Franklin
Small Cap
Growth Fund
Franklin Strategic Series
PROSPECTUS
September 1, 1995
as amended March 28, 1996
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin Small Cap Growth Fund (the "Fund") is a diversified series of Franklin
Strategic Series (the "Trust"), an open-end management investment company. The
Fund's investment objective is long-term capital growth. It seeks to accomplish
its objective by investing primarily in equity securities of companies which
have a market capitalization of less than $1 billion at the time of the Fund's
investment and by attempting to keep at least a third of its assets invested in
companies with market capitalization of $550 million or less.
The Fund may invest in domestic and foreign securities as described under
"Investment Objective and Policies of the Fund."
An SAI concerning the Fund dated September 1, 1995, as may be amended from time
to time, provides a further discussion of certain areas in this Prospectus and
other matters which may be of interest to some investors. It has been filed with
the Securities and Exchange Commission ("SEC") and is incorporated herein by
reference. A copy is available without charge from the Fund or from
Distributors, at the address or telephone number shown above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Fund offers two classes of shares to its investors: Franklin Small Cap
Growth Fund - Class I ("Class I") and Franklin Small Cap Growth Fund - Class II
("Class II"). Investors can choose between Class I shares, which generally bear
a higher front-end sales charge and lower ongoing Rule 12b-1 distribution fees
("Rule 12b-1 fees"), and Class II shares, which generally have a lower front-end
sales charge and higher ongoing Rule 12b-1 fees. Investors should consider the
differences between the two classes, including the impact of sales charges and
Rule 12b-1 fees, in choosing the more suitable class given their anticipated
investment amount and time horizon. See "How to Buy Shares of the Fund -
Differences Between Class I and Class II."
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank; further, such shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
Shares of the Fund involve investment risks, including the possible loss of
principal.
This Prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this Prospectus. Further
information may be obtained from the underwriter.
Contents Page
Expense Table............................................ 2
Financial Highlights..................................... 4
About the Fund........................................... 4
Investment Objective and
Policies of the Fund..................................... 5
Management of the Fund................................... 12
Distributions to Shareholders............................ 13
Taxation of the Fund
and Its Shareholders..................................... 15
How to Buy Shares of the Fund............................ 16
Other Programs and Privileges
Available to Fund Shareholders........................... 22
Exchange Privilege....................................... 24
How to Sell Shares of the Fund........................... 27
Telephone Transactions................................... 31
Valuation of Fund Shares................................. 32
How to Get Information Regarding
an Investment in the Fund................................ 33
Performance.............................................. 34
General Information...................................... 35
Account Registrations.................................... 36
Important Notice Regarding
Taxpayer IRS Certifications.............................. 37
Portfolio Operations..................................... 38
Useful Terms and Definitions............................. 38
Expense Table
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in the Fund. These figures are based on aggregate
operating expenses of the Class I shares (before fee waivers) for the fiscal
year ended April 30, 1995.
<TABLE>
<CAPTION>
Class I Class II
<S> <C> <C>
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%+
................................................................................Class I Class II
Annual Fund Operating Expenses
as a percentage of average net assets)
Management Fees (before fee waivers) 0.63%* 0.63%*
12b-1 Fees......................................................................0.20%** 1.00%**
Other Expenses:
Reports to Shareholders........................................................0.11% 0.11%
Shareholder Servicing Costs....................................................0.10% 0.10%
Other..........................................................................0.12% 0.12%
Total Other Expenses............................................................0.33% 0.33%
Total Fund Operating Expenses...................................................1.16%* 1.96%*
</TABLE>
++Although Class II has a lower front-end sales charge than Class I, over time
the higher Rule 12b-1 fee for Class II may cause shareholders to pay more for
Class II shares than for Class I shares. Given the maximum front-end sales
charge and the rate of Rule 12b-1 fees of each class, it is estimated that this
will take less than six years for shareholders who maintain total shares valued
at less than $100,000 in the Franklin Templeton Funds. Shareholders with larger
investments in the Franklin Templeton Funds will reach the crossover point more
quickly. See "How to Buy Shares of the Fund - Purchase Price of Fund Shares" for
the definition of Franklin Templeton Funds and similar references.
++++Class I investments of $1 million or more are not subject to a front-end
sales charge; however, a contingent deferred sales charge of 1% is generally
imposed on certain redemptions within a "contingency period" of 12 months of the
calendar month of such investments. See "How to Sell Shares of the Fund -
Contingent Deferred Sales Charge."
+Class II shares redeemed within a "contingency period" of 18 months of the
calendar month of such investments are subject to a 1% contingent deferred sales
charge. See "How to Sell Shares of the Fund - Contingent Deferred Sales Charge."
*Represents the amount that would have been payable to the investment manager
before any fee waiver by the investment manager. The investment manager agreed
in advance, however, to waive a portion of its management fees. With this fee
waiver, management fees and total operating expenses for Class I represented
0.16% and 0.69%, respectively, of the Fund's average net assets.
**Consistent with National Association of Securities Dealers, Inc.'s rules, it
is possible that the combination of front-end sales charges and Rule 12b-1 fees
could cause long-term shareholders to pay more than the economic equivalent of
the maximum front-end sales charges permitted under those same rules.
Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in the Fund. Rather the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.
Example
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge, that apply to a $1,000 investment
in the Fund over various time periods assuming (1) a 5% annual rate of return
and (2) redemption at the end of each time period.
One Year Three Years Five Years Ten Years
Class I................. $56* $80 $106 $180
Class II................ $40 $71 $115 $236
*Assumes that a contingent deferred sales charge will not apply to Class I
shares.
A Class II shareholder would pay the following expenses on the same investment,
assuming no redemption:
One Year Three Years Five Years Ten Years
$30 $71 $115 $236
This example is based on the aggregate operating expenses, before fee waivers,
shown above and should not be considered a representation of past or future
expenses, which may be more or less than those shown. The operating expenses are
borne by the Fund and only indirectly by shareholders as a result of their
investment in the Fund. In addition, federal securities regulations require the
example to assume an annual return of 5%, but the Fund's actual return may be
more or less than 5%.
Financial Highlights
Set forth below is a table containing the financial highlights for a Class I
share of the Fund from February 14, 1992 (the effective date of the registration
statement for the Fund) through April 30, 1992, and for each of the three fiscal
years in the period ended April 30, 1995. The information has been audited by
Coopers & Lybrand L.L.P., independent auditors, whose audit report appears in
the financial statements in the Fund's Annual Report to Shareholders dated April
30, 1995. Information regarding Class II will be included after it has been in
effect for a period covered by the table. See the discussion "Reports to
Shareholders" under "General Information."
<TABLE>
<CAPTION>
Per Share Operating Performance Ratios/Supplemental Data
--------------------------------- --------------------------
Net Ratio
Realized & Distri- Distri- Net Net Ratio of of Net
Year Net Asset Net Unrealized Total butions butions Asset Assets Expenses Investment
Ended Value at Invest- Gain From From Net From Total Value at End to Average Income to Portfolio
April Beginning ment (Loss) on Investment Investment Capital Distri- at End Total of Year Net Average Turnover
30 of Year Income Securities Operations Income Gains butions of Year Return* (in 000's) Assets*** Net Assets Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19921 $10.00 $0.04 $(0.460) $(0.420) $ -- $ -- $ -- $ 9.58 (19.96)%** $ 1,268 --% 2.45%** 2.41%
1993 9.58 0.07 0.657 0.727 (0.087) -- -- 10.22 7.66 6,026 -- 0.84 63.15
1994 10.22 0.03 2.944 2.974 (0.043) (0.401) (0.444) 12.75 29.26 23,915 0.30 0.24 89.60
1995 12.75 0.03 3.138 3.168 (0.021) (0.997) (1.018) 14.90 27.05 63,010 0.69 0.25 104.84
</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 does not include the maximum 4.5% initial sales charge and assumes
reinvestment of dividends and capital gains at net asset value.
**Annualized
***During the periods indicated, Franklin Advisers, Inc., the investment
manager, agreed in advance to limit its management fees and make payments of
other expenses of 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
---------------------
19921................................................... 1.74%**
1993.................................................... 1.95
1994.................................................... 1.58
1995.................................................... 1.16
About the Fund
As noted on the cover, the Fund is a diversified series of the Trust, an
open-end management investment company commonly called a "mutual fund." The
Trust was organized in 1991 as a Delaware business trust and registered with the
SEC under the 1940 Act. The Fund has two classes of shares of beneficial
interest ("multiclass" structure) with a par value of $.01 per share: Franklin
Small Cap Growth Fund - Class I and Franklin Small Cap Growth Fund - Class II.
All Fund shares outstanding before October 2, 1995, have been redesignated as
Class I shares, and will retain their previous rights and privileges, except for
legally required modifications to shareholder voting procedures, as discussed in
"General Information - Organization and Voting Rights."
Investment Objective and Policies of the Fund
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. The Fund seeks to accomplish 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 the Fund's investment adviser believes to be positioned for
rapid growth in revenues or earnings and assets, characteristics which 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. There is, of
course, no assurance that the Fund's objective will be achieved.
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 such 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.
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 the Fund's investment manager believes have strong growth
potential, in relatively well-known, larger companies in mature industries which
the investment manager believes have the potential for capital appreciation, or
in corporate debt securities consisting of bonds, notes and debentures if the
Fund deems the investment to present a favorable investment opportunity,
consistent with the Fund's objective of long-term capital growth. The Fund may
seek capital appreciation by investing in debt securities which the Fund's
investment manager 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 the investment manager's
opinion, such 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 B 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. For
a description of ratings, please refer to 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, certificates of deposit, 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 which 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. Such 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.
