As filed with the Securities and Exchange Commission on June 12, 1997
File Nos.
33-39088
811-6243
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 24 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 27 (X)
FRANKLIN STRATEGIC SERIES
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BOULEVARD, SAN MATEO, CA 94404 (Address of
Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (415) 312-2000
Harmon E. Burns, 777 Mariners Island Blvd., San Mateo, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[x] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Declaration Pursuant to Rule 24f-2. The issuer has registered an indefinite
number or amount of securities under the Securities Act of 1933 pursuant to
Section 24f-2 under the Investment Company Act of 1940. The issuer filed a 24f-2
Notice for the fiscal year ending April 30, 1996 on June 28, 1996.
FRANKLIN STRATEGIC SERIES
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN THE PROSPECTUS
(Franklin Strategic Biotechnology Discovery Fund)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis Expense Summary
3. Condensed Financial "How does the Fund Measure
Information Performance?"
4. General Description "How is the Trust Organized?";
"What are the Fund's Goals?"; "What
Kinds of Securities does the Fund
Purchase?"; "What are the Practices
and Strategies that the Fund may
Follow?"; "What are the Risks of
This Investment?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Not Applicable
Fund Performance
6. Capital Stock and Other "How is the Trust Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions Might
I Receive from the Fund?"; "How
Taxation Affects the Fund and its
Shareholders"; "Transaction
Procedures and Special
Requirements"; "What If I Have
Questions About my Account?"
7. Purchase of Securities "How Do I Buy Shares?"; "May I
Being Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Who
Manages the Fund?"; "What If I Have
Questions About my Account?";
"Useful Terms and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage Your
Account"
9. Pending Legal Proceedings Not Applicable
FRANKLIN STRATEGIC SERIES
CROSS REFERENCE SHEET
FORM N-1A
PART B: INFORMATION REQUIRED IN THE STATEMENT OF ADDITIONAL INFORMATION
(Franklin Strategic Biotechnology Discovery Fund)
N-1A Location in
Item No. Item Registration Statement
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and Not Applicable
History
13. Investment Objectives and "How does the Fund Invest Its
Policies Assets?"; "Investment Restrictions"
14. Management of the Fund "Officers and Trustees"; "What are
the Fund's Potential Risks?";
"Investment Management and Other
Services"
15. Control Persons and "Officers and Trustees";
Principal Holders of "Investment Management and Other
Securities Services?"; "Miscellaneous
Information"
16. Investment Advisory and "Investment Management and Other
Other Services Services"; "The Fund's Underwriter"
17. Brokerage Allocation "How does the Fund Buy Securities
for its Portfolio?"
18. Capital Stock and Other See Prospectus "How is the Trust
Securities Organized?"
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Shares?"; "How are Fund Shares
Valued?"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance "How does the Fund Measure
Data Performance?"
23. Financial Statements Not Applicable
PROSPECTUS & APPLICATION
FRANKLIN STRATEGIC BIOTECHNOLOGY DISCOVERY FUND
AUGUST 26, 1997
INVESTMENT STRATEGY: GROWTH
The Franklin Strategic Biotechnology Discovery Fund (the "Fund") is a
non-diversified mutual fund. The Fund seeks capital appreciation by
investing primarily in equity securities of biotechnology companies.
This prospectus describes the Fund. It contains information you should know
before investing in the Fund. Please keep it for future reference.
More information about the Fund is contained in a document dated August 26,
1997, as may be amended from time to time, and called the Statement of
Additional Information ("SAI"). It has been filed with the SEC and is
incorporated by reference into this prospectus. For a free copy or a larger
print version of this prospectus, call 1-800/DIAL BEN or write the Fund at
its address.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE
U.S. GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO
SALES REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
FRANKLIN STRATEGIC BIOTECHNOLOGY DISCOVERY FUND
AUGUST 1, 1997
When reading this prospectus, you will see certain terms beginning with
capital letters. This means the term is explained in our glossary section.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary..........................................
What are the Fund's Goals?...............................
What Kinds of Securities does the Fund Purchase?.........
What are the Practices and Strategies that the
Fund may Follow?........................................
What are the Risks of this Investment?...................
Who Manages the Fund?....................................
How does the Fund Measure Performance?...................
How Taxation Affects the Fund and its Shareholders.......
How is the Trust Organized?..............................
ABOUT YOUR ACCOUNT
How Do I Buy Shares?.....................................
May I Exchange Shares for Shares of Another Fund?........
How Do I Sell Shares?....................................
What Distributions Might I Receive from the Fund?........
Transaction Procedures and Special Requirements..........
Services to Help You Manage Your Account.................
What If I Have Questions About My Account?...............
GLOSSARY
Useful Terms and Definitions.............................
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the Fund's estimated expenses for the current fiscal
year. The Fund's actual expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge Imposed on Purchases
(as a percentage of Offering Price) 4.50%++
Deferred Sales Charge None+++
Exchange Fee (per transaction) $5.00*
B. ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees
Rule 12b-1 Fees 0.35%**
Other Expenses
Total Fund Operating Expenses
C. EXAMPLE
As a shareholder you would pay the following expenses for each $1,000
that you invest in the Fund. Assume the Fund's annual return is 5%,
operating expenses are as described above, and you sell your shares
after the number of years shown.
1 YEAR 3 YEAR
$[ ]*** $[ ]
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES
OR RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE
SHOWN. The Fund pays its operating expenses. The effects of these
expenses are reflected in its Net Asset Value or dividends and are not
directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more.
+++A Contingent Deferred Sales Charge of 1% may apply to purchases of $1
million or more if you sell the shares within one year. A Contingent
Deferred Sales Charge may also apply to purchases by certain retirement plans
that qualify to buy shares without a front-end sales charge. See "How Do I
Sell Shares? - Contingent Deferred Sales Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without
a fee.
**The combination of front-end sales charges and Rule 12b-1 fees could cause
long-term shareholders to pay more than the economic equivalent of the
maximum front-end sales charge permitted under the NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
WHAT ARE THE FUND'S GOALS?
The Fund's investment goal is to seek capital appreciation by investing
primarily in securities of biotechnology companies and discovery research
firms located in the U.S. and other countries. This goal is a fundamental
policy of the Fund, which means that it may not be changed without approval
of the Fund's shareholders. Of course, there is no assurance that the Fund
will achieve its goal.
The Fund concentrates its investments which means that it invests more than
25% of its total assets in the securities of issuers in one industry.
Because the Fund concentrates its investments, you should not consider the
Fund a complete investment program.
GENERAL POLICIES AND STRATEGIES. The Fund will invest at least 65% of its
assets in equity securities of biotechnology companies. For the Fund, a
"biotechnology company" has at least 50% of its earnings derived from
biotechnology activities, or at least 50% of its assets devoted to such
activities. The percentage is based upon the results of the company's most
recently reported fiscal year. Biotechnology activities are research,
development, manufacture and distribution of various biotechnological or
biomedical products, services, and processes. For example, this may include
companies involved with genetic engineering and gene therapy. It also
includes companies involved in applications and developments in areas such as
healthcare, pharmaceuticals, and agriculture.
WHAT KINDS OF SECURITIES DOES THE FUND PURCHASE?
The Fund invests primarily in Equity Securities. Equity Securities are
securities which entitle the holder to participate in a company's general
operating success or failure, through the receipt of dividends and through
changes in the value of the securities. Public trading for such shares is
typically a stock exchange but trading can also take place between
broker-dealers. Equity Securities generally take the form of common stock or
preferred stock, but also include Warrants, Rights and Convertible Preferred
Stock. Preferred stockholders typically receive greater dividends than
common stockholders and may have greater voting rights as well. Convertible
Preferred Stock has the additional feature of converting into common stock of
a company after certain periods of time or under certain circumstances. A
Warrant gives the holder the option to buy newly created securities at a
fixed price on a set date or during a set period. A Right is similar to a
Warrant, except that it must be exercised within a relatively short period of
time.
The Fund may also invest up to 35% of its assets in Debt Securities of any
type of foreign or domestic issuer. Debt Securities are securities issued by
a company which represent a loan of money by the purchaser of the securities
to the company. The company is then obligated to pay interest to the lender,
usually on a fixed payment schedule, and to return the lender's money over a
certain period. See "What are the Risks of this Investment? - Debt
Securities."
The Fund may invest in a variety of Debt Securities, including bonds,
debentures, notes and Convertible Debt Securities issued by U.S. or foreign
corporations and the U.S. government. Bonds, debentures and notes differ in
the length of the issuer's repayment schedule. Bonds typically have a longer
payment schedule than debentures, and debentures typically have a longer
repayment schedule than notes. Typically, debt securities with a shorter
repayment schedule pay interest at a lower rate than debt securities with a
longer repayment schedule. Convertible Debt Securities have the additional
feature of converting into common stock of a company after certain periods of
time or under certain circumstances.
The Fund's investments in Debt Securities will generally either be rated
investment grade, or be unrated but of comparable quality as determined by
Advisers. Investment grade refers to a Debt Security that either has been
rated in one of the top four categories by an independent rating service,
such as Moody's or S&P, or, if unrated, where the Fund's investment adviser
has determined its quality and categorized it with similar quality securities
that have been rated. The fourth grade (BBB) is considered medium grade and
securities in this category may have some speculative characteristics.
Securities are given ratings by independent organizations which grade the
issuer based on its financial soundness. Generally, the lower the rating
category, the more risky is the investment. The Fund intends to invest less
than 5% in Debt Securities considered to be below investment grade. The SAI
contains a discussion of the ratings.
The Fund may invest in securities that are traded on U.S. or foreign
securities exchanges, the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") national market system or in the U.S.
or foreign over-the-counter ("OTC") markets.
NON-U.S. SECURITIES. The Fund may invest up to 25% of its total assets in
securities (either debt or equity) of non-U.S. issuers which are traded in
the U.S. or in foreign markets. The Fund's investments in non-U.S.
securities may include the purchase of both Equity Securities which entitle
the Fund to vote on matters affecting the issuer, and Equity Securities which
do not. In addition, the Fund may purchase Debt Securities issued by foreign
companies, as well as foreign governments. The Fund may also purchase the
securities of issuers in developing nations, but it has no present intention
of doing so. The Fund may invest in securities issued in any currency and
may hold foreign currency. Securities of issuers within a given country may
be issued, quoted and traded in the currency of the other country, or in
multinational currency units such as the European Currency Unit.
DEPOSITARY RECEIPTS. The Fund may invest in securities commonly known as
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs")
and Global Depositary Receipts ("GDRs") of non-U.S. issuers. Such depositary
receipts are interests in a pool of a non-U.S. company's securities which
have been deposited with a bank or trust company. The Fund considers
investments in Depositary Receipts to be investments in the equity securities
of the issuers into which the Depositary Receipts may be converted.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on
exchanges or over-the-counter. Depositary Receipts may be issued under
sponsored or unsponsored programs.
TEMPORARY INVESTMENTS. Advisers typically keeps a portion of the assets of
the Fund invested in short-term debt securities
although it may choose not to do so when circumstances dictate. These
temporary investments permit the Fund to raise cash quickly in order to meet
redemption requests. The Fund also may make temporary investments while
awaiting the accumulation of additional monies to make larger investments.
Temporary investments tend to be less risky and less subject to fluctuations
due to general market conditions than other investments. Temporary
investments made by the Fund may include shares of one or more money market
funds managed by Advisers or its affiliates.
The Fund may invest an unlimited amount of its assets in such investments for
temporary defensive purposes in the event of, or when Advisers anticipates a
general decline in the market prices of stocks in which the Fund invests.
As a temporary investment, the Fund may invest up to 10% of its assets in
repurchase agreements, including tri-party repurchase agreements and reverse
repurchase agreements. In a repurchase transaction, the Fund purchases a
U.S. government security from a bank or broker-dealer and the Fund agrees to
sell the security back to the bank or broker-dealer at an agreed upon price
and date. The value of the securities transferred to the Fund's custodian is
determined daily so that there is on deposit at all times with the Fund's
custodian at least 100% of the value of the repurchase agreement.
WHAT ARE THE PRACTICES AND STRATEGIES THAT THE FUND MAY FOLLOW?
HEDGING AND INCOME TRANSACTIONS. Hedging is a technique designed to reduce a
potential loss to the Fund as a result of certain economic or market risks,
including risks related to fluctuations in interest rates, currency exchange
rates between U.S. and foreign securities or between different foreign
currencies, and broad or specific market movements. The Fund may use various
hedging strategies which are discussed below. These strategies are also used
by many mutual funds and other institutional investors. When pursuing these
hedging strategies, the Fund may engage in the following types of
transactions: purchase and sell exchange-listed and OTC put and call options
on securities, equity and fixed-income indices and other financial
instruments; purchase and sell financial futures contracts and options
thereon; and enter into various currency transactions such as currency
forward contracts, currency futures contracts, currency swaps or options on
currencies or currency futures (collectively, all of the above are called
"Hedging Transactions"). Each of these Hedging Transactions is described
more fully in the SAI.
The various techniques described above as Hedging Transactions may also be
used by the Fund for non-hedging purposes. For example, these techniques may
be used to produce income to the Fund where the Fund's participation in the
transaction involves the payment of a premium to the Fund. The Fund may also
use a hedging technique to bet on the fluctuation of certain indices,
currencies or economic or market changes such as a reduction in interest
rates. No more than 5% of the Fund's assets will be exposed to risks of such
types of instruments when entered into for non-hedging purposes.
ILLIQUID INVESTMENTS. The Fund will maintain at least 85% of its net assets
in liquid securities. A liquid security is a security that can be sold
within seven days in the normal course of business at approximately the
amount at which the Fund has valued the security and carries such value on
its financial statements. Most restricted securities (those subject to legal
restrictions on their sale), and repurchase agreements which terminate more
than seven days from their initial purchase date are not considered to be
liquid.
The Fund will not invest in securities of foreign issuers which are issued
without stock certificates or other evidences of ownership. The Fund does
not consider securities which are acquired outside the U.S. and which are
publicly traded in the U.S. or on a foreign securities exchange or market to
be illiquid as long as: the Fund intends to resell the security in the
market; the Fund believes it can readily dispose of the security for cash at
approximately the amount at which the Fund has valued the security; and
current market prices are readily available.
SHORT SALES. The Fund may engage in two types of short sale transactions,
"naked short sales" and "short sales against the box." In a naked short sale
transaction, the Fund sells a security which it does not own to a purchaser
at a specified price. In order to complete the short sale transaction, the
Fund must: (1) borrow the security to deliver the security to the purchaser;
and (2) buy the same security in the market in order to return it to the
borrower. In buying the security to replace the borrowed security, the Fund
expects to buy the security in the market for less than the amount it earned
on the short sale, thereby yielding a profit. No securities will be sold
short is, after the sale, the total market value of all the Fund's open naked
short positions would exceed 25% of its assets.
The Fund may also sell securities "short against the box" without limit. In a
short sale against the box, the Fund actually holds in its portfolio the
securities which it has sold short. In replacing the borrowed securities in
the transaction, the Fund may either buy securities in the open market or use
those in its portfolio. See "Short-Selling" in the SAI for more discussion
of these practices.
PORTFOLIO TURNOVER. The Fund anticipates its annual portfolio turnover rate
generally will not exceed 100%. This expected rate is not a limiting factor
in the operation of the Fund's portfolio.
LOANS OF PORTFOLIO SECURITIES. The Fund may lend securities it has purchased
to banks or broker-dealers in order to realize additional income which the
Fund receives as a loan premium. The total amount of the loans will not
exceed 20% of the value of the Fund's total assets. For each loan the Fund
will receive in return securities with a value at least equal to 100% of the
current market value of the loaned securities.
FUNDAMENTAL RESTRICTIONS. The Fund has adopted a number of restrictions on
its investments which are "fundamental." This means that they may not be
changed without the approval of the Fund's shareholders. These restrictions
are set forth in the SAI.
Among other things, the Fund may not make loans except that it may lend
portfolio securities to certain borrowers consistent with current regulatory
requirements. The Fund's purchase of debt securities is not considered to be
a loan. The Fund also is not permitted to issue securities senior to its
stock or borrow money or utilize leverage in excess of the maximum permitted
by the Investment Company Act of 1940, as amended, which is currently 33 1/3%
of total assets (this limitation does not include borrowing for emergency or
other short-term purposes). Such borrowing has special risks. The Fund will
not engage in investment transactions when its borrowing exceeds 5% of its
assets.
PERCENTAGE RESTRICTIONS. If in purchasing a security, the Fund has complied
with a percentage restriction, a later increase or decrease in the percentage
resulting from changes in the market value of the security or illiquidity of
its portfolio securities or the amount of the Fund's net assets will not be
considered a violation of any of the foregoing policies.
WHAT ARE THE RISKS OF THIS INVESTMENT?
GENERAL. As with all mutual funds, there is no assurance that the Fund's
goals will be achieved. Generally, if the securities owned by the Fund
increase in value, the value of the shares of the Fund which you own will
increase. Similarly, if the securities owned by the Fund decrease in value,
the value of your shares will also decline. In this way, you participate in
any change in the value of the securities owned by the Fund.
COMMON STOCKS. To the extent that the Fund's investments consist of common
stocks, a decline in the market, expressed for example by a drop in any
securities index that is based on Equity Securities, such as the Dow Jones
Industrial or the Standard & Poor's 500 average, may also be reflected in the
Fund's share price.
DEBT SECURITIES GENERALLY. To the extent that the Fund's investments consist
of fixed-income securities, changes in interest rates will affect the value
of the Fund's portfolio and 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 your shares.
Historically, there have been both increases and decreases in interest rates
and in securities prices generally and such increases and decreases may
reoccur unpredictably in the future.
INDUSTRY RISK. As stated above, the Fund concentrates its investments in the
biotechnology industry. Therefore, the Fund's investments and performance
are subject to the risk that this particular group of related securities will
decline in price. The biotechnology industry is subject to extensive
government regulation. The industry will be affected by government
regulatory requirements, regulatory approval for new drugs and medical
products, patent considerations, product liability, and similar matters. For
example, in the past several years, the U.S. Congress has considered
legislation concerning healthcare reform and changes to the U.S. Food and
Drug Administration's ("FDA") approval process. If such legislation is
passed it may affect the biotechnology industry. As these factors impact the
biotechnology industry, the value of your shares may fluctuate significantly
over relatively short periods of time.
Because the biotechnology industry is relatively new, investors may be quick
to react to developments which affect the industry. In the past,
biotechnology securities have exhibited considerable volatility in reaction
to research and other developments. In comparison to more developed
industries, there may be a thin trading market in biotechnology securities
and adverse developments in the biotechnology industry may be more likely to
result in decreases in the value of biotechnology stocks.
Biotechnology companies are often small, start-up ventures, whose products
are only in the research stage. Only a limited number of biotechnology
companies have reached the point of approval of products by the FDA and
subsequent commercial production and distribution of such products.
Therefore, the success of investments in the biotechnology industry is often
based upon speculation and expectations about future products, research
progress, and new product filings with regulatory authorities. Such
investments are speculative and may drop sharply in value in response to
regulatory or research setbacks.
SMALLER COMPANIES. Biotechnology companies are often relatively new or
unseasoned companies that are in their early stages of development, or are
small companies. Securities of unseasoned companies present greater risks
than securities of larger, more established companies. 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 for growth or potential development or to
generate such funds through external financing on favorable terms, or they
may be developing or marketing new products or services for which markets are
not yet established and may never become established. Due to these and other
factors, small companies may suffer significant losses as well as realize
substantial growth, and investments in small companies tend to be volatile
and are therefore speculative.
Historically, small capitalization stocks have been more volatile in price
than larger capitalization stocks. Among the reasons for the greater price
volatility of these securities are the less certain growth prospects of
smaller firms, the lower degree of liquidity in the markets for such stocks,
and the greater sensitivity of small companies to changing economic
conditions. Besides exhibiting greater volatility, small company stocks may,
to a degree, fluctuate independently of larger company stocks. Small company
stocks may decline in price as large company stocks rise, or rise in price as
large company stocks decline. You should therefore expect that the value of
the Fund's shares may be more volatile than the shares of a fund that invests
in larger capitalization stocks.
NON-DIVERSIFICATION. The Fund is a non-diversified Fund under the federal
securities laws which regulate mutual funds. This means that there is no
restriction on the amount of assets that the Fund may invest in the
securities of any one issuer. However, under requirements of the Code, the
Fund may not purchase securities if more than 25% of its total assets would
be invested in the securities of a single issuer or, with respect to 50% of
its total assets, more than 5% of the Fund's assets would be invested in the
securities of a single issuer. Because the Fund is non-diversified and
concentrates its investments in one industry (as described below), the value
of your shares may fluctuate more widely, and the Fund may present greater
risk than other investments.
NON-U.S. SECURITIES. Because the Fund invests in foreign securities, you
should consider certain factors that would not be involved if the Fund
invested solely in U.S. securities. Such risks include: fluctuations in the
value of the currency in which the security is traded or quoted as compared
to the U.S. dollar; unpredictable political, social and economic developments
in the foreign country where the security is issued or where the issuer of
the security is located; and the possible imposition by a foreign government
of limits on the ability of the Fund to obtain a foreign currency or to
convert a foreign currency into U.S. dollars; or the imposition of other
foreign laws or restrictions. Since the Fund may invest in securities issued,
traded or quoted in currencies other than the U.S. dollar, changes in foreign
currency exchange rates will affect the value of securities in the Fund's
portfolio. Advisers generally attempts to reduce such risk, known as
"currency risk" through Hedging Transactions.
In addition, in certain countries, the possibility of expropriation of
assets, confiscatory taxation, or diplomatic developments could adversely
affect investments in those countries. Expropriation of assets refers to the
possibility that a country's laws will prohibit the return to the U.S. of any
monies which the Fund has invested in the country. Confiscatory taxation
refers to the possibility that a foreign country will adopt a tax law which
has the effect of requiring the Fund to pay significant amounts, if not all,
of the value of the Fund's investment to the foreign country's taxing
authority. Diplomatic developments means that because of certain actions
occurring within a foreign country such as significant civil rights
violations or because of the United States' actions during a time of crisis
in the particular country, all communications and other official governmental
relations between the country and the United States could be severed. This
could result in the abandonment of any U.S. investors', such as the Fund's,
money in the particular country, with no ability to have the money returned
to the United States.
There may be less publicly available information about a foreign company than
about a U.S. company. Foreign issuers may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to or
as uniform as those of U.S. issuers. The number of securities traded, and the
frequency of such trading, in non-U.S. securities markets, while growing in
volume, is for the most part, substantially less than in U.S. markets. As a
result, securities of many foreign issuers are less liquid and their prices
more volatile than securities of comparable U.S. issuers. Transaction costs,
the costs associated with buying and selling securities, on non-U.S.
securities markets are generally higher than in the U.S. There is generally
less government supervision and regulation of exchanges, brokers and issuers
than there is in the U.S. The Fund's foreign investments may include both
voting and non voting securities, sovereign debt and participations in
foreign government deals. The Fund may have greater difficulty taking
appropriate legal action with respect to foreign investments in non-U.S.
courts than with respect to domestic issuers in U.S. courts.
