PROSPECTUS & APPLICATION
FRANKLIN
BLUE CHIP
FUND
INVESTMENT STRATEGY
GROWTH
JUNE 3, 1996,
AS AMENDED JANUARY 1, 1997
FRANKLIN STRATEGIC SERIES
This prospectus contains information you should know before investing in the
Fund. Please keep it for future reference.
The Fund's SAI, dated June 3, 1996, as amended January 1, 1997, as may be
further amended from time to time, includes more information about the Fund's
procedures and policies. It has been filed with the SEC and is incorporated by
reference into this prospectus. For a free copy or a larger print version of
this prospectus, call 1-800/DIAL BEN or write the Fund at the address shown.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
BY, any bank and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Shares of the Fund involve investment risks, including the possible
loss of principal.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES REPRESENTATIVE, DEALER,
OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
FRANKLIN BLUE CHIP FUND
JUNE 3, 1996,
AS AMENDED JANUARY 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.................................... 2
Financial Highlights............................... 3
How does the Fund Invest its Assets?............... 4
What are the Fund's Potential Risks?............... 8
Who Manages the Fund?.............................. 9
How does the Fund Measure Performance?............. 11
How is the Trust Organized?........................ 12
How Taxation Affects You and the Fund.............. 12
About Your Account
How Do I Buy Shares?............................... 14
May I Exchange Shares for Shares of Another Fund?.. 19
How Do I Sell Shares?.............................. 21
What Distributions Might I Receive from the Fund?.. 23
Transaction Procedures and Special Requirements.... 24
Services to Help You Manage Your Account........... 28
Glossary
Useful Terms and Definitions....................... 31
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 contractual managment and Rule 12b-1 fees and
estimates of the other operating expenses for the current fiscal year. Your
actual expenses may vary.
A.Shareholder Transaction Expenses+
Maximum Sales Charge Imposed on Purchases
(as a percentage of Offering Price) 4.50%++
Deferred Sales Charge None+++
Exchange Fee (per transaction) $5.00*
B.Annual Fund Operating Expenses
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.57%**
Rule 12b-1 Fees 0.35%***
Other Expenses 0.33%
Total Fund Operating Expenses 1.25%**
C. Example
Assume the Fund's annual return is 5% and its operating expenses are as
described above. For each $1,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.
1 YEAR 3 YEARS
$57**** $83
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. See "How Do I Sell
Shares? Contingent Deferred Sales Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**Advisers has agreed in advance to limit its management fees and make certain
payments to reduce the Fund's expenses so that the Fund's aggregate annual
operating expenses do not exceed 1.25% of the Fund's average net assets for
the current fiscal year. Absent this reduction, contractual and expected
management fees and total operating expenses would equal 0.75% and 1.81%,
respectively, of the Fund's average net assets. After April 30, 1997, Advisers
may terminate this arrangement at any time.
***The combination of front-end sales charges and Rule 12b-1 fees could cause
long-term shareholders to pay more than the economic equivalent of the maximum
front-end sales charge permitted under the NASD's rules.
****Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has not been
audited.
FOR THE SIX
MONTHS ENDED
OCTOBER 31, 1996
Per Share Operating Performance
Net Asset Value at Beginning of Period $10.00
Net Investment Income 0.040
Net Realized & Unrealized Gain (Loss) on Securities 0.200
Total From Investment Operations 0.240
Distributions from Net Investment Income (0.072)
Distributions from Realized Capital Gains -
Total Distributions -
Net Asset Value at End of Period $10.24
Total Return* 2.40%
Ratios/Supplemental Data
Net Assets at End of Period (in 000's) $3,332
Ratio of Expenses to Average Net Assets 1.25
Ratio of Net Investment Income to Average Net Assets*** 1.17%**
Portfolio Turnover Rate 0.70%
Average Commission Rate+ 0.0603
*Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum front-end sales charge and assumes
reinvestment of dividends and capital gains, if any, at net asset value.
**Annualized.
***During the period indicated, Advisers agreed to waive in advance a portion or
all of its management fees and made payments of other expenses incurred by the
Fund. Had such action not been taken, the ratio of operating expenses to average
net assets would have been 1.83%.
+Represents the average commission rate per share paid by the Fund in connection
with the execution of the Fund's portfolio transactions in equity securities.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is long-term capital appreciation. The objective
is a fundamental policy of the Fund and may not be changed without shareholder
approval. Of course, there is no assurance that the Fund's objective will be
achieved.