Special Risk Considerations. The Fund may invest in relatively new or unseasoned
companies which 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 or 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
such companies tend to be volatile and are therefore speculative.
Historically, the small capitalization stocks have been more volatile in price
than the 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. Investors 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. The Fund may invest up to 25% of its total assets in foreign
securities, including those of developing 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.
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, 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. Further, the Fund may encounter difficulties or be
unable to pursue legal remedies and obtain judgments in foreign courts. 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.
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 which are acquired by a 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 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.
Loans of Portfolio Securities. Consistent with procedures approved by the Board
of Trustees and subject to the following conditions, the Fund may lend its
portfolio securities to qualified securities dealers or other institutional
investors, provided that such loans do not exceed 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 collateral with an initial market value of at least 102% of
the initial market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 100%. Such
collateral shall consist of cash, securities issued by the U.S. Government, its
agencies or instrumentalities, or irrevocable letters of credit. The lending of
securities is a common practice in the securities industry. The Fund engages in
security loan arrangements with the primary objective of increasing the Fund's
income either through investing the cash collateral in short-term interest
bearing obligations or by receiving a loan premium from the borrower. Under the
securities loan agreement, the Fund continues to be entitled to all dividends or
interest on any loaned securities. As with any extension of credit, there are
risks of delay in recovery and loss of rights in the collateral should the
borrower of the security fail financially.
Borrowing. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of 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. It is the policy of the Fund that illiquid securities
(securities that cannot be disposed of within seven days in the normal course of
business at approximately the amount at which the Fund has valued the
securities) may not constitute, at the time of purchase, more than 10% of the
value of the total net assets of the Fund. The Board of Trustees 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 such
securities to be considered liquid (and thus not subject to the foregoing 10%
limitation), to the extent the investment manager determines on a daily basis
that there is a liquid institutional or other market for such securities.
Notwithstanding the investment manager's determination in this regard, the Board
of Trustees will remain responsible for such determinations and will consider
appropriate action, consistent with the Fund's objective and policies, if a
security should become illiquid subsequent to its purchase. In this regard, if
qualified institutional buyers are no longer interested in purchasing 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 "The Fund's Investment Objective and Restrictions - Illiquid
Securities" in the SAI.
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 such companies that are securities brokers,
dealers, underwriters or investment advisers. Such companies are considered part
of the financial services industry sector.
Pursuant to Section 12(d)(3) 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.
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
the Fund's investment manager which invest primarily in short-term debt
securities. Such temporary investments will only be made with cash held to
maintain liquidity or pending investment. In addition, for temporary defensive
purposes, in the event of, or when the investment manager 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 covered put and call options
and purchase put and call options, on securities and indices, which trade on
securities exchanges and in the over-the-counter market. The Fund may purchase
and sell futures and options on futures with respect to 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 purchase 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 involve certain risks. Such 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 or
securities correlate with price movements in the relevant portion of the Fund's
portfolio. The Fund bears the risk that the prices of its portfolio securities
will not move in the same amount as the option or future it has purchased, or
that there may be a negative correlation which would result in a loss on both
such securities and the option or future.
The Fund's option and futures investments may be limited by the requirements of
the Internal Revenue Code of 1986, as amended (the "Code"), for qualification as
a regulated investment company and may reduce the portion of the Fund's
dividends which 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, more
information about which is included in the section entitled "Additional
Information Regarding Taxation" in the SAI.
Positions in exchange traded options and futures may be closed out only on an
exchange which provides a secondary market. There may not always be a liquid
secondary market for a futures or option contract at a time when the Fund seeks
to "close out" its position. If the Fund were unable to "close out" a futures or
option position, and if prices moved adversely, the Fund would have to continue
to make daily cash payments to maintain its required margin, and if the Fund had
insufficient cash, it might have to sell portfolio securities at a
disadvantageous time. In addition, the Fund might be required to deliver the
stocks underlying futures or 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.
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 its investment
manager disagree with this position. Nevertheless, pending a change in the
staff's position, the Fund will treat OTC options and "cover" assets as subject
to the Fund's limitation on illiquid securities. (See "Investment Objective and
Policies of the Fund - Illiquid Investments" in this Prospectus.)
In addition, adverse market movements could cause the Fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a futures contract. There is also the risk of loss by
the Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a futures contract or option. Transactions in
options and financial 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. (See "The Fund's Investment Objective and Restrictions -
Transactions in Options, Futures and Options on Financial Futures" in the SAI
for a fuller discussion of the Fund's investments in options and futures,
including the risks associated with such activity.)
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 purchases a U.S. government security subject to resale to a bank or
dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Fund in each agreement, with the value of the
underlying security marked-to-market daily to maintain coverage of at least
100%. A default by the seller might cause the Fund to experience a loss or delay
in the liquidation of the collateral securing the repurchase agreement. The Fund
might also incur disposition costs in liquidating the collateral. The Fund,
however, intends to enter into repurchase agreements only with financial
institutions such as broker-dealers and banks which are deemed creditworthy by
the Fund's investment manager. A repurchase agreement is deemed to be a loan by
the Fund under the 1940 Act. The U.S. government security subject to resale (the
collateral) will be held on behalf of the Fund by a custodian approved by the
Fund's Board of Trustees and will be held pursuant to a written agreement.
The Fund may also enter into reverse repurchase agreements. Such agreements
involve the sale of securities held by the Fund pursuant to an agreement to
repurchase the securities 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 Section 2(a)(23) of the 1940 Act, the
Fund does not treat these arrangements as borrowings under investment
restriction 3 (set forth in the SAI) so long as the segregated account is
properly maintained.
General. The Fund will invest at least 65% of its total assets in equity
securities of companies which have a market capitalization of less than $1
billion at the time of the Fund's investment. 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; however, there is no assurance that it
will always be able to find suitable companies to include in this one-third
portion. The investment manager will monitor the availability of securities
suitable for investment by the Fund and recommend appropriate action to the
Board of Trustees 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
of Trustees will review the availability of suitable investments quarterly,
including the investment manager's assessment of the availability of suitable
investments. The investment manager will also present to the Board the
investment manager's views and recommendations regarding the Fund's ability to
meet this goal in the future. If the Board of Trustees 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 such changes will be consistent with the requirements of
the 1940 Act and the rules adopted thereunder.
The Fund is subject to a number of additional investment restrictions, some of
which may be changed only with the approval of shareholders, which limit its
activities to some extent. For a list of these restrictions and more information
concerning the policies discussed herein, please see the SAI.
The 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 the approval of a majority of the Fund's outstanding shares.
How Shareholders Participate
in the Results of the Fund's Activities
The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
the shareholder owns will increase. If the securities owned by the Fund decrease
in value, the value of the shareholder's shares will also decline. In this way,
shareholders participate in any change in the value of the securities owned by
the Fund.
In addition to the factors which affect the value of individual securities, as
described in the preceding sections, a shareholder may anticipate that the value
of Fund shares will fluctuate with movements in the broader equity and bond
markets, as well.
To the extent the Fund's investments consist of common stocks, a decline in the
market, expressed for example by a drop in the Dow Jones Industrials or the
Standard & Poor's 500 average or any other equity based index, may also be
reflected in declines in the Fund's share price. To the extent the Fund's
investments consist of debt securities, changes in interest rates will affect
the value of the Fund's portfolio and thus its share price. Increased rates of
interest which frequently accompany higher inflation and/or a growing economy
are likely to have a negative effect on the value of Fund shares. History
reflects both increases and decreases in the prevailing rate of interest, and in
the valuation of the market, and these may reoccur unpredictably in the future.
Management of the Fund
The Board has the primary responsibility for the overall management of the Fund
and for electing the officers of the Trust who are responsible for administering
its day-to-day operations.
The Board has carefully reviewed the multiclass structure to ensure that no
material conflict exists between the two classes of shares. Although the Board
does not expect to encounter material conflicts in the future, the Board will
continue to monitor the Fund and will take appropriate action to resolve such
conflicts if any should arise.
In developing the multiclass structure the Fund has retained the authority to
establish additional classes of shares. It is the Fund's present intention to
offer only two classes of shares, but new classes may be offered in the future.
Advisers serves as the Fund's investment manager. Advisers is a wholly-owned
subsidiary of Resources, a publicly owned holding company, the principal
shareholders of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its various subsidiaries (the "Franklin Templeton Group"). Advisers acts
as investment manager or administrator to 36 U.S. registered investment
companies (118 separate series) with aggregate assets of over $81 billion.
Pursuant to a management agreement, the Manager supervises and implements the
Fund's investment policies and provides certain administrative services and
facilities which are necessary to conduct the Fund's business. The Manager
performs similar services for other funds and there may be times when the
actions taken with respect to the Fund's portfolio will differ from those taken
by the Manager on behalf of other funds. Neither the Manager (including its
affiliates) nor its officers, directors or employees nor the officers and
trustees of the Fund are prohibited from investing in securities held by the
Fund or other funds which are managed or administered by the Manager to the
extent such transactions comply with the Fund's Code of Ethics. Please see
"Investment Advisory and Other Services" and "General Information" in the SAI
for further information on securities transactions and a summary of the Fund's
Code of Ethics.
Among the responsibilities of the Manager under the management agreement is the
selection of brokers and dealers through whom transactions in the Fund's
portfolio securities will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more than one broker is
able to provide the best execution, the Manager will consider the furnishing of
quotations and of other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of shares of the Fund,
as factors in selecting a broker. Further information is included under "The
Fund's Policies Regarding Brokers Used on Portfolio Transactions" in the SAI.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Investor Services, in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
During the fiscal year ended April 30, 1995, expenses borne by Class I shares of
the Fund, including fees representing 0.16% paid to Advisers, after fee waiver
determined under advance agreement, and to Investor Services, totaled 0.69% of
the average daily net assets of that class.