DEPOSITARY RECEIPTS. Depositary Receipts reduce but do not eliminate all the
risk inherent in investing in the securities of non-U.S. issuers. To the
extent that the Fund acquires Depositary Receipts through banks which do not
have a contractual relationship with the foreign issuer of the security
underlying the Depositary Receipt to issue and service such Depositary
Receipts, there may be an increased possibility that the Fund would not
become aware of and be able to respond to corporate actions such as stock
splits or rights offerings involving the foreign issuer in a timely manner.
HEDGING TRANSACTIONS. Hedging Transactions, whether entered into as a hedge
or for gain, have risks associated with them. The three most significant
risks associated with Hedging Transactions are: (i) possible default by the
other party to the transaction; (ii) illiquidity; and (iii) to the extent
Adviser's view as to certain market movements is incorrect, the risk that the
use of such Hedging Transactions could result in losses greater than if they
had not been used. Use of put and call options may (i) result in losses to
the Fund, (ii) force the purchase or sale of portfolio securities at
inopportune times or for prices higher than or lower than current market
values, (iii) limit the amount of appreciation the Fund can realize on its
investments, (iv) increase the cost of holding a security and reduce the
returns on securities or (v) cause the Fund to hold a security it might
otherwise sell.
The use of currency transactions can result in the Fund incurring losses as a
result of a number of factors including the imposition of controls by a
foreign or the U.S. government on the exchange of foreign currencies, the
inability of foreign securities transactions to be completed with the
security being delivered to the Fund, or the inability to deliver or receive
a specified currency.
SHORT SALES. Short sales carry risks of loss if the price of the security
sold short increases after the sale. In this situation, when the Fund
replaces the borrowed security by buying the security in the securities
markets, the Fund may pay more for the security than it has received from the
purchaser in the short sale. The Fund may, however, profit from a change in
the value of the security sold short, if the price decreases.
144A SECURITIES. Subject to its liquidity limitation, the Fund may invest in
certain unregistered securities which may be sold under Rule 144A of the
Securities Act of 1933 ("144A securities"). Due to changing market or other
factors, 144A securities may be subject to a greater possibility of becoming
illiquid than securities which have been registered with the SEC for sale.
In addition, the Fund's purchase of 144A securities may increase the level of
the security's illiquidity as some institutional buyers may become
disinterested in purchasing such securities after the Fund has purchased them.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day
operations.
INVESTMENT MANAGER. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also performs similar services for other
funds. It is wholly owned by Resources, a publicly owned company engaged in
the financial services industry through its subsidiaries. Charles B. Johnson
and Rupert H. Johnson, Jr. are the principal shareholders of Resources.
Together, Advisers and its affiliates manage over $191 billion in assets.
Please see "Investment Management and Other Services" and "Miscellaneous
Information" in the SAI for information on securities transactions and a
summary of the Fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is: Kurt von Emster, Rupert H. Johnson, Jr. and Evan
McCulloch.
Kurt von Emster, CFA
Portfolio Manager of Advisers
Mr. von Emster is a Chartered Financial Analyst and holds a Bachelor of Arts
degree in Business and Economics from the University of California at Santa
Barbara. He has been with the Franklin Templeton Group since 1989.
Rupert H. Johnson, Jr.
President of Advisers; Senior Vice President of Advisory Services and
Franklin Investment Advisory Services, Inc.
Mr. Johnson is a graduate of Washington and Lee University. He has been with
the Franklin Templeton Group since 1965 and prior thereto was an officer in
the U.S. Marine Corps. Mr. Johnson is a member of several securities
industry-related associations.
Evan McCulloch
Portfolio Manager of Advisers
Mr. McCulloch holds a Bachelor of Science degree in Economics from the
University of California at Berkeley. He has been with the Franklin Templeton
Group since 1992. He is a member of the Association for Investment Management
and Research.
MANAGEMENT FEES. The Fund pays its own operating expenses. These expenses
include Advisers' management fees; taxes, if any; custodian, legal and
auditing fees; the fees and expenses of Board members who are not members of,
affiliated with, or interested persons of Advisers; fees of any personnel not
affiliated with Advisers; insurance premiums; trade association dues;
expenses of obtaining quotations for calculating the Fund's Net Asset Value;
and printing and other expenses that are not expressly assumed by Advisers.
Under its management agreement, the Fund pays Advisers a management fee equal
to a [monthly] rate of []. The fee is computed at the close of business on
the last business day of each month.
During the Fund's start-up period, Advisers has agreed in advance to waive
limit its management fees and make certain payments to reduce expenses so the
Fund's total operating expenses do not exceed []% for the current fiscal
year. After date, Advisers may end this agreement at any time.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can
provide the best execution, it may consider research and related services and
the sale of Fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, when selecting a broker or dealer. Please see "How
does the Fund Buy Securities for its Portfolio?" in the SAI for more
information.
ADMINISTRATIVE SERVICES. FT Services provides certain administrative
services and facilities for the Fund. Under its administration agreement, the
Fund pays FT Services a monthly administration fee equal to an annual rate of
0.15% of the Fund's average daily net assets up to $200 million, 0.135% of
average daily net assets over $200 million up to $700 million, 0.10% of
average daily net assets over $700 million up to $1.2 billion, and 0.075% of
average daily net assets over $1.2 billion. Please see "Investment Management
and Other Services" in the SAI for more information.
THE RULE 12B-1 PLAN
The Fund has a distribution plan or "Rule 12b-1 Plan" under which it may
reimburse Distributors or others for the expenses of activities that are
primarily intended to sell shares of the Fund. These expenses may include,
among others, distribution or service fees paid to Securities Dealers or
others who have executed a servicing agreement with the Fund, Distributors or
its affiliates, a prorated portion of Distributors overhead expenses; and the
expenses of printing prospectuses and reports used for sales purposes, and
preparing and distributing sales literature and advertisements.
Payments by the Fund under the plan may not exceed 0.35% per year of the
Fund's average daily net assets. All distribution expenses over this
amount will be borne by those who have incurred them. During the first year
after certain purchases made without a sales charge, Distributors may keep
the Rule 12b-1 fees associated with the purchase. For more information,
please see "The Fund's Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, the Fund advertises its performance. The more commonly
used measure of performance is total return. Performance figures are usually
calculated using the maximum sales charge, but certain figures may not
include the sales charge. Total return is the change in value of an
investment over a given period. It assumes any dividends and capital gains
are reinvested.
The Fund's investment results will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures,
please see "How does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund is treated as a separate entity for federal income tax purposes.
The Fund intends to qualify and elect to be treated as a regulated investment
company under Subchapter M of the Code. By distributing all of its income
and meeting certain other requirements relating to the sources of its income
and diversification of its assets, the Fund will generally not be liable for
federal income or excise taxes.
For federal income tax purposes, any income dividends that you receive from
the Fund, as well as any distributions derived from the excess of net
short-term capital gain over net long-term capital loss, are treated as
ordinary income whether you have elected to receive them in cash or in
additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of
the length of time you have owned Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to
you until the following January, will be treated for tax purposes as if
received by you on December 31 of the calendar year in which they are
declared.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be treated as a long-term capital
loss to the extent of capital gain dividends received with respect to such
shares.
The Fund will inform you of the source of its dividends and distributions at
the time they are paid, and will promptly after the close of each calendar
year advise you of the tax status for federal income tax purposes of such
dividends and distributions.
If you are not a U.S. person for U.S. federal income tax purposes, you should
consult with your financial or tax advisor regarding the applicability of
U.S. withholding or other taxes on distributions received by you from the
Fund and the application of foreign tax laws to these distributions. You
should also consult your advisor with respect to the applicability of any
state and local intangible property or income taxes to your shares of the
Fund and distributions and redemption proceeds received from the Fund.
HOW IS THE TRUST ORGANIZED?
The Fund is a non-diversified series of Franklin Strategic Series (the
"Trust"), an open-end management investment company, commonly called a mutual
fund. It was organized as a Delaware business trust on January 25, 1991, and
is registered with the SEC. Shares of each series of the Trust have equal and
exclusive rights to dividends and distributions declared by that series and
the net assets of the series in the event of liquidation or dissolution.
Shares of the Fund are considered Class I shares for redemption, exchange and
other purposes. Additional series and classes of shares may be offered in
the future.
The Trust has noncumulative voting rights. This gives holders of more than
50% of the shares voting the ability to elect all of the members of the
Board. If this happens, holders of the remaining shares voting will not be
able to elect anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust or
a series of the Trust may hold special meetings, however, for matters
requiring shareholder approval. A meeting may also be called by the Board in
its discretion or by shareholders holding at least 10% of the outstanding
shares. In certain circumstances, we are required to help you communicate
with other shareholders about the removal of a Board member.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check.
MINIMUM
INVESTMENTS*
To Open Your Account...... $100
To Add to Your Account.... $ 25
*We may waive these minimums for retirement plans. We may also refuse any
order to buy shares.
SALES CHARGE REDUCTIONS AND WAIVERS
IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR WAIVER
CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH EACH
PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
QUANTITY DISCOUNTS. The sales charge you pay depends on the dollar amount
you invest, as shown in the table below.
TOTAL SALES CHARGE AMOUNT PAID TO
AS A PERCENTAGE OF DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
Under $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 or more* None None None
*If you invest $1 million or more, a Contingent Deferred Sales Charge may be
imposed on an early redemption. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to
Securities Dealers" below for a discussion of payments Distributors may make
out of its own resources to Securities Dealers for certain purchases.
CUMULATIVE QUANTITY DISCOUNTS. To determine if you may pay a reduced sales
charge, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your existing shares in the Franklin Templeton
Funds, as well as those of your spouse, children under the age of 21 and
grandchildren under the age of 21. If you are the sole owner of a company,
you may also add any company accounts, including retirement plan accounts.
Companies with one or more retirement plans may add together the total plan
assets invested in the Franklin Templeton Funds to determine the sales charge
that applies.
LETTER OF INTENT. You may buy shares at a reduced sales charge by completing
the Letter of Intent section of the shareholder application. A Letter of
Intent is a commitment by you to invest a specified dollar amount during a 13
month period. The amount you agree to invest determines the sales charge you
pay.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION,
YOU ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase
in Fund shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on
the reserved shares as you direct. Our policy of reserving shares does not
apply to certain retirement plans.
If you would like more information about the Letter of Intent privilege,
please see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in
the SAI or call Shareholder Services.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Fund
shares at a reduced sales charge that applies to the group as a whole. The
sales charge is based on the combined dollar value of the group members'
existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
SALES CHARGE WAIVERS. The Fund's front-end sales charge and Contingent
Deferred Sales Charge do not apply to certain purchases. For waiver
categories 1, 2 or 3 below: (i) the distributions or payments must be
reinvested within 365 days of their payment date, and (ii) the distributions
may be from either Class I or Class II shares of a fund.
The Fund's sales charges do not apply if you are buying shares with money
from the following sources:
1. Dividend and capital gain distributions from any Franklin Templeton Fund
or a real estate investment trust (REIT) sponsored or advised by
Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds, the Templeton Variable Annuity
Fund, the Templeton Variable Products Series Fund, or the Franklin
Government Securities Trust. You should contact your tax advisor for
information on any tax consequences that may apply.
4. Redemptions from any Franklin Templeton Fund if you:
Originally paid a sales charge on the shares,
Reinvest the money within 365 days of the redemption date, and
Reinvest the money in the SAME CLASS of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares were subject to a
Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
The Fund's sales charges also do not apply to purchases by:
5. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
6. Group annuity separate accounts offered to retirement plans.
7. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
8. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments by the
Fund on arbitrage rebate calculations.
9. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs.
10. Registered Securities Dealers and their affiliates, for their investment
accounts only
11. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
12. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
13. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
14. Accounts managed by the Franklin Templeton Group
15. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer
with at least 100 employees, or (ii) have plan assets of $1 million or more,
or (iii) agree to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy shares without a front-end sales charge.
Retirement plans that are not Qualified Retirement Plans or SEPs, such as
403(b) or 457 plans, must also meet the requirements described under "Group
Purchases" above. For retirement plan accounts opened on or after May 1,
1997, a Contingent Deferred Sales Charge may apply if the account is closed
within 365 days of the retirement plan account's initial purchase in the
Franklin Templeton Funds. Please see "How Do I Sell Shares? - Contingent
Deferred Sales Charge" for details.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the
Fund. Plan documents are required for all retirement plans. Trust Company
can provide the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need
an application other than the one included in this prospectus. For a
retirement plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing
a retirement plan. Your investment representative or advisor can help you
make investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate
and are responsible for certain purchases made without a sales charge. The
payments are subject to the sole discretion of Distributors, and are paid by
Distributors or one of its affiliates and not by the Fund or its shareholders.
1. Purchases of $1 million or more - up to 1% of the amount invested.
2. Purchases made without a front-end sales charge by certain retirement plans
described under "Sales Charge Reductions and Waivers - Retirement Plans"
above - up to 1% of the amount invested. For retirement plan accounts
opened on or after May 1, 1997, a Contingent Deferred Sales Charge will not
apply to the account if the Securities Dealer chooses to receive a payment
of 0.25% or less or if no payment is made.
3. Purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the amount
invested.
4. Purchases by Chilean retirement plans - up to 1% of the amount invested.
A Securities Dealer may receive only one of these payments for each
qualifying purchase. Securities Dealers who receive payments in connection
with investments described in paragraphs 1 or 4 above or a payment of up to
1% for investments described in paragraph 2 will be eligible to receive the
Rule 12b-1 fee associated with the purchase starting in the thirteenth
calendar month after the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES,
PLEASE SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO
SECURITIES DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale
and a purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment
objective and policies, and its rules and requirements for exchanges. For
example, some Franklin Templeton Funds do not accept exchanges and others may
have different investment minimums.
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STEPS TO FOLLOW
METHOD
- -------------------------------------------------------------------------------
BY MAIL 1. Send us written instructions signed by all
account owners
2. Include any outstanding share certificates for
the shares you want to exchange
- -------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
-If you do not want the ability to exchange by phone
to apply to your account, please let us know.
- -------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- -------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges.
If you have held your shares less than six months, however, you will pay the
percentage difference between the sales charge you previously paid and the
applicable sales charge of the new fund. If you have never paid a sales
charge on your shares because, for example, they have always been held in a
money fund, you will pay the Fund's applicable sales charge no matter how
long you have held your shares. These charges may not apply if you qualify
to buy shares without a sales charge.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred
Sales Charge when you exchange shares. Any shares subject to a Contingent
Deferred Sales Charge at the time of exchange, however, will remain so in the
new fund. For accounts with shares subject to a Contingent Deferred Sales
Charge, shares are exchanged into the new fund in the order they were
purchased. If you exchange shares into one of our money funds, the time your
shares are held in that fund will not count towards the completion of any
Contingency Period. For more information about the Contingent Deferred Sales
Charge, please see that section under "How Do I Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. PLEASE NOTIFY US IN WRITING IF YOU DO NOT WANT THIS
OPTION TO BE AVAILABLE ON YOUR ACCOUNT. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the Fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the Fund more than twice in a calendar
quarter, or (iii) exchanged shares equal to at least $5 million, or more
than 1% of the Fund's net assets. Shares under common ownership or control
are combined for these limits. If you have exchanged shares as described in
this paragraph, you will be considered a Market Timer. Each exchange by a
Market Timer, if accepted, will be charged $5.00. Some of our funds do not
allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Advisor Class" or "Class Z" shares. Because
the Fund does not currently offer an Advisor Class, you may exchange Advisor
Class shares of any Franklin Templeton Fund for shares of the Fund at Net
Asset Value. If you do so and you later decide you would like to exchange
into a fund that offers an Advisor Class, you may exchange your Fund shares
for Advisor Class shares of that fund. Certain shareholders of Class Z shares
of Franklin Mutual Series Fund Inc. may also exchange their Class Z shares
for shares of the Fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
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METHOD STEPS TO FOLLOW
- -------------------------------------------------------------------------------
BY MAIL 1. Send us written instructions signed by all
account owners. If you would like your redemption
proceeds wired to a bank account, your instructions
should include:
o The name, address and telephone number of the
bank where you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
- If you are using a savings and loan or credit
union, the name of the corresponding bank and the
account number
2. Include any outstanding share certificates for
the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may
need to send additional documents. Accounts under
court jurisdiction may have other requirements.
- -------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other
than an escrow account, you must first sign up for
the wire feature. To sign up, send us written
instructions, with a signature guarantee. To avoid
any delay in processing, the instructions should
include the items listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional
accounts may exceed $50,000 by completing a
separate agreement. Call Institutional Services
to receive a copy.
o If there are no share certificates issued for
the shares you want to sell or you have already
returned them to the Fund
o Unless you are selling shares in a Trust Company
retirement plan account
o Unless the address on your account was changed
by phone within the last 15 days
- If you do not want the ability to redeem by phone
to apply to your account, please let us know.
- -------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- -------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the
registered owners on the account, send us written instructions signed by all
account owners, with a signature guarantee. We are not able to receive or
pay out cash in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive
your request in proper form before 1:00 p.m. Pacific time, your wire payment
will be sent the next business day. For requests received in proper form
after 1:00 p.m. Pacific time, the payment will be sent the second business
day. By offering this service to you, the Fund is not bound to meet any
redemption request in less than the seven day period prescribed by law.
Neither the Fund nor its agents shall be liable to you or any other person
if, for any reason, a redemption request by wire is not processed as
described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or
draft to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment
for more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under
age 59 1/2, unless the distribution meets an exception stated in the Code. To
obtain the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
If you did not pay a front-end sales charge because you invested $1 million
or more or agreed to invest $1 million or more under a Letter of Intent, a
Contingent Deferred Sales Charge may apply if you sell all or a part of your
investment within the Contingency Period. Once you have invested $1 million
or more, any additional investments you make without a sales charge may also
be subject to a Contingent Deferred Sales Charge if they are sold within the
Contingency Period. The charge is 1% of the value of the shares sold or the
Net Asset Value at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy shares without a front-end sales charge may also be subject to
a Contingent Deferred Sales Charge if the retirement plan account is closed
within 365 days of the account's initial purchase in the Franklin Templeton
Funds.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will
redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT,
we will redeem additional shares to cover any Contingent Deferred Sales
Charge. For requests to sell a stated NUMBER OF SHARES, we will deduct the
amount of the Contingent Deferred Sales Charge, if any, from the sale
proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997,
or (ii) the Securities Dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, as described under "How Do I Buy
Shares? - Other Payments to Securities Dealers"
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan, at a rate of up to 1% a
month of an account's Net Asset Value. For example, if you maintain an
annual balance of $1 million, you can redeem up to $120,000 annually
through a systematic withdrawal plan free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Redemptions by Trust Company employee benefit plans or employee benefit
plans serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income semiannually to
shareholders of record on the first business day before the 15th of the month
and pays them on or about the last day of that month.
Capital gains, if any, may be distributed annually, usually in December.
Dividend payments are not guaranteed, are subject to the Board's discretion
and may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR
GUARANTEE ANY FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that
any distribution will lower the value of the Fund's shares by the amount of
the distribution and you will then receive a portion of the price you paid
back in the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the
Fund (without a sales charge or imposition of a Contingent Deferred Sales
Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. This is a convenient way to accumulate additional
shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a Contingent Deferred Sales
Charge). Many shareholders find this a convenient way to diversify their
investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both
dividend and capital gain distributions in cash. If you have the money sent
to another person or to a checking account, you may need a signature
guarantee. If you send the money to a checking account, please see
"Electronic Fund Transfers" under "Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS [6 AND 7] OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE
WILL AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE
FUND. You may change your distribution option at any time by notifying us by
mail or phone. Please allow at least seven days before the record date for
us to process the new option. For Trust Company retirement plans, special
forms are required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the
Net Asset Value per share as of the scheduled close of the NYSE, generally
1:00 p.m. Pacific time. You can find the prior day's closing Net Asset Value
and Offering Price of the Fund in many newspapers.
To calculate Net Asset Value per share, the Fund's assets are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares outstanding. The Fund's assets are valued as
described under "How are Fund Shares Valued?" in the SAI.
THE PRICE WE USE WHEN YOU BUY OR SELL SHARES
You buy shares at the Offering Price, unless you qualify to buy shares at a
reduced sales charge or with no sales charge. The Offering Price is based on
the Net Asset Value per share and includes the maximum sales charge. We
calculate it to two decimal places using standard rounding criteria. You
sell shares at Net Asset Value.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you
buy or sell shares through your Securities Dealer, however, we will use the
Net Asset Value next calculated after your Securities Dealer receives your
request, which is promptly transmitted to the Fund. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents.
PROPER FORM
An order to buy shares is in proper form when we receive your signed
shareholder application and check. Written requests to sell or exchange
shares are in proper form when we receive written instructions signed by all
registered owners, with a signature guarantee if necessary. We must also
receive any outstanding share certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any
delay in processing your transaction, they should include:
o Your name,
o The Fund's name,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential
claims based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You
should be able to obtain a signature guarantee from a bank, broker, credit
union, savings association, clearing agency, or securities exchange or
association. A NOTARIZED SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the
costly problem of replacing lost, stolen or destroyed certificates. If a
certificate is lost, stolen or destroyed, you may have to pay an insurance
premium of up to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and
assignment form in separate envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. We will
not be liable for following instructions communicated by telephone if we
reasonably believe they are genuine. For your protection, we may delay a
transaction or not implement one if we are not reasonably satisfied that the
instructions are genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you
may wish to ask your investment representative for assistance or send us
written instructions, as described elsewhere in this prospectus. If you are
unable to execute a transaction by phone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to
sell shares or change distribution options on Trust Company retirement plans
by phone. While you may exchange shares of Trust Company IRA and 403(b)
retirement accounts by phone, certain restrictions may be imposed on other
retirement plans.
To obtain any required forms or more information about distribution or
transfer procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights
and ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when
registering your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register
the account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of
survivorship" is shown as "Jt Ten" on your account statement. For any
account with two or more owners, ALL owners must sign instructions to process
transactions and changes to the account. Even if the law in your state says
otherwise, we cannot accept instructions to change owners on the account
unless all owners agree in writing. If you would like another person or
owner to sign for you, please send us a current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a
minor under your state's Uniform Gifts/Transfers to Minors Act. Other than
this form of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please
send us the following documents when you open your account. This will help
avoid delays in processing your transactions while we verify who may sign on
the account.
