding period and debt financing restrictions
imposed under the Code on the corporation claiming the deduction. These
restrictions are discussed in the SAI.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred 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 received with respect to such shares.
The Fund will inform you of the source of its 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 such dividends
and distributions.
If you are not a U.S. person for U.S. federal income tax purposes, you should
consult with your financial or tax advisor regarding the applicability of U.S.
withholding or other taxes on distributions received by you from the Fund and
the application of foreign tax laws to these distributions. You should also
consult your advisor with respect to the applicability of any state and local
intangible property or income taxes to your shares of the Fund and distributions
and redemption proceeds received from the Fund.
About Your Account
How Do I Buy Shares?
Opening Your Account
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. Please indicate which class of shares you want to buy. If you do not
specify a class, your purchase will be automatically invested in Class I shares.
MINIMUM
INVESTMENTS*
- --------------------------------------------------------------------------------
To Open Your Account $100
To Add to Your Account $ 25
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares. Currently, the Fund does not allow investments by Market Timers.
Deciding Which Class to Buy
You should consider a number of factors when deciding which class of shares to
buy. IF YOU PLAN TO BUY $1 MILLION OR MORE IN A SINGLE PAYMENT OR YOU QUALIFY TO
BUY CLASS I SHARES WITHOUT A SALES CHARGE, YOU MAY NOT BUY CLASS II SHARES.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds; and
o you plan to sell a substantial number of your shares within approximately six
years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
Purchase Price of Fund Shares
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE
AS A PERCENTAGE OF AMOUNT PAID
-------------------- TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- -------------------------------------------------------------------------
CLASS I
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
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares?
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Deciding Which
Class to Buy."
Sales Charge Reductions and Waivers
If you qualify to buy shares under one of the sales charge reduction or waiver
categories described below, please include a written statement with each
purchase order explaining which privilege applies. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
Cumulative Quantity Discounts - Class I Only. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your Class I and Class II
shares in the Franklin Templeton Funds, as well as those of your spouse,
children under the age of 21 and grandchildren under the age of 21. If you are
the sole owner of a company, you may also add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
Letter of Intent - Class I Only. You may buy Class I 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 on Class I 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 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
Group Purchases - Class I Only. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
Sales Charge Waivers. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 4:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or a
REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares reinvested were subject
to a Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
5. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front-end or contingent deferred sales charges at the
time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to Class I purchases by:
6. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following the order.
7. Group annuity separate accounts offered to retirement plans
8. Retirement plans that (i) are sponsored by an employer with at least 100
employees, (ii) have plan assets of $1 million or more, or (iii) agree to invest
at least $500,000 in the Franklin Templeton Funds over a 13 month period.
Retirement plans that are not Qualified Retirement Plans or SEPS, such as 403(b)
or 457 plans, must also meet the requirements described under "Group Purchases -
Class I Only" above.
9. An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is permissible and suitable
for you and the effect, if any, of payments by the Fund on arbitrage rebate
calculations.
10. Broker-dealers and qualified registered investment advisors who have entered
into a supplemental agreement with Distributors for their clients who are
participating in comprehensive fee programs, sometimes known as wrap fee
programs.
11. Registered Securities Dealers and their affiliates, for their investment
accounts only
12. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
13. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
14. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
15. Accounts managed by the Franklin Templeton Group
16. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
How Do I Buy Shares in Connection with Retirement Plans?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
Other Payments to Securities Dealers
The payments below apply to Securities Dealers who initiate and are responsible
for Class II purchases and certain Class I purchases made without a sales
charge. A Securities Dealer may only receive one of the following payments for
each qualifying purchase. The payments described below are paid by Distributors
or one of its affiliates, at its own expense, and not by the Fund or its
shareholders.
1. Securities Dealers may receive up to 1% of the purchase price for Class II
purchases. During the first year after the purchase, Distributors may keep a
part of the Rule 12b-1 fees associated with that purchase.
2. Securities Dealers will receive up to 1% of the purchase price for Class I
purchases of $1 million or more.
3. Securities Dealers may, in the sole discretion of Distributors, receive up to
1% of the purchase price for Class I purchases made under waiver category 8
above.
4. Securities Dealers may receive up to 0.25% of the purchase price for Class I
purchases made under waiver categories 6 and 9.
Please see "How Do I Buy, Sell and Exchange Shares - Other Payments to
Securities Dealers" in the SAI for any breakpoints that may apply.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. 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 NASD.
May I Exchange Shares for Shares of Another Fund?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums. Some
Franklin Templeton Funds do not offer Class II shares.
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you're exchanging
- --------------------------------------------------------------------------------
By Phone Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to exchange by phone, please let
us know.
- --------------------------------------------------------------------------------
Through Your Dealer Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
Will Sales Charges Apply to My Exchange?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
Contingent Deferred Sales Charge - Class I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
Contingent Deferred Sales Charge - Class II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
CDSC, such as shares from the reinvestment of dividends and capital gains ("free
shares"), $2,000 in shares that are no longer subject to a CDSC because you have
held them for longer than 18 months ("matured shares"), and $3,000 in shares
that are still subject to a CDSC ("CDSC liable shares"). If you exchange $3,000
into a new fund, $500 will be exchanged from free shares, $1,000 from matured
shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. We believe the proportional method of exchanging Class II shares
more closely reflects the expectations of Class II shareholders if shares are
sold during the Contingency Period. The tax consequences of a sale or exchange
are determined by the Code and not by the method used by the Fund to transfer
shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
Exchange Restrictions
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class.
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically registered
money fund account requiring only one signature for all transactions. Please
notify us in writing if you do not want this option to be available on your
account(s). Additional procedures may apply. Please see "Transaction Procedures
and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may
significantly affect the Fund.
How Do I Sell Shares?
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares you
are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may
have additional requirements.
- -------------------------------------------------------------------------------
By Phone Call Shareholder Services
(Only available if you have completed and sent to us the telephone redemption
agreement included with this prospectus)
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts
may exceed $50,000 by completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for the shares you
want to sell or you have already returned them to the Fund
o Unless the address on your account was changed by phone
within the last 30 days
- -------------------------------------------------------------------------------
Through Your Dealer Call your investment representative
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
Trust Company Retirement Plan Accounts
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
591/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
Contingent Deferred Sales Charge
A Contingent Deferred Sales Charge may apply to Class I purchases of $1 million
or more if you sell all or a portion of the shares within one year and any Class
II purchase if you sell the shares within 18 months. The charge is 1% of the
value of the shares sold or the Net Asset Value at the time of purchase,
whichever is less. Distributors keeps the charge to recover payments made to
Securities Dealers.