Plans of Distribution
A separate plan of distribution has been approved and adopted for each class
("Class I Plan" and Class II Plan", respectively, or "Plan(s)") pursuant to Rule
12b-1 under the 1940 Act. The Rule 12b-1 fees charged to each class are based
solely on the distribution and, with respect to Class II Plan, servicing fees
attributable to that particular class. Under either Plan, the portion of fees
remaining after payment to securities dealers or others for distribution or
servicing may be paid to Distributors for routine ongoing promotion and
distribution expenses incurred with respect to such class. Such expenses may
include, but are not limited to, the printing of prospectuses and reports used
for sales purposes, expenses of preparing and distributing sales literature and
related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of Distributors' overhead expenses attributable to
the distribution of Fund shares.
The maximum amount which the Fund may reimburse to Distributors of others under
the Class I Plan for such distribution expenses is 0.25% per annum of Class I's
average daily net assets payable on a quarterly basis. All expenses of
distribution in excess of 0.25% per annum will be borne by Distributors, or
others who have incurred them, without reimbursement from the Fund.
Under the Class II Plan, the Fund pays to Distributors distribution and related
expenses up to 0.75% per annum of Class II's daily net assets, payable
quarterly. Such fees may be used in order to compensate Distributors or others
for providing distribution and related services and bearing certain expenses of
the class. All expenses of distribution, marketing and related services over
that amount will be borne by Distributors or others who have incurred them,
without reimbursement by the Fund. In addition, the Class II Plan provides for
an additional payment by the Fund of up to 0.25% per annum of Class II's average
daily net assets as a servicing fee, payable quarterly. This fee will be used to
pay securities dealers or others for, among other things, assisting in
establishing and maintaining customer accounts and records; assisting with
purchase and redemption requests; receiving and answering correspondence;
monitoring dividend payments from the Fund on behalf of customers, or similar
activities related to furnishing personal services and/or maintaining
shareholder accounts.
Either Distributors, or one of its affiliates, may pay, from its or their own
resources, a commission of up to 1% of the purchase price of Class II shares to
securities dealers who initiate and are responsible for such purchases. During
the first year following the purchase of Class II shares, Distributors will
retain a portion of Class II's Rule 12b-1 fees attributable equal to 0.75% per
annum of Class II's average daily net assets to partially recoup fees
Distributors pays to securities dealers in connection with initial purchases of
Class II shares.
Both Plans also cover any payments to or by the Fund, Advisers, Distributors, or
other parties on behalf of the Fund, Advisers or Distributors, to the extent
such payments are deemed to be for the financing of any activity primarily
intended to result in the sale of shares issued by the Fund within the context
of Rule 12b-1. The payments under the Plans are included in the maximum
operating expenses which may be borne by each class of the Fund. For more
information, please see "The Fund's Underwriter" in the SAI.
Distributions to Shareholders
There are two types of distributions which the Fund may make to its
shareholders:
1. Income dividends. The Fund receives income in the form of dividends, interest
and other income derived from its investments. This income, less the expenses
incurred in the Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of dividends paid per
share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed net capital gains from the prior fiscal year. The Fund may
make more than one distribution derived from net short-term and net long-term
capital gains in any year or adjust the timing of these distributions for
operational or other reasons.
Distribution To Each Class of Shares
According to the requirements of the Code, dividends and capital gains will be
calculated and distributed in the same manner for Class I and Class II shares.
The per share amount of any income dividends will generally differ only to the
extent that each class is subject to different Rule 12b-1 fees.
Distribution Date
Although subject to change by the Board, without prior notice to or approval by
shareholders, the Fund's current policy is to declare dividends payable
semiannually in June and December for shareholders of record generally on the
first business day preceding the 15th of the month, payable on or about the last
business day of such months. The amount of income dividend payments by the Fund
is dependent upon the amount of net income received by the Fund from its
portfolio holdings, is not guaranteed and is subject to the discretion of the
Board. Fund shares are quoted ex-dividend on the first business day following
the record date. The Fund does not pay "interest" or guarantee any fixed rate of
return on an investment in its shares.
In order to be entitled to a dividend, an investor must have acquired Fund
shares prior to the close of business on the record date. An investor
considering purchasing Fund shares shortly before the record date of a
distribution should be aware that because the value of the Fund's shares is
based directly on the amount of its net assets, rather than on the principle of
supply and demand, any distribution of income or capital gain will result in a
decrease in the value of the Fund's shares equal to the amount of the
distribution. While a dividend or capital gain distribution received shortly
after purchasing shares represents, in effect, a return of a portion of the
shareholder's investment, it may be taxable as dividend income or capital gain.
Distribution Options
Distributions from the Fund may be taken in any of these ways:
1. Purchase additional shares of the Fund - The shareholder may purchase
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. Class II
shareholders, may also reinvest distributions in Class I shares of the Fund.
This is a convenient way to accumulate additional shares and maintain or
increase the shareholder's earnings base.
2. Purchase shares of other Franklin Templeton Funds - Distributions may be
directed to purchase the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a contingent deferred sales charge).
Class II shareholders, may also direct distributions to purchase Class I shares
of another Franklin Templeton Fund. Many shareholders find this a convenient way
to diversify their investments.
3. Receive distributions in cash - Dividends, or both dividend and capital gain
distributions may be received by the shareholder in cash. The shareholder may
have the money sent directly to the address of record, to another person, or to
a checking account. If the money is to be sent to a checking account, please see
"Electronic Fund Transfers" under "Other Programs and Privileges Available to a
Fund's Shareholders."
To select one of these options, the shareholder should complete sections 6 and 7
of the Shareholder Application included with this Prospectus, or the investment
representative should be notified of the option preferred. If no option is
selected, dividend and capital gain distributions will be automatically
reinvested in the same class of the Fund. The distribution option selected may
be changed at any time by notifying the Fund by mail or by telephone. Please
allow at least seven days prior to the record date for a Fund to process the new
option.
Taxation of the Fund
and Its Shareholders
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Fund and its shareholders is included in the section entitled,
"Additional Information Regarding Taxation" in the SAI.
The Fund intends to continue to qualify for treatment as a regulated investment
company under Subchapter M of the 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 the shareholder
receives from the Fund, as well as any distributions derived from the excess of
net short-term capital gain over net long-term capital loss, are treated as
ordinary income whether the shareholder has elected to receive them in cash or
in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time the shareholder has owned Fund shares and regardless of whether
such distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January, will be treated for tax purposes as if
received by the shareholder on December 31 of the calendar year in which they
are declared.
For corporate shareholders, 83.34% of the income dividends paid by the Fund for
the fiscal year ended April 30, 1995 qualified for the corporate
dividends-received deduction, subject to certain holding period and debt
financing restrictions imposed under the Code on the corporation claiming the
deduction. These restrictions are discussed in the SAI.
Redemptions and exchanges of Fund shares are taxable events on which a
shareholder 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
purchasing shares of the Fund will not be included in the federal tax basis of
such shares sold or exchanged within 90 days of their purchase (for purposes of
determining gain or loss with respect to such shares) if the sales proceeds are
reinvested in the Fund or in another of the Franklin Templeton Funds (as such
term is defined under "How to Buy Shares of the Fund") and a sales charge which
would otherwise apply to the reinvestment is reduced or eliminated. Any portion
of such sales charge excluded from the tax basis of the shares sold will be
added to the tax basis of the shares acquired in the reinvestment.
The Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid and will, promptly after the close of
each calendar year, advise them of the tax status for federal income tax
purposes of such dividends and distributions.
Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding or other taxes on distributions received by them from the
Fund and the application of foreign tax laws to these distributions.
Shareholders should also consult their tax advisors with respect to the
applicability of any state and local intangible property or income taxes to
their shares of the Fund and distributions and redemption proceeds received from
the Fund.
How to Buy Shares of the Fund
Shares to open a Fund account may be bought with as little as $100 and make
additional investments at any time with as little as $25. These minimums may be
waived when shares are purchased by retirement plans. To open an account, the
investor should contact the investment representative or complete and sign the
enclosed Shareholder Application and return it to the Fund with a check. Please
indicate which class of shares to buy. If no class is specified, the purchase
will automatically be invested in Class I shares.
Deciding Which Class to Buy
When deciding which class of shares to buy, the investor should consider a
number of factors, including the amount expected to be invest and the length of
time the investor expects to hold the investment. If the investor plans to
invest $1 million or more in a single payment or qualifies to buy Class I shares
at net asset value, Class II shares may not be bought.
Generally, the investor should consider buying Class I shares if:
o The investor expects to invest in the Fund over the long term;
o the investor qualifies to buy Class I shares at a reduced sales charge; or
o the investor intends to purchase $1 million or more over time.
The investor should consider Class II shares if:
o The investor expects to invest less than $100,000 in Franklin Templeton Funds;
and
o the investor intends to make substantial redemptions within approximately six
years or less of investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees, which accumulate over time to outweigh the
lower Class II front-end sales charge and result in lower income dividends for
Class II shareholders. If the investor qualifies to buy Class I shares at a
reduced sales charge based upon the size of the purchase or through the Letter
of Intent or Rights of Accumulation programs, but intend to hold the shares less
than approximately six years, the investor should evaluate whether it is more
economical to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for the
investor 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 will therefore be automatically invested in Class
I shares. The investor may accumulate more than $1 million in Class II shares
through purchases over time, but if it is the intention to do this the investor
should determine whether it would be more beneficial 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
The investor may buy shares at the public offering price of the class, unless
the investor qualifies to purchase shares at a discount or without a sales
charge as discussed below. The front-end sales charge for Class II shares is 1%
and, unlike Class I shares, does not vary based upon the size of the purchase.