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TYPE OF ACCOUNT DOCUMENTS REQUIRED
- -------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- -------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify
the general partners, or
2. A certification for a partnership agreement
- -------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- -------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the
shares to the street or nominee name account of another Securities Dealer.
Both dealers must have an agreement with Distributors or we cannot process
the transfer. Contact your Securities Dealer to initiate the transfer. We
will process the transfer after we receive authorization in proper form from
your delivering Securities Dealer. Accounts may be transferred
electronically through the NSCC. For accounts registered in street or
nominee name, we may take instructions directly from the Securities Dealer or
your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements
and other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions
directly from your dealer or representative, including instructions to
exchange or redeem your shares. Electronic instructions may be processed
through established electronic trading systems and programs used by the Fund.
Telephone instructions directly from your representative will be accepted
unless you have let us know that you do not want telephone privileges to
apply to your account.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax
identification number on a signed shareholder application or applicable tax
form. Federal law requires us to withhold 31% of your taxable distributions
and sale proceeds if (i) you have not furnished a certified correct taxpayer
identification number, (ii) you have not certified that withholding does not
apply, (iii) the IRS or a Securities Dealer notifies the Fund that the number
you gave us is incorrect, or (iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if
the IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do
this if the value of your account fell below this amount because you
voluntarily sold your shares and your account has been inactive (except for
the reinvestment of distributions) for at least six months. Before we close
your account, we will notify you and give you 30 days to increase the value
of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your
checking account to the Fund each month to buy additional shares. If you are
interested in this program, please refer to the automatic investment plan
application included with this prospectus or contact your investment
representative. The market value of the Fund's shares may fluctuate and a
systematic investment plan such as this will not assure a profit or protect
against a loss. You may discontinue the program at any time by notifying
Investor Services by mail or phone.
AUTOMATIC PAYROLL DEDUCTION
You may have money transferred from your paycheck to the Fund to buy
additional shares. Your investments will continue automatically until you
instruct the Fund and your employer to discontinue the plan. To process your
investment, we must receive both the check and payroll deduction information
in required form. Due to different procedures used by employers to handle
payroll deductions, there may be a delay between the time of the payroll
deduction and the time we receive the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or
annual basis. The value of your account must be at least $5,000 and the
minimum payment amount for each withdrawal must be at least $50. For
retirement plans subject to mandatory distribution requirements, the $50
minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete
the systematic withdrawal plan section of the shareholder application
included with this prospectus and indicate how you would like to receive your
payments. You may choose to direct your payments to buy the same class of
shares of another Franklin Templeton Fund or have the money sent directly to
you, to another person, or to a checking account. If you choose to have the
money sent to a checking account, please see "Electronic Fund Transfers"
below.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic
withdrawal plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold under the plan may
also be subject to a Contingent Deferred Sales Charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us in
writing at least seven business days before the end of the month preceding a
scheduled payment. Please see "How Do I Buy, Sell and Exchange Shares? -
Systematic Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions from the Fund
or payments under a systematic withdrawal plan sent directly to a checking
account. If the checking account is with a bank that is a member of the
Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If you choose this option, please allow at least
fifteen days for initial processing. We will send any payments made during
that time to the address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the Fund's code number to use TeleFACTS(R). The Fund's code
number is [].
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. PLEASE
VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household
and send only one copy of a report. Call Fund Information if you would like
an additional free copy of the Fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more
information, call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your
shares are held by a financial institution, in a street name account, or
networked through the NSCC, the Fund may not be able to offer these services
directly to you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor
Services at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California
94403-7777. The Fund, Distributors and Advisers are also located at this
address. You may also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION
(PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with
high quality service. You will hear a regular beeping tone if your call is
being recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - Certain funds in the Franklin Templeton Funds offer
multiple classes of shares. The different classes have proportionate
interests in the same portfolio of investment securities. They differ,
however, primarily in their sales charge structures and Rule 12b-1 plans.
Because the Fund's sales charge structure and Rule 12b-1 plan are similar to
those of Class I shares, shares of the Fund are considered Class I shares for
redemption, exchange and other purposes.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - The 12 month period during which a Contingent Deferred
Sales Charge may apply. Regardless of when during the month you purchased
shares, they will age one month on the last day of that month and each
following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply
if you sell your shares within the Contingency Period.
CONVERTIBLE PREFERRED STOCK - Securities which have the feature of converting
into common stock of a company after certain periods of time or under certain
circumstances. Holders of convertible securities gain the benefits of being
a preferred stockholder and receiving higher dividends, with the expectation
of becoming a common stockholder in the future. A convertible security's
value typically reflects changes in the company's underlying common stock
value.
CONVERTIBLE DEBT SECURITIES - Securities which have the feature of converting
into common stock of a company after certain periods of time or under certain
circumstance. Holders of convertible debt securities gain the benefits of
being a debt holder and receiving regular interest payments, with the
expectation of becoming a common stockholder in the future. A convertible
security's value typically reflects changes in the company's underlying
common stock value.
DEBT SECURITIES - Securities issued by a company which represent a loan of
money by the purchaser of the securities to the company. A Debt Security
typically has a fixed payment schedule which obligates the company to pay
interest to the lender and to return the lender's money over a certain time
period. A company typically meets its payment obligations associated with
its outstanding Debt Securities before it declares and pays any dividends to
holders of its Equity Securities. While Debt Securities are typically used
as an investment to produce income to an investor as a result of the fixed
payment schedule, Debt Securities may also increase or decrease in value
depending upon factors such as interest rate movements and the success or
lack of success of a company.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined
the Fund is a legally permissible investment and that can only buy shares of
the Fund without paying sales charges.
EQUITY SECURITIES - Securities which entitle the holder to participate in a
company's general operating success or failure. The purchaser of an Equity
Security typically receives an ownership interest in the company as well as
certain voting rights. The owner of an Equity Security participates in a
company's success through the receipt of dividends which are distributions of
earnings by the company to its owners. Equity Security owners also
participate in a company's success or lack of success through increases or
decreases in the value of the company's shares as traded in the public
trading market for such shares.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator
Fund, Inc., Templeton Variable Annuity Fund, and Templeton Variable Products
Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
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 or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value
per share and includes the front-end sales charge. The maximum front-end
sales charge is 4.50%.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SECURITIES MARKETS - U.S. or foreign securities exchanges typically represent
the primary trading market for U.S. and foreign securities. A securities
exchange brings together buyers and sellers of the same securities. The
National Association of Securities Dealers Automated Quotation System
("NASDAQ") national market system also brings together buyers and sellers of
the same securities through an electronic medium which facilitates a sale and
purchase of the security. Typically, the companies whose securities are
traded on the NASDAQ national market system are smaller than the companies
whose securities are traded on a securities exchange. Finally, the
over-the-counter ("OTC") market refers to all other avenues whereby brokers
bring together buyers and sellers of securities.
SEP - An employer sponsored simplified employee pension plan established
under section 408(k) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
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
WARRANTS AND RIGHTS - 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 Right also gives the holder the Right to subscribe for newly
created securities. However, a Right differs from a Warrant in that it must
be exercised within a relatively short period of time.
WE/OUR/US - Unless the context indicates a different meaning, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.
FRANKLIN STRATEGIC
BIOTECHNOLOGY
DISCOVERY FUND
STATEMENT OF
ADDITIONAL INFORMATION
AUGUST 26, 1997
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
How does the Fund Invest its Assets?.........................
What are the Fund's Potential Risks?.........................
Investment Restrictions......................................
Officers and Trustees........................................
Investment Management and Other Services.....................
How does the Fund Buy Securities for its Portfolio?..........
How Do I Buy, Sell and Exchange Shares?......................
How are Fund Shares Valued?..................................
Additional Information on Distributions and Taxes............
The Fund's Underwriter.......................................
How does the Fund Measure Performance?.......................
Miscellaneous Information....................................
Financial Statements.........................................
Useful Terms and Definitions.................................
Appendix.....................................................
Description of Ratings.....................................
- -----------------------------------------------------------------------
When reading this SAI, you will see certain terms beginning with
capital letters. This means the term is explained under "Useful
Terms and Definitions."
- -----------------------------------------------------------------------
The Franklin Strategic Biotechnology Discovery Fund (the "Fund") is a
non-diversified series of Franklin Strategic Series (the "Trust"), an open-end
management investment company. The Fund's investment objective is capital
appreciation. The Fund seeks to achieve its objective by investing primarily in
equity securities of biotechnology companies and discovery research firms.
The Prospectus, dated August 26, 1997, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN or write the Fund at the address shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
- ------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
- ------------------------------------------------------------------------------
ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together
with the section in the Prospectus entitled "How does the Fund Invest its
Assets?"
CONVERTIBLE SECURITIES. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. The price of a
convertible security is also influenced by the market value of the security's
underlying common stock and tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of
the underlying stock declines. Because its value can be influenced by both
interest rate and market movements, a convertible security is not as
sensitive to interest rates as a similar fixed-income security, nor is it as
sensitive to changes in share price as its underlying stock.
When issued by an operating company, a convertible security tends to be
senior to common stock, but at the same time is often subordinate to other
types of fixed income securities issued by its respective corporation. If
the security is issued by a brokerage firm, the security is an obligation of
that firm. The issuer of a convertible security may be important in
determining the security's value, because the Fund will have recourse only to
the issuer.
While the Fund uses the same criteria to rate a convertible debt security
that it uses to rate a more conventional debt security, a convertible
preferred stock is treated like a preferred stock for the Fund's financial
reporting, credit rating, and investment limitation purposes. A preferred
stock is subordinated to all debt obligations in the event of insolvency, and
an issuer's failure to make a dividend payment is generally not an event of
default entitling the preferred shareholder to take action. A preferred
stock generally has no maturity date, so that its market value is dependent
on the issuer's business prospects for an indefinite period of time. In
addition, distributions from preferred stock are dividends, rather than
interest payments, and are usually treated as such for corporate tax purposes.
DEPOSITARY RECEIPTS. The Fund may invest in securities commonly known as
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs")
and Global Depositary Receipts ("GDRs") of non-U.S. issuers. Such depositary
receipts are interests in a pool of a non-U.S. company's securities which
have been deposited with a bank or trust company. The bank or trust company
then sells interests in the pool to investors in the form of Depositary
Receipts. Depositary Receipts can be unsponsored or sponsored by the issuer
of the underlying securities or by the issuing bank or trust company.
ADRs are usually issued by an American bank or trust company and may be
registered for use in U.S. securities markets. EDRs and GDRs are typically
issued by foreign banks or trust companies, although they also may be issued
by U.S. banks or trust companies. The Fund considers investments in
Depositary Receipts to be investments in the equity securities of the issuers
into which the Depositary Receipts may be converted.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on
exchanges or over-the-counter. While ADRs do not eliminate all the risks
associated with foreign investments, by investing in ADRs rather than
directly in the stock of foreign issuers, the Fund will avoid currency risks
during the settlement period for either purchases or sales and certain
foreign securities markets trading risks. In general, there is a large,
liquid market in the U.S. for ADRs quoted on a national securities exchange
or on NASDAQ. The information available for ADRs is subject to the
accounting, auditing, and financial reporting standards of the U.S. market or
exchange on which they are traded, which standards are more uniform and more
exacting than those to which many foreign issuers may be subject.
Depositary Receipts may be issued under sponsored or unsponsored programs.
In sponsored programs, an issuer has made arrangements to have its securities
traded in the form of Depositary Receipts. In unsponsored programs, the
issuer may not be directly involved in the creation of the program. Although
regulatory requirements with respect to sponsored and unsponsored programs
are generally similar, in some cases it may be easier to obtain financial
information from an issuer that has participated in the creation of a
sponsored program. Accordingly, there may be less information available
regarding issuers of securities underlying unsponsored programs, and there
may not be a correlation between such information and the market value of the
Depositary Receipts.
SHORT-TERM INVESTMENTS. As stated in the Prospectus, the Fund may invest
cash temporarily in short-term debt instrument. The Fund may also invest its
short term cash in shares of the Franklin Money Fund, the assets of which are
managed by the Fund's investment adviser under a master/feeder structure.
Such temporary investments may be made either for liquidity purposes, to meet
redemption requirements or as a temporary defensive measure.
REPURCHASE AGREEMENTS. As a temporary investment, the Fund may invest up to
10% of its assets in repurchase agreements, including tri-party repurchase
agreements and reverse repurchase agreements. In a repurchase transaction,
the Fund purchases a U.S. government security from a bank or broker-dealer.
The agreement provides that the Fund must sell the security back at an agreed
upon price and date. The bank or broker-dealer must transfer to the Fund's
account securities with an initial value, including any earned but unpaid
interest, equal to at least 102% of the dollar amount invested by the Fund in
each repurchase agreement. The value of the underlying U.S. government
security is determined daily so that there is on deposit with the Fund's
custodian bank at least 100% of the value of the repurchase agreement. In a
tri-party repurchase agreement, the security is maintained at the bank or
broker-dealer's custodian bank, as opposed to being transferred to and
maintained at the Fund's custodian.
The Fund may also enter into reverse repurchase agreements. In a reverse
repurchase agreement transaction, the Fund sells a security and agrees to
repurchase the security at an agreed-upon price, on a specific date and with
an agreed upon interest payment. The Fund will maintain in an account at its
custodian bank cash or high grade liquid debt securities of an amount equal
to the Fund's obligation under the agreement, including earned but unpaid
interest. The value of the securities subject to the reverse repurchase
agreement will be determined each day. Although reverse repurchase
agreements are borrowings, under the federal laws which regulate mutual
funds, the Fund does not treat reverse repurchase agreements as borrowings
under its fundamental investment restriction against borrowing since it has
established the account at the custodian bank.
ILLIQUID INVESTMENTS AND RESTRICTED SECURITIES. The Fund will not invest
more than 15% of its net assets in illiquid securities. Subject to this
limitation, the Board has authorized the Fund to invest in restricted
securities where such investment is consistent with the Fund's investment
objective and has authorized such securities to be considered to be liquid to
the extent Advisers determines that there is a liquid institutional or other
market for such securities. For example, restricted securities may be
considered liquid where they may be freely transferred among qualified
institutional buyers pursuant to Rule 144A under the Securities Act of 1933,
as amended, and where a liquid institutional market has developed. The Board
will review any determination by Advisers to treat a restricted security as a
liquid security on an ongoing basis, including Advisers' assessment of
current trading activity and the availability of reliable price information.
In determining whether a restricted security is properly considered a liquid
security, Advisers and the Board will take into account the following
factors: (i) the frequency of trades and quotes for the security; (ii) the
number of dealers willing to purchase or sell the security and the number of
other potential purchasers; (iii) dealer undertakings to make a market in the
security; and (iv) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer). To the extent
the Fund invests in restricted securities that are deemed liquid, the general
level of illiquidity in the Fund may be increased if qualified institutional
buyers become uninterested in purchasing these securities or the market for
these securities contracts.
HEDGING AND INCOME TRANSACTIONS. As discussed in the Prospectus, the Fund
may use various hedging strategies.
Some examples of situations in which Hedging Transactions may be used are:
(i) to attempt to protect against possible changes in the market value of
securities held in or to be purchased for the Fund's portfolio resulting from
changes in securities markets or currency exchange rate fluctuations; (ii) to
protect the Fund's gains in the value of portfolio securities which have not
yet been sold; (iii) to facilitate the sale of certain securities for
investment purposes; and (iv) as a temporary substitute for purchasing or
selling particular securities.
Any combination of Hedging Transactions may be used at any time as determined
by the Fund's investment adviser. Use of any Hedging Transaction is a
function of numerous variables, including market conditions. The ability of
the Fund to utilize Hedging Transactions successfully will depend on the
investment adviser's ability to predict pertinent market movements, which
cannot be assured. The Fund will comply with applicable regulatory
requirements when implementing these strategies, including the establishment
of certain isolated accounts at the Fund's Custodian. Hedging Transactions
involving financial futures and options on futures will be purchased, sold or
entered into generally for bona fide hedging, risk management or portfolio
management purposes.
As discussed in the Prospectus, the Fund may also use Hedging Transactions
for non-hedging purposes. However, no more than 5% of the Fund's assets will
be exposed to risks of Hedging Transactions when entered into for non-hedging
purposes. Each type of Hedging Transaction is described below.
TRANSACTIONS IN OPTIONS, FUTURES AND OPTIONS ON FINANCIAL FUTURES.
WRITING CALL OPTIONS. Call options written by the Fund give the holder the
right to buy the underlying securities from the Fund at a stated exercise
price; put options written by the Fund give the holder the right to sell the
underlying security to the Fund at a stated exercise price. A call option
written by the Fund is "covered" if the Fund owns the underlying security
which is subject to the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its portfolio. A
call option is also covered if the Fund holds a call on the same security and
in the same principal amount as the call written where the exercise price of
the call held (a) is equal to or less than the exercise price of the call
written or (b) is greater than the exercise price of the call written if the
difference is maintained by the Fund in cash and high grade debt securities
in a segregated account with its custodian bank. The premium paid by the
purchaser of an option will reflect, among other things, the relationship of
the exercise price to the market price and volatility of the underlying
security, the remaining term of the option, supply and demand and interest
rate.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, since, with regard to
certain options, the writer may be assigned an exercise notice at any time
prior to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in
the market value of the underlying security during the option period. If a
call option is exercised, the writer experiences a profit or loss from the
sale of the underlying security.
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of
the same series as the option previously written. The effect of the purchase
is that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the
holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series
as the option previously purchased. There is no guarantee that either a
closing purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both. Also,
effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any securities subject to the option to be used for other
Fund investments. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than
a the premium received from writing the option or is less than the premium
paid to purchase the option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option is likely
to be offset in whole or in part by appreciation of the underlying security
owned by the Fund.
PURCHASING CALL OPTIONS. The Fund may purchase call options on securities
which it intends to purchase in order to limit the risk of a substantial
increase in the market price of such security. The Fund may also purchase
call options on securities held in its portfolio and on which it has written
call options. A call options gives the holder the right to buy the
underlying securities from the option writer at a stated exercise price.
Prior to its expiration, a call option may be sold in a closing sale
transaction. Profit or loss from such a sale will depend on whether the
amount received is more or less than the premium paid for the call option
plus the related transaction costs.
WRITING PUT OPTIONS. A put option gives the purchaser of the option the
right to sell, and the writer (seller) the obligation to buy, the underlying
security at the exercise price during the option period. The option may be
exercised at any time prior to its expiration date. The operation of put
options in other respects, including their related risks and rewards, is
substantially identical to that of call options.
The Fund would write put options only on a covered basis, which means that
the Fund would maintain in a segregated account cash, U.S. government
securities or other liquid, high-grade debt securities in an amount not less
than the exercise price at all times while the put option is outstanding.
(The rules of the clearing corporation currently require that such assets be
deposited in escrow to secure payment of the exercise price.) The Fund would
generally write covered put options in circumstances where Advisers wishes to
purchase the underlying security for the Fund's portfolio at a price lower
than the current market price of the security. In such event, the Fund would
write a put option at an exercise price which, reduced by the premium
received on the option, reflects the lower price it is willing to pay. Since
the Fund would also receive interest on debt securities or currencies
maintained to cover the exercise price of the option, this technique could be
used to enhance current return during periods of market uncertainty. The
risk in such a transaction would be that the market price of the underlying
security would decline below the exercise price less the premium received.
PURCHASING PUT OPTIONS. The Fund may purchase put options. As the holder of
a put option, the Fund has the right to sell the underlying security at the
exercise price at any time during the option period. The Fund may enter into
closing sale transactions with respect to such options, exercise them or
permit them to expire.
The Fund may purchase a put option on an underlying security ("a protective
put") owned by the Fund as a hedging technique in order to protect against an
anticipated decline in the value of the security. Such hedge protection is
provided only during the life of the put option when the Fund, as the holder
of the put option, is able to sell the underlying security at the put
exercise price, regardless of any decline in the underlying security's market
price or currency's exchange value. For example, a put option may be
purchased in order to protect unrealized appreciation of a security when
Advisers deems it desirable to continue to hold the security because of tax
considerations. The premium paid for the put option and any transaction
costs would reduce any short-term capital gain otherwise available for
distribution when the security is eventually sold.
The Fund may also purchase put options at a time when the Fund does not own
the underlying security. By purchasing put options on a security it does not
own, the Fund seeks to benefit from a decline in the market price of the
underlying security. If the put option is not sold when it has remaining
value, and if the market price of the underlying security remains equal to or
greater than the exercise price during the life of the put option, the Fund
will lose its entire investment in the put option. In order for the purchase
of a put option to be profitable, the market price of the underlying security
must decline sufficiently below the exercise price to cover the premium and
transaction costs, unless the put option is sold in a closing sale
transaction.
OVER-THE-COUNTER OPTIONS ("OTC OPTIONS"). The Fund intends to write covered
put and call options and purchase put and call options which trade in the
over-the-counter market to the same extent that it will engage in exchange
traded options. Just as with exchange traded options, OTC call options give
the holder the right to buy an underlying security from an option writer at a
stated exercise price; OTC put options give the holder the right to sell an
underlying security to an option writer at a stated exercise price. However,
OTC options differ from exchange traded options in certain material respects.
OTC options are arranged directly with dealers and not, as is the case with
exchange traded options, with a clearing corporation. Thus, there is a risk
of non-performance by the dealer. Because there is no exchange, pricing is
typically done by reference to information from market makers. However, OTC
options are available for a greater variety of securities, and in a wider
range of expiration dates and exercise prices, than exchange traded options;
and the writer of an OTC option is paid the premium in advance by the dealer.
There can be no assurance that a continuous liquid secondary market will
exist for any particular option at any specific time. Consequently, the Fund
may be able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer
that issued it. Similarly, when the Fund writes an OTC option, it generally
can close out that option prior to its expiration only by entering into a
closing purchase transaction with the dealer to which the Fund originally
wrote it.
OPTIONS ON STOCK INDICES. The Fund may also purchase call and put options on
stock indices in order to hedge against the risk of market or industry-wide
stock price fluctuations. Call and put options on stock indices are similar
to options on securities except that, rather than the right to purchase or
sell stock at a specified price, options on a stock index give the holder the
right to receive, upon exercise of the option, an amount of cash if the
closing level of the underlying stock index is greater than (or less than, in
the case of puts) the exercise price of the option. This amount of cash is
equal to the difference between the closing price of the index and the
exercise price of the option, expressed in dollars multiplied by a specified
number. Thus, unlike stock options, all settlements are in cash, and gain or
loss depends on price movements in the stock market generally (or in a
particular industry or segment of the market) rather than price movements in
individual stocks.