We will first redeem shares not subject to the charge in the following order:
1) A calculated number of shares equal to the capital appreciation on shares
held less than the Contingency Period,
2) Shares purchased with reinvested dividends and capital gain distributions,
and
3) Shares held longer than the Contingency Period.
We then redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated dollar amount, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated number of shares, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
Waivers. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual balance of
$1 million in Class I shares, you can withdraw up to $120,000 annually through a
systematic withdrawal plan free of charge. Likewise, if you maintain an annual
balance of $10,000 in Class II shares, $1,200 may be withdrawn annually free of
charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to termination
or plan transfer
What Distributions Might I Receive From the Fund?
The Fund declares dividends from its net investment income semiannually in June
and December to shareholders of record on the first business day before the 15th
of the month and pays them on or about the last day of that month.
Capital gains, if any, may be distributed annually, usually in December.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of each class.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution.
Distribution Options
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy additional shares of the same
class 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. If you own Class II shares, you may also reinvest
your distributions in Class I shares of the Fund. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge). If
you own Class II shares, you may also direct your distributions to buy Class I
shares of another Franklin Templeton Fund. Many shareholders find this a
convenient way to diversify their investments.
3. Receive distributions in cash - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
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 you do not select an option, we will
automatically reinvest dividend and capital gain distributions in the same class
of the Fund. For Trust Company retirement plans, special forms are required to
receive distributions in cash. You may change your distribution option at any
time by notifying us by mail or phone. Please allow at least seven days prior to
the record date for us to process the new option.
Transaction Procedures and Special Requirements
How and When Shares Are Priced
The Fund is open for business each day the Exchange is open. We determine the
Net Asset Value per share of each class as of the scheduled close of the
Exchange, generally 1:00 p.m. Pacific time. You can find the prior day's closing
Net Asset Value and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.
The Price We Use When You Buy or Sell Shares
You buy shares at the Offering Price of the class you wish to purchase, unless
you qualify to buy shares at a reduced sales charge or with no sales charge. The
Offering Price of each class is based on the Net Asset Value per share of the
class and includes the maximum sales charge. We calculate it to two decimal
places using standard rounding criteria. You sell shares at Net Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
Proper Form
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
Written Instructions
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. You should
verify that the institution is an eligible guarantor prior to signing. A
notarized signature is not sufficient.
Share Certificates
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
Telephone Transactions
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
We may only be liable for losses resulting from unauthorized telephone
transactions if we do not follow reasonable procedures designed to verify the
identity of the caller. When you call, we will request personal or other
identifying information, and will also record calls. For your protection, we may
delay a transaction or not implement one if we are not reasonably satisfied that
telephone instructions are genuine. If this occurs, we will not be liable for
any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by
telephone, we will not be liable for any loss.
Trust Company Retirement Plan Accounts. You may not sell shares or change
distribution options on Trust Company retirement plans by phone. While you may
exchange shares of Trust Company IRA and 403(b) retirement accounts by phone,
certain restrictions may be imposed on other retirement plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
Account Registrations and Required Documents
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
Joint Ownership. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Trusts. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
Required Documents. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- -------------------------------------------------------------------------------
Corporation Corporate Resolution
- -------------------------------------------------------------------------------
Partnership 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
- -------------------------------------------------------------------------------
Trust 1. The pages from the trust document that identify the trustees
, or
2. A certification for trust
- -------------------------------------------------------------------------------
Street or Nominee Accounts. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
Electronic Instructions. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We can accept electronic instructions directly from your dealer or
representative without further inquiry. Electronic instructions may be processed
through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
Tax Identification Number
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
Services to Help You Manage Your Account
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can 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
included with this prospectus or contact your investment representative. 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
discontinue the program at any time by notifying Investor Services by mail or
phone.
Automatic Payroll Deduction
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply. 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 direct your payments to buy the same class of shares of another
Franklin Templeton Fund or 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.
You will generally receive your payment by the fifth business day of the month
in which a payment is scheduled. When you sell your shares under a systematic
withdrawal plan, it is a taxable transaction.
Because of the front-end sales charge, you may not want to set up a systematic
withdrawal plan if you plan to buy shares on a regular basis. Shares sold under
the plan may also be subject to a Contingent Deferred Sales Charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
Electronic Fund Transfers
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with 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. We will send any payments made during that time to the
address of record on your account.
TeleFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips.
You will need the code number for each class to use TeleFACTS. The code numbers
for Class I and Class II are 199 and 299.
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. Please verify the
accuracy of your statements when you receive them.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
Institutional Accounts
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. For further information, call Institutional
Services.
Availability of These Services
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
What If I Have Questions About My Account?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
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.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
Glossary
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
CD - Certificate of deposit
Class I and Class II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
Code - Internal Revenue Code of 1986, as amended
Contingency Period - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
Contingent Deferred Sales Charge (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
Eligible Governmental Authority - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
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., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
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.
NASD - National Association of Securities Dealers, Inc.
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.
NSCC - National Securities Clearing Corporation
Offering Price - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
Qualified Retirement Plan(s) - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
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
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or another wholly owned
subsidiary of Resources. Franklin Global Health Care Fund
PROSPECTUS & APPLICATION
FRANKLIN NATURAL
RESOURCES FUND
INVESTMENT STRATEGY
GROWTH & INCOME
SEPTEMBER 1, 1996
Franklin Strategic Series
This prospectus describes the Franklin Natural Resources Fund (the "Fund"). It
contains infor- mation you should know before investing in the Fund. Please keep
it for future reference.
The Fund's SAI, dated September 1, 1996, as may be amended from time to time,
includes more information about the Fund's procedures and policies. It has been
filed with the SEC and is incorporated by reference into this prospectus. For a
free copy or a larger print version of this prospectus, call 1-800/DIAL BEN or
write the Fund at the address shown.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Shares of the Fund involve investment risks, including the possible
loss of principal.
LIKE ALL MUTUAL FUNDS, 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.