<TABLE>
<CAPTION>
Total Sales Charge
As a Percentage of
------------------
Amount Allowed to
Net Amount Dealer as a Percentage
Size of Transaction at Offering Price Offering Price Invested of Offering Price*
- --------------------------------------------------------------------------------------------------------------------------
Class I
<S> <C> <C> <C>
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%
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. Distributors may at times reallow
the entire sales charge to the securities dealer. A securities dealer who
receives 90% or more of the sales commission may be deemed an underwriter under
the Securities Act of 1933, as amended.
**A contingent deferred sales charge of 1% may be imposed on: (i) certain
redemptions of all or a part of an investment of $1 million or more in Class I
shares; and (ii) redemptions of Class II shares within 18 months of their
purchase. See "How to Sell Shares of the Fund - Contingent Deferred Sales
Charge."
***Please see "General - Other Payments to Securities Dealers" below for a
discussion of payments Distributors may make to securities dealers out of its
own resources.
+Purchases of Class II shares are limited to purchases below $1 million. See
"Deciding Which Class to Buy."
The offering price for each class will be calculated to two decimal places using
standard rounding criteria.
Quantity Discounts in Sales Charges - Class I Shares Only
As shown in the table above, the sales charge an investor may pay when buying
Class I shares may be reduced based upon the size of the purchase.
Rights of Accumulation. To determine if the investor may pay a reduced sales
charge, add the cost or current value, whichever is higher, of Class I and Class
II shares in other Franklin Templeton Funds, as well as those of the investor's
spouse, children under the age of 21 and grandchildren under the age of 21, to
the amount of the current Class I purchase. To receive the reduction, the
investor or the investor's investment representative must notify Distributors
that the investment qualifies for a discount.
Letter of Intent. The investor may purchase 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 the investor to invest a
specified dollar amount during a 13 month period. The amount the investor agrees
to invest determines the sales charge to be paid on Class I shares. The investor
or the investor's investment representative must inform the Fund that the Letter
is in effect each time shares are purchased.
By completing the Letter of Intent section of the Shareholder Application, the
investor acknowledges and agrees to the following:
o The investor authorizes Distributors to reserve five percent (5%) of the
amount of the total intended purchase in Class I shares registered in the
investor's name.
o The investor grants Distributors a security interest in these shares and
appoint Distributors as attorney-in-fact with full power of substitution to
redeem any or all of these reserved shares to pay any unpaid sales charge if the
investor does not fulfill the terms of the Letter.
o The Fund will include the reserved shares in the total shares owned by the
investor as reflected on the periodic statements.
o The investor will receive dividend and capital gain distributions on the
reserved shares; the Fund will pay or reinvest these distributions as the
investor directs.
o Although the investor may exchange the shares, the investor may not liquidate
reserved shares until the Letter is completed or pay the higher sales charge.
o The Fund's policy of reserving shares does not apply to certain benefit plans
described under "Purchases at Net Asset Value."
More information about the Letter of Intent privilege is included in the SAI or
the investor may call the Shareholder Services Department.
Group Purchases. If the shareholder is a member of a qualified group, Class I
shares may be purchased at the reduced sales charge applicable to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase. For
example, if group members previously invested and still hold $80,000 of Fund
shares and invest $25,000, the sales charge will be 3.75%.
Distributor defines a qualified group as one which (i) has been in existence for
more than six months, (ii) has a purpose other than acquiring Fund shares at a
discount and (iii) satisfies uniform criteria which enable Distributors to
realize economies of scale in its costs of distributing shares.
In addition, a qualified group must have more than 10 members, and be available
to arrange for meetings between our representatives and group members. It must
also agree to include sales and other materials related to the Franklin
Templeton Funds in publications and mailings to its members at reduced or no
cost to Distributors, and arrange for payroll deduction or other bulk
transmission of investments to the Fund.
If the investor selects a payroll deduction plan, the investments will continue
automatically until the investor notifies the Fund and the employer to
discontinue further investments. Due to the varying procedures used by employers
to handle payroll deductions, there may be a delay between the time of the
payroll deduction and the time the money reaches the Fund. The purchase is
invested at the applicable offering price per share determined on the day that
the Fund receives both the check and the payroll deduction data in required
form.
Purchases at Net Asset Value
The investor may invest money from the following sources in Class I shares of
the Fund without paying front-end or contingent deferred sales charges. The
investor may also purchase Class II shares without paying front-end or
contingent deferred sales charges if the source of the investment proceeds is
included in paragraph (i) below:
(i) a distribution that the investor has received from a Franklin Templeton Fund
or a real estate investment trust ("REIT") sponsored or advised by Franklin
Properties, Inc., if the distribution is returned within 365 days of its payment
date. The investor may reinvest Class II distributions in either Class I or
Class II shares, but Class I distributions may only be invested in Class I
shares under this privilege. For more information, see "Distribution Options"
under "Distributions to Shareholders" or call Shareholder Services at
1-800/632-2301;
(ii) a redemption from a mutual fund with investment objectives similar to those
of the Fund, if (a) the investor's investment in that fund was subject to either
a front-end or contingent deferred sales charge at the time of purchase, (b) the
fund is not part of the Franklin Templeton Funds, and (c) the redemption
occurred within the past 60 days;
(iii) a distribution from an existing retirement plan already invested in the
Franklin Templeton Funds (including the Franklin Templeton Profit Sharing 401(k)
plan), up to the total amount of the distribution. The distribution must be
returned to the Fund within 365 days of the distribution date; or
(iv) a redemption from Templeton Institutional Funds, Inc., if the investor then
reinvests the redemption proceeds under an employee benefit plan qualified under
Section 401 of the Code, in shares of the Fund.
The investor may also reinvest the proceeds from a redemption of any of the
Franklin Templeton Funds in Class I or Class II shares of the Fund at net asset
value. To do so, the investor must (a) have paid a sales charge on the purchase
or sale of the original shares, (b) reinvest the redemption money in the same
class of shares, and (c) request the reinvestment of the money within 365 days
of the redemption date. The investor may reinvest up to the total amount of the
redemption proceeds under this privilege. If a different class of shares is
purchased, the full front-end sales charge must be paid at the time of purchase
of the new shares. While the investor will receive credit for any contingent
deferred sales charge paid on the shares redeemed, a new contingency period will
begin. Shares that were no longer subject to a contingent deferred sales charge
will be reinvested at net asset value and will not be subject to a new
contingent deferred sales charge. Shares exchanged into other Franklin Templeton
Funds are not considered "redeemed" for this privilege (see "Exchange
Privilege").
If the investor immediately reinvested the redemption proceeds in a Franklin
Bank Certificate of Deposit ("CD") but wanted to reinvest them back into the
Franklin Templeton Funds as described above, the investor will have 365 days
from the date the CD (including any rollover) matures to do so.
If the investor's securities dealer or another financial institution reinvests
the money in the Fund at net asset value for the investor, that person or
institution may charge the investor a fee for this service.
A redemption is a taxable transaction, but reinvestment without a sales charge
may affect the amount of gain or loss recognized and the tax basis of the shares
reinvested. If the investor has a loss on the redemption, the loss may be
disallowed if reinvested in the same fund within a 30-day period. For more
information regarding the possible tax consequences of such a reinvestment,
please see the tax section of this Prospectus and the SAI.
Certain categories of investors also qualify to purchase Class I shares of the
Fund at net asset value regardless of the source of the investment proceeds. If
the investor or the investor's account is included in one of the categories
below, none of the Class I shares purchased will be subject to front-end or
contingent deferred sales charges:
(i) companies exchanging shares or selling assets pursuant to a merger,
acquisition or exchange offer;
(ii) accounts managed by the Franklin Templeton Group;
(iii) certain unit investment trusts and unit holders of these trusts
reinvesting distributions from the trusts in the Fund;
(iv) registered securities dealers and their affiliates, for their investment
accounts only;
(v) current employees of securities dealers and their affiliates and their
family members, in accordance with the internal policies and procedures of the
employing securities dealer and affiliate;
(vi) broker-dealers who have entered into a supplemental agreement with
Distributors, on behalf of their clients who are participating in comprehensive
fee programs. These programs, sometimes known as wrap fee programs, are
sponsored by the broker-dealer and either advised by the broker-dealer or by
another registered investment advisor affiliated with that broker;
(vii) any state, county, or city, or any instrumentality, department, authority
or agency thereof which has determined that the Fund is a legally permissible
investment and which is prohibited by applicable investment laws from paying a
sales charge or commission in connection with the purchase of shares of any
registered management investment company ("an eligible governmental authority").
SUCH INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND
TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or the Manager on arbitrage rebate
calculations. If the investor is a securities dealer who has executed a dealer
agreement with Distributors and, through its services, an eligible governmental
authority invests in the Fund at net asset value, Distributors or one of its
affiliates may make a payment, out of its own resources, to the securities
dealer in an amount not to exceed 0.25% of the amount invested. Please contact
the Franklin Templeton Institutional Services Department for additional
information;
(viii) officers, trustees, directors and full-time employees of the Franklin
Templeton Funds, or of the Franklin Templeton Group, and their family members.