The Fund may also seek current income incidental to long-term capital
appreciation, although this is not a fundamental policy of the Fund. Unless
otherwise noted, the Fund's investment policies discussed below are not
fundamental policies. This means they may be changed without shareholder
approval.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
Blue Chip Equity Securities. Under normal market conditions, the Fund invests at
least 80%, and intends to try to invest up to 100%, of its total assets in a
diversified portfolio of equity securities of "blue chip companies." Blue chip
companies are well-established companies with a long record of revenue growth
and profitability. These companies generally dominate their respective markets,
and have a reputation for quality management, as well as superior products and
services. Blue chip companies also tend to have relatively large capitalization.
When selecting securities for the Fund's portfolio, Advisers tries to identify
quality blue chip companies based on a number of criteria. Specifically,
Advisers looks for companies that are leaders in their industry with a dominant
market position and a sustainable competitive advantage. Advisers also looks for
companies that exhibit consistent growth, a strong financial record, and market
capitalization of more than $1 billion. The Fund intends to invest in a
portfolio that is diversified across a large number of industries.
The types of equity securities the Fund may buy include common stock, warrants
to buy common stock, and securities convertible into common stock. Although the
Fund may invest without limit in any of these types of securities, it intends to
invest primarily in common stock. For a description of warrants and convertible
securities, please see the discussion below.
Foreign Securities. The Fund seeks investment opportunities across all markets
in the world. Accordingly, the Fund may invest without limit in the equity
securities of blue chip companies located outside the U.S. This may include
companies in either developed or emerging markets, as certain companies in
emerging markets meet all the criteria of a blue chip company. The amount of the
Fund's assets invested in foreign securities may vary over time depending on
Advisers' outlook.
The Fund may buy foreign securities traded in the U.S. or directly in foreign
markets. The Fund may also invest in foreign securities by purchasing American
Depositary Receipts ("ADRs"). ADRs are certificates issued by U.S. banks. They
give their holders the right to receive the securities of a foreign issuer
deposited with the bank or a correspondent bank. The Fund may buy both sponsored
and unsponsored ADRs.
Foreign securities have risks that U.S. securities do not have. For more
information about foreign securities and their risks, please see "What are the
Fund's Potential Risks?"
Convertible Securities and Warrants. The Fund may invest in convertible
securities and warrants without limit. It currently intends, however, to limit
these investments to no more than 5% of its net assets. A convertible security
is generally a debt obligation or a preferred stock that may be converted within
a specified period of time into a certain amount of common stock of the same or
a different issuer. A convertible security may also be subject to redemption by
the issuer but only after a specified date and under circumstances established
at the time the security is issued. Convertible securities provide a
fixed-income stream and the opportunity, through their conversion feature, to
participate in any capital appreciation resulting from a market price advance in
the convertible security's underlying common stock.
A warrant gives its holder the right to buy newly created securities of the
issuer of the warrant, or a related company, at a set price. The warrant usually
allows its holder to buy the new security on a specific date or during a set
period of time. If a warrant is not used or sold by its holder, it expires
worthless.
Futures and Options. The Fund may buy and sell futures contracts for securities
and currencies. A futures contract is an obligation to buy or sell a specified
security or currency at a set price on a specified future date. The Fund may
invest in futures contracts only to hedge against changes in the value of its
securities or currencies or those it intends to buy. The Fund will not enter
into a futures contract if the amounts paid for its open contracts, including
required initial deposits, would exceed 5% of the Fund's net assets.
For hedging purposes only, the Fund may buy or write (sell) put and call options
on securities listed on a national securities exchange. The options themselves
may be traded on an exchange or over-the-counter. An option on a security allows
its holder to buy a specified security (a call option) or to sell a specified
security (a put option) from or to the writer of the option at a set price
during the term of the option. All options written by the Fund will be covered,
as discussed in the SAI. The Fund will not buy an option if the amounts paid for
its open option positions exceed 5% of its net assets.
Futures and options are generally considered derivative securities. They may not
always be successful hedges. For a further discussion of these securities,
including their risks and special tax considerations that may apply, please see
the SAI.
OTHER INVESTMENT POLICIES OF THE FUND
Short-Term Investments. Occasionally, pending investment of proceeds from new
sales of the Fund's shares or for cash management or temporary defensive
purposes, the Fund may hold cash or invest in high quality money market
instruments of U.S. and foreign issuers. These include government securities,
commercial paper, bank certificates of deposit, bankers' acceptances and
repurchase agreements secured by any of these instruments. Any of these
securities purchased by the Fund will either be rated "A1" or "A2" by S&P or
"P1" or "P2" by Moody's or unrated but of comparable quality. It is impossible
to predict when or for how long the Fund would employ these strategies.