The Fund may invest in both domestic and foreign securities.
FRANKLIN
NATURAL
RESOURCES
FUND
- --------------------------------------------------------------------------------
SEPTEMBER 1, 1996
WHEN READING THIS PROSPECTUS, YOU
WILL SEE TERMS IN CAPITAL LETTERS. THIS
MEANS THE TERM IS EXPLAINED IN OUR
GLOSSARY SECTION.
Table of Contents
ABOUT THE FUND
Expense Summary ............................ 2
Financial Highlights ....................... 3
How Does the Fund Invest Its Assets? ....... 4
What Are the Fund's Potential Risks? ....... 9
Who Manages the Fund? ...................... 11
How Does the Fund Measure Performance? ..... 13
How Is the Trust Organized? ................ 14
How Taxation Affects You and the Fund ...... 15
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ....................... 16
May I Exchange Shares for Shares of Another Fund? 21
How Do I Sell Shares? ...................... 23
What Distributions Might I Receive From the Fund? 25
Transaction Procedures and Special Requirements 26
Services to Help You Manage Your Account ... 31
GLOSSARY
Useful Terms and Definitions ............... 33
APPENDIX
Description of Ratings ..................... 36
777 MARINERS ISLAND BLVD.
P.O. BOX 7777
SAN MATEO
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the Fund's historical expenses for the fiscal year ended
April 30, 1996. Your actual expenses may vary.
A. 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*
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.63%**
Rule 12b-1 Fees 0.29%***
Other Expenses 0.85%
-----------
Total Fund Operating Expenses 1.77%**,+++
===========
C. EXAMPLE
Assume the Fund's annual return is 5% and its operating expenses are as
described above. For each $1,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$62**** $98 $137 $244
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The Fund pays its operating expenses. The effects of these expenses are
reflected in its Net Asset Value or dividends and are not directly charged
to your account.
+If your transaction is processed through your Securities Dealer, you may
be charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more. A
Contingent Deferred Sales Charge of 1% may apply, however, if you sell the
shares within one year. See "How Do I Sell Shares? - Contingent Deferred
Sales Charge" for details.
+++Annualized.
*$5.00 fee is only for Market Timers. We process all other exchanges
without a fee.
**Advisers has agreed in advance to waive its management fees and make
certain payments to reduce the Fund's expenses. With this reduction, the
Fund paid no management fees and total Fund operating expenses 0.99%.
***These fees may not exceed 0.35%. 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 charge
permitted under the NASD's rules.
****Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering the period beginning June 5, 1995, the Fund's commencement
date, and ending on the fiscal year ended April 30, 1996, appears in the
financial statements in the Trust's Annual Report to Shareholders for the fiscal
year ended April 30, 1996. The Annual Report to Shareholders also includes more
information about the Fund's performance. For a free copy, please call Fund
Information.
YEAR ENDED APRIL 30 1996+
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $10.00
---------
Net Investment Income 0.08
Net Realized & Unrealized Gain (Loss) on Securities 3.217
---------
Total From Investment Operations 3.297
=========
Distributions From Net Investment Income (0.063)
Distributions From Capital Gains (0.094)
---------
Total Distributions (0.157)
---------
Net Asset Value at End of Period 13.14
=========
Total Return* 33.36%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) $9,909
Ratio of Expenses to Average Net Assets*** 0.99%**
Ratio of Net Investment Income to Average Net Assets 1.16%**
Portfolio Turnover Rate 59.04%
Average Commission Rate++ 0.0517
+For the period June 5, 1996 (effective date) to April 30, 1996.
++Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
*Total return measures the change in value of an investment over the period
indicated. It is not annualized. It does not include the maximum front-end sales
charge or the Contingent Deferred Sales Charge. It assumes reinvestment of
dividends and capital gains, if any, at Net Asset Value.
**Annualized.
***During the period indicated, Advisers agreed in advance to waive its
management fees and make certain payments to reduce expenses of the Fund. Had
such action not been taken, the ratio of annualized operating expenses to
average net assets would have been 1.77%.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is to seek to provide high total return. The
Fund's total return consists of both capital appreciation and current dividend
and interest income. The objective is a fundamental policy of the Fund and may
not be changed without shareholder approval. Of course, there is no assurance
that the Fund's objective will be achieved.
The Fund seeks to achieve its objective by investing at least 65% of its total
assets in securities issued by companies which own, produce, refine, process and
market natural resources, as well as those that provide support services for
natural resources companies (i.e., those that develop technologies or provide
services or supplies directly related to the production of natural resources).
These companies are concentrated in the natural resources sector which includes,
but is not limited to, the following industries: Integrated oil; oil and gas
exploration and production; gold and precious metals; steel and iron ore
production; aluminum production; forest products; farming products; paper
products; chemicals; building materials; energy services and technology; and
environmental services.
The Fund at all times, except during temporary defensive periods, seeks to
maintain at least 65% of its total assets invested in securities issued by
companies in the natural resources sector. The Fund reserves the right to hold,
as a temporary defensive measure or as a reserve for redemptions, short-term
U.S. government securities, high quality money market securities, including
repurchase agreements, or cash in such proportions as, in the opinion of
Advisers, prevailing market or economic conditions warrant.
TYPES OF SECURITIES THE FUND MAY INVEST IN
The Fund invests in common stocks (including preferred or debt securities
convertible into common stocks), preferred stocks and debt securities. The
mixture of common stocks, debt securities and preferred stocks varies from time
to time based upon Advisers' assessment as to whether investments in each
category will contribute to meeting the Fund's investment objective.
The Fund may invest, without percentage limitation, in fixed-income securities
having at the time of purchase, one of the four highest ratings of Moody's
Investors Service ("Moody's") (Aaa, Aa, A, Baa), Standard & Poor's Corporation
("S&P") (AAA, AA, A, BBB), two nationally recognized statistical rating
organizations, or in fixed-income securities that are not rated if, in the
opinion of Advisers, such securities are comparable in quality to those within
the four highest ratings. These are considered to be "investment grade"
securities, although fixed-income securities rated in the fourth highest rating
category are regarded as having an adequate capacity to pay principal and
interest but with greater vulnerability to adverse economic conditions and some
speculative characteristics. The Fund's commercial paper investments at the time
of purchase will be rated "A-1" or "A-2" by S&P or "Prime-1" or "Prime-2" by
Moody's or, if not rated, will be of comparable quality as determined by
Advisers.