Although the investor may pay sales charges on investments in accounts opened
after the association has ended, the shareholder may continue to invest in
accounts opened while they were with Franklin without paying sales charges;
(ix) trust companies and bank trust departments that exercise exclusive
discretionary investment authority over funds held in a fiduciary, agency,
advisory, custodial or similar capacity and agree to invest at least $1 million
in Franklin Templeton Funds over a 13 month period. Distributors will accept
orders for such accounts by mail accompanied by a check or by telephone or other
means of electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next business
day following such order;
(x) group annuity separate accounts offered to retirement plans;
(xi) trustees or other fiduciaries purchasing securities for certain retirement
plans of organizations with collective retirement plan assets of $1 million or
more, without regard to where such assets are currently invested; or
(xii) Designated Retirement Plans. Non-Designated Retirement Plans may also
qualify to purchase shares of the Fund under this privilege if they meet the
requirements for Designated Retirement Plans and those described under "Group
Purchases," above.
If the investor qualifies to buy shares at net asset value as discussed in this
section, please specify in writing the privilege that applies to the purchase
and include that written statement with the purchase order. Distributors will
not be responsible for purchases that are not made at net asset value if this
written statement is not included with the order.
For more information, please see the SAI.
Purchasing Shares of the Fund in Connection with Retirement Plans Involving
Tax-Deferred Investments
Shares of the Fund may be used for individual or employer-sponsored retirement
plans involving tax-deferred investments. The Fund may be used as an investment
vehicle for an existing retirement plan, or the Trust Company may provide the
plan documents and serve as custodian or trustee. A plan document must be
adopted in order for a retirement plan to be in existence.
Trust Company, an affiliate of Distributors, can serve as custodian or trustee
for retirement plans. Brochures for Trust Company plans contain important
information regarding eligibility, contribution and deferral limits and
distribution requirements. Please note that an application other than the one
contained in this Prospectus must be used to establish a retirement plan account
with Trust Company. To obtain a retirement plan brochure or application, call
1-800/DIAL BEN (1-800/342-5236).
Please see "How to Sell Shares of the Fund" for specific information regarding
redemptions from retirement plan accounts. Specific forms are required to be
completed for distributions from Trust Company retirement plans.
Individuals and plan sponsors should consult with legal, tax or benefits and
pension plan consultants before choosing a retirement plan. In addition,
retirement plan investors should consider consulting their investment
representatives or advisors concerning investment decisions within their plans.
General
The Fund continuously offers its shares through securities dealers who have an
agreement with Distributors. The Fund and Distributors may refuse any order for
the purchase of shares. Currently, the Fund does not allow investments by Market
Timers.
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law. Banks and financial institutions
selling Fund shares may be required to register as dealers pursuant to state
law.
Other Payments to Securities Dealers. Distributors will pay the following
commissions, out of its own resources, to securities dealers who initiate and
are responsible for Class I purchases of $1 million or more: 1% on sales of $1
million but less than $2 million, plus 0.80% on sales of $2 million but less
than $3 million, plus 0.50% on sales of $3 million but less than $50 million,
plus 0.25% on sales of $50 million but less than $100 million, plus 0.15% on
sales of $100 million or more. These breakpoints are reset every 12 months for
purposes of additional purchases.
Distributors or one of its affiliates may also pay up to 1% of the purchase
price to securities dealers who initiate and are responsible for Class I
purchases made at net asset value by any of the entities described in paragraphs
(ix), (xi) or (xii) under "Purchases at Net Asset Value" above. These payments
may not be made to securities dealers or others in connection with the sale of
Fund shares if the payments might be used to offset administration or
recordkeeping costs for retirement plans or circumstances suggest that plan
sponsors or administrators might use or otherwise allow the use of Rule 12b-1
fees to offset such costs. Please see the SAI for the breakpoints applicable to
these purchases.
For Class II purchases, either Distributors or one of its affiliates may pay
securities dealers, out of its own resources, up to 1% of the purchase price. To
partially recoup these payments, Distributors will keep part of the Rule 12b-1
fees assessed to the shares during the first year following their purchase.
Either Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with the
sale of shares of the Franklin Templeton Funds. In some cases, this compensation
may be available only to securities dealers whose representatives have sold or
are expected to sell significant amounts of shares of the Franklin Templeton
Funds. Compensation may include financial assistance and payments made in
connection with conferences, sales or training programs for employees of the
securities dealer, seminars for the public, advertising, sales campaigns and/or
shareholder services, programs regarding one or more of the Franklin Templeton
Funds and other programs or events sponsored by securities dealers, and payment
for travel expenses of invited registered representatives and their families,
including lodging, in connection with business meetings or seminars located
within or outside the U.S. Securities dealers may not use sales of the Fund's
shares to qualify for this compensation if prohibited by the laws of any state
or self-regulatory agency, such as the National Association of Securities
Dealers, Inc. None of this compensation is paid for by the Fund or its
shareholders.
For additional information about shares of the Fund, the SAI. The SAI also
includes a listing of the officers and trustees of the Trust who are affiliated
with Distributors. See "Officers and Trustees."
Other Programs and Privileges Available to Fund Shareholders
Certain of the programs and privileges described in this section may not be
available directly from the Fund to shareholders whose shares are held, of
record, by a financial institution or in a "street name" account or networked
account through the National Securities Clearing Corporation ("NSCC") (see the
section captioned "Account Registrations" in this Prospectus).
Share Certificates
Shares from an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by the shareholder, can be 2% or more of the value of
the lost, stolen or destroyed certificate. A certificate will be issued if
requested by the shareholder or by the securities dealer.
Confirmations
A confirmation statement will be sent to each shareholder semi-annually to
reflect the dividends reinvested during that period and after each other
transaction which affects the shareholder's account. This statement will also
show the total number of shares owned by the shareholder, including the number
of shares in "plan balance" for the account of the shareholder.
Automatic Investment Plan
The Automatic Investment Plan offers a convenient way to invest in the Fund.
Under the plan, the investor can arrange to have money transferred automatically
from the checking account to the Fund each month to buy additional shares.
Please refer to the Automatic Investment Plan Application at the back of this
Prospectus for the requirements of the program. The investor's investment
representative may also assist the investor. Of course, the market value of the
Fund's shares may fluctuate and a systematic investment plan such as this will
not assure a profit or protect against a loss. The investor may terminate the
program at any time by notifying Investor Services by mail or by phone.
Systematic Withdrawal Plan
The Systematic Withdrawal Plan allows the investor to receive regular payments
from the account on a monthly, quarterly, semiannual or annual basis. To
establish a Systematic Withdrawal Plan, the value of the account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at least
$50. Please keep in mind that $50 is merely the minimum amount and is not a
recommended amount. For retirement plans subject to mandatory distribution
requirements, the $50 minimum will not apply.
To establish a Systematic Withdrawal Plan, please complete the Systematic
Withdrawal Plan section of the Shareholder Application included with this
Prospectus and indicate how the preferred option for payments. The investor may
choose to receive payments in any of the following ways:
1. Purchase shares of other Franklin Templeton Funds - The investor may direct
payments to purchase the same class of shares of another Franklin Templeton
Fund.
2. Receive payments in cash - The investor may choose to receive payments in
cash. The money may be sent directly to the investor, to another person, or to a
checking account. For instructions on sending the money to a checking account,
please see "Electronic Fund Transfers" below.
There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once the plan is established, any distributions paid by the
Fund will be automatically reinvested in the investor's account. Payments under
the plan will be made from the redemption of an equivalent amount of shares in
the account, generally on the first business day of the month in which a payment
is scheduled. The investor will generally receive the payments within three to
five days after the shares are redeemed.
Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the
shares in the investor's account if payments exceed distributions received from
the Fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of the investor's account, the account will
be closed and the remaining balance in the account will be sent to the investor.
Redemptions under a Systematic Withdrawal Plan are considered a sale for federal
income tax purposes. Because the amount withdrawn under the plan may be more
than the investor's actual yield or income, part of the payment may be a return
of the investment.
While a Systematic Withdrawal Plan is in effect, shares must be held either in
plan balance or, where share certificates are outstanding, deposited with the
Fund. The investor should ordinarily not make additional investments in the Fund
of less than $5,000 or three times the amount of annual withdrawals under the
plan because of the sales charge on additional purchases. Shares redeemed under
the plan may also be subject to a contingent deferred sales charge. Please see
"Contingent Deferred Sales Charge" under "How to Sell Shares."
The investor may terminate a Systematic Withdrawal Plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying Investor
Services in writing at least seven business days prior to the end of the month
preceding a scheduled payment. The Fund may also terminate a Systematic
Withdrawal Plan by notifying the shareholder in writing and will automatically
terminate a Systematic Withdrawal Plan if all shares in the account are
withdrawn or if the Fund receives notification of the shareholder's death or
incapacity.
Electronic Fund Transfers
The investor may choose to have distributions from the Fund or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the checking
account is maintained at a bank that is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
the investor chooses this option, fifteen days should be allowed for initial
processing. Any payments made during that time will be sent to the address of
record on the shareholder's account.
Institutional Accounts
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
the Franklin Templeton Institutional Services Department at 1-800/321-8563.
Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these funds are
offered to the public with a sales charge. If a shareholder's investment
objective or outlook for the securities markets changes, the Fund shares may be
exchanged for the same class of shares of other Franklin Templeton Funds which
are eligible for sale in the shareholder's state of residence and in conformity
with such fund's stated eligibility requirements and investment minimums. Some
funds, however, may not offer Class II shares. Class I shares may be exchanged
for Class I shares of any of the other Franklin Templeton Funds. Class II shares
may be exchanged for Class II shares of any of the other Franklin Templeton
Funds. No exchanges between different classes of shares will be allowed. A
contingent deferred sales charge will not be imposed on exchanges. If, however,
the exchanged shares were subject to a contingent deferred sales charge in the
original fund purchased and shares are subsequently redeemed within the
contingency period of the class, a contingent deferred sales charge will be
imposed. Before making an exchange, investors should review the prospectus of
the fund they wish to exchange from and the fund they wish to exchange into for
all specific requirements or limitations on exercising the exchange privilege,
for example, limitations on a fund's sale of its shares, minimum holding periods
for exchanges at net asset value, or applicable sales charges.