When the Fund writes an option on a stock index, the Fund will establish a
segregated account containing cash or high quality fixed-income securities
with its custodian bank in an amount at least equal to the market value of
the underlying stock index and will maintain the account while the option is
open or it will otherwise cover the transaction.
FUTURES CONTRACTS. The Fund may enter into contracts for the purchase or
sale of futures contracts based upon financial indices ("financial
futures"). Financial futures contracts are commodity contracts that obligate
the long or short holder to take or make delivery of a specified quantity of
a financial instrument, such as a security, or, as in the case of the Fund,
the cash value of a securities index during a specified future period at a
specified price. A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver such cash value called for by the contract
on a specified date. A "purchase" of a futures contract means the
acquisition of a contractual obligation to take delivery of the cash value
called for by the contract at a specified date. Futures contracts have been
designed by exchanges which have been designated "contracts markets" by the
Commodity Futures Trading Commission ("CFTC") and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market.
At the same time a futures contract is purchased or sold, the Fund must
allocate cash or securities as a deposit payment ("initial deposit"). Daily
thereafter, the futures contract is valued and the payment of "variation
margin" may be required since each day the Fund would provide or receive cash
that reflects any decline or increase in the contract's value.
Although financial futures contracts by their terms call for the actual
delivery or acquisition of securities, or the cash value of the index, in
most cases the contractual obligation is fulfilled before the date of the
contract without having to make or take delivery of the securities or cash.
The offsetting of a contractually obligation is accomplished by buying (or
selling, as the case may be) on a commodities exchange an identical financial
futures contract calling for delivery in the same month. Such a transaction,
which is effected through a member of an exchange, cancels the obligation to
make or take delivery of the securities or cash. Since all transactions in
the futures market are made, offset or fulfilled through a clearinghouse
associated with the exchange on which the contracts are traded, the Fund will
incur brokerage fees when it purchases or sells financial futures contracts.
The Fund will not engage in transactions in futures contracts or related
options for speculation but only as a hedge against changes resulting from
market conditions in the values of its securities or securities which it
intends to purchase and, to the extent consistent therewith, to accommodate
cash flows. The Fund will not enter into any stock index or financial
futures contract or related option if, immediately thereafter, more than
one-third of the Fund's total assets would be represented by futures
contracts or related options. In addition, the Fund may not purchase or sell
futures contracts or purchase or sell related options if, immediately
thereafter, the sum of the amount of initial deposits on its existing
financial futures and premiums paid on options on financial futures contracts
would exceed 5% of the market value of the Fund's total assets. In instances
involving the purchase of futures contracts or related call options, money
market instruments equal to the market value of the futures contract or
related option will be deposited in a segregated account with the custodian
to collateralize such long positions.
The purpose of the acquisition or sale of a futures contract is to attempt to
protect the Fund from fluctuations in price of portfolio securities without
actually buying or selling the underlying security.
To the extent the Fund enters into a futures contract, it will maintain with
its custodian, to the extent required by the rules of the SEC, assets in a
segregated account to cover its obligations with respect to such contract
which will consist of cash, cash equivalents or high quality debt securities
from its portfolio in an amount equal to the difference between the
fluctuating market value of such futures contracts and the aggregate value of
the initial and variation margin payments made by the Fund with respect to
such futures contracts.
STOCK INDEX FUTURES AND OPTIONS ON STOCK INDEX FUTURES.
The Fund may purchase and sell stock index futures contracts and options on
stock index futures contracts.
STOCK INDEX FUTURES. A stock index futures contract obligates the seller to
deliver (and the purchaser to take) an amount of cash equal to a specific
dollar amount times the difference between the value of a specific stock
index at the close of the last trading day of the contract and the price at
which the agreement is made. No physical delivery of the underlying stocks
in the index is made.
The Fund may sell stock index futures contracts in anticipation of or during
a market decline to attempt to offset the decrease in market value of its
equity securities that might otherwise result. When the Fund is not fully
invested in stocks and anticipates a significant market advance, it may
purchase stock index futures in order to gain rapid market exposure that may
in part or entirely offset increase in the cost of common stocks that it
intends to purchase.
OPTIONS ON STOCK INDEX FUTURES. The Fund may purchase and sell call and put
options on stock index futures to hedge against risks of market side price
movements. The need to hedge against such risks will depend on the extent of
diversification of the fund's common stock portfolio and the sensitivity of
such investments to factors influencing the stock market as a whole.
Call and put options on stock index futures are similar to options on
securities except that, rather than the right to purchase or sell stock at a
specified price, options on a stock index futures give the holder the right
to receive cash. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance to the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the
closing price of the futures contract on the expiration date.
BOND INDEX FUTURES AND OPTIONS ON SUCH CONTRACTS. The Fund may purchase and
sell futures contracts based on the index of debt securities and options on
such futures contracts to the extent they currently exist and, in the future,
may be developed. The Fund reserves the right to conduct futures and options
transactions based on an index which may be developed in the future to
correlate with price movements in certain categories of debt securities. The
Fund's investment strategy in employing futures contracts based on an index
of debt securities will be similar to that used by it in other financial
futures transactions.
The Fund may also purchase and write put and call options on such index
futures and enter into closing transactions with respect to such options.
See "Risk Factors and Considerations Regarding Options, Futures and Options
on Futures," for a discussion of the risks regarding the Fund's transactions
in financial futures.
SHORT-SELLING. In a short sale, the Fund sells a security it does not own in
anticipation of a decline in the market value of that security. The security
sold must be listed on a national exchange. To complete the transaction, the
fund must borrow the security to make delivery to the buyer. The Fund is
then obligated to replace the security borrowed by purchasing it at the
market price at the time of replacement. Until the security is replaced, the
Fund must pay the lender any dividends or interest that accrue during the
period of the loan. To borrow the security, the Fund may also be required to
pay a premium, which would increase the cost of the security sold. The
proceeds of the short sale will be retained by the broker, to the extent
necessary to meet margin requirements, until the short position is closed out.
The Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security, and the Fund will realize a gain if
the security declines in price between those same dates. The amount of any
gain will be decreased, and the amount of any loss increased, by the amount
of any premium, dividends or interest the Fund is required to pay in
connection with the short sale.
In addition to the short sales discussed above, The Fund may also make short
sales "against the box." A short sale is "against the box" to the extent
that the Fund contemporaneously owns or has the right to obtain at no added
cost securities identical to
those sold short.
The Fund will place in a segregated account with its custodian bank an amount
of cash or U.S. government securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short
and (b) any cash or securities required to be deposited as collateral with
the broker in connection with the short sale (not including the proceeds from
the short sale). The segregated account will be marked-to-market daily and
at no time will the amount deposited in the segregated account and with the
broker as collateral be less than the market value of the securities at the
time they were sold short.
CONVERSION TO A MASTER/FEEDER STRUCTURE
The Fund currently invests directly in securities. Certain Franklin Templeton
Funds, however, are "feeder funds" in a master/feeder fund structure. This
means they invest their assets in a "master fund" that, in turn, invests its
assets directly in securities. The Fund's investment objective and other
fundamental policies allow it to invest either directly in securities or
indirectly in securities through a master fund. In the future, the Board may
decide to convert the Fund to a master/feeder structure. If this occurs, your
purchase of Fund shares will be considered your consent to a conversion and
we will not seek further shareholder approval. We will, however, notify you
in advance of the conversion. If the Fund converts to a master/feeder
structure, its fees and total operating expenses are not expected to increase.
WHAT ARE THE FUND'S POTENTIAL RISKS?
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in
securities the disposition of which may be subject to legal or contractual
restrictions or the markets for which may be illiquid. The sale of
restricted or illiquid securities often requires more time and results in
higher brokerage charges or dealer discounts and other selling expenses than
does the sale of securities eligible for trading on national securities
exchanges or in the over-the-counter markets. Restricted securities often
sell at a price lower than similar securities that are not subject to
restrictions on resale.
REPURCHASE AGREEMENTS AND LOANS OF PORTFOLIO SECURITIES. As with any
extension of credit, a default by the borrower or seller might cause the Fund
to experience a loss or delay in the liquidation of the collateral. The Fund
might also incur disposition costs in liquidating the collateral. The Fund,
however, intends to enter into repurchase agreements only with government
securities dealers recognized by the Federal Reserve Board or with member
banks of the Federal Reserve System.
POLITICAL AND ECONOMIC RISKS. Investing in securities of non-U.S. companies
may entail additional risks due to the potential political and economic
instability of certain countries and the risks of expropriation,
nationalization, confiscation or the imposition of restrictions on foreign
investment and on repatriation of capital invested. In the event of such
expropriation, nationalization or other confiscation by any country, the Fund
could lose its entire investment in any such country.
INTERNAL POLITICAL INSTABILITY. Certain countries in which the Fund may
invest may have factions that advocate revolutionary change related to
political philosophies, religious ideology or ethnic based territorial
independence. Any disturbance on the part of such groups could carry the
potential for wide-spread destruction or confiscation of property owned by
individuals and entities foreign to such country and could cause the loss of
the Fund's investment in those countries.
FOREIGN INVESTMENT RESTRICTIONS. Certain countries prohibit or impose
substantial restrictions on investments in their capital markets,
particularly their equity markets, by foreign entities such as the Fund. As
illustrations, certain countries require governmental approval prior to
investments by foreign persons, or limit the amount of investment by foreign
persons in a particular company, or limit the investment by foreign persons
to only a specific class of securities of a company that may have less
advantageous terms than securities of the company available for purchase by
nationals. Moreover, the national policies of certain countries may restrict
investment opportunities in issuers or industries deemed sensitive to
national interests. In addition, some countries require governmental
approval for the repatriation of investment income, capital or the proceeds
of securities sales by foreign investors. The Fund could be adversely
affected by delays in, or a refusal to grant, any required governmental
approval for repatriation, as well as by the application to it of other
restrictions on investments.
NON-UNIFORM CORPORATE DISCLOSURE STANDARDS AND GOVERNMENTAL REGULATION.
Foreign companies are not generally subject to uniform accounting, auditing
and financial reporting standards or to other regulatory requirements
comparable to those applicable to U.S. companies. Most of the securities
held by the Fund will not be registered with the SEC or regulators of any
foreign country, nor will the issuers thereof be subject to the SEC's
reporting requirements. Thus, there will be less available information
concerning foreign issuers of securities held by the Fund than is available
concerning U.S. issuers. In instances where the financial statements of an
issuer are not deemed to reflect accurately the financial situation of the
issuer, the investment manager will take appropriate steps to evaluate the
proposed investment, which may include on-site inspection of the issuer,
interviews with its management and consultations with accountants, bankers
and other specialists.
CURRENCY FLUCTUATIONS. Because the Fund under normal circumstances will
invest a portion of its total assets in the securities of foreign issuers
which are denominated in foreign currencies, the strength or weakness of the
U.S. dollar against such foreign currencies will account for part of the
Fund's investment performance. A decline in the value of any particular
currency against the U.S. dollar will cause a decline in the U.S. dollar
value of the Fund's holdings of securities denominated in such currency and,
therefore, will cause an overall decline in the Fund's Net Asset Value and
any net investment income and capital gains to be distributed in U.S. dollars
to shareholders of the Fund.
The rate of exchange between the U.S. dollar and other currencies is
determined by several factors including the supply and demand for the
particular currencies, central bank effort to support particular currencies,
the movement of interest rates, the pace of business activity in certain
other countries, and the U.S., and other economic and financial conditions
affecting the world economy.
Although the Fund values its assets daily in terms of U.S. dollars, the Fund
does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. The Fund will do so from time to time, and
investors should be aware of the costs of currency conversion. Although
foreign exchange dealers do not charge a fee for conversion, they do realize
a profit based on the difference (the "spread") between the prices at which
they are buying and selling various currencies. Thus, a dealer may offer to
sell a foreign currency to the Fund at one rate, while offering a lesser rate
of exchange should the Fund desire to sell that currency to the dealer.
ADVERSE MARKET CHARACTERISTICS. Securities of many foreign issuers may be
less liquid and their prices more volatile than securities of comparable U.S.
issuers. In addition, foreign securities exchanges and brokers are generally
subject to less governmental supervision and regulation than in the U.S., and
foreign securities exchange transactions are usually subject to fixed
commissions, which are generally higher than negotiated commissions on U.S.
transactions. In addition, foreign securities exchange transactions may be
subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of the
Fund are uninvested and no return is earned thereon. The inability of the
Fund to make intended security purchases due to settlement problems could
cause the Fund to miss attractive opportunities. Inability to dispose of a
portfolio security due to settlement problems either could result in losses
to the Fund due to subsequent declines in value of the portfolio security or,
if the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser. The investment manager will consider
such difficulties when determining the allocation of the Fund's assets,
although the investment manager does not believe that such difficulties will
have a material adverse effect on the Fund's portfolio trading activities.
DEVELOPING MARKETS. With respect to investments in developing markets, the
small size, inexperience, and limited volume of trading on securities markets
in certain developing countries may make the Fund's investments in developing
countries illiquid and more volatile than investments in more developed
countries, and the Fund may be required to establish special custody or other
arrangements before making certain investments in those countries. The
economies of developing countries generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustments
in relative currency values, and other protectionist measures imposed or
negotiated by the countries with which they trade. These economies also have
been and may continue to be adversely affected by economic conditions in the
countries with which they trade. In many developing markets, there is less
government supervision and regulation of business and industry practices,
stock exchanges, brokers, and listed companies than in the United States.
There is an increased risk, therefore, of uninsured loss due to lost, stolen,
or counterfeit stock certificates.
The risks with respect to investments in companies domiciled in developing
countries also include: (i) less social, political, and economic stability;
(ii) the small current size of the markets for such securities and the
currently low or nonexistent volume of trading, which results in a lack of
liquidity and in greater price volatility; (iii) certain national policies
which may restrict the Fund's investment opportunities, including
restrictions on investment in issuers or industries deemed sensitive to
national interests; (iv) foreign taxation; (v) the absence of developed
structures governing private or foreign investment or allowing for judicial
redress for injury to private property; (vi) the absence, until recently in
certain Eastern European countries, of capital market structure or
market-oriented economy; and (vii) the possibility that recent favorable
economic developments in Eastern Europe may be slowed or reversed by
unanticipated political or social events in such countries.
In addition, some developing market countries have experienced substantial,
and in some periods extremely high, rates of inflation for many years.
Inflation and rapid fluctuations in inflation rates have had and may continue
to have negative effects on the economies and securities markets of certain
countries. Moreover, the economies of some developing countries may differ
favorably or unfavorably from the United States economy in such respects as
growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency, and balance of payments
position.
NON-U.S. WITHHOLDING TAXES. The Fund's net investment income from foreign
issuers may be subject to non-U.S. withholding taxes, thereby reducing the
Fund's not investment income.
OPTIONS, FUTURES AND OPTIONS ON FUTURES. The Fund's ability to hedge
effectively all or a portion of its securities through transactions in
options on stock indexes, stock index futures and related options depends on
the degree to which price movements in the underlying index or underlying
securities correlate with price movements in the relevant portion of the
Fund's securities. Inasmuch as such securities will not duplicate the
components of any index or such underlying securities, the correlation will
not be perfect. Consequently, the Fund bears the risk that the prices of the
securities being hedged will not move in the same amount as the hedging
instrument. It is also possible that there may be a negative correlation
between the index or other securities underlying the hedging instrument and
the hedged securities which would result in a loss on both such securities
and the hedging instrument. Accordingly, successful use by the Fund of
options on stock indexes, stock index futures, financial futures and related
options will be subject to Advisers' ability to predict correctly movements
in the direction of the securities markets generally or of a particular
segment. This requires different skills and techniques than predicting
changes in the price of individual stocks.
Although the use of futures and options transactions for hedging should tend
to minimize the risk of loss due to a decline in the value of the hedged
position, these transactions also tend to limit any potential gain which
might result from an increase in value of the position taken. Futures
contracts create greater ongoing potential financial risks to the Fund
because the Fund is required to make ongoing monetary deposits with futures
brokers. In an option transaction, the Fund's exposure is limited to the
cost of the initial premium paid by the Fund to the broker to engage in the
transaction. Losses resulting from the use of Hedging Transactions can
reduce net asset value, and possibly income, and such losses can be greater
than if the Hedging Transactions had not been utilized. The cost of entering
into Hedging Transactions may also reduce the Fund's total return to
investors.
Positions in stock index options, stock index futures and related options may
be closed out only on an exchange which provides a secondary market. There
can be no assurance that a liquid secondary market will exist for any
particular stock index option or futures contract or related option at any
specific time. Thus, it may not be possible to close such an option or
futures position. The inability to close options or futures positions also
could have an adverse impact on the Fund's ability to effectively hedge its
securities. The Fund will enter into an option or futures position only if
there appears to be a liquid secondary market for such options or futures.
There can be no assurance that a continuous liquid secondary market will
exist for any particular OTC option at any specific time. Consequently, the
Fund may be able to realize the value of an OTC option it has purchased only
by exercising it or entering into a closing sale transaction with the dealer
that issued it. Similarly, when the Fund writes an OTC option, it generally
can close out that option prior to its expiration only by entering into a
closing purchase transaction with the dealer to which the Fund originally
wrote it. If a covered call option writer cannot effect a closing
transaction, it cannot sell the underlying security until the option expires
or the option is exercised. Therefore, a covered call option writer of an
OTC option may not be able to sell an underlying security even though it
might otherwise be advantageous to do so. Likewise, a secured put writer of
an OTC option may be unable to sell the securities pledged to secure the put
for other investment purposes while it is obligated as a put writer.
Similarly, a purchase of such put or call option might also find it difficult
to terminate its position on a timely basis in the absence of a secondary
market.
The CFTC and the various exchanges have established limits referred to as
"speculative position limits" on the maximum net long or net short position
which any person may hold or control in a particular futures contract.
Trading limit are imposed on the maximum number contracts which any person
may trade on a particular trading day. An exchange may order the liquidation
of positions found to be in violation of these limits and it may impose other
sanctions or restrictions. The Fund does not believe that these trading and
positions limits will have an adverse impact on the Fund's strategies for
hedging its securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the future market could be reduced, thus producing distortion.
Third, from the point of view of speculators, the margin deposit requirements
in the futures market are less onerous than margin requirements in the
securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility
of distortion, a correct forecast of general interest rate trends by Advisers
may still not result in a successful transaction.
In addition, futures contracts entail risks. Although the Fund believes that
use of such contracts will benefit the Fund, if Advisers' investment judgment
about the general direction of interest rates is incorrect, the Fund's
overall performance would be poorer than if it had not entered into any such
contract. For example, if the Fund has hedged against the possibility of an
increase in interest rates which would adversely affect the price of bonds
held in its portfolio and interest rates decrease instead, the Fund will lose
part or all of the benefit of the increased value of its bonds which it has
hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Fund has insufficient cash, it may have
to sell securities from its portfolio to meet daily variation margin
requirements. Such sales may be, but will not necessarily be, at increased
prices which reflect the rising market. The Fund may have to sell securities
at a time when it may be disadvantageous to do so.
The Fund's sale of futures contracts and purchase of put options on futures
contracts will be solely to protect its investments against declines in value
and, to the extent consistent therewith, to accommodate cash flows. The Fund
expects that in the normal course it will purchase securities upon
termination of long futures contracts and long call options on futures
contracts, but under unusual market conditions it may terminate any of such
positions without a corresponding purchase of securities.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund may purchase or sell
forward foreign currency exchange contracts. While these contracts are not
presently regulated by the Commodity Futures Trading Commission ("CFTC"), the
CFTC may in the future assert authority to regulate forward contracts. In
such event the Fund's ability to utilize forward contracts will reduce the
potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance for the Fund than if it had not entered
into such contracts. The use of foreign currency forward contracts will not
eliminate fluctuations in the underlying U.S. Dollar equivalent value of, or
rates of return on, the Fund's foreign currency denominated portfolio
securities and the use of such techniques will subject the Fund to certain
risks.
The matching of the increase in value of a forward contract and the decline
in the U.S. Dollar equivalent value of the foreign currency denominated asset
that is the subject of the hedge generally will not be precise. In addition,
the Fund may not always be able to enter into foreign currency forward
contracts at attractive prices and this will limit the Fund's ability to use
such contracts to hedge or cross-hedge its assets. Also, with regard to the
Fund's use of cross-hedges, there can be no assurance that historical
correlations between the movement of certain foreign currencies relative to
the U.S. Dollar will continue. Thus, at any time poor correlation may exist
between movements in the exchange rates of the foreign currencies in which
the Fund's assets that are the subject of such cross-hedges are denominated.
OPTIONS ON FOREIGN CURRENCIES. The Fund may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
futures contracts on foreign currencies, or forward contracts, will be
utilized. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of
such securities, even if their value in the foreign currency remains
constant. In order to protect against such diminutions in the value of
portfolio securities, the Fund may purchase put options on the foreign
currency. If the value of the currency does decline, the Fund will have the
right to sell such currency for a fixed amount in dollars and will thereby
offset, in whole or part, the adverse effect on its portfolio which otherwise
would have resulted.
Conversely, where there is a projected rise in the dollar value of a currency
in which securities to be acquired are denominated is projected, thereby
increasing the cost of such securities, the Fund may purchase call options
thereon. The purchase of such options could offset, at least partially, the
effects of the adverse movements in exchange rates. As in the case of other
types of options, however, the benefit to the Fund deriving from purchases of
foreign currency options will be reduced by the amount of the premium and
related transaction costs. In addition, where currency exchange rates do not
move in the direction or to the extent anticipated, the Fund could sustain
losses on transactions in foreign currency options which would require it to
forego a portion or all of the benefits of advantageous changes in such rates.
The Fund may write options on foreign currencies for the same types of
hedging purposes. For example, where the Fund anticipates a decline in the
dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates it could, instead of purchasing a put option,
write a call option on the relevant currency. If the expected decline
occurs, the option will most likely not be exercised, and the diminution in
value of portfolio securities will be offset by the amount of the premium
received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Fund could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the Fund to hedge
such increased cost up to the amount of the premium. As in the case of other
types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may
be exercised and the Fund would be required to purchase or sell the
underlying currency at a loss which may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, the Fund also
may be required to forego all or a portion of the benefits which might
otherwise have been obtained from favorable movements in exchange rates.
The Fund intends to write covered call options on foreign currencies. A call
option written on a foreign currency by the Fund is "covered" if the Fund
owns the underlying foreign currency covered by the call or has an absolute
and immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated
account by its custodian bank) upon conversion or exchange of other foreign
currency held in its portfolio. A call option is also covered if the Fund
has a call on the same foreign currency and in the same principal amount as
the call written where the exercise price of the call held (a) is equal to or
less than the exercise price of the call written or (b) is greater than the
exercise price of the call written if the difference is maintained by the
Fund in cash, U.S. Government securities or other high grade liquid debt
securities in a segregated account with its custodian bank.