The Fund may also invest up to 15% of its total assets at the time of purchase
in lower rated fixed-income securities (those rated BB or lower by S&P or Ba or
lower by Moody's) and unrated securities of comparable quality (commonly known
as "junk bonds.") The Fund will not acquire such securities rated lower than B
by Moody's or S&P. Lower rated securities are considered by S&P and Moody's, on
balance, to be predominantly speculative with respect to the issuer's capacity
to pay principal or interest, as the case may be, in accordance with the terms
of the obligation and will generally involve more credit risk than securities in
the higher rating categories. Please see the SAI for a more complete discussion
of these investments.
If the rating on an issue held in the Fund's portfolio is changed by the rating
agency, this event will be considered by the Fund in its evaluation of the
overall investment merits of that security but will not necessarily result in an
automatic sale of the security. Please see the Appendix in this prospectus.
The Fund may invest up to 35% of its assets in securities of issuers that are
outside the natural resources sector. These investments will include common
stocks, debt securities or preferred stocks, and will be selected to meet the
Fund's investment objective of providing high total return. These securities may
be issued by either U.S. or non-U.S. companies, governments, or governmental
instrumentalities. Some of these issuers may be in industries related to the
natural resources sector and, therefore, may be subject to similar risks.
Securities that are issued by foreign companies or are denominated in foreign
currencies are subject to the risks discussed under "What Are the Fund's
Potential Risks?"
Securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities, including U.S. Treasury bills, notes and bonds, as well as
certain agency securities and mortgage-backed securities issued by the
Government National Mortgage Association (GNMA), may carry guarantees which are
backed by the "full faith and credit" of the U.S. government. Any such guarantee
will extend to the payment of interest and principal due on the securities and
will not provide any protection from fluctuations in either the securities'
yield or value or to the yield or value of the Fund's shares. Other investments
in agency securities are not necessarily backed by the "full faith and credit"
of the U.S. government, such as certain securities issued by the Federal
National Mortgage Association (FNMA), the Federal Home Loan Mortgage
Corporation, the Student Loan Marketing Association and the Farm Credit Bank.
The Fund may invest in debt securities issued or guaranteed by foreign
governments. These securities are typically denominated in foreign currencies
and are subject to the currency fluctuation and other risks of foreign
securities investments discussed under "What Are the Fund's Potential Risks?"
The foreign government securities in which the Fund intends to invest generally
will include obligations issued by national, state or local governments or
similar political subdivisions. Foreign government securities also include debt
obligations of supranational entities, including international organizations
designed or supported by governmental entities to promote economic
reconstruction or development and international banking institutions and related
government agencies. Examples include the International Bank of Reconstruction
and Development (the World Bank), the European Investment Bank, the Asian
Development Bank and the Inter-American Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units. An example of a multinational currency unit is the European
Currency Unit. A European Currency Unit represents specified amounts of the
currencies of certain of the 12-member states of the European Economic
Community. Debt securities of quasi-governmental agencies are issued by entities
owned by either a national or local government or are obligations of a political
unit that is not backed by the national government's full faith and credit and
general taxing powers. Foreign government securities also include
mortgage-related securities issued or guaranteed by national or local
governmental instrumentalities, including quasi-governmental agencies.
WHERE THE FUND MAY INVEST
The Fund may invest in the securities of issuers both within and outside the
U.S., including emerging market countries.
The Fund may buy foreign securities that are traded in the U.S. or in foreign
markets or buy sponsored or unsponsored American Depositary Receipts ("ADRs"),
which are receipts typically issued by a U.S. bank or trust company that
evidence ownership of underlying securities issued by a foreign corporation.
These securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. Generally, ADRs, which are issued
in registered form, are designed for use in the U.S. securities markets. The
issuers of unsponsored ADRs are not obligated to disclose material information
in the U.S. and, therefore, there may be less information available to the
investing public than with sponsored ADRs. Advisers will attempt to
independently accumulate and evaluate information with respect to the issuers of
the underlying securities of sponsored and unsponsored ADRs to attempt to limit
the Fund's exposure to the market risk associated with such investments. For
purposes of the Fund's investment policies, investments in ADRs will be deemed
to be investments in the equity securities of the foreign issuers into which
they may be converted.
Under normal conditions, it is anticipated that the percentage of assets
invested in U.S. securities will be higher than that invested in securities of
any other single country. It is possible that at times the Fund may have 50% or
more of its total assets invested in foreign securities.
OTHER INVESTMENT POLICIES OF THE FUND
SHORT-TERM INVESTMENTS. The Fund may invest its cash, including cash resulting
from purchases and sales of Fund shares, temporarily in short-term debt
instruments, including high grade commercial paper, repurchase agreements and
other money market equivalents and, pursuant to an exemption from the
requirements of the 1940 Act, the shares of affiliated money market funds, which
invest primarily in short-term debt securities. To the extent the Fund invests
in affiliated money market funds, such as the Franklin Money Fund, Advisers has
agreed to waive its management fee on any portion of the Fund's assets invested
in the affiliated fund. Temporary investments will only be made with cash held
to maintain liquidity or pending investment. In addition, for temporary
defensive purposes in the event of, or when Advisers anticipates a general
decline in the market prices of stocks in which the Fund invests, the Fund may
invest an unlimited amount of its assets in short-term debt instruments.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions in which
the Fund buys a U.S. government security subject to resale to a bank or dealer
at an agreed-upon price and date. The transaction requires the collateralization
of the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller might cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund might
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks which are deemed creditworthy by Advisers. A
repurchase agreement is deemed to be a loan by the Fund under the 1940 Act. The
U.S. government security subject to resale (the collateral) will be held on
behalf of the Fund by a custodian approved by the Board and will be held
pursuant to a written agreement.
The Fund may also enter into reverse repurchase agreements. These agreements
involve the sale of securities held by the Fund pursuant to an agreement to
repurchase the securities at an agreed upon price, date and interest payment.