Exchanges may be made in any of the following ways:
Exchanges by Mail
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
Exchanges by Telephone
Shareholders, or their investment representative of record, if any, may exchange
shares of the Fund by telephone by calling Investor Services at 1-800/632-2301
or the automated Franklin TeleFACTS(R) system (day or night) at 1-800/247-1753.
If the shareholder does not wish this privilege extended to a particular
account, the Fund or Investor Services should be notified.
The telephone exchange privilege allows a shareholder to effect exchanges from
the Fund into an identically registered account of the same class of shares in
one of the other available Franklin Templeton Funds. The telephone exchange
privilege is available only for uncertificated shares or those which have
previously been deposited in the shareholder's account. The Fund and Investor
Services will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. Please refer to "Telephone Transactions -
Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, shareholders should follow the other
exchange procedures discussed in this section, including the procedures for
processing exchanges through securities dealers.
Exchanges Through Securities Dealers
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "Exchanges by Telephone"
above. Such a dealer-ordered exchange will be effective only for uncertificated
shares on deposit in the shareholder's account or for which certificates have
previously been deposited. A securities dealer may charge a fee for handling an
exchange.
Additional Information Regarding Exchanges
Exchanges of the same class of shares are made on the basis of the net asset
values of the class involved, except as set forth below. Exchanges of shares of
a class which were purchased without a sales charge will be charged a sales
charge in accordance with the terms of the prospectus of the fund and the class
of shares being purchased, unless the original investment in the Franklin
Templeton Funds was made pursuant to the privilege permitting purchases at net
asset value, as discussed under "How to Buy Shares of the Fund." Exchanges of
Class I shares of the Fund which were purchased with a lower sales charge into a
fund which has a higher sales charge will be charged the difference in sales
charges, unless the shares were held in the Fund for at least six months prior
to executing the exchange.
When an investor requests the exchange of the total value of the Fund account
declared but unpaid income dividends and capital gain distributions will be
transferred to the fund being exchanged into and will be invested at net asset
value. Because the exchange is considered a redemption and purchase of shares,
the shareholder may realize a gain or loss for federal income tax purposes.
Backup withholding and information reporting may also apply. Information
regarding the possible tax consequences of such an exchange is included in the
tax section in this Prospectus and in the SAI.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing money market
instruments, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objectives exist immediately.
Subsequently, this money will be withdrawn from such short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The exchange privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
Exchanges of Class I Shares
The contingency period during which a contingent deferred sales charge may be
assessed for Class I shares will be tolled (or stopped) for the period such
shares are exchanged into and held in a Franklin or Templeton Class I money
market fund. If a Class I account has shares subject to a contingent deferred
sales charge, Class I shares will be exchanged into the new account on a
"first-in, first-out" basis. See "How to Sell Shares of the Fund - Contingent
Deferred Sales Charge" for a discussion of investments subject to a contingent
deferred sales charge.
Exchanges of Class II Shares
When an account is composed of Class II shares subject to the contingent
deferred sales charge, and Class II shares that are not, the shares will be
transferred proportionately into the new fund. Shares received from reinvestment
of dividends and capital gains are referred to as "free shares," shares which
were originally subject to a contingent deferred sales charge but to which the
contingent deferred sales charge no longer applies are called "matured shares,"
and shares still subject to the contingent deferred sales charge are referred to
as "CDSC liable shares." CDSC liable shares held for different periods of time
are considered different types of CDSC liable shares. For instance, if a
shareholder has $1,000 in free shares, $2,000 in matured shares, and $3,000 in
CDSC liable shares, and the shareholder exchanges $3,000 into a new fund, $500
will be exchanged from free shares, $1,000 from matured shares, and $1,500 from
CDSC liable shares. Similarly, if CDSC liable shares have been purchased at
different periods, a proportionate amount will be taken from shares held for
each period. If, for example, a shareholder holds $1,000 in shares bought 3
months ago, $1,000 bought 6 months ago, and $1,000 bought 9 months ago, and the
shareholder exchanges $1,500 into the new fund, $500 from each of these shares
will be deemed exchanged into the new fund.
The only money market fund exchange option available to Class II shareholders is
the Franklin Templeton Money Fund II ("Money Fund II"), a series of the Franklin
Templeton Money Fund Trust. No drafts (checks) may be written on Money Fund II
accounts, nor may shareholders purchase shares of Money Fund II directly. Class
II shares exchanged for shares of Money Fund II will continue to age for
purposes of calculating the contingent deferred sales charge, because they
continue to be subject to Rule 12b-1 fees. The contingent deferred sales charge
will be assessed if CDSC liable shares are redeemed. Class I shares may be
exchanged for shares of any of the money market funds in the Franklin Templeton
Funds except Money Fund II. Draft writing privileges and direct purchases are
allowed on these other money market funds as described in their respective
prospectuses.
To the extent shares are exchanged proportionately, as opposed to another
method, such as first-in first-out, or free shares followed by CDSC liable
shares, the exchanged shares may, in some instances, be CDSC liable even though
a redemption of such shares, as discussed elsewhere herein, may no longer be
subject to a contingent deferred sales charge. The proportional method is
believed by management to more closely meet and reflect the expectations of
Class II shareholders in the event shares are redeemed during the contingency
period. For federal income tax purposes, the cost basis of shares redeemed or
exchanged is determined under the Code without regard to the method of
transferring shares chosen by the Fund.
Retirement Plan Accounts
Franklin Templeton IRA and 403(b) retirement plan accounts may exchange shares
directly. Certain restrictions may apply, however, to other types of retirement
plans. See "Restricted Accounts" under "Telephone Transactions."
Market Timers
The Fund currently will not accept investments from Market Timers.
Transfers
Transfers between identically registered accounts in the same fund and class are
treated as non-monetary and non-taxable events, and are not subject to a
contingent deferred sales charge. The transferred shares will continue to age
from the date of original purchase. Shares of each class will be transferred on
the same basis as described above for exchanges.
Conversion Rights
It is not presently anticipated that Class II shares will be convertible to
Class I shares. A shareholder may, however, sell the Class II shares and use the
proceeds to purchase Class I shares, subject to all applicable sales charges.
How to Sell Shares of the Fund
A shareholder may at any time liquidate shares owned and receive from the Fund
the value of the shares. Shares may be redeemed in any of the following ways:
Redemptions By Mail
Send a written request signed by all registered owners, to Investor Services, at
the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from the
Fund the value of the class of shares redeemed based upon the net asset value
per share (less the contingent deferred sales charge, if applicable) next
computed after the written request in proper form is received by Investor
Services. Redemption requests received after the time at which the net asset
value is calculated (at the scheduled closing of the Exchange (generally 1:00
p.m. Pacific time) each day that the Exchange is open for business will receive
the price calculated on the following business day. Shareholders are requested
to provide a telephone number(s) where they may be reached during business
hours, or in the evening if preferred. Investor Services' ability to contact a
shareholder promptly when necessary will speed the processing of the redemption.
To be considered in proper form, signatures must be guaranteed if the redemption
request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owners of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage firm
account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions, including,
for example, when (a) the current address of one or more joint owners of an
account cannot be confirmed, (b) multiple owners have a dispute or give
inconsistent instructions to the Fund, (c) the Fund has been notified of an
adverse claim, (d) the instructions received by the Fund are given by an agent,
not the actual registered owner, (e) the Fund determines that joint owners who
are married to each other are separated or may be the subject of divorce
proceedings, or (f) the authority of a representative of a corporation,
partnership, association, or other entity has not been established to the
satisfaction of the Fund.
Signatures must be guaranteed by an "eligible guarantor institution" as defined
under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Share Certificates - Where shares to be redeemed are represented by share
certificates, the request for redemption must be accompanied by the share
certificate and a share assignment form signed by the registered owners exactly
as the account is registered, with the signatures guaranteed as referenced
above. Shareholders are advised, for their own protection, to send the share
certificate and assignment form in separate envelopes if they are being mailed
in for redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officers of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustees and (2)
a copy of the pertinent pages of the trust document listing the trustees or a
Certification for Trust if the trustees are not listed on the account
registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form.
Redemptions By Telephone
Shareholders who complete the Franklin Templeton Telephone Redemption
Authorization Agreement (the "Agreement"), included with this Prospectus, may
redeem shares of the Fund by telephone, subject to the Restricted Account
exception noted under "Telephone Transactions - Restricted Accounts. Information
may also be obtained by writing to the Fund or Investor Services at the address
shown on the cover or by calling 1-800/632-2301. The Fund and Investor Services
will employ reasonable procedures to confirm that instructions given by
telephone are genuine. Shareholders, however, bear the risk of loss in certain
cases as described under "Telephone Transactions - Verification Procedures."
For shareholder accounts with the completed Agreement on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account.
Telephone redemption requests received before the scheduled closing of the
Exchange (generally 1:00 p.m. Pacific time) on any business day will be
processed that same day.
The redemption check will be sent within seven days, made payable to all the
registered owners on the account, and will be sent only to the address of
record. Redemption requests by telephone will not be accepted within 30 days
following an address change by telephone. In that case, a shareholder should
follow the other redemption procedures set forth in this Prospectus.