The Fund also intends to write call options on foreign currencies that are
not covered for cross-hedging purposes. A call option on a foreign currency
is for cross-hedging purposes if it is not covered, but is designed to
provide a hedge against a decline in the U.S. dollar value of a security
which the Fund owns or has the right to acquire and which is denominated in
the currency underlying the option due to an adverse change in the exchange
rate. In such circumstances, the Fund collateralizes the option by
maintaining in a segregated account with the Fund's custodian bank, cash or
U.S. Government securities or other high grade liquid debt securities in an
amount not less than the value of the underlying foreign currency in U.S.
dollars marked to market daily.
Options on foreign currencies and forward contracts are not traded on
contracts are not traded on contract markets regulated by the CFTC or (with
the exception of certain foreign currency options) by the SEC. To the
contrary, such instruments are traded through financial institutions acting
as market makers, although foreign currency options are also traded on
certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC regulation.
Similarly, options on currencies may be traded over-the-counter. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore
continue to an unlimited extent over a period of time. Although the purchase
of an option cannot lose more than the amount of the premium plus related
transaction costs, this entire amount could be lost. Moreover, the option
writer and a trader of forward contracts could lose amounts substantially in
excess of their initial investments, due to the margin and collateral
requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation ("OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the over-the-counter market,
potentially permitting the Fund to liquidate open positions at a profit prior
to exercise or expiration, or to limit losses in the event of adverse market
movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency option
exercises, or would result in undue burdens on the OCC or its clearing
member, impose special procedures on exercise and settlement, such as
technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions, on exercise.
In addition, forward contracts and options on foreign currencies may be
traded on foreign exchanges. Such transactions are subject to the risk of
governmental actions affecting trading in or the prices of foreign
currencies. The value of such positions also could be adversely affected by
(i) other complex foreign political and economic factors, (ii) lesser
availability than in the U.S. of data on which to make trading decisions,
(iii) delays in the Fund's ability to act upon economic events occurring in
foreign markets during nonbusiness hours in the U.S., (iv) the imposition of
different exercise and settlement terms and procedures and margin
requirements than int the U.S., and (v) less trading volume.
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.
HIGH YIELDING, FIXED INCOME SECURITIES. The Fund may invest up to 5% of its
assets in lower-rated fixed income securities and unrated securities of
comparable quality (known as "junk bonds") The market values of such
securities tend to reflect individual corporate developments to a greater
extent than do higher-rated securities, which react primarily to fluctuations
in the general level of interest rates. Such lower-rated securities also
tend to be more sensitive to economic conditions than higher-rated
securities. These lower-rated securities are considered by S&P and Moody's,
on balance, to be predominantly speculative with respect to the issuer's
capacity to pay dividends in accordance with the terms of the obligations and
will generally involve more credit risk than securities in the higher rating
categories. Even securities rated BBB or Baa by S&P and Moody's
respectively, ratings which are considered investment grade, possess some
speculative characteristics.
Companies that issue lower-rated securities are often highly leveraged and
may not have more traditional methods of financing available to them.
Therefore, the risk associated with acquiring the securities of such issuers
is generally greater than is the case with higher-rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of lower-rated securities may experience
financial stress. During these periods, such issuers may not have sufficient
earnings to meet their preferred stock payment obligations. The issuer's
ability to service its preferred stock obligations may also be adversely
affected by specific corporate developments, or the issuer's inability to
meet specific projected business forecasts, or the unavailability of
additional financing. An economic downturn may disrupt the market for high
yield securities and adversely affect the value of outstanding preferred
stock and the ability of issuers of such securities to pay dividends. The
risk of loss due to default by the issuer may be significantly greater for
the holders of high yielding securities because such securities are generally
unsecured and are often subordinated to other creditors of the issuer.
High yielding, fixed-income securities frequently have call or buy-back
features which would permit an issuer to call or repurchase the security from
the Fund. Although such securities are typically not callable for a period
from three to five years after their issuance, when calls are exercised by
the issuer during periods of declining interest rates, the Fund would likely
have to replace such called security with a lower yielding security, thus
decreasing the net investment income to the Fund and dividends to
shareholders. The premature disposition of a high yielding security due to a
call or buy-back feature, the deterioration of the issuer's creditworthiness,
or a default may also make it more difficult for the Fund to manage the
timing of its receipt of income, which may have tax implications. Further
information is included under "Taxation of the Fund and Its Shareholders" in
the Fund's Prospectus.
The Fund may have difficulty disposing of certain lower-rated securities
because there may be a thin trading market for a particular security at any
given time. The market for lower-rated securities generally tends to be
concentrated among a smaller number of dealers than is the case for
securities which trade in a broader secondary retail market. Generally,
purchasers of these securities are predominantly dealers and other
institutional buyers, rather than individuals. To the extent a secondary
trading market for lower-rated securities does exist, it is generally not as
liquid as the secondary market for higher-rated securities. Reduced
liquidity in the secondary market may have an adverse impact on market price
and the Fund's ability to depose of particular issues, when necessary, to
meet the Fund's liquidity needs or in response to a specific economic event,
such as the deterioration in the creditworthiness of the issuer. Reduced
liquidity in the secondary market for certain securities may also make it
more difficult for the Fund to obtain market quotations based on actual
trades for purposes of valuing the Fund's portfolio. Current value for these
high yield issues are obtained from pricing services and/or a limited number
of dealers and may be based upon factors other than actual sales. (See
"Valuation of Fund Shares" in the Fund's Prospectus.)
The Fund is authorized to acquire lower-rated, securities that are sold
without registration under the federal securities laws and therefore carry
restrictions on resale. Many recently issued lower-rated securities have
been sold with registration rights, covenants and penalty provisions for
delayed registration. If the Fund is required to sell such restricted
securities before the securities have been registered, it may be deemed an
underwriter of such securities as defined in the Securities Act of 1933,
which entails special responsibilities and liabilities. The Fund may incur
special costs in disposing of such securities; however, the Fund will
generally incur no costs when the issuer is responsible for registering the
securities.
The Fund may acquire lower-rated securities during an initial underwriting.
Such securities involve special risks because they are new issues. The Fund
has no arrangements with its underwriters or any other person concerning the
acquisition of such securities, and the investment manager will carefully
review the credit and other characteristics pertinent to such new issues.
The Fund will rely on Advisers' judgment, analysis and experience in
evaluating the creditworthiness of an issuer. In this evaluation, Advisers
will take into consideration, among other things, anticipated cash flow;
interest coverage; asset coverage; earning prospects the experience and
managerial strength of the issuer; responsiveness to changes in interest
rates and business conditions; debt maturity schedules and borrowing
requirements; and the issuer's changing financial condition and public
recognition thereof. In the event the rating on an issue held in the Fund's
portfolio is changed by the rating service, such change will be considered by
the Fund in its evaluation of the overall investment merits of that security
but will not necessarily result in an automatic sale of the security.
Factors adversely impacting the market value of high yielding securities will
adversely impact the Fund's net asset value. For example, adverse publicity
regarding lower-rated securities which appeared during 1989 and 1990 along
with highly publicized defaults of some high yield issuers, and concerns
regarding a sluggish economy which continued in 1993, depressed the prices
for many such securities.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies.
These restrictions may not be changed without the approval of a majority of
the outstanding voting securities of the Fund. Under the 1940 Act, this means
the approval of (i) more than 50% of the outstanding shares of the Fund or
(ii) 67% or more of the shares of the Fund present at a shareholder meeting
if more than 50% of the outstanding shares of the Fund are represented at the
meeting in person or by proxy, whichever is less. The Fund MAY NOT:
1. Make loans to other persons, except by the purchase of bonds,
debentures or similar obligations which are publicly distributed or of a
character usually acquired by institutional investors or through loans of the
Fund's portfolio securities, or to the extent the entry into a repurchase
agreement may be deemed a loan.
2. Borrow money, except in the form of repurchase agreements or from banks
in order to meet redemption requests that might otherwise require the
untimely disposition of portfolio securities or for other temporary or
emergency (but not investment) purposes, in an amount up to 10% of the value
of the Fund's total assets (including the amount borrowed) based on the
lesser of cost or market, less liabilities (not including the amount
borrowed) at the time the borrowing is made. While borrowings exceed 5% of
the Fund's total assets, the Fund will not make any additional investments.
3. Underwrite securities of other issuers or invest more than 15% of its
assets in illiquid securities.
4. Invest in securities for the purpose of exercising management or
control of the issuer.
5. Invest in the securities of other investment companies, except in
accordance with the Federal Securities laws. To the extent permitted by
exemptions granted under the 1940 Act, the Fund may invest in shares of one
or more money market funds managed by Franklin Advisers, Inc. or its
affiliates.
In addition to these financial policies, it is the present policy of the Fund
(which may be changed without the approval of the shareholders) not to
pledge, mortgage or hypothecate the Fund's assets as securities for loans,
nor to engage in joint or joint and several trading accounts in securities,
except that it may participate in joint repurchase arrangements, invest its
short-term cash in shares of the Franklin Money Fund (pursuant to the terms
of any order, and any conditions therein, issued by the SEC permitting such
investments), or combine orders to purchase or sell with orders from other
persons to obtain lower brokerage commissions.
If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities or the amount of assets will not be
considered a violation of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of the Fund under the 1940 Act are indicated by an asterisk (*).
POSITIONS AND OFFICES PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS WITH THE TRUST DURING THE PAST FIVE
YEARS
Frank H. Abbott, III (76)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); and
director or trustee, as the case may be, of 29 of the investment companies in
the Franklin Templeton Group of Funds.
Harris J. Ashton (65)
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
Trustee
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods (a meat packing company); and director or
trustee, as the case may be, of 53 of the investment companies in the
Franklin Templeton Group of Funds.
*Harmon E. Burns (52)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.
and Franklin Templeton Services, Inc.; Executive Vice President, Franklin
Advisers, Inc.; Director, Franklin/Templeton Investor Services,Inc. and
Franklin Mutual Advisers, Inc.; and officer and/or director or trustee, as
the case may be, of most other subsidiaries of Franklin Resources, Inc. and
58 of the investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (65)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director, General
Host Corporation (nursery and craft centers); and director, trustee or
managing general partner, as the case may be, of 55 of the investment
companies in the Franklin Templeton Group of Funds.
David W. Garbellano (82)
111 New Montgomery St., #402
San Francisco, CA 94105
Trustee
Private investor; Assistant Secretary/Treasurer and Director, Berkeley
Science Corporation (a venture capital company); and director, or trustee, as
the case may be, of 30 of the investment companies in the Franklin Templeton
Group of Funds.
*Charles B. Johnson (64)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton Investor
Services, Inc., Franklin Templeton Services, Inc. and General Host
Corporation (nursery and craft centers); and officer and/or director or
trustee, as the case may be, of most other subsidiaries of Franklin
Resources, Inc. and of 54 of the investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (57)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers,
Inc.; Senior Vice President and Director, Franklin Advisory Services, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of most other subsidiaries of
Franklin Resources, Inc. and of 60 of the investment companies in the
Franklin Templeton Group of Funds.
Frank W. T. LaHaye (68)
20833 Stevens Creek Blvd., Suite 102
Cupertino, CA 95014
Trustee
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Corporation (software
firm); Director, Fischer Imaging Corporation (medical imaging systems) and
Digital Transmission Systems, Inc. (wireless communications); and director or
trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (69)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (financial services); Director, Fund
American Enterprises Holdings, Inc., MCI Communications Corporation, CCC
Information Services Group, Inc. (information services), MedImmune, Inc.
(biotechnology), Shoppers Express (home shopping), andSpacehab, Inc.
(aerospace services); and director or trustee, as the case may be, of 50 of
the investment companies in the Franklin Templeton Group of Funds; FORMERLY
Chairman, Hambrecht and Quist Group, Director, H & Q Healthcare Investors,
and President, National Association of Securities Dealers, Inc.
Martin L. Flanagan (37)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President and Director , Templeton Worldwide,
Inc.; Director, Executive Vice President and Chief Operating Officer,
Templeton Investment Counsel, Inc.; Senior Vice President and Treasurer,
Franklin Advisers, Inc.; Treasurer, Franklin Advisory Services, Inc.;
Treasurer and Chief Financial Officer, Franklin Investment Advisory Services,
Inc.; President, Franklin Templeton Services, Inc.; Senior Vice President,
Franklin/Templeton Investor Services, Inc.; officer, and or director or
trustee, as the case may be, of 58 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (48)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer and Chief
Operating Officer, Franklin Investment Advisory Services, Inc.; and officer
of 58 of the investment companies in the Franklin Templeton Group of Funds.
Charles E. Johnson (41)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Vice President
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; President, Chief Executive Officer & Chief
Investment Officer and Director Franklin Institutional Services Corporation;
Chairman and Director, Templeton Investment Counsel, Inc.; Vice President,
Franklin Advisers, Inc.; officer and/or director of some of the subsidiaries
of Franklin Resources, Inc.; and officer and/or director or trustee, as the
case may be, of 37 of the investment companies in the Franklin Templeton
Group of Funds.
Diomedes Loo-Tam (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 35 of the investment
companies in the Franklin Templeton Group of Funds.
Edward V. McVey (60)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 30 of the investment companies in the
Franklin Templeton Group of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are currently
paid $[] per month plus $[] per meeting attended. As shown above, some of the
nonaffiliated Board members also serve as directors or trustees of other
investment companies in the Franklin Templeton Group of Funds. They may
receive fees from these funds for their services. The following table
provides the total fees paid to nonaffiliated Board members by the Trust and
by other funds in the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN THE
TOTAL FEES FRANKLIN
RECEIVED FROM TEMPLETON GROUP
TOTAL FEES THE FRANKLIN OF FUNDS ON
RECEIVED FROM TEMPLETON GROUP WHICH EACH
NAME THE TRUST* OF FUNDS** SERVES***
Frank H. Abbott, III $5,100 $165,326 29
Harris J. Ashton.. 5,100 343,591 53
S. Joseph Fortunato 5,100 360,411 55
David Garbellano.. 4,800 148,916 30
Frank W.T. LaHaye 4,800 139,233 27
Gordon S. Macklin 5,100 335,541 50
*For the fiscal year ended April 30, 1997.
**For the calendar year ended December 31, 1996.
***We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the Board members are responsible. The Franklin Templeton Group of
Funds currently includes 59 registered investment companies, with
approximately 167 U.S. based funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director, trustee
or managing general partner. No officer or Board member received any other
compensation, including pension or retirement benefits, directly or
indirectly from the Fund or other funds in the Franklin Templeton Group of
Funds. Certain officers or Board members who are shareholders of Resources
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
Many of the Board members own shares in other funds in the Franklin Templeton
Group of Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers
and the father and uncle, respectively, of Charles E. Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio
transactions are executed. Advisers' activities are subject to the review
and supervision of the Board to whom Advisers renders periodic reports of the
Fund's investment activities. Advisers and its officers, directors and
employees are covered by fidelity insurance for the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action
with respect to any of the other funds it manages, or for its own account,
that may differ from action taken by Advisers on behalf of the Fund.
Similarly, with respect to the Fund, Advisers is not obligated to recommend,
buy or sell, or to refrain from recommending, buying or selling any security
that Advisers and access persons, as defined by the 1940 Act, may buy or sell
for its or their own account or for the accounts of any other fund. Advisers
is not obligated to refrain from investing in securities held by the Fund or
other funds that it manages. Of course, any transactions for the accounts of
Advisers and other access persons will be made in compliance with the Fund's
Code of Ethics. Please see "Miscellaneous Information - Summary of Code of
Ethics."
MANAGEMENT AGREEMENT. The management agreement is in effect until [], 199[].
It may continue in effect for successive annual periods if its continuance is
specifically approved at least annually by a vote of the Board or by a vote
of the holders of a majority of the Fund's outstanding voting securities, and
in either event by a majority vote of the Board members who are not parties
to the management agreement or interested persons of any such party (other
than as members of the Board), cast in person at a meeting called for that
purpose. The management agreement may be terminated without penalty at any
time by the Board or by a vote of the holders of a majority of the Fund's
outstanding voting securities, or by Advisers on 60 days' written notice, and
will automatically terminate in the event of its assignment, as defined in
the 1940 Act.
ADMINISTRATIVE SERVICES. FT Services provides certain administrative
services and facilities for the Fund. These include preparing and maintaining
books, records, and tax and financial reports, and monitoring compliance with
regulatory requirements. FT Services is a wholly owned subsidiary of
Resources.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York, 10286, acts as custodian of the securities and other assets
of the Fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco,
California 94105 are the Fund's independent auditors.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
Advisers selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management
agreement and any directions that the Board may give.
When placing a portfolio transaction, Advisers seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid by the
Fund is negotiated between Advisers and the broker executing the transaction.
The determination and evaluation of the reasonableness of the brokerage
commissions paid are based to a large degree on the professional opinions of
the persons responsible for placement and review of the transactions. These
opinions are based on the experience of these individuals in the securities
industry and information available to them about the level of commissions
being paid by other institutional investors of comparable size. Advisers will
ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in
the opinion of Advisers, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
Advisers may pay certain brokers commissions that are higher than those
another broker may charge, if Advisers determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or Advisers' overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to Advisers include, among others, supplying information
about particular companies, markets, countries, or local, regional, national
or transnational economies, statistical data, quotations and other securities
pricing information, and other information that provides lawful and
appropriate assistance to Advisers in carrying out its investment advisory
responsibilities. These services may not always directly benefit the Fund.
They must, however, be of value to Advisers in carrying out its overall
responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on
the research services Advisers receives from dealers effecting transactions
in portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research
and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, Advisers and its affiliates may use this
research and data in their investment advisory capacities with other clients.
If the Fund's officers are satisfied that the best execution is obtained, the
sale of Fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, may also be considered a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive
certain fees when the Fund tenders portfolio securities pursuant to a
tender-offer solicitation. As a means of recapturing brokerage for the
benefit of the Fund, any portfolio securities tendered by the Fund will be
tendered through Distributors if it is legally permissible to do so. In turn,
the next management fee payable to Advisers will be reduced by the amount of
any fees received by Distributors in cash, less any costs and expenses
incurred in connection with the tender.
If purchases or sales of securities of the Fund and one or more other
investment companies or clients supervised by Advisers are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to
all by Advisers, taking into account the respective sizes of the funds and
the amount of securities to be purchased or sold. In some cases this
procedure could have a detrimental effect on the price or volume of the
security so far as the Fund is concerned. In other cases it is possible that
the ability to participate in volume transactions and to negotiate lower
brokerage commissions will be beneficial to the Fund.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have
an agreement with Distributors. Securities Dealers may at times receive the
entire sales charge. A Securities Dealer who receives 90% or more of the
sales charge may be deemed an underwriter under the Securities Act of 1933,
as amended.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund
may be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction
fee in the percentages indicated in the table under "How Do I Buy Shares? -
Quantity Discounts" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the Fund we may impose a $10 charge against your account for each returned
item.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge.
The banks may charge service fees to their customers who participate in the
trusts. A portion of these service fees may be paid to Distributors or one of
its affiliates to help defray expenses of maintaining a service office in
Taiwan, including expenses related to local literature fulfillment and
communication facilities.
Shares of the Fund may be offered to investors in Taiwan through securities
advisory firms known locally as Securities Investment Consulting Enterprises.
In conformity with local business practices in Taiwan, shares may be offered
with the following schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE
- ------------------------------- ------------
Under $30,000 3.0%
$30,000 but less than $50,000 2.5%
$50,000 but less than $100,000 2.0%
$100,000 but less than $200,000 1.5%
$200,000 but less than $400,000 1.0%
$400,000 or more 0%
Other Payments to Securities Dealers. Distributors may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of $1 million or more: 1% on sales of $1
million to $2 million, plus 0.80% on sales over $2 million to $3 million,
plus 0.50% on sales over $3 million to $50 million, plus 0.25% on sales over
$50 million to $100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts,
out of its own resources, to Securities Dealers who initiate and are
responsible for purchases by certain retirement plans without a front-end
sales charge, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on
sales over $3 million to $50 million, plus 0.25% on sales over $50 million to
$100 million, plus 0.15% on sales over $100 million. Distributors may make
these payments in the form of contingent advance payments, which may be
recovered from the Securities Dealer or set off against other payments due to
the dealer if shares are sold within 12 months of the calendar month of
purchase. Other conditions may apply. All terms and conditions may be imposed
by an agreement between Distributors, or one of its affiliates, and the
Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing
efforts in the Franklin Templeton Group of Funds; a Securities Dealer's
support of, and participation in, Distributors' marketing programs; a
Securities Dealer's compensation programs for its registered representatives;
and the extent of a Securities Dealer's marketing programs relating to the
Franklin Templeton Group of Funds. Financial support to Securities Dealers
may be made by payments from Distributors' resources, from Distributors'
retention of underwriting concessions and, in the case of funds that have
Rule 12b-1 plans, from payments to Distributors under such plans. In
addition, certain Securities Dealers may receive brokerage commissions
generated by fund portfolio transactions in accordance with the NASD's rules.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy
Fund shares, as described in the Prospectus. At any time within 90 days after
the first investment that you want to qualify for a reduced sales charge, you
may file with the Fund a signed shareholder application with the Letter of
Intent section completed. After the Letter is filed, each additional
investment will be entitled to the sales charge applicable to the level of
investment indicated on the Letter. Sales charge reductions based on
purchases in more than one Franklin Templeton Fund will be effective only
after notification to Distributors that the investment qualifies for a
discount. Your holdings in the Franklin Templeton Funds acquired more than 90
days before the Letter is filed will be counted towards completion of the
Letter, but they will not be entitled to a retroactive downward adjustment in
the sales charge. Any redemptions you make during the 13 month period, except
in the case of certain retirement plans, will be subtracted from the amount
of the purchases for purposes of determining whether the terms of the Letter
have been completed. If the Letter is not completed within the 13 month
period, there will be an upward adjustment of the sales charge, depending on
the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute
a Letter before a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the
sales charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in your
name until you fulfill the Letter. This policy of reserving shares does not
apply to certain retirement plans. If total purchases, less redemptions,
equal the amount specified under the Letter, the reserved shares will be
deposited to an account in your name or delivered to you or as you direct. If
total purchases, less redemptions, exceed the amount specified under the
Letter and is an amount that would qualify for a further quantity discount, a
retroactive price adjustment will be made by Distributors and the Securities
Dealer through whom purchases were made pursuant to the Letter (to reflect
such further quantity discount) on purchases made within 90 days before and
on those made after filing the Letter. The resulting difference in Offering
Price will be applied to the purchase of additional shares at the Offering
Price applicable to a single purchase or the dollar amount of the total
purchases. If the total purchases, less redemptions, are less than the amount
specified under the Letter, you will remit to Distributors an amount equal to
the difference in the dollar amount of sales charge actually paid and the
amount of sales charge that would have applied to the aggregate purchases if
the total of the purchases had been made at a single time. Upon remittance,
the reserved shares held for your account will be deposited to an account in
your name or delivered to you or as you direct. If within 20 days after
written request the difference in sales charge is not paid, the redemption of
an appropriate number of reserved shares to realize the difference will be
made. In the event of a total redemption of the account before fulfillment of
the Letter, the additional sales charge due will be deducted from the
proceeds of the redemption, and the balance will be forwarded to you.