When effecting reverse repurchase transactions, cash or high grade liquid debt
securities of a dollar amount equal in value to the Fund's obligation under the
agreement, including accrued interest, will be maintained in a segregated
account with the Fund's custodian bank, and the securities subject to the
reverse repurchase agreement will be marked-to-market each day. Although reverse
repurchase agreements are borrowings under the 1940 Act, the Fund does not treat
these arrangements as borrowings under investment restriction 2 in the SAI, so
long as the segregated account is properly maintained.
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 that such loans do not exceed 33% of the value of the Fund's total
assets at the time of the most recent loan. The borrower must deposit with the
Fund's custodian 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 collateral 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 the cash collateral in short-term
interest bearing obligations or by receiving a loan premium from the borrower.
Under the securities loan agreement, the Fund continues to be entitled to all
dividends or interest on any loaned securities. As with any extension of credit,
there are risks of delay in recovery and loss of rights in the collateral should
the borrower of the security fail financially.
BORROWING. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of its assets, except that the Fund may enter into reverse
repurchase agreements or borrow money from banks in an amount up to 33% of its
total asset value (computed at the time the loan is made) for temporary or
emergency purposes. While borrowings exceed 5% of the Fund's total assets, the
Fund will not make any additional investments.
ILLIQUID INVESTMENTS. Generally, the Fund may not invest more than 15% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them. Subject to this
limitation, the Board has authorized the Fund to invest in restricted securities
where such investments are consistent with the Fund's investment objective and
has authorized such securities considered liquid to the extent Advisers
determines on a daily basis that there is a liquid institutional or other market
for such securities. Notwithstanding Advisers' determinations in this regard,
the Board will remain responsible for such determinations and will consider
appropriate action, consistent with the Fund's objective and policies, if a
security should become illiquid after its purchase. To the extent the Fund
invests in restricted securities that are deemed liquid, the general level of
illiquidity in the Fund may be increased if qualified institutional buyers
become uninterested in buying these securities or the market for these
securities contracts.
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 net
assets will not be considered a violation of any of the foregoing policies.
OTHER POLICIES AND RESTRICTIONS. As discussed more fully in the SAI, the Fund
also may buy debt obligations on a "when-issued" or "delayed delivery" basis and
from time to time enter into standby commitment agreements. The Fund has a
number of additional investment restrictions that limit its activities to some
extent. Some of these restrictions may only be changed with shareholder
approval. For a list of these restrictions and more information about the Fund's
investment policies, please see "How Does the Fund Invest Its Assets?" and
"Investment Restrictions" in the SAI.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
The Fund is designed for long-term investors and not as a trading vehicle. The
Fund is not intended to present a complete investment program.
NON-DIVERSIFICATION RISK. Although the Fund's assets will usually be invested in
a substantial number of issuers, the Fund is non-diversified as defined by the
1940 Act. This generally means that more than 5% of the Fund's assets may be
invested in the securities of a single issuer. Consequently, changes in the
financial condition of a single issuer may have a greater effect on the Fund's
share value than such changes would have on the performance of other mutual
funds, particularly those which invest in a broad range of issuers, sectors and
industries.
THE NATURAL RESOURCES SECTOR. There are several risk factors that need to be
assessed before investing in the natural resources sector. Certain of the
industries' commodities are subject to limited pricing flexibility as a result
of similar supply and demand factors. Others are subject to broad price
fluctuations, reflecting the volatility of certain raw materials' prices and the
instability of supplies of other resources. These factors can effect the overall
profitability of an individual company operating within the natural resources
sector. While Advisers strives to diversify among the industries within the
natural resources sector to minimize this volatility, there will be occasions
where the value of an individual company's securities will prove more volatile
than the broader market. In addition, many of these companies operate in areas
of the world where they are subject to unstable political environments, currency
fluctuations and inflationary pressures.
FOREIGN SECURITIES. Investment in the Fund's shares requires consideration of
certain risks that are not normally involved in investment solely in U.S.
issuers. These risks include political, social or economic instability in the
country of the issuer, the difficulty of predicting international trade
patterns, the possibility of the imposition of exchange controls, expropriation,
restrictions on removal of currency or other assets, nationalization of assets,
foreign withholding and income taxation, and foreign trading practices
(including higher trading commissions, custodial charges and delayed
settlements). Foreign securities may be subject to greater fluctuations in price
than securities issued by U.S. corporations or issued or guaranteed by the U.S.
government, its instrumentalities or agencies. The markets on which foreign
securities trade may have less volume and liquidity, and may be more volatile
than securities markets in the U.S. In addition, there may be less publicly
available information about a foreign company than about a U.S. domiciled
company. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
U.S. domestic companies. There is generally less government regulation of
securities exchanges, brokers and listed companies abroad than in the U.S.
Confiscatory taxation or diplomatic developments could also affect investment in
those countries.
In many instances, foreign debt securities may provide higher yields than
securities of domestic issuers that have similar maturities and quality. Under
certain market conditions, these investments may be less liquid than the
securities of U.S. corporations and are certainly less liquid than securities
issued or guaranteed by the U.S. government, its instrumentalities or agencies.
Finally, in the event of a default of any foreign debt obligations, it may be
more difficult for the Fund to obtain or to enforce a judgment against the
issuers of the securities. If a security is denominated in foreign currency, the
value of the security to the Fund will be affected by changes in currency
exchange rates and in exchange control regulations, and costs will be incurred
in connection with conversions between currencies. A change in the value of any
foreign currency against the U.S. dollar will result in a corresponding change
in the U.S. dollar value of the Fund's securities denominated in that currency.
These changes will also affect the Fund's income and distributions to
shareholders. In addition, although the Fund will receive income on foreign
securities in such currencies, the Fund will be required to compute and
distribute its income in U.S. dollars. Therefore, if the exchange rate for any
currency declines materially after the Fund's income has been accrued and
translated into U.S. dollars, the Fund could be required to liquidate portfolio
securities to make required distributions. Similarly, if an exchange rate
declines between the time the Fund incurs expenses in U.S. dollars and the time
such expenses are paid, the amount of currency required to be converted into
U.S. dollars in order to pay such expenses in U.S. dollars will be greater.
The Fund may choose to hedge exposure to currency fluctuations by entering into
forward foreign currency exchange contracts, and buying and selling options,
futures contracts and options on futures contracts related to foreign
currencies. The Fund may use forward currency exchange contracts in the normal
course of business to lock in an exchange rate in connection with purchases and
sales of securities denominated in foreign currencies. Advisers may employ other
currency management strategies to hedge portfolio securities or to shift
investment exposure from one currency to another. Some of these strategies will
require the Fund to set aside liquid assets in a segregated custodial account to
cover its obligations. Options, futures and options on futures and forward
contracts are generally considered "derivative securities." See "Currency
Hedging Transactions and Associated Risks" in the SAI.