Institutional accounts (certain corporations, bank trust departments, government
entities, and qualified retirement plans which qualify to purchase shares at net
asset value pursuant to the terms of this Prospectus) that wish to execute
redemptions in excess of $50,000 must complete an Institutional Telephone
Privileges Agreement which is available from the Franklin Templeton
Institutional Services Department by telephoning 1-800/321-8563.
Redeeming Shares Through Securities Dealers
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if the
shareholder redeems shares through a dealer, the redemption price will be the
net asset value next calculated after the shareholder's dealer receives the
order which is promptly transmitted to the Fund, rather than on the day the Fund
receives the shareholder's written request in proper form. The documents, as
described under "Redemptions By Mail" above, as well as a signed letter of
instruction, are required regardless of whether the shareholder redeems shares
directly or submits such shares to a securities dealer for repurchase. A
shareholder's letter should reference the Fund and the class, the account
number, the fact that the repurchase was ordered by a dealer and the dealer's
name. Details of the dealer-ordered trade, such as trade date, confirmation
number, and the amount of shares or dollars, will help speed processing of the
redemption. The seven-day period within which the proceeds of the shareholder's
redemption will be sent will begin when the Fund receives all documents required
to complete ("settle") the repurchase in proper form. The redemption proceeds
will not earn dividends or interest during the time between receipt of the
dealer's repurchase order and the date the redemption is processed upon receipt
of all documents necessary to settle the repurchase. Thus, it is in a
shareholder's best interest to have the required documentation completed and
forwarded to the Fund as soon as possible. The shareholder's dealer may charge a
fee for handling the order. The SAI contains more information on the redemption
of shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers, all or a portion of
Class I investments of $1 million or more and any Class II investments redeemed
within the contingency period (12 months for Class I and 18 months for Class II)
will be assessed a contingent deferred sales charge, unless one of the
exceptions described below applies. The charge is 1% of the lesser of the value
of the shares redeemed (exclusive of reinvested dividends and capital gain
distributions) or the net asset value at the time of purchase of such shares,
and is retained by Distributors. The contingent deferred sales charge is waived
in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation on those shares held less than the
contingency period; (ii) shares purchased with reinvested dividends and capital
gain distributions; and (iii) other shares held longer than the contingency
period. Shares subject to a contingent deferred sales charge will then be
redeemed on a "first-in, first-out" basis. For tax purposes, a contingent
deferred sales charge is treated as either a reduction in redemption proceeds or
an adjustment to the cost basis of the shares redeemed.
The contingent deferred sales charge on each class of shares is waived, as
applicable, for: exchanges; any account fees; distributions from an individual
retirement plan account due to death or disability, or upon periodic
distributions based on life expectancy; tax-free returns of excess contributions
from employee benefit plans; distributions from employee benefit plans,
including those due to termination or plan transfer; redemptions through a
Systematic Withdrawal Plan set up for shares prior to February 1, 1995, and for
Systematic Withdrawal Plans set up thereafter, redemptions of up to 1% monthly
of an account's net asset value (3% quarterly, 6% semiannually or 12% annually);
redemptions initiated by the Fund due to a shareholder's account falling below
the minimum specified account size; and redemptions following the death of the
shareholder or the beneficial owner.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Unless otherwise specified, requests for redemptions of a specified dollar
amount will result in additional shares being redeemed to cover any applicable
contingent deferred sales charge while requests for redemption of a specific
number of shares will result in the applicable contingent deferred sales charge
being deducted from the total dollar amount redeemed.
Additional Information Regarding Redemptions
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption. In addition, the right of redemption may be suspended or
the date of payment postponed if the Exchange is closed (other than customary
closing) or upon the determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it, by order, for the
protection of shareholders. Of course, the amount received may be more or less
than the amount invested by the shareholder, depending on fluctuations in the
market value of securities owned by the Fund.
Retirement Plan Accounts
Retirement plan account liquidations require the completion of certain
additional forms to ensure compliance with IRS regulations. To liquidate a
retirement plan account, a shareholder or securities dealer may call Franklin's
Retirement Plans Department to obtain the necessary forms.
Tax penalties will generally apply to any distribution from such plans to a
participant under age 59 1/2, unless the distribution meets one of the
exceptions set forth in the Code.
Other
For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the securities dealer may
call Franklin's Dealer Services Department.
Telephone Transactions
Shareholders of the Fund and their investment representative of record, if any,
may be able to execute various transactions by calling Investor Services at
1-800/632-2301.
All shareholders will be able to execute various telephone transactions,
including to: (i) effect a change in address, (ii) change a dividend option (see
"Restricted Accounts" below), (iii) transfer Fund shares in one account to
another identically registered account in the Fund, (iv) request the issuance of
certificates, to be sent to the address of record only, and (v) exchange Fund
shares as described in this Prospectus by telephone. In addition, shareholders
who complete and file an Agreement as described under "How to Sell Shares of the
Fund - Redemptions By Telephone" will be able to redeem shares of the Fund.
Verification Procedures
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and by sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to the shareholder caused by an unauthorized transaction.
The Fund and Investor Services may be liable for any losses due to unauthorized
or fraudulent instructions in the event such reasonable procedures are not
followed. Shareholders are, of course, under no obligation to apply for or
accept telephone transaction privileges. In any instance where the Fund or
Investor Services is not reasonably satisfied that instructions received by
telephone are genuine, the requested transaction will not be executed, and
neither the Fund nor Investor Services will be liable for any losses which may
occur because of a delay in implementing a transaction.
Restricted Accounts
Telephone redemptions and dividend option changes may not be accepted on
Franklin Templeton retirement accounts. To assure compliance with all applicable
regulations, special forms are required for any redemption, distribution, or
dividend payment changes. While the telephone exchange privilege is extended to
Franklin Templeton IRA and 403(b) retirement accounts, certain restrictions may
apply to other types of retirement plans.
To obtain further information regarding distribution or transfer procedures,
including any required forms, retirement account shareholders may call to speak
to a Retirement Plan Specialist at 1-800/527-2020.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privilege will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
investment representative for assistance, or send written instructions to the
Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.
The telephone transaction privilege may be modified or discontinued by the Fund
at any time upon 60 days' written notice to shareholders.
Valuation of Fund Shares
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the Exchange (generally 1:00 p.m. Pacific time) each day that
the Exchange is open for trading. Many newspapers carry daily quotations of the
prior trading day's closing "bid" (net asset value) and "ask" (offering price,
which includes the maximum sales charge of the Fund).
The net asset value per share of each class is determined by deducting the
aggregate gross value of all liabilities of each class from the aggregate gross
value of all assets of each class, and then dividing the difference by the
number of shares of the class outstanding.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. The value of a foreign security is
determined as of the close of trading on the foreign exchange on which it is
traded or as of the schedule closing of trading on the Exchange, if that is
earlier, and that value is then converted into its U.S. dollar equivalent at the
foreign exchange rate in effect at noon, New York time, on the day the value of
the foreign security is determined. If no sale is reported at that time, the
mean between the current bid and asked price is used. Occasionally, events which
affect the values of foreign securities and foreign exchange rates may occur
between the times at which they are determined and the close of the exchange and
will, therefore, not be reflected in the computation of the Fund's net asset
value. If events materially affecting the value of these foreign securities
occur during such period, then these securities will be valued in accordance
with procedures established by the Board.
Portfolio securities which are traded both in the over-the-counter market and on
a stock exchange are valued according to the broadest and most representative
market as determined by the Manager. Portfolio securities underlying actively
traded call options are valued at their market price as determined above. The
current market value of any option held by the Fund is its last sale price on
the relevant exchange prior to the time when assets are valued. Lacking any
sales that day or if the last sale price is outside the bid and ask prices, the
options are valued within the range of the current closing bid and ask prices if
such valuation is believed to fairly reflect the contract's market value. Other
securities for which market quotations are readily available are valued at the
current market price, which may be obtained from a pricing service, based on a
variety of factors, including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of trustees, the
Fund may utilize a pricing service, bank or securities dealer to perform any of
the above described functions.
Each of the Fund's classes will bear, pro rata, all of the common expenses of
the Fund, except that each class will bear the Rule 12b-1 fees payable under its
respective plan. The net asset value of all outstanding shares of each class of
the Fund will be computed on a pro rata basis based on the proportionate
participation in the Fund represented by the value of shares of such classes.
Due to the specific distribution expenses and other costs that will be allocable
to each class, the dividends paid to each class of the Fund may vary.
How to Get Information Regarding
an Investment in the Fund
Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.
From a touch-tone phone, shareholders may access an automated system (day or
night) which offers the following features:
By calling the Franklin TeleFACTS(R) system at 1-800/247-1753, shareholders may
obtain account information, current price and, if available, yield or other
performance information specific to the Fund or any Franklin Templeton Fund,
process an exchange, within the same class, into an identically registered
Franklin account and request duplicate confirmation or year-end statements and
deposit slips.
Class I and Class II share codes for the Fund, which will be needed to access
system information are 198 and 298, respectively. The system's automated
operator will prompt the caller with easy to follow step-by-step instructions
from the main menu. Other features may be added in the future.
To assist shareholders and securities dealers wishing to speak directly with a
representative, the following list of Franklin departments, telephone numbers
and hours of operation is provided. The same numbers may be used when calling
from a rotary phone:
<TABLE>
<CAPTION>
Hours of Operation(Pacific time)
Department Name Telephone No. (Monday through Friday)
<S> <C> <C>
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
</TABLE>
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
Performance
Advertisements, sales literature and communications to shareholders may contain
several measures of a class' performance, including current yield, various
expressions of total return, and current distribution rate. They may
occasionally cite statistics to reflect its volatility or risk.