If a Letter is executed on behalf of certain retirement plans, the level and
any reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve
5% of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will
be purchased at the Net Asset Value determined on the business day following
the dividend record date (sometimes known as the "ex-dividend date"). The
processing date for the reinvestment of dividends may vary and does not
affect the amount or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell 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
occurs, it is the Fund's general policy to initially invest this money in
short-term, interest-bearing money market instruments, unless it is believed
that attractive investment opportunities consistent with the Fund's
investment objective exist immediately. This money will then be withdrawn
from the short-term money market instruments and invested in portfolio
securities in as orderly a manner as is possible when attractive investment
opportunities arise.
The proceeds from the sale of shares of an investment company are generally
not available until the fifth business day following the sale. The funds you
are seeking to exchange into may delay issuing shares pursuant to an exchange
until that fifth business day. The sale of Fund shares to complete an
exchange will be effected at Net Asset Value at the close of business on the
day the request for exchange is received in proper form. Please see "May I
Exchange Shares for Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your
account. Payments under the plan will be made from the redemption of an
equivalent amount of shares in your account, generally on the 25th day of the
month in which a payment is scheduled. If the 25th falls on a weekend or
holiday, we will process the redemption on the next business day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
Fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if
all shares in your account are withdrawn or if the Fund receives notification
of the shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund
in a timely fashion. Any loss to you resulting from your dealer's failure to
do so must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. In the case of redemption requests, the Board reserves
the right to make payments in whole or in part in securities or other assets
of the Fund, in case of an emergency, or if the payment of such a redemption
in cash would be detrimental to the existing shareholders of the Fund. In
these circumstances, the securities distributed would be valued at the price
used to compute the Fund's net assets and you may incur brokerage fees in
converting the securities to cash. The Fund does not intend to redeem
illiquid securities in kind. If this happens, however, you may not be able to
recover your investment in a timely manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your
dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at Net Asset Value until we receive new
instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find
you from your account. These costs may include a percentage of the account
when a search company charges a percentage fee in exchange for its location
services.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the Fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions
that maintain omnibus accounts with the Fund on behalf of numerous beneficial
owners for recordkeeping operations performed with respect to such owners.
For each beneficial owner in the omnibus account, the Fund may reimburse
Investor Services an amount not to exceed the per account fee that the Fund
normally pays Investor Services. These financial institutions may also charge
a fee for their services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the scheduled close of the
NYSE, generally 1:00 p.m. Pacific time, each day that the NYSE is open for
trading. As of the date of this SAI, the Fund is informed that the NYSE
observes the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System for which market quotations are readily available are valued at the
last quoted sale price of the day or, if there is no such reported sale,
within the range of the most recent quoted bid and ask prices.
Over-the-counter portfolio securities are valued within the range of the most
recent quoted bid and ask prices. Portfolio securities that 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 Advisers.
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
before the time when assets are valued. Lacking any sales that day or if the
last sale price is outside the bid and ask prices, options are valued within
the range of the current closing bid and ask prices if the valuation is
believed to fairly reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on
the foreign exchange on which it is traded or as of the scheduled close of
trading on the NYSE, if that is earlier. The 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 foreign security is valued within the
range of the most recent quoted bid and ask prices. Occasionally events that
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 values of these foreign
securities occur during this period, the securities will be valued in
accordance with procedures established by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the scheduled close of the NYSE. The value of these securities used in
computing the Net Asset Value of the Fund's shares is determined as of such
times. Occasionally, events affecting the values of these securities may
occur between the times at which they are determined and the scheduled close
of the NYSE that will not be reflected in the computation of the Fund's Net
Asset Value. If events materially affecting the values of these securities
occur during this period, the securities will be valued at their fair value
as determined in good faith by the Board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the Board. With the approval of
the Board, the Fund may utilize a pricing service, bank or Securities Dealer
to perform any of the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. INCOME DIVIDENDS. The Fund receives income generally in the form of
dividends, interest and other income derived from its investments. This
income, less the expenses incurred in the Fund's operations, is its net
investment income from which income dividends may be distributed. Thus, the
amount of dividends paid per share may vary with each distribution.
2. CAPITAL GAIN DISTRIBUTIONS. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term
capital gains (after taking into account any capital loss carryforward [or
post-October loss deferral]) may generally be made once each year in December
to reflect any net short-term and net long-term capital gains realized by the
Fund as of October 31 of the current fiscal year and any undistributed
capital gains from the prior fiscal year. The Fund may adjust the timing of
these distributions for operational or other reasons.
TAXES
As stated in the Prospectus, the Fund intends to qualify and elect to be
treated as a regulated investment company under Subchapter M of the Code. The
Board reserves the right not to maintain the qualification of the Fund as a
regulated investment company if it determines this course of action to be
beneficial to shareholders. In that case, the Fund will be subject to federal
and possibly state corporate taxes on its taxable income and gains, and
distributions to shareholders will be taxable to the extent of the Fund's
available earnings and profits.
Subject to the limitations discussed below, all or a portion of the income
distributions paid by the Fund may be treated by corporate shareholders as
qualifying dividends for purposes of the dividends-received deduction under
federal income tax law. If the aggregate qualifying dividends received by the
Fund (generally, dividends from U.S. domestic corporations, the stock in
which is not debt-financed by the Fund and is held for at least a minimum
holding period) is less than 100% of its distributable income, then the
amount of the Fund's dividends paid to corporate shareholders that may be
designated as eligible for this deduction will not exceed the aggregate
qualifying dividends received by the Fund for the taxable year. The amount or
percentage of income qualifying for the corporate dividends-received
deduction will be declared by the Fund annually in the Fund's fiscal year end
annual report.
Corporate shareholders should note that dividends paid by the Fund from
sources other than the qualifying dividends it receives will not qualify for
the dividends-received deduction. For example, any interest income and net
short-term capital gain (in excess of any net long-term capital loss or
capital loss carryover) included in investment company taxable income and
distributed by the Fund as a dividend will not qualify for the
dividends-received deduction.
Corporate shareholders should also note that availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless the Fund shares have been held (or deemed
held) for at least 46 days in a substantially unhedged manner. The
dividends-received deduction may also be reduced to the extent interest paid
or accrued by a corporate shareholder is directly attributable to its
investment in Fund shares. The entire dividend, including the portion that is
treated as a deduction, is includable in the tax base on which the
alternative minimum tax is computed and may also result in a reduction in the
shareholder's tax basis in its Fund shares, under certain circumstances, if
the shares have been held for less than two years. Corporate shareholders
whose investment in the Fund is "debt financed" for these tax purposes should
consult with their tax advisors concerning the availability of the
dividends-received deduction.
The Code requires all funds to distribute at least 98% of their taxable
ordinary income earned during the calendar year and at least 98% of their
capital gain net income earned during the twelve-month period ending October
31 of each year (in addition to amounts from the prior year that were neither
distributed nor taxed to the Fund) to you by December 31 of each year in
order to avoid the imposition of a federal excise tax. Under these rules,
certain distributions which are declared in October, November or December but
which, for operational reasons, may not be paid to you until the following
January, will be treated for tax purposes as if paid by the Fund and received
by you on December 31 of the calendar year in which they are declared. The
Fund intends as a matter of policy to declare and pay such dividends, if any,
in December to avoid the imposition of this tax, but does not guarantee that
its distributions will be sufficient to avoid any or all federal excise taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between your basis in the
shares and the amount received, subject to the rules described below. If such
shares are a capital asset in your hands, gain or loss will be capital gain
or loss and will be long-term for federal income tax purposes if you have
held the shares for more than one year.
All or a portion of the sales charge incurred in buying shares of the Fund
will not be included in the federal tax basis of such shares sold or
exchanged within 90 days of their purchase (for purposes of determining gain
or loss with respect to such shares) if the sales proceeds are reinvested in
the Fund or in another fund in the Franklin Templeton Funds and a sales
charge which would otherwise apply to the reinvestment is reduced or
eliminated. Any portion of the sales charge excluded from the tax basis of
the shares sold will be added to the tax basis of the shares acquired in the
reinvestment. You should consult with your tax advisor concerning the tax
rules applicable to the redemption and exchange of Fund shares.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax
basis of the shares repurchased.
Any loss realized upon the redemption of shares within six months from the
date of their purchase will be treated as a long-term capital loss to the
extent of amounts treated as distributions of net long-term capital gain
during the six month period.
The Fund's investment in options, futures and forward contracts, including
transactions involving actual or deemed short sales or foreign exchange gains
or losses are subject to many complex and special tax rules. For example, OTC
options on debt securities and equity options, including options on stock and
on narrow-based stock indexes, will be subject to tax under Section 1234 of
the Code, generally producing a long-term or short-term capital gain or loss
upon exercise, lapse, or closing out of the option or sale of the underlying
stock or security. By contrast, the Fund's treatment of certain other
options, futures and forward contracts entered into by the Fund is generally
governed by Section 1256 of the Code. These "Section 1256" positions
generally include listed options on debt securities, options on broad-based
stock indices, options on securities indices, options on futures contracts,
regulated futures contracts and certain foreign currency contracts and
options thereon.
Absent a tax election to the contrary, each Section 1256 position held by the
Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Fund's fiscal year, and all
gain or loss associated with fiscal year transactions and mark-to-market
positions at fiscal year end (except certain foreign currency gain or loss
covered by Section 988 of the Code) will generally be treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. The
effect of Section 1256 mark-to-market rules may be to accelerate income or to
convert what otherwise would have been long-term capital gains into
short-term capital gains (or vice versa) or short-term capital losses into
long-term capital losses (or vice versa) within the Fund. The acceleration of
income on Section 1256 positions may require the Fund to accrue taxable
income without the corresponding receipt of cash. In order to generate cash
to satisfy the distribution requirements of the Code, the Fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares. In these ways, any or all of these rules may affect the amount,
character and timing of income distributed to shareholders by the Fund.
When the Fund holds an option, future, or forward contract that substantially
diminishes the Fund's risk of loss with respect to another position of the
Fund (as might occur in some hedging transactions), this combination of
positions could be treated as a "straddle" for tax purposes, resulting in
possible deferral of losses, adjustments in the holding periods of Fund
securities and conversion of short-term capital losses into long-term capital
losses. Certain tax elections exist for mixed straddles (i.e., straddles
comprised of at least one Section 1256 position and at least one non-Section
1256 position) which may reduce or eliminate the operation of these straddle
rules.
As a regulated investment company, the Fund is subject to the requirement
that less than 30% of its annual gross income be derived from the sale or
other disposition of securities and certain other investments held for less
than three months ("short-short income"). This requirement may limit the
Fund's ability to engage in options, futures, and forward contracts and
certain other hedging transactions because these transactions are often
consummated in less than three months and may require the sale of portfolio
securities held less than three months and may, as in the case of short sales
of portfolio securities, reduce the holding periods of certain securities
within the Fund, resulting in additional short-short income for the Fund.
The Fund will monitor its transactions in options, futures, and forward
contracts and may make certain other tax elections in order to mitigate the
effect of the above rules and to prevent disqualification of the Fund as a
regulated investment company under Subchapter M of the Code.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currencies, foreign currency payables
or receivables, foreign currency denominated debt securities, foreign
currency forward contracts, and options or futures contracts on foreign
currencies are generally subject to Section 988 of the Code which may cause
such gains and losses to be treated as ordinary income and losses rather than
capital gains and losses and may affect the amount and timing of the Fund's
income or loss from such transactions and in turn, its distributions to
shareholders.
In order for the Fund to qualify as a regulated investment company under
subchapter M of the Code, at least 90% of the Fund's annual gross income must
consist of dividends, interest and certain other types of qualifying income,
and no more than 30% of its annual gross income may be derived from the sale
or other disposition of securities or other instruments held for less than
three months. Foreign exchange gains derived by the Fund with respect to the
Fund's business of investing in stock or securities or options or futures
with respect to such stock or securities is qualifying income for purposes of
this 90% limitation.
Currency speculation or the use of currency forward contracts or other
currency instruments for non-hedging purposes may generate gains deemed to be
not derived with respect to the Fund's business of investing in stock or
securities and related options or futures. Under current law, non
directly-related gains arising from foreign currency positions or instruments
held for less than three months are treated as derived from the disposition
of securities held less than three months in determining the Fund's
compliance with the 30% limitation. The Fund will limit its activities
involving foreign exchange gains to the extent necessary to comply with these
requirements.
The federal income tax treatment of interest rate and currency swaps is
unclear in certain respects and may in some circumstances result in the
realization of income not qualifying under the 90% test described above or be
deemed to be derived from the disposition of securities held less than three
months in determining the Fund's compliance with the 30% limitation. The Fund
will limit its interest rate and currency swaps to the extent necessary to
comply with these requirements.
If the Fund owns shares in a foreign corporation that constitutes a passive
foreign investment company (a "PFIC") for federal income tax purposes and the
Fund does not elect to treat the foreign corporation as a "qualified electing
fund" within the meaning of the Code, the Fund may be subject to U.S. federal
income taxation on a portion of any "excess distribution" it receives from
the PFIC or any gain it derives from the disposition of such shares, even if
such income is distributed as a taxable dividend by the Fund to its U.S.
shareholders. The Fund may also be subject to additional interest charges in
respect of deferred taxes arising from such distributions or gains. Any
federal income tax paid by the Fund as a result of its ownership of shares of
a PFIC will not give rise to a deduction or credit to the Fund or to any
shareholder. A PFIC means any foreign corporation if, for the taxable year
involved, either (i) it derives at least 75 percent of its gross income from
"passive income" (including, but not limited to, interest, dividends,
royalties, rents and annuities), or (ii) on average, at least 50 percent of
the value (or adjusted basis, if elected) of the assets held by the
corporation produce "passive income."
On April 1, 1992, proposed U.S. Treasury regulations were issued regarding a
special mark-to-market election for regulated investment companies. Under
these regulations, the annual mark-to-market gain, if any, on shares held by
the Fund in a PFIC would be treated as an excess distribution received by the
Fund in the current year, eliminating the deferral and the related interest
charge. These excess distribution amounts are treated as ordinary income,
which the Fund will be required to distribute to shareholders even though the
Fund has not received any cash to satisfy this distribution requirement.
These regulations would be effective for taxable years ending after the
promulgation of the proposed regulations as final regulations.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering for shares of the Fund. The
underwriting agreement will continue in effect for successive annual periods
if its continuance is specifically approved at least annually by a vote of
the Board or by a vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the Board
members who are not parties to the underwriting agreement or interested
persons of any such party (other than as members of the Board), cast in
person at a meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may be terminated
by either party on 90 days' written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The Fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
Distributors may be entitled to reimbursement under the Rule 12b-1 plan, as
discussed below. Except as noted, Distributors received no other compensation
from the Fund for acting as underwriter.
THE RULE 12B-1 PLAN
The Fund has adopted a distribution plan or "Rule 12b-1 plan" pursuant to
Rule 12b-1 of the 1940 Act. Under the plan, the Fund may pay up to a maximum
of 0.35% per year of its average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of its shares.
In addition to the payments that Distributors or others are entitled to under
the plan, the plan also provides that to the extent the Fund, Advisers or
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be for the financing of any activity
primarily intended to result in the sale of shares of the Fund within the
context of Rule 12b-1 under the 1940 Act, then such payments shall be deemed
to have been made pursuant to the plan.
In no event shall the aggregate asset-based sales charges, which include
payments made under the plan, plus any other payments deemed to be made
pursuant to the plan, exceed the amount permitted to be paid under the rules
of the NASD.
The terms and provisions of the plan relating to required reports, term, and
approval are consistent with Rule 12b-1.
To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks will not be entitled to participate in the plan as a result of
applicable federal law prohibiting certain banks from engaging in the
distribution of mutual fund shares. These banking institutions, however, are
permitted to receive fees under the plan for administrative servicing or for
agency transactions. If you are a customer of a bank that is prohibited from
providing these services, you would be permitted to remain a shareholder of
the Fund, and alternate means for continuing the servicing would be sought.
In this event, changes in the services provided might occur and you might no
longer be able to avail yourself of any automatic investment or other
services then being provided by the bank. It is not expected that you would
suffer any adverse financial consequences as a result of any of these changes.
The plan has been approved in accordance with the provisions of Rule 12b-1.
The plan is renewable annually by a vote of the Board, including a majority
vote of the Board members who are not interested persons of the Fund and who
have no direct or indirect financial interest in the operation of the plan,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such Board members be done by the
non-interested members of the Board. The plan and any related agreement may
be terminated at any time, without penalty, by vote of a majority of the
non-interested Board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with Advisers, or by
vote of a majority of the Fund's outstanding shares. Distributors or any
dealer or other firm may also terminate their respective distribution or
service agreement at any time upon written notice.
The plan and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a
majority of the Fund's outstanding shares, and all material amendments to the
plan or any related agreements shall be approved by a vote of the
non-interested members of the Board, cast in person at a meeting called for
the purpose of voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly
on the amounts and purpose of any payment made under the plan and any related
agreements, as well as to furnish the Board with such other information as
may reasonably be requested in order to enable the Board to make an informed
determination of whether the plan should be continued.
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return quotations used by the Fund are based on the
standardized methods of computing performance mandated by the SEC. If a Rule
12b-1 plan is adopted, performance figures reflect fees from the date of the
plan's implementation. An explanation of these and other methods used by the
Fund to compute or express performance follows. Regardless of the method
used, past performance does not guarantee future results, and is an
indication of the return to shareholders only for the limited historical
period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over one-, five- and ten-year
periods [, or fractional portion thereof,] that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The
calculation assumes the maximum front-end sales charge is deducted from the
initial $1,000 purchase, and income dividends and capital gain distributions
are reinvested at Net Asset Value. The quotation assumes the account was
completely redeemed at the end of each one-, five- and ten-year period and
the deduction of all applicable charges and fees. If a change is made to the
sales charge structure, historical performance information will be restated
to reflect the maximum front-end sales charge currently in effect.
These figures will be calculated according to the SEC formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the one-, five- or
ten-year periods at the end of the one-, five- or ten-
year periods [(or fractional portion thereof)]
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the
initial $1,000 purchase, and income dividends and capital gain distributions
are reinvested at Net Asset Value. Cumulative total return, however, will be
based on the Fund's actual return for a specified period rather than on its
average return over one-, five- and ten-year periods [, or fractional portion
thereof].
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities
in which the fund invests. A beta of more than 1.00 indicates volatility
greater than the market and a beta of less than 1.00 indicates volatility
less than the market. Another measure of volatility or risk is standard
deviation. Standard deviation is used to measure variability of Net Asset
Value or total return around an average over a specified period of time. The
idea is that greater volatility means greater risk undertaken in achieving
performance.
OTHER PERFORMANCE QUOTATIONS
The Fund may also quote the performance of shares without a sales charge.
Sales literature and advertising may quote a current distribution rate,
yield, cumulative total return, average annual total return and other
measures of performance as described elsewhere in this SAI with the
substitution of Net Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment
for Individual Retirement Accounts (IRAs), Business Retirement Plans, and
other tax-advantaged retirement plans may quote a total return based upon
compounding of dividends on which it is presumed no federal income tax
applies.
The Fund may include in its advertising or sales material information
relating to investment objectives and performance results of funds belonging
to the Franklin Templeton Group of Funds. Resources is the parent company of
the advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow JonesAE Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment
of dividends.
b) Standard & Poor'sAE 500 Stock Index or its component indices - an
unmanaged index composed of 400 industrial stocks, 40 financial stocks, 40
utilities stocks, and 20 transportation stocks. Comparisons of performance
assume reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed
on the NYSE.
d) Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions, exclusive
of any applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
h) Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK,
CHANGING TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines -
provide performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
l) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
m) Standard & Poor'sAE 100 Stock Index - an unmanaged index based on the
prices of 100 blue-chip stocks, including 92 industrials, one utility, two
transportation companies, and 5 financial institutions. The S&P 100 Stock
Index is a smaller more flexible index for options trading.
n) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its category.
Advertisements or information may also compare the Fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, if any, as well as the value of its shares that are
based upon the value of such portfolio investments, can be expected to
decrease. Conversely, when interest rates decrease, the value of the Fund's
shares can be expected to increase. CDs are frequently insured by an agency
of the U.S. government. An investment in the Fund is not insured by any
federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the Fund to calculate its figures. In
addition, there can be no assurance that the Fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to
have a projected amount available in the future to fund a child's college
education. (Projected college cost estimates are based upon current costs
published by the College Board.) The Franklin Retirement Planning Guide leads
you through the steps to start a retirement savings program. Of course, an
investment in the Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 49 years
and now services more than 2.7 million shareholder accounts. In 1992,
Franklin, a leader in managing fixed-income mutual funds and an innovator in
creating domestic equity funds, joined forces with Templeton Worldwide, Inc.,
a pioneer in international investing. Mutual Series Fund Inc., known for its
value-driven approach to domestic equity investing, became part of the
organization four years later. Together, the Franklin Templeton Group has
over 191 billion in assets under management for more than 5.2 million U.S.
based mutual fund shareholder and other accounts. The Franklin Templeton
Group of Funds offers 122 U.S. based open-end investment companies to the
public. The Fund may identify itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one
in service quality for five of the past nine years.
From time to time, the number of Fund shares held in the "street name"
accounts of various Securities Dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the Fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the Fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal
securities transactions subject to the following general restrictions and
procedures: (i) the trade must receive advance clearance from a compliance
officer and must be completed by the close of the business day following the
day clearance is granted; (ii) copies of all brokerage confirmations must be
sent to a compliance officer and, within 10 days after the end of each
calendar quarter, a report of all securities transactions must be provided to
the compliance officer; and (iii) access persons involved in preparing and
making investment decisions must, in addition to (i) and (ii) above, file
annual reports of their securities holdings each January and inform the
compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they
are recommending a security in which they have an ownership interest for
purchase or sale by a fund or other client.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I - Certain funds in the Franklin Templeton Funds offer multiple
classes of shares. The different classes have proportionate interests in the
same portfolio of investment securities. They differ, however, primarily in
their sales charge structures and Rule 12b-1 plans. Because the Fund's sales
charge structure and Rule 12b-1 plan are similar to those of Class I shares,
shares of the Fund are considered Class I shares for redemption, exchange and
other purposes.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of FundsAE and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator
Fund, Inc., Templeton Variable Annuity Fund, and Templeton Variable Products
Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of FundsAE and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value
per share and includes the front-end sales charge. The maximum front-end
sales charge is 4.50%.