The operating expense ratio of the Fund can be expected to be higher than that
of an investment company investing exclusively in U.S. securities because of the
additional expenses of the Fund attributable to its foreign investment activity,
such as custodial costs, valuation costs and communication costs, although the
Fund's expenses are expected to be similar to expenses of other investment
companies investing in a mix of U.S. securities and securities of one or more
foreign countries.
Investing in emerging market countries subjects the Fund to heightened foreign
securities investment risks as discussed in this section.
INTEREST RATE AND MARKET RISK. To the extent the Fund invests in debt
securities, changes in interest rates in any country where the Fund is invested
will affect the value of the Fund's portfolio and its share price. Rising
interest rates, which often occur during times of inflation or a growing
economy, are likely to have a negative effect on the value of the Fund's shares.
To the extent the Fund invests in common stocks, a general market decline in any
country where the Fund is invested, may also cause the Fund's share price to
decline. The value of worldwide stock markets and interest rates has increased
and decreased in the past. These changes are unpredictable and may happen again
in the future.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations.
INVESTMENT MANAGER. Advisers is the investment manager of the Fund and other
funds with aggregate assets of over $81 billion. It is wholly owned by
Resources, a publicly owned company engaged in the financial services industry
through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the
principal shareholders of Resources.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is: Suzanne Willoughby Killea and Robert Mullin since inception
and Serena Perin since December 1995.
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.
Robert Mullin
Portfolio Manager of Advisers
Mr. Mullin holds a Bachelor of Arts degree in economics from the University of
Colorado at Boulder. He has been with Advisers or an affiliate since 1992. He is
a member of several securities industry-related associations.
Serena Perin
Portfolio Manager of Advisers
Ms. Perin holds a Bachelor of Arts degree in business economics from Brown
University. Prior to joining Franklin she served as a research assistant to a
member of Parliament in London, England. Ms. Perin is a member of several
securities industry associations. She joined Franklin in 1991 and Templeton in
1994.
SERVICES PROVIDED BY ADVISERS. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also provides certain administrative services and
facilities for the Fund and performs similar services for other funds. Please
see "Investment Advisory and Other Services" and "Miscellaneous Information" in
the SAI for information on securities transactions and a summary of the Fund's
Code of Ethics.
MANAGEMENT FEES. During the fiscal year ended April 30, 1996, management fees
and total operating expenses, before any advance waiver, totaled 0.63% and 1.77%
of the average daily net assets of the Fund. Under an agreement by Advisers to
waive its fees, the Fund paid no management fees and total annualized operating
expenses totaling 0.99%. Advisers may end this arrangement at any time upon
notice to the Board.
Under its management agreement, the Fund pays Advisers a management fee equal to
an annual rate of 0.625 of 1% for the first $100 million of average daily net
assets of the Fund; 0.50 of 1% in excess of $100 million up to $250 million of
average daily net assets; 0.45 of 1% in excess of $250 million up to $10 billion
of average daily net assets; 0.44 of 1% in excess of $10 billion up to $12.5
billion of average daily net assets; 0.42 of 1% in excess of $12.5 billion up to
$15 billion of average daily net assets; and 0.40 of 1% in excess of $15 billion
of average daily net assets. The fee is computed daily and paid monthly.
The management fee will be reduced as necessary to comply with the most
stringent limits on Fund expenses of any state where the Fund offers it shares.
Currently, the most restrictive limitation on a fund's allowable expenses for
each fiscal year, as a percentage of its average net assets, is 2.5% of the
first $30 million in assets, 2% of the next $70 million, and 1.5% of assets over
$100 million.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares when selecting a broker or dealer. Please see "How Does the Fund
Buy Securities For Its Portfolio?" in the SAI for more information.
THE FUND'S RULE 12B-1 PLAN
The Fund has a distribution plan or "Rule 12b-1 Plan" under which it may
reimburse Distributors or others for activities primarily intended to sell
shares of the Fund. These expenses may include, among others, distribution or
service fees paid to Securities Dealers or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates, printing prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and advertisements, and a prorated portion of Distributors' overhead expenses.
Payments by the Fund under the plan may not exceed 0.35% per year of the Fund's
average daily net assets. Of this amount, the Fund may reimburse up to 0.25% to
Distributors or others and may pay an additional 0.10% to Distributors for
distribution expenses. All distribution expenses over this amount will be borne
by those who have incurred them. For more information, please see "The Fund's
Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, the Fund advertises its performance. The more commonly used
measures of performance are total return, current yield and current distribution
rate. Performance figures are usually calculated using the maximum sales charge,
but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield shows the
income per share earned by the Fund. The current distribution rate shows the
dividends or distributions paid to shareholders by the Fund. This rate is
usually computed by annualizing the dividends paid per share during a certain
period and dividing that amount by the current Offering Price. Unlike current
yield, the current distribution rate may include income distributions from
sources other than dividends and interest received by the Fund.
The Fund's investment results will vary. Performance figures are always based on
past performance and do not indicate future results. For a more detailed
description of how the Fund calculates its performance figures, please see "How
Does the Fund Measure Performance?" in the SAI.
HOW IS THE TRUST ORGANIZED?
The Fund is a non-diversified series of Franklin Strategic Series (the "Trust"),
an open-end management investment company, commonly called a mutual fund. It was
organized as a Delaware business trust on January 25, 1991, and is registered
with the SEC under the 1940 Act. Shares of each series of the Trust have equal
and exclusive rights to dividends and distributions declared by that series and
the net assets of the series in the event of liquidation or dissolution. Shares
of the Fund are considered Class I shares for redemption, exchange and other
purposes. In the future, additional series and classes of shares may be offered.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
electing or removing members of the Board.
CONVERSION TO A MASTER/FEEDER STRUCTURE
The Fund currently invests directly in securities. Certain Franklin Templeton
Funds, however, are "feeder funds" in a master/feeder fund structure. This means
they invest their assets in a "master fund" that, in turn, invests its assets
directly in securities. The Fund's investment objective and other fundamental
policies allow it to invest either directly in securities or indirectly in
securities through a master fund. In the future, the Board may decide to convert
the Fund to a master/feeder structure.