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five- and
ten-year periods, or portion thereof, to the extent applicable, through the end
of the most recent calendar quarter, assuming reinvestment of all distributions.
The Fund may also furnish total return quotations for each class for other
periods or based on investments at various sales charge levels or at net asset
value. For such purposes, total return equals the total of all income and
capital gain paid to shareholders, assuming reinvestment of all distributions,
plus (or minus) the change in the value of the original investment, expressed as
a percentage of the purchase price.
Current yield for each class reflects the income per share earned by the Fund's
portfolio investments; it is calculated for each class by dividing that class'
net investment income per share during a recent 30-day period by the maximum
public offering price for that class of shares on the last day of that period
and annualizing the result.
Current yield for each class, which is calculated according to a formula
prescribed by the SEC (see the SAI), is not indicative of the dividends or
distributions which were or will be paid to the Fund's shareholders. Dividends
or distributions paid to shareholders of a class are reflected in the current
distribution rate, which may be quoted to shareholders. The current distribution
rate is computed by dividing the total amount of dividends per share paid by a
class during the past 12 months by a current maximum offering price for that
class of shares. Under certain circumstances, such as when there has been a
change in the amount of dividend payout or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid during the
period such policies were in effect, rather than using the dividends during the
past 12 months. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing
and short-term capital gain, and is calculated over a different period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against a class' income and will assume the payment of the
maximum sales charge on the purchase of that class of shares. When there has
been a change in the sales charge structure, the historical performance figures
will be restated to reflect the new rate. The investment results of each class,
like all other investment companies, will fluctuate over time; thus, performance
figures should not be considered to represent what an investment may earn in the
future or what a class' total return, current yield or distribution rate may be
in any future period.
Because Class II shares were not offered prior to October 2, 1995, no
performance data is available for these shares. After a sufficient period of
time has passed, Class II performance data will be available.
General Information
Reports to Shareholders
The Fund's fiscal year ends April 30. Annual Reports containing audited
financial statements of the Fund, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to one household as well
as to reduce Fund expenses, Investor Services will attempt to identify related
shareholders within a household, and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to the Fund at
the telephone number or address set forth on the cover page of this Prospectus.
Additional information on Fund performance is included in the Trust's Annual
Report to Shareholders and the SAI.
Organization and Voting Rights
The Trust is authorized to issue an unlimited number of shares of beneficial
interest, with a par value of $.01 per share in various series and classes. Each
series, in effect, represents a separate mutual fund with its own investment
objective and policies. All shares have one vote and, when issued, are fully
paid and nonassessable. All shares have equal voting, participation and
liquidation rights, but have no subscription, preemptive or conversion rights.
The Trust issues shares in seven other series: Franklin California Growth Fund,
Franklin Global Health Care Fund, Franklin Global Utilities Fund, Franklin
Institutional MidCap Growth Fund, Franklin MidCap Growth Fund, Franklin
Strategic Income Fund and Franklin Natural Resources Fund. All shares have equal
voting, participation and liquidation rights, but have no subscription,
preemptive or conversion rights. The Trust reserves the right to issue
additional classes of shares to the Fund, or to add additional series.
The Trust's shareholders will vote together to elect trustees and on other
matters affecting the entire Trust, but will vote separately on matters
affecting separate series or classes. Shares have noncumulative voting rights
which means that in all elections of trustees, the holders of more than 50% of
the shares voting can elect 100% of the trustees if they choose to do so, and in
such event, the holders of the remaining shares voting will not be able to elect
any person or persons to the Board.
The Fund does not intend to hold annual shareholders' meetings. The Fund may,
however, hold a special meeting for such purposes as changing fundamental
investment restrictions, approving a new management agreement or any other
matters which are required to be acted on by shareholders under the 1940 Act. A
meeting may also be called by a majority of the Board or by shareholders holding
at least ten percent of the shares entitled to vote at the meeting. Shareholders
will receive assistance in communicating with other shareholders in connection
with the election or removal of trustees such as that provided in Section 16(c)
of the 1940 Act.
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 a certain class of the Fund's shares, however, only shareholders of that
class will be entitled to vote. Therefore each class of shares will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by class by state corporation law, or (3) required to be
voted on separately by class by the 1940 Act, or the rules adopted thereunder.
For instance, if a change to the Rule 12b-1 plan relating to Class I shares
requires shareholder approval, only shareholders of Class I may vote on the
change to the Rule 12b-1 plan affecting that class. Similarly, if a change to
the Rule 12b-1 plan relating to Class II shares requires approval, only
shareholders of Class II may vote on changes to such plan. On the other hand, if
there is a proposed change to the investment objective of the Fund, the proposal
would affect all shareholders, regardless of which class of shares they hold
and, therefore, each share has the same voting rights.
Redemptions by the Fund
The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $50, but only where the value
of such account has been reduced by the shareholder's prior voluntary redemption
of shares and has been inactive (except for the reinvestment of distributions)
for a period of at least six months, provided advance notice is given to the
shareholder. More information is included in the SAI.
Other Information
Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Fund nor its affiliates will be liable for any loss to the shareholder caused by
the shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
Account Registrations
An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, a shareholder may transfer an account in the Fund carried
in "street" or "nominee" name by the shareholder's securities dealer to a
comparably registered Fund account maintained by another securities dealer. Both
the delivering and receiving securities dealers must have executed dealer
agreements on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not process the
transfer and will so inform the shareholder's delivering securities dealer. To
effect the transfer, a shareholder should instruct the securities dealer to
transfer the account to a receiving securities dealer and sign any documents
required by the securities dealer(s) to evidence consent to the transfer. Under
current procedures, the account transfer may be processed by the delivering
securities dealer and the Fund after the Fund receives authorization in proper
form from the shareholder's delivering securities dealer. In the future it may
be possible to effect such transfers electronically through the services of the
NSCC.
The Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of record on an
investor's account, the investor will be deemed to have authorized the use of
electronic instructions on the account, including, without limitation, those
initiated through the services of the NSCC, to have adopted as instruction and
signature any such electronic instructions received by the Fund and the
Shareholder Services Agent, and to have authorized them to execute the
instructions without further inquiry. At the present time, such services which
are available include the NSCC's "Networking," "Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment, or by calling Franklin's Fund
Information Department.
Important Notice Regarding
Taxpayer IRS Certifications
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the Internal Revenue Service ("IRS") any taxable dividend, capital
gain distribution, or other reportable payment (including share redemption
proceeds) and withhold 31% of any such payments made to individuals and other
non-exempt shareholders who have not provided a correct taxpayer identification
number ("TIN") and made certain required certifications that appear in the
Shareholder Application. A shareholder may also be subject to backup withholding
if the IRS or a securities dealer notifies the Fund that the number furnished by
the shareholder is incorrect or that the shareholder is subject to backup
withholding for previous under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a shareholder who has
completed an "awaiting TIN" certification to provide the Fund with a certified
TIN within 60 days after opening the account.
Portfolio Operations
The 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, Advisers
Mr. Jamieson holds a Bachelor of Arts degree from Bucknell University and a
Master's degree in accounting and finance from the University of Chicago
Graduate School of Business. He has been with Advisers or an affiliate since
1987. He is a member of several securities industry-related associations.
Nicholas Moore
Portfolio Manager, Advisers
Mr. Moore holds a Bachelor of Science degree in business administration, with a
focus on accounting and finance, from the School of Business, Menlo College,
Menlo Park, California. He has been with Advisers or an affiliate since 1986.
Michael McCarthy
Portfolio Manager, Advisers
Mr. McCarthy holds a Bachelor of Arts degree in history from the University of
California at Los Angeles. He has been with Advisers or an affiliate since 1992.
Useful Terms and Definitions
1940 Act - Investment Company Act of 1940, as amended.
Advisers - Franklin Advisers, Inc., the Fund's investment manager.
Board - The Board of Trustees of the Trust.
Code - Internal Revenue Code of 1986, as amended.
Designated Retirement Plans - certain retirement plans, including
profit-sharing, pension, 401(k) and simplified employee pension plans, that: (i)
are sponsored by an employer with at least 200 employees; (ii) have aggregate
plan assets of at least $1 million; or (iii) agree to invest at least $1 million
in any of the Franklin Templeton Funds over a 13 month period. Distributors
determines the qualifications for Designated Retirement Plans.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter.
Exchange - New York Stock Exchange.
Franklin Funds - the mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust.
Franklin Templeton Funds - the Franklin Funds and the Templeton Funds.
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries.
Investor Services - Franklin/Templeton Investor Services, Inc.
Letter - Letter of Intent.
Manager - Franklin Advisers, Inc., the Fund's investment manager.
Market Timers - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
Net asset value (NAV) - the value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding. When you buy, sell or exchange shares, we will use
the NAV per share for the applicable class next calculated after we receive your
request in proper form.
Non-Designated Retirement Plans - employee benefit plans not included as
"Designated Retirement Plans" and not qualified under Section 401 of the Code.
Offering price - The public offering price is equal to the net asset value per
share of the class plus the front-end sales charge. The front-end sales charge
is 4.5% for Class I shares and 1% for Class II shares.
Proper Form (Purchases) - generally, the Fund must receive a completed
Shareholder Application accompanied by a negotiable check.
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information.
SEC - Securities and Exchange Commission.
Securities Dealer - financial institutions which, either directly or through
affiliates, have an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TeleFACTS(R) - Franklin Templeton's automated customer servicing system.
Templeton Funds - the U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund.
Trust Company - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly-owned subsidiaries of Resources.
U.S. - United States.