PROSPECTUS - The prospectus for the Fund dated August 26, 1997, as may be
amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these
terms refer to the Fund and/or Investor Services, Distributors, or other
wholly owned subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong and, in the majority of
instances, differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually their promissory obligations not having an original maturity
in excess of nine months. Moody's employs the following designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FRANKLIN STRATEGIC SERIES
File Nos. 33-39088
811-6243
FORM N-1A
PART C
Other Information
ITEM 24 FINANCIAL STATEMENTS AND EXHIBITS
a) Not Applicable
b) Exhibits:
The following exhibits are incorporated by reference, except exhibits 5(xi),
5(xii) and 15(ix) which are attached herewith:
(1) copies of the charter as now in effect;
(i) Agreement and Declaration of Trust of Franklin California
250 Growth Index Fund dated January 22, 1991
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Certificate of Trust of Franklin California 250 Growth
Index Fund dated January 22, 1991
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iii) Certificate of Amendment to the Certificate of Trust of
Franklin California 250 Growth Index Fund dated November
19, 1991
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iv) Certificate of Amendment to the Certificate of Trust of
Franklin Strategic Series dated May 14, 1992
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(v) Certificate of Amendment of Agreement and Declaration of
Trust of Franklin Strategic Series dated April 18, 1995
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(2) copies of the existing By-Laws or instruments corresponding
thereto;
(i) Amended and Restated By-Laws of Franklin California 250
Growth Index Fund as of April 25, 1991
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Amendment to By-Laws dated October 27, 1994
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(3) copies of any voting trust agreement with respect to more than five
percent of any class of equity securities of the Registrant;
Not Applicable
(4) specimens or copies of each security issued by the Registrant,
including copies of all constituent instruments, defining the rights
of the holders of such securities, and copies of each security being
registered;
Not Applicable
(5) copies of all investment advisory contracts relating to the
management of the assets of the Registrant;
(i) Management Agreement between the Registrant, on behalf of
Franklin Global Health Care Fund, Franklin Small Cap Growth
Fund, and Franklin Natural Resources Fund, and Franklin
Advisers, Inc., dated February 24, 1992
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Administration Agreement between the Registrant, on behalf
of Franklin MidCap Growth Fund, and Franklin Advisers,
Inc., dated April 12, 1993
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(iii) Management Agreement between the Registrant, on behalf of
Franklin Strategic Income Fund, and Franklin Advisers,
Inc., dated May 24, 1994
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iv) Subadvisory Agreement between Franklin Advisers, Inc., on
behalf of the Franklin Strategic Income Fund, and Templeton
Investment Counsel, Inc., dated May 24, 1994
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(v) Amended and Restated Management Agreement between the
Registrant, on behalf of Franklin California Growth Fund,
and Franklin Advisers, Inc., dated July 12, 1993
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(vi) Management Agreement between the Registrant, on behalf of
Franklin Blue Chip Fund, and Franklin Advisers, Inc., dated
February 13, 1996
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 14, 1996
(vii) Management Agreement between the Registrant, on behalf of
Franklin Institutional MidCap Growth Fund (now known as
Franklin MidCap Growth Fund), and Franklin Advisers, Inc.,
dated January 1, 1996
Filing: Post-Effective Amendment No. 19 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 27, 1996
(viii)Amendment dated August 1, 1995 to the Management Agreement
between the Registrant, on behalf of Franklin California
Growth Fund, and Franklin Advisers, Inc., dated July 12,
1993
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(ix) Amendment dated August 1, 1995 to the Management Agreement
between the Registrant, on behalf of Franklin Global Health
Care Fund, Franklin Small Cap Growth Fund, and Franklin
Natural Resources Fund, and Franklin Advisers, Inc., dated
February 24, 1992
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(x) Amendment dated August 1, 1995 to the Management Agreement
between the Registrant, on behalf of Franklin Strategic
Income Fund, and Franklin Advisers, Inc., dated May 24, 1994
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(xi) Form of Management Agreement between the Registrant, on
behalf of Franklin Strategic Biotechnology Discovery Fund,
and Franklin Advisers, Inc.
(xii) Form of Administration Agreement between the Registrant, on
behalf of Franklin Strategic Biotechnology Discovery Fund,
and Franklin Templeton Services, Inc.
(6) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies of
all agreements between principal underwriters and dealers;
(i) Amended and Restated Distribution Agreement between the
Registrant, on behalf of all Series except Franklin
Strategic Income Fund, and Franklin/Templeton Distributors,
Inc., dated April 23, 1995
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Amended and Restated Distribution Agreement between the
Registrant, on behalf of Franklin Strategic Income Fund,
and Franklin/Templeton Distributors, Inc., dated March 29,
1995
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iii) Forms of Dealer Agreements between Franklin/Templeton
Distributors, Inc., and Securities Dealers is Incorporated
herein by reference to:
Registrant: Franklin Tax-Free Trust
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(7) copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
Trustees or officers of the Registrant in their capacity as such;
any such plan that is not set forth in a formal document, furnish a
reasonably detailed description thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts under
Section 17(f) of the Investment Company Act of 1940 (the "1940
Act"), with respect to securities and similar investments of the
Registrant, including the schedule of remuneration;
(i) Custodian Agreement between the Registrant and Bank of
America NT & SA dated May 24, 1994
Filing: Post-Effective Amendment No. 14 to Registration
Statement on form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Copy of Custodian Agreements between the Registrant and
Citibank Delaware
1. Citicash Management ACH Customer Agreement
2. Citibank Cash Management Services Master Agreement
3. Short Form Bank Agreement - Deposits and Disbursements
of Funds is incorporated herein by reference to:
Registrant: Franklin Asset Allocation Fund
Filing: Post-Effective Amendment No. 56 to Registration
Statement on Form N-1A
File No. 2-12647
Filing Date: May 17, 1996
(iii) Master Custody Agreement between the Registrant and Bank of
New York dated February 16, 1996
Filing: Post-Effective Amendment No. 19 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 14, 1996
(iv) Terminal Link Agreement between the Registrant and Bank of
New York dated February 16, 1996
Filing: Post-Effective Amendment No. 19 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 14, 1996
(9) copies of all other material contracts not made in the ordinary
course of business which are to be performed in whole or in part at
or after the date of filing the Registration Statement;
Not Applicable
(10) an opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will when sold
be legally issued, fully paid and nonassessable;
Not Applicable
(11) Copies of any other opinions, appraisals or rulings and consents to
the use thereof relied on in the preparation of this registration
statement and required by Section 7 of the 1933 Act;
Not Applicable
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in consideration for
providing the initial capital between or among the Registrant, the
underwriter, adviser, promoter or initial stockholders and written
assurances from promoters or initial stockholders that their
purchases were made for investment purposes without any present
intention of redeeming or reselling;
(i) Letter of Understanding dated August 20, 1991
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Letter of Understanding dated April 12, 1995
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iii) Letter of Understanding dated June 5, 1995
Filing: Post-Effective Amendment No. 17 to
Registration Statement on Form N-1A
File No. 33-39088
Filing Date: December 5, 1995
(iv) Form of Letter of Understanding for Franklin California
Growth Fund dated August 30, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 7, 1996
(v) Form of Letter of Understanding for Franklin Global Health
Care Fund dated August 30, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 7, 1996
(14) copies of the model plan used in the establishment of any retirement
plan in conjunction with which Registrant offers its securities, any
instructions thereto and any other documents making up the model
plan. Such form(s) should disclose the costs and fees charged in
connection therewith;
Not Applicable
(15) copies of any plan entered into by Registrant pursuant to Rule 12b-l
under the 1940 Act, which describes all material aspects of the
financing of distribution of Registrant's shares, and any agreements
with any person relating to implementation of such plan.
(i) Amended and Restated Distribution Plan between the
Registrant, on behalf of Franklin California Growth Fund,
Franklin Small Cap Growth Fund, Franklin Global Health Care
Fund and Franklin Global Utilities Fund, and
Franklin/Templeton Distributors, Inc., dated July 1, 1993
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Distribution Plan between the Registrant, on behalf of
Franklin Global Utilities Fund - Class II, and
Franklin/Templeton Distributors, Inc., dated March 30, 1995
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of the Franklin Strategic Income
Fund, and Franklin/Templeton Distributors, Inc., dated May
24, 1994
Filing: Post-Effective Amendment No. 14 to
Registration Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iv) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of the Franklin Natural Resources
Fund, and Franklin/Templeton Distributors, Inc., dated June
1, 1995
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(v) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of the Franklin MidCap Growth Fund,
and Franklin/Templeton Distributors, Inc., dated June 1,
1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 7, 1996
(vi) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of the Franklin Blue Chip Fund, and
Franklin/Templeton Distributors, Inc., dated May 28, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 7, 1996
(vii) Distribution Plan pursuant to Rule 12b-1 between
the Registrant, on behalf of Franklin Small Cap Growth Fund
- Class II, and Franklin/Templeton Distributors, Inc.,
dated September 29, 1995
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 7, 1996
(ix) Form of Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Strategic Biotechnology
Discovery Fund, and Franklin/Templeton Distributors, Inc.
(16) schedule for computation of each performance quotation provided in
the registration statement in response to Item 22 (which need not be
audited).
(i) Schedule for Computation of Performance and Quotations is
Incorporated herein by reference to:
Registrant: Franklin Tax-Advantaged U.S. Government
Securities Fund
Filing: Post-Effective Amendment No. 8 to Registration
Statement on Form N-1A
File No. 33-11963
Filing Date: March 1, 1995
(17) Powers of Attorney
(i) Power of Attorney for Franklin Strategic Series dated
December 14, 1995
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(ii) Power of Attorney for MidCap Growth Portfolio dated June
29, 1995
Filing: Post-Effective Amendment No. 15 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: July 3, 1995
(iii) Certificate of Secretary for Franklin Strategic
Series dated December 14, 1995
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(iv) Certificate of Secretary for MidCap Growth
Portfolio dated June 29, 1995
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-39088
Filing Date: July 3, 1995
(18) Copies of any plan entered into by Registrant pursuant to Rule
18f-3 under the 1940 Act
(i) Multiple Class Plan dated October 19, 1995
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 7, 1996
(ii) Multiple Class Plan for Franklin California Growth Fund
dated June 18, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 7, 1996
(iii) Multiple Class Plan for Franklin Global Health Care Fund
dated June 18, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 7, 1996
(iv) Multiple Class Plan for Franklin Small Cap Growth
Fund dated June 18, 1996
Filing: Post-Effective Amendment No. 24 to
Registration Statement on Form N-1A
File No. 33-39088
Filing Date: December 11, 1996
(v) Multiple Class Plan for Franklin Natural Resources
Fund dated June 18, 1996
Filing: Post-Effective Amendment No. 24 to
Registration Statement on Form N-1A
File No. 33-39088
Filing Date: December 11, 1996
(27) Financial Data Schedule
Not Applicable
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 26 NUMBER OF HOLDERS OF SECURITIES
As of May 31, 1997 the number of record holders of the only classes of
securities of the Registrant was as follows:
Number of Record Holders
Shares of Beneficial Interest Class I Class II Advisor Class
Franklin California Growth Fund 36,184 4,324 N/A
Franklin Strategic Income Fund 1,898 N/A N/A
Franklin MidCap Growth Fund 1,041 N/A N/A
Franklin Global Utilities Fund 16,502 424 N/A
Franklin Small Cap Growth Fund 100,734 22,966 311
Franklin Global Health Care Fund 24,675 1,906 N/A
Franklin Natural Resources Fund 6,123 N/A 80
Franklin Blue Chip Fund 1,017 N/A N/A
Franklin Strategic Biotechnology 0 N/A N/A
Discovery Fund
ITEM 27 INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a Trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court or appropriate
jurisdiction the question whether such indemnification is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 28 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
a) Franklin Advisers, Inc.
The officers and directors of the Registrant's manager also serve as
officers and/or directors for (1) the manager's corporate parent, Franklin
Resources, Inc., and/or (2) other investment companies in the Franklin Templeton
Group of Funds. In addition, Mr. Charles B. Johnson is a director of General
Host Corporation. For additional information please see Part B and Schedules A
and D of Form ADV of the Funds' Investment Manager (SEC File 801-26292)
incorporated herein by reference, which sets forth the officers and directors of
the Investment Manager and information as to any business, profession, vocation
or employment of a substantial nature engaged in by those officers and directors
during the past two years.
b) Templeton Investment Counsel, Inc.
Templeton Investment Counsel, Inc. ("TICI"), an indirect, wholly owned
subsidiary of Franklin Resources, Inc., serves as the Franklin Strategic Income
Fund's Sub-adviser, furnishing to Franklin Advisers, Inc. in that capacity,
portfolio management services and investment research. For additional
information please see Part B and Schedules A and D of Form ADV of the Franklin
Strategic Income Fund's Sub-adviser (SEC File 801-15125), incorporated herein by
reference, which sets forth the officers and directors of the Sub-adviser and
information as to any business, profession, vocation or employment of a
substantial nature engaged in by those officers and directors during the past
two years.
ITEM 29 PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Gold Fund Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Tax-Advantaged International Bond Fund
Franklin Tax-Advantaged U.S. Government Securities Fund
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
Franklin Templeton Japan Fund
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
b) The information required by this Item 29 with respect to each director and
officer of Distributors is incorporated by reference to Part B of this N-1A and
Schedule A of Form BD filed by Distributors with the Securities and Exchange
Commission pursuant to the Securities Act of 1934 (SEC File No.
8-5889)
c) Not Applicable. Registrant's principal underwriter is an affiliated
person of an affiliated person of the Registrant.
ITEM 30 LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 are kept by the Registrant or its
shareholder services agent, Franklin/Templeton Investor Services, Inc., both of
whose address is 777 Mariners Island Blvd., San Mateo, CA 94404.
ITEM 31 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 32 UNDERTAKINGS
a) The Registrant hereby undertakes to promptly call a meeting of shareholders
for the purpose of voting upon the question of removal of any trustee or
trustees when requested in writing to do so by the record holders of not less
than 10 percent of the Registrant's outstanding shares and to assist its
shareholders in the communicating with other shareholders in accordance with the
requirements of Section 16(c) of the Investment Company Act of 1940.
b) The Registrant hereby undertakes to comply with the information requirement
in Item 5A of the Form N-1A by including the required information in the Trust's
annual report and to furnish each person to whom a prospectus is delivered a
copy of the annual report upon request and without charge.
c) The Registrant hereby undertakes to file a Post-Effective Amendment on
behalf of Franklin Strategic Biotechnology Discovery Fund using Financial
Statements which need not be certified, within four to six months from effective
date of Registrant's Registration Statement under the Securities Act of 1933.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Amendment to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of San Mateo and the State of California, on the
12th day of June, 1997.
Franklin Strategic Series
(Registrant)
By: Rupert H. Johnson, Jr., President
Rupert H. Johnson, Jr., President
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
its Registration Amendment has been signed below by the following persons in the
capacities and on the dates indicated:
Rupert H. Johnson, Jr.* Principal Executive Officer and
Rupert H. Johnson, Jr. Trustee
Dated: June 12, 1997
Martin L. Flanagan* Principal Financial Officer
Martin L. Flanagan Dated: June 12, 1997
Diomedes Loo-Tam* Principal Accounting Officer
Diomedes Loo-Tam Dated: June 12, 1997
Frank H. Abbott, III* Trustee
Frank H. Abbott, III Dated: June 12, 1997
Harris J. Ashton* Trustee
Harris J. Ashton Dated: June 12, 1997
Harmon E. Burns* Trustee
Harmon E. Burns Dated: June 12, 1997
S. Joseph Fortunato* Trustee
S. Joseph Fortunato Dated: June 12, 1997
David W. Garbellano* Trustee
David W. Garbellano Dated: June 12, 1997
Charles B. Johnson* Trustee
Charles B. Johnson Dated: June 12, 1997
Frank W.T. LaHaye* Trustee
Frank W.T. LaHaye Dated: June 12, 1997
Gordon S. Macklin* Trustee
Gordon S. Macklin Dated: June 12, 1997
*By /s/Larry L. Greene
Attorney-in-Fact
(Pursuant to Power of Attorney previously filed)
FRANKLIN STRATEGIC SERIES
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.B1(i) Agreement and Declaration of Trust of Franklin *
California 250 Growth Index Fund dated January
22, 1991
EX-99.B1(ii) Certificate of Trust of Franklin California *
250 Growth Index Fund dated January 22, 1991
EX-99.B1(iii) Certificate of Amendment to the Certificate of *
Trust of Franklin California 250 Growth Index
Fund dated November 19, 1991
EX-99.B1(iv) Certificate of Amendment to the Certificate of *
Trust of Franklin Strategic Series dated May
14, 1992
EX-99.B1(v) Certificate of Amendment of Agreement and *
Declaration of Trust of Franklin Strategic
Series dated April 18, 1995
EX-99.B2(i) Amended and Restated By-Laws of Franklin *
California 250 Growth Index Fund as of April
25, 1991
EX-99.B2(ii) Amendment to By-Laws dated October 27, 1994 *
EX-99.B5(i) Management Agreement between the Registrant, *
on behalf of Franklin Global Health Care Fund,
Franklin Small Cap Growth Fund and Franklin
Natural Resources Fund, and Franklin Advisers,
Inc., dated February 24, 1992
EX-99.B5(ii) Administration Agreement between the *
Registrant, on behalf of Franklin MidCap
Growth Fund, and Franklin Advisers, Inc.,
dated April 12, 1993
EX-99.B5(iii) Management Agreement between the Registrant, *
on behalf of Franklin Strategic Income Fund,
and Franklin Advisers, Inc., dated May 24, 1994
EX-99.B5(iv) Subadvisory Agreement between Franklin *
Advisers, Inc., on behalf of the Franklin
Strategic Income Fund, and Templeton
Investment Counsel, Inc., dated May 24, 1994
EX-99.B5(v) Amended and Restated Management Agreement *
between the Registrant, on behalf of Franklin
California Growth Fund, and Franklin Advisers,
Inc., dated July 12, 1993
EX-99.B5(vi) Management Agreement between the Registrant, *
on behalf of Franklin Blue Chip Fund, and
Franklin Advisers, Inc., dated February 13,
1996
EX-99.B5(vii) Management Agreement between the Registrant, *
on behalf of Franklin Institutional MidCap
Growth Fund (now known as Franklin MidCap
Growth Fund), and Franklin Advisers, Inc.,
dated January 1, 1996
EX-99.B5(viii) Amendment dated August 1, 1995 to the *
Management Agreement between the Registrant,
on behalf of Franklin Global Health Care Fund,
and Franklin Small Cap Growth Fund, and Franklin
Natural Resources Fund, and Franklin Advisers,
Inc., dated February 24, 1992
EX-99.B5(x) Amendment dated August 1, 1995 to the *
Management Agreement between the Registrant
on behalf of Franklin Strategic Income Fund,
and Franklin Advisers, Inc., dated May 24, 1994
EX-99.B5(xi) Form of Management Agreement between the Attached
Registrant, on behalf of Franklin Strategic
Biotechnology Discovery Fund, and Franklin
Advisers, Inc.
EX-99.B5(xii) Form of Administration Agreement between the Attached
Registrant, on behalf of Franklin Strategic
Biotechnology Discovery Fund, and Franklin
Templeton Services, Inc.
EX-99.B6(i) Amended and Restated Distribution Agreement *
between the Registrant, on behalf of all
Series except Franklin Strategic Income Fund,
and Franklin/Templeton Distributors, Inc.,
dated April 23, 1995
EX-99.B6(ii) Amended and Restated Distribution Agreement *
between the Registrant on behalf of Franklin
Strategic Income Fund, and Franklin/Templeton
Distributors, Inc., dated March 29, 1995
EX-99.B6(iii) Forms of Dealer Agreements between *
Franklin/Templeton Distributors, Inc., and
Securities Dealers
EX-99.B8(i) Custodian Agreement between the Registrant and *
Bank of America NT & SA dated May 24, 1994
EX-99.B8(ii) Custodian Agreements between the Registrant *
and Citibank Delaware
EX-99.B8(iii) Master Custody Agreement between the *
Registrant and Bank of New York dated February
16, 1996
EX-99.B8(iv) Terminal Link Agreement between the Registrant *
and Bank of New York dated February 16, 1996
EX-99.B13(i) Letter of Understanding dated August 20, 1991 *
EX-99.B13(ii) Letter of Understanding dated April 12, 1995 *
EX-99.B13(iii) Letter of Understanding dated June 5, 1995 *
EX-99.B13(iv) Form of Letter of Understanding for Franklin *
California Growth Fund dated August 30, 1996
EX-99.B13(v) Form of Letter of Understanding for Franklin *
Global Health Care Fund dated August 30, 1996
EX-99.B15(i) Amended and Restated Distribution Plan between *
the Registrant, on behalf of Franklin California
Growth Fund, Franklin Small Cap Growth Fund,
Franklin Global Health Care Fund and Franklin
Global Utilities Fund, and Franklin/Templeton
Distributors, Inc., dated July 1, 1993
EX-99.B15(ii) Distribution Plan between the Registrant, on *
behalf of Franklin Global Utilities Fund Class II,
and Franklin/Templeton Distributors, Inc., dated
March 30, 1995
EX-99.B15(iii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of Franklin
Strategic Income Fund, and Franklin/Templeton
Distributors, Inc., dated May 24, 1994
EX-99.B15(iv) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of the
Franklin Natural Resources Fund, and
Franklin/Templeton Distributors, Inc.,
dated June 1, 1995
EX-99.B15(v) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of the
Franklin MidCap Growth Fund, and
Franklin/Templeton Distributors, Inc., dated
June 1, 1996
EX-99.B15(vi) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of the
Franklin Blue Chip Fund, and Franklin/Templeton
Distributors, Inc., dated May 28, 1996
EX-99.B15(vii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of Franklin
Small Cap Growth Fund - Class II, and
Franklin/Templeton Distributors, Inc., dated
September 29, 1995
EX-99.B15(viii) Distribution Plan pursuant to Rule 12b-1 Attached
between the Registrant, on behalf of Franklin
California Growth Fund - Class II, and Franklin
Global Health Care Fund - Class II, and
Franklin/Templeton Distributors, Inc., dated
March 30, 1995
EX-99.B15(ix) Form of Distribution Plan pursuant to Rule Attached
12b-1 between the Registrant, on behalf of
Franklin Strategic Biotechnology Discovery
Fund, and Franklin/Templeton Distributors, Inc.