Various states have adopted certain guidelines for registering master/feeder
funds. If the Board decides to convert the Fund to a master/feeder structure,
the Fund will seek shareholder approval before the conversion if required by the
applicable guidelines or law at that time. If shareholder approval is not
required, your purchase of Fund shares will be considered your consent to a
conversion and we will not seek further shareholder approval. We will, however,
notify you in advance of the conversion. If the Fund converts to a master/feeder
structure, its fees and total operating expenses are not expected to increase.
HOW TAXATION AFFECTS YOU AND THE FUND
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund intends to continue to qualify 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 definition in the Code of a Passive Foreign
Investment Company ("PFIC") may subject the Fund to an income tax and interest
charge with respect to such investments. To the extent possible, the Fund will
avoid such treatment by not investing in PFIC securities or by adopting other
tax strategies for any PFIC securities it does purchase.
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.
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 Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
For corporate shareholders, 28.81% of the ordinary income distributions
(including short-term capital gain distributions) paid by the Fund for the
fiscal year ended April 30, 1996 qualified for the corporate dividends-received
deduction, subject to certain holding period and debt financing restrictions
imposed under the Code on the corporation claiming the deduction. These
restrictions are discussed in the SAI.
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.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred 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 received with respect to such 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 such dividends
and distributions.
If you are not considered a U.S. person for federal income tax purposes, you
should consult with your financial or tax advisor regarding the applicability of
U.S. withholding or other taxes on distributions received by you from the Fund
and the application of foreign tax laws to these distributions. You should also
consult your tax advisor with respect to the applicability of any state and
local intangible property or income taxes to your shares of the Fund and
distributions and redemption proceeds received from the Fund.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
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.
MINIMUM
INVESTMENTS*
To Open Your Account $100
To Add to Your Account $ 25
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares.
SALES CHARGE REDUCTIONS AND WAIVERS
- - IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR WAIVER
CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH EACH
PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
QUANTITY DISCOUNTS. The sales charge you pay depends on the dollar amount you
invest, as shown in the table below.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
--------------------
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED 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
*If you invest $1 million or more, a Contingent Deferred Sales Charge may be
imposed on an early redemption. Please see "How Do I Sell Shares? - Contingent
Deferred Sales Charge." Please also see "Other Payments to Securities Dealers"
below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases.
CUMULATIVE QUANTITY DISCOUNTS. To determine if you may pay a reduced sales
charge, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your Class I and Class II shares in the Franklin
Templeton Funds, as well as those of your spouse, children under the age of 21
and grandchildren under the age of 21. If you are the sole owner of a company,
you may also add any company accounts, including retirement plan accounts.
Companies with one or more retirement plans may add together the total plan
assets invested in the Franklin Templeton Funds to determine the sales charge
that applies.
LETTER OF INTENT. You may buy 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.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Fund shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Fund
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
SALES CHARGE WAIVERS. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying shares with money from
the following sources:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or a
REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares reinvested were subject
to a Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
5. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within
the past 60 days, you may invest the proceeds without any sales charge if
(a) the investment objectives were similar to the Fund's, and (b) your
shares in that fund were subject to any front-end or contingent deferred
sales charges at the time of purchase. You must provide a copy of the
statement showing your redemption.
The Fund's sales charges will also not apply to purchases by:
6. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following the order.
7. Group annuity separate accounts offered to retirement plans
8. Retirement plans that (i) are sponsored by an employer with at least 100
employees, (ii) have plan assets of $1 million or more, or (iii) agree to invest
at least $500,000 in the Franklin Templeton Funds over a 13 month period.
Retirement plans that are not Qualified Retirement Plans or SEPS, such as 403(b)
or 457 plans, must also meet the requirements described under "Group Purchases"
above.
9. An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is permissible and suitable
for you and the effect, if any, of payments by the Fund on arbitrage rebate
calculations.
10. Broker-dealers and qualified registered investment advisors who have entered
into a supplemental agreement with Distributors for their clients who are
participating in comprehensive fee programs, sometimes known as wrap fee
programs
11. Registered Securities Dealers and their affiliates, for their investment
accounts only
12. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
13. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
14. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
15. Accounts managed by the Franklin Templeton Group
16. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments below apply to Securities Dealers who initiate and are responsible
for certain purchases made without a sales charge. A Securities Dealer may only
receive one of the following payments for each qualifying purchase. The payments
described below are paid by Distributors or one of its affiliates, at its own
expense, and not by the Fund or its shareholders.
1. Securities Dealers will receive up to 1% of the purchase price for purchases
of $1 million or more.
2. Securities Dealers may, in the sole discretion of Distributors, receive up to
1% of the purchase price for purchases made under waiver category 8 above.
3. Securities Dealers may receive up to 0.25% of the purchase price for
purchases made under waiver categories 6 and 9 above.
PLEASE SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES - OTHER PAYMENTS TO
SECURITIES DEALERS" IN THE SAI FOR ANY BREAKPOINTS THAT MAY APPLY.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. 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 NASD.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums.
<TABLE>
<CAPTION>
METHOD STEPS TO FOLLOW
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<S> <C>
BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares you're exchanging
- ---------------------------------------------------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone to apply to your account, please let us know.
- ----------------------------------------------------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- ----------------------------------------------------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred Sales
Charge when you exchange shares. Any shares subject to a Contingent Deferred
Sales Charge at the time of exchange, however, will remain so in the new fund.
For accounts with shares subject to a Contingent Deferred Sales Charge, shares
are exchanged into the new fund in the order they were purchased. If you
exchange shares into one of our money funds, the time your shares are held in
that fund will not count towards the completion of any Contingency Period. For
more information about the Contingent Deferred Sales Charge, please see that
section under "How Do I Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS.
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically
registered money fund account requiring only one signature for all
transactions. Please notify us in writing if you do not want this option to
be available on your account(s). Additional procedures may apply. Please
see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you: (i) request an exchange
out of the Fund within two weeks of an earlier exchange request, (ii)
exchange shares out of the Fund more than twice in a calendar quarter, or
(iii) exchange shares equal to at least $5 million, or more than 1% of the
Fund's net assets. Shares under common ownership or control are combined
for these limits. If you exchange shares as described in this paragraph,
you will be considered a Market Timer. Each exchange by a Market Timer, if
accepted, will be charged $5.00. Some of our funds do not allow investments
by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
<TABLE>
<CAPTION>
METHOD STEPS TO FOLLOW
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send additional documents. Accounts under
court jurisdiction may have additional requirements.
- ----------------------------------------------------------------------------------------------------------------------------
BY PHONE Call Shareholder Services
(Only available if you Telephone requests will be accepted:
have completed and sent
to us the telephone o If the request is $50,000 or less. Institutional accounts may exceed $50,000 by
redemption agreement completing a separate agreement. Call Institutional Services to receive a copy.
included with this
prospectus) o If there are no share certificates issued for the shares you want to sell or you
have already returned them to the Fund
o Unless you are selling shares in a Trust Company retirement plan account
o Unless the address on your account was changed by phone within the last 30 days
- ----------------------------------------------------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- ----------------------------------------------------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative.
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
CONTINGENT DEFERRED SALES CHARGE
If you did not pay a front-end sales charge because you invested $1 million or
more, a Contingent Deferred Sales Charge may apply if you sell all or a part of
your investment within the Contingency Period. The charge is 1% of the value of
the shares sold or the Net Asset Value at the time of purchase, whichever is
less. Distributors keeps the charge to recover payments made to Securities
Dealers.
We will first redeem shares not subject to the charge in the following order:
1) A calculated number of shares equal to the capital appreciation on shares
held less than the Contingency Period,
2) Shares purchased with reinvested dividends and capital gain distributions,
and
3) Shares held longer than the Contingency Period.
We then redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, up to 1% a month of an account's Net Asset Value (3%
quarterly, 6% semiannually or 12% annually). For example, if you maintain
an annual balance of $1 million, you can withdraw up to $120,000 annually
through a systematic withdrawal plan free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to
termination or plan transfer
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income semiannually to
shareholders of record on the first business day before the 15th of the month
and pays them on or about the last day of that month. Capital gains, if any, may
be distributed annually, usually in December.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy 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. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy 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 receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
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 YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE FUND. For
Trust Company retirement plans, special forms are required to receive
distributions in cash. You may change your distribution option at any time by
notifying us by mail or phone. Please allow at least seven days prior to the
record date for us to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the Exchange is open. We determine the
Net Asset Value per share as of the scheduled close of the Exchange, generally
1:00 p.m. Pacific time. You can find the prior day's closing Net Asset Value and
Offering Price of the Fund in many newspapers.
To calculate Net Asset Value per share, the Fund's assets are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares outstanding. The Fund's assets are valued as
described under "How Are Fund Shares Valued?" in the SAI.
THE PRICE WE USE WHEN YOU BUY OR SELL SHARES
You buy shares at the Offering Price, unless you qualify to buy shares at a
reduced sales charge or with no sales charge. The Offering Price is based on the
Net Asset Value per share and includes the maximum sales charge. We calculate it
to two decimal places using standard rounding criteria. You sell shares at Net
Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. YOU SHOULD
VERIFY THAT THE INSTITUTION IS AN ELIGIBLE GUARANTOR PRIOR TO SIGNING. A
NOTARIZED SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
We may only be liable for losses resulting from unauthorized telephone
transactions if we do not follow reasonable procedures designed to verify the
identity of the caller. When you call, we will request personal or other
identifying information, and will also record calls. For your protection, we may
delay a transaction or not implement one if we are not reasonably satisfied that
telephone instructions are genuine. If this occurs, we will not be liable for
any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by telephone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. You may not sell shares or change
distribution options on Trust Company retirement plans by phone. While you may
exchange shares of Trust Company IRA and 403(b) retirement accounts by phone,
certain restrictions may be imposed on other retirement plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
<TABLE>
<CAPTION>
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
CORPORATION Corporate Resolution
- ---------------------------------------------------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify the general partners, or
2. A certification for a partnership agreement
- ---------------------------------------------------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the trustees, or
2. A certification for trust
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
ELECTRONIC INSTRUCTIONS. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We can accept electronic instructions directly from your dealer or
representative without further inquiry. Electronic instructions may be processed
through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
TAX IDENTIFICATION NUMBER
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can 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
included with this prospectus or contact your investment representative. 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
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
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 direct your payments to buy the same class of shares of another
Franklin Templeton Fund or 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.
You will generally receive your payment by the fifth business day of the month
in which a payment is scheduled. When you sell your shares under a systematic
withdrawal plan, it is a taxable transaction.
Because of the Fund's front-end sales charge, you may not want to set up a
systematic withdrawal plan if you plan to buy shares on a regular basis. Shares
sold under the plan may also be subject to a Contingent Deferred Sales Charge.
Please see "Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with 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. We will send any payments made during that time to the
address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips.
You will need the Fund's code number to use TeleFACTS. The Fund's code is 203.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. PLEASE
VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household
and send only one copy of a report. Call Fund Information if you would like
an additional free copy of the Fund's financial reports or an interim
quarterly report.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. For further information, call Institutional
Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
DEPARTMENT NAME TELEPHONE NO. HOURS OF OPERATION (PACIFIC TIME)
(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.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
Glossary
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
CD - Certificate of deposit
CLASS I AND CLASS II - Certain funds in the Franklin Templeton Funds offer two
classes of shares, designated "Class I" and "Class II." The two classes have
proportionate interests in the same portfolio of investment securities. They
differ, however, primarily in their sales charge structures and Rule 12b-1
plans. Because the Fund's sales charge structure and Rule 12b-1 plan are similar
to those of Class I shares, shares of the Fund are considered Class I shares for
redemption, exchange and other purposes.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - The 12 month period during which a Contingent Deferred
Sales Charge may apply. Regardless of when during the month you purchased
shares, they will age one month on the last day of that month and each following
month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
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., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
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.
NASD - National Association of Securities Dealers, Inc.
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.
NSCC - National Securities Clearing Corporation
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the 4.50% sales charge.
QUALIFIED RETIREMENT PLAN(S) - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
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
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or another wholly owned
subsidiary of Resources.
Appendix
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
COMMERCIAL PAPER RATINGS
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.
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.