EX-99.B16(i) Schedule for Computation of Performance *
Quotation
EX-99.B17(i) Power of Attorney for Franklin Strategic *
Series dated December 14, 1995
EX-99.B17(ii) Power of Attorney for MidCap Growth Portfolio *
dated June 29, 1995
EX-99.B17(iii) Certificate of Secretary for Franklin *
Strategic Series dated December 14, 1995
EX-99.B17(iv) Certificate of Secretary for MidCap Growth *
Portfolio dated June 29, 1995
EX-99.B18(i) Multiple Class Plan dated October 19, 1995 *
EX-99.B18(ii) Multiple Class Plan for Franklin California *
Growth Fund dated June 18, 1996
EX-99.B18(iii) Multiple Class Plan for Franklin Global Health *
Care Fund dated June 18, 1996
EX-99.B18(iv) Multiple Class Plan for Franklin Small Cap *
Growth Fund dated June 18, 1996
EX-99.B18(v) Multiple Class Plan for Franklin Natural *
Resources Fund dated June 18, 1996
* Incorporated by reference
FRANKLIN STRATEGIC SERIES
on behalf of the
FRANKLIN STRATEGIC BIOTECHNOLOGY DISCOVERY FUND
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT made between FRANKLIN STRATEGIC SERIES, a
Delaware business trust (the "Trust"), on behalf of FRANKLIN STRATEGIC
BIOTECHNOLOGY DISCOVERY FUND (the "Fund"), a series of the Trust, and FRANKLIN
ADVISERS, INC., a California corporation, (the "Manager").
WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 (the
"1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its By-Laws
and its Registration Statements under the 1940 Act and the Securities Act of
1933, all as heretofore and hereafter amended and supplemented; and the Trust
desires to avail itself of the services, information, advice, assistance and
facilities of an investment manager and to have an investment manager perform
various management, statistical, research, investment advisory and other
services for the Fund; and,
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, is engaged in the business of rendering
management, investment advisory, counseling and supervisory services to
investment companies and other investment counseling clients, and desires to
provide these services to the Fund.
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is mutually agreed as follows:
l. EMPLOYMENT OF THE MANAGER. The Trust hereby employs the Manager to
manage the investment and reinvestment of the Fund's assets and to administer
its affairs, subject to the direction of the Board of Trustees and the officers
of the Trust, for the period and on the terms hereinafter set forth. The Manager
hereby accepts such employment and agrees during such period to render the
services and to assume the obligations herein set forth for the compensation
herein provided. The Manager shall for all purposes herein be deemed to be an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Fund or the Trust in any way or otherwise be deemed an agent of the Fund or the
Trust.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE MANAGER. The
Manager undertakes to provide the services hereinafter set forth and to
assume the following obligations:
A. INVESTMENT MANAGEMENT SERVICES.
(a) The Manager shall manage the Fund's assets subject to
and in accordance with the investment objectives and policies of the Fund and
any directions which the Trust's Board of Trustees may issue from time to time.
In pursuance of the foregoing, the Manager shall make all determinations with
respect to the investment of the Fund's assets and the purchase and sale of its
investment securities, and shall take such steps as may be necessary to
implement the same. Such determinations and services shall include determining
the manner in which any voting rights, rights to consent to corporate action and
any other rights pertaining to the Fund's investment securities shall be
exercised. The Manager shall render or cause to be rendered regular reports to
the Trust, at regular meetings of its Board of Trustees and at such other times
as may be reasonably requested by the Trust's Board of Trustees, of (i) the
decisions made with respect to the investment of the Fund's assets and the
purchase and sale of its investment securities, (ii) the reasons for such
decisions and (iii) the extent to which those decisions have been implemented.
(b) The Manager, subject to and in accordance with any
directions which the Trust's Board of Trustees may issue from time to time,
shall place, in the name of the Fund, orders for the execution of the Fund's
securities transactions. When placing such orders, the Manager shall seek to
obtain the best net price and execution for the Fund, but this requirement shall
not be deemed to obligate the Manager to place any order solely on the basis of
obtaining the lowest commission rate if the other standards set forth in this
section have been satisfied. The parties recognize that there are likely to be
many cases in which different brokers are equally able to provide such best
price and execution and that, in selecting among such brokers with respect to
particular trades, it is desirable to choose those brokers who furnish research,
statistical, quotations and other information to the Fund and the Manager in
accordance with the standards set forth below. Moreover, to the extent that it
continues to be lawful to do so and so long as the Board of Trustees determines
that the Fund will benefit, directly or indirectly, by doing so, the Manager may
place orders with a broker who charges a commission for that transaction which
is in excess of the amount of commission that another broker would have charged
for effecting that transaction, provided that the excess commission is
reasonable in relation to the value of "brokerage and research services" (as
defined in Section 28(e) (3) of the Securities Exchange Act of 1934) provided by
that broker.
Accordingly, the Trust and the Manager agree that the
Manager shall select brokers for the execution of the Fund's transactions from
among:
(i) Those brokers and dealers who provide quotations and
other services to the Fund, specifically including the
quotations necessary to determine the Fund's net assets, in
such amount of total brokerage as may reasonably be required
in light of such services; and
(ii) Those brokers and dealers who supply research,
statistical and other data to the Manager or its affiliates
which the Manager or its affiliates may lawfully and
appropriately use in their investment advisory capacities,
which relate directly to securities, actual or potential, of
the Fund, or which place the Manager in a better position to
make decisions in connection with the management of the
Fund's assets and securities, whether or not such data may
also be useful to the Manager and its affiliates in managing
other portfolios or advising other clients, in such amount
of total brokerage as may reasonably be required. Provided
that the Trust's officers are satisfied that the best
execution is obtained, the sale of shares of the Fund may
also be considered as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
(c) When the Manager has determined that the Fund should
tender securities pursuant to a "tender offer solicitation," Franklin/Templeton
Distributors, Inc. ("Distributors") shall be designated as the "tendering
dealer" so long as it is legally permitted to act in such capacity under the
federal securities laws and rules thereunder and the rules of any securities
exchange or association of which Distributors may be a member. Neither the
Manager nor Distributors shall be obligated to make any additional commitments
of capital, expense or personnel beyond that already committed (other than
normal periodic fees or payments necessary to maintain its corporate existence
and membership in the National Association of Securities Dealers, Inc.) as of
the date of this Agreement. This Agreement shall not obligate the Manager or
Distributors (i) to act pursuant to the foregoing requirement under any
circumstances in which they might reasonably believe that liability might be
imposed upon them as a result of so acting, or (ii) to institute legal or other
proceedings to collect fees which may be considered to be due from others to it
as a result of such a tender, unless the Trust on behalf of the Fund shall enter
into an agreement with the Manager and/or Distributors to reimburse them for all
such expenses connected with attempting to collect such fees, including legal
fees and expenses and that portion of the compensation due to their employees
which is attributable to the time involved in attempting to collect such fees.
(d) The Manager shall render regular reports to the Trust,
not more frequently than quarterly, of how much total brokerage business has
been placed by the Manager, on behalf of the Fund, with brokers falling into
each of the categories referred to above and the manner in which the allocation
has been accomplished.
(e) The Manager agrees that no investment decision will be
made or influenced by a desire to provide brokerage for allocation in accordance
with the foregoing, and that the right to make such allocation of brokerage
shall not interfere with the Manager's paramount duty to obtain the best net
price and execution for the Fund.
B. PROVISION OF INFORMATION NECESSARY FOR PREPARATION OF SECURITIES
REGISTRATION STATEMENTS, AMENDMENTS AND OTHER MATERIALS. The Manager, its
officers and employees will make available and provide accounting and
statistical information required by the Fund in the preparation of registration
statements, reports and other documents required by federal and state securities
laws and with such information as the Fund may reasonably request for use in the
preparation of such documents or of other materials necessary or helpful for the
underwriting and distribution of the Fund's shares.
C. OTHER OBLIGATIONS AND SERVICES. The Manager shall make its
officers and employees available to the Board of Trustees and officers of the
Trust for consultation and discussions regarding the administration and
management of the Fund and its investment activities.
3. EXPENSES OF THE FUND. It is understood that the Fund will pay all of
its own expenses other than those expressly assumed by the Manager herein, which
expenses payable by the Fund shall include:
A. Fees and expenses paid to the Manager as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian, dividend
disbursing agent and shareholder record-keeping services, including the expenses
of issue, repurchase or redemption of its shares;
D. Expenses of obtaining quotations for calculating the value of
the Fund's net assets;
E. Salaries and other compensations of executive officers of the
Trust who are not officers, directors, stockholders or employees of the Manager
or its affiliates;
F. Taxes levied against the Fund;
G. Brokerage fees and commissions in connection with the
purchase and sale of securities for the Fund;
H. Costs, including the interest expense, of borrowing
money;
I. Costs incident to meetings of the Board of Trustees and
shareholders of the Fund, reports to the Fund's shareholders, the filing of
reports with regulatory bodies and the maintenance of the Fund's and the
Trust's legal existence;
J. Legal fees, including the legal fees related to the
registration and continued qualification of the Fund's shares for sale;
K. Trustees' fees and expenses to trustees who are not
directors, officers, employees or stockholders of the Manager or any of its
affiliates;
L. Costs and expense of registering and maintaining the
registration of the Fund and its shares under federal and any applicable
state laws; including the printing and mailing of prospectuses to its
shareholders;
M. Trade association dues; and
N. The Fund's pro rata portion of fidelity bond, errors and
omissions, and trustees and officer liability insurance premiums.
4. COMPENSATION OF THE MANAGER. The Fund shall pay a management fee in
cash to the Manager based upon a percentage of the value of the Fund's net
assets, calculated as set forth below, as compensation for the services rendered
and obligations assumed by the Manager, during the preceding month, on the first
business day of the month in each year.
A. For purposes of calculating such fee, the value of the net assets
of the Fund shall be determined in the same manner as that Fund uses to compute
the value of its net assets in connection with the determination of the net
asset value of its shares, all as set forth more fully in the Fund's current
prospectus and statement of additional information. The rate of the management
fee payable by the Fund shall be calculated daily at the following annual rates:
_______ of the average daily net assets up to and
including $500 million;
_______ of the average daily net assets over $500 million
up to and including $1 billion; and
_______ of the average daily net assets over $1 billion.
B. The management fee payable by the Fund shall be reduced or
eliminated to the extent that Distributors has actually received cash payments
of tender offer solicitation fees less certain costs and expenses incurred in
connection therewith and to the extent necessary to comply with the limitations
on expenses which may be borne by the Fund as set forth in the laws, regulations
and administrative interpretations of those states in which the Fund's shares
are registered. The Manager may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in purchase price of
its services. The Manager shall be contractually bound hereunder by the terms of
any publicly announced waiver of its fee, or any limitation of the Fund's
expenses, as if such waiver or limitation were full set forth herein.
C. If this Agreement is terminated prior to the end of any
month, the accrued management fee shall be paid to the date of termination.
5. ACTIVITIES OF THE MANAGER. The services of the Manager to the Fund
hereunder are not to be deemed exclusive, and the Manager and any of its
affiliates shall be free to render similar services to others. Subject to and in
accordance with the Agreement and Declaration of Trust and By-Laws of the Trust
and Section 10(a) of the 1940 Act, it is understood that trustees, officers,
agents and shareholders of the Trust are or may be interested in the Manager or
its affiliates as directors, officers, agents or stockholders; that directors,
officers, agents or stockholders of the Manager or its affiliates are or may be
interested in the Trust as trustees, officers, agents, shareholders or
otherwise; that the Manager or its affiliates may be interested in the Fund as
shareholders or otherwise; and that the effect of any such interests shall be
governed by said Agreement and Declaration of Trust, By-Laws and the 1940 Act.
6. LIABILITIES OF THE MANAGER.
A. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties hereunder on the part
of the Manager, the Manager shall not be subject to liability to the Trust or
the Fund or to any shareholder of the Fund for any act or omission in the course
of, or connected with, rendering services hereunder or for any losses that may
be sustained in the purchase, holding or sale of any security by the Fund.
B. Notwithstanding the foregoing, the Manager agrees to reimburse
the Trust for any and all costs, expenses, and counsel and trustees' fees
reasonably incurred by the Trust in the preparation, printing and distribution
of proxy statements, amendments to its Registration Statement, holdings of
meetings of its shareholders or trustees, the conduct of factual investigations,
any legal or administrative proceedings (including any applications for
exemptions or determinations by the Securities and Exchange Commission) which
the Trust incurs as the result of action or inaction of the Manager or any of
its affiliates or any of their officers, directors, employees or stockholders
where the action or inaction necessitating such expenditures (i) is directly or
indirectly related to any transactions or proposed transaction in the stock or
control of the Manager or its affiliates (or litigation related to any pending
or proposed or future transaction in such shares or control) which shall have
been undertaken without the prior, express approval of the Trust's Board of
Trustees; or, (ii) is within the control of the Manager or any of its affiliates
or any of their officers, directors, employees or stockholders. The Manager
shall not be obligated pursuant to the provisions of this Subparagraph 6(B), to
reimburse the Trust for any expenditures related to the institution of an
administrative proceeding or civil litigation by the Trust or a shareholder
seeking to recover all or a portion of the proceeds derived by any stockholder
of the Manager or any of its affiliates from the sale of his shares of the
Manager, or similar matters. So long as this Agreement is in effect, the Manager
shall pay to the Trust the amount due for expenses subject to this Subparagraph
6(B) within 30 days after a bill or statement has been received by the Manager
therefor. This provision shall not be deemed to be a waiver of any claim the
Trust may have or may assert against the Manager or others for costs, expenses
or damages heretofore incurred by the Trust or for costs, expenses or damages
the Trust may hereafter incur which are not reimbursable to it hereunder.
C. No provision of this Agreement shall be construed to protect any
trustee or officer of the Trust, or director or officer of the Manager, from
liability in violation of Sections 17(h) and (i) of the 1940 Act.
7. RENEWAL AND TERMINATION.
A. This Agreement shall become effective on the date written below
and shall continue in effect for two (2) years thereafter, unless sooner
terminated as hereinafter provided and shall continue in effect thereafter for
periods not exceeding one (1) year so long as such continuation is approved at
least annually (i) by a vote of a majority of the outstanding voting securities
of each Fund or by a vote of the Board of Trustees of the Trust, and (ii) by a
vote of a majority of the Trustees of the Trust who are not parties to the
Agreement (other than as Trustees of the Trust), cast in person at a meeting
called for the purpose of voting on the Agreement.
B. This Agreement:
(i) may at any time be terminated without the payment of any
penalty either by vote of the Board of Trustees of the Trust or by vote of a
majority of the outstanding voting securities of the Fund on 60 days' written
notice to the Manager;
(ii) shall immediately terminate with respect to the
Fund in the event of its assignment; and
(iii) may be terminated by the Manager on 60 days'
written notice to the Fund.
C. As used in this Paragraph the terms "assignment," "interested
person" and "vote of a majority of the outstanding voting securities" shall have
the meanings set forth for any such terms in the 1940 Act.
D. Any notice under this Agreement shall be given in
writing addressed and delivered, or mailed post-paid, to the other party at
any office of such party.
8. SEVERABILITY. If any provision of this Agreement shall be held
or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.
9. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and effective on the 13th day of February, 1996.
FRANKLIN STRATEGIC SERIES
By:
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN ADVISERS, INC.
By:
Harmon E. Burns
Executive Vice President
FUND ADMINISTRATION AGREEMENT
AGREEMENT dated as of , 1997 between FRANKLIN STRATEGIC SERIES, a
Delaware business trust ("the Investment Company"), on behalf of its series
FRANKLIN STRATEGIC BIOTECHNOLOGY DISCOVERY FUND (the "Fund") and FRANKLIN
TEMPLETON SERVICES, INC. (the "Administrator").
In consideration of the mutual agreements herein made, the parties
hereby agree as follows:
(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to the Fund:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless
these facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment on
behalf of the Fund;
(d) supervising preparation of periodic reports to Shareholders,
notices of dividends, capital gains distributions and tax credits; and attending
to routine correspondence and other communications with individual Shareholders
when asked to do so by the Fund's shareholder servicing agent or other agents of
the Fund;
(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services engaged by the
Fund; providing fund accounting services, including preparing and supervising
publication of daily net asset value quotations, periodic earnings reports and
other financial data;
(f) monitoring relationships with organizations serving the Fund,
including custodians, transfer agents, public accounting firms, law firms,
printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping
requirements under the federal securities laws, including the 1940 Act, and the
rules and regulations thereunder, supervising compliance with recordkeeping
requirements imposed by state laws or regulations, and maintaining books and
records for the Fund (other than those maintained by the custodian and transfer
agent);
(h) preparing and filing of tax reports including the Fund's income
tax returns, and monitoring the Fund's compliance with subchapter M of the
Internal Revenue Code, and other applicable tax laws and regulations;
(i) monitoring the Fund's compliance with: 1940 Act and other
federal securities laws, and rules and regulations thereunder; state and foreign
laws and regulations applicable to the operation of investment companies; the
Fund's investment objectives, policies and restrictions; and the Code of Ethics
and other policies adopted by the Investment Company's Board of Trustees or
Directors ("Board") or by the Adviser and applicable to the Fund;
(j) providing executive, clerical and secretarial personnel
needed to carry out the above responsibilities; and
(k) preparing regulatory reports, including without limitation
NSARs, proxy statements and U.S. and foreign ownership reports.
Nothing in this Agreement shall obligate the Investment Company or the Fund to
pay any compensation to the officers of the Investment Company. Nothing in this
Agreement shall obligate the Administrator to pay for the services of third
parties, including attorneys, auditors, printers, pricing services or others,
engaged directly by the Fund to perform services on behalf of the Fund.
(2) The Fund agrees to pay to the Administrator as compensation for such
services a monthly fee equal on an annual basis to 0.15% of the first $200
million of the average daily net assets of each Fund during the month preceding
each payment, reduced as follows: on such net assets in excess of $200 million
up to $700 million, a monthly fee equal on an annual basis to 0.135%; on such
net assets in excess of $700 million up to $1.2 billion, a monthly fee equal on
an annual basis to 0.1%; and on such net assets in excess of $1.2 billion, a
monthly fee equal on an annual basis to 0.075%.
From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually bound
hereunder by the terms of any publicly announced waiver of its fee, or any
limitation of each affected Fund's expenses, as if such waiver or limitation
were fully set forth herein.
(3) This Agreement shall remain in full force and effect through for one
year after its execution and thereafter from year to year to the extent
continuance is approved annually by the Board of the Investment Company.
(4) This Agreement may be terminated by the Investment Company at any time
on sixty (60) days' written notice without payment of penalty, provided that
such termination by the Investment Company shall be directed or approved by the
vote of a majority of the Board of the Investment Company in office at the time
or by the vote of a majority of the outstanding voting securities of the
Investment Company (as defined by the 1940 Act); and shall automatically and
immediately terminate in the event of its assignment (as defined by the 1940
Act).
(5) In the absence of willful misfeasance, bad faith or gross negligence
on the part of the Administrator, or of reckless disregard of its duties and
obligations hereunder, the Administrator shall not be subject to liability for
any act or omission in the course of, or connected with, rendering services
hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their duly authorized officers.
FRANKLIN STRATEGIC SERIES on behalf of
Franklin Strategic Biotechnology Discovery Fund
By:
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN TEMPLETON SERVICES, INC.
By:
Harmon E. Burns
Executive Vice President
FRANKLIN STRATEGIC SERIES
on behalf of Franklin Strategic Biotechnology Discovery Fund
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by Franklin
Strategic Series ("Trust") for the use of its series named Franklin Strategic
Biotechnology Discovery Fund (the "Fund"), which Plan shall take effect on the
date the shares of the Fund are first offered (the "Effective Date of the
Plan"). The Plan has been approved by a majority of the Board of Trustees of the
Trust (the "Board"), including a majority of the trustees who are not interested
persons of the Trust and who have no direct or indirect financial interest in
the operation of the Plan (the "non-interested trustees"), cast in person at a
meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Management Agreement between the Trust on behalf of
the Fund and Franklin Advisers, Inc. ("Advisers") and the terms of the
Underwriting Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board concluded that
the compensation of Advisers, under the Management Agreement was fair and not
excessive; however, the Board also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the Fund to
Advisers, Distributors, or others or by Advisers or Distributors to others may
be deemed to constitute distribution expenses. Accordingly, the Board determined
that the Plan should provide for such payments and that adoption of the Plan
would be prudent and in the best interests of the Fund and its shareholders.
Such approval included a determination that in the exercise of their reasonable
business judgment and in light of their fiduciary duties, there is a reasonable
likelihood that the Plan will benefit the Fund and its shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all expenses incurred by
Distributors or others in the promotion and distribution of the shares of the
Fund, as well as for shareholder services provided for existing shareholders of
the Fund. These expenses may include, but are not limited to, the expenses of
the printing of prospectuses and reports used for sales purposes, 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. These
expenses may also include any distribution or service fees paid to securities
dealers or their firms or others. Agreements for the payment of service fees to
securities dealers or their firms or others shall be in a form which has been
approved from time to time by the Board, including the non-interested trustees.
2. The maximum amount which may be reimbursed by the Fund to Distributors or
others pursuant to Paragraph 1 herein shall be 0.35% per annum of the average
daily net assets of the Fund. Said reimbursement shall be made quarterly by the
Fund to Distributors or others.
3. In addition to the payments which the Fund is authorized to make pursuant to
paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers, Distributors
or other parties on behalf of the Fund, Advisers or Distributors make payments
that are deemed to be payments by the Fund 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 under the Act, then such payments shall be deemed to have
been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies reimbursed to it and to others under the
Plan, and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. The Plan shall continue in effect for a period of more than one year only so
long as such continuance is specifically approved at least annually by a vote of
the Board, including the non-interested trustees, cast in person at a meeting
called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested trustees, on not more than sixty (60) days' written notice, or by
Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between the Trust on behalf of the Fund and
Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be
amended to increase materially the amount to be spent for distribution pursuant
to Paragraph 2 hereof without approval by a majority of the Fund's outstanding
voting securities.
8. All material amendments to the Plan, or any agreements entered into pursuant
to this Plan, shall be approved by a vote of the non-interested trustees cast in
person at a meeting called for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and nomination of the Trust's
non-interested trustees shall be committed to the discretion of such
non-interested trustees.
This Plan and the terms and provisions thereof are hereby accepted and agreed to
by the Trust and Distributors as evidenced by their execution hereof.
FRANKLIN STRATEGIC SERIES
on behalf of Franklin Strategic
Biotechnology Discovery Fund
By:
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:
Harmon E. Burns
Executive Vice President