Repurchase Agreements. A repurchase transaction is another type of short-term
investment. The Fund buys a U.S. government security subject to resale to a bank
or dealer at an agreed-upon price and date. The seller's obligation is secured
by the transfer of securities with an initial market value, including accrued
interest, equal to at least 102% of the dollar amount invested by the Fund in
each agreement. The value of the underlying securities is marked-to-market daily
to maintain coverage of at least 100%. If the seller defaults, the Fund may
experience a loss or delay when it tries to sell the securities securing the
repurchase agreement and may have to pay disposition costs. The Fund, however,
intends to enter into repurchase agreements only with financial institutions,
such as broker-dealers and banks, that Advisers believes are creditworthy.
A repurchase agreement is considered a loan by the Fund under the 1940 Act. The
U.S. government security subject to resale (the collateral) will be held on
behalf of the Fund by a custodian bank approved by the Board and will be held
pursuant to a written agreement.
Loans of Portfolio Securities. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors,
provided these loans do not exceed one-third of the value of the Fund's total
assets at the time of the most recent loan. The borrower must deposit with the
Fund's custodian bank collateral with an initial market value of at least 102%
of the initial market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain coverage of at least 100%. This collateral
shall consist of cash, securities issued by the U.S. government, its agencies or
instrumentalities, or irrevocable letters of credit.
The lending of securities is a common practice in the securities industry. The
Fund may engage in security loan arrangements with the primary objective of
increasing the Fund's income either through investing cash collateral in
short-term interest bearing obligations or by receiving a loan premium from the
borrower. Under the securities loan agreement, the Fund continues to be entitled
to all dividends or interest on any loaned securities. As with any extension of
credit, there are risks of delay in recovery and loss of rights in the
collateral should the borrower of the security fail financially.
Borrowing. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of its assets, except it may borrow up to 15% of its total assets
(including the amount borrowed) to meet redemption requests that might otherwise
require the untimely disposition of portfolio securities or for other temporary
or emergency purposes and may pledge its assets in connection with these
borrowings. The Fund will not make any additional investments while borrowings
exceed 5% of its total assets.
When-Issued and Standby Commitment Purchases. The Fund may buy equity securities
on a "when-issued" or "delayed delivery" basis. These transactions are
arrangements whereby the Fund buys securities with payment and delivery
scheduled for a future time, generally within 15 to 60 days. The Fund may also
buy equity securities under a standby commitment agreement. If the Fund enters
into a standby commitment agreement, it will be obligated, for a set period of
time, to buy a certain amount of a security that may be issued and sold to the
Fund at the option of the issuer. The price of the security is set at the time
of the agreement. The Fund will receive a commitment fee typically equal to 0.5%
of the purchase price of the security. The Fund will receive this fee regardless
of whether the security is actually issued.
Currency Transactions. In connection with the Fund's investment in foreign
securities, it may hold currencies other than the U.S. dollar and enter into
forward currency exchange transactions to facilitate settlements and to protect
against changes in exchange rates. In a forward currency transaction, the Fund
agrees to buy or sell a foreign currency at a set exchange rate. Payment and
delivery of the currency occurs on a future date. There is no assurance that
these strategies will be successful. The Fund's investment in foreign currencies
and forward currency exchange transactions will not exceed 10% of its net
assets. The Fund may also enter into futures contracts for currencies as
discussed above.
Restricted Securities. The Board has authorized the Fund to invest in restricted
securities, if consistent with the Fund's investment objective. Restricted
securities are not registered with the SEC. If Advisers determines on a daily
basis that there is a liquid institutional or other market for these securities,
the Board has authorized them to be considered liquid securities and not subject
to the Fund's policy on illiquid investments. Notwithstanding Advisers'
determination, the Board remains responsible for liquidity determinations and
will consider appropriate action if a restricted security becomes illiquid after
its purchase. In this case, if qualified institutional buyers are no longer
interested in buying restricted securities that were previously considered
liquid or if the market for these securities contracts, they will be
redesignated illiquid securities and subject to the Fund's illiquid investment
policy. This may reduce the general level of liquidity in the Fund.
Illiquid Investments. The Fund's policy is not to invest more than 10% of its
net assets, at the time of purchase, in illiquid securities. Illiquid securities
are generally securities that cannot be sold within seven days in the normal
course of business at approximately the amount at which the Fund has valued
them.
Portfolio Turnover. The Fund anticipates its annual portfolio turnover rate
generally will not exceed 50%, but you should not consider this rate a limiting
factor in the operation of the Fund's portfolio.
Percentage Restrictions. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in value of portfolio securities or the amount of net
assets will not be considered a violation of any of the foregoing policies.
Other Policies and Restrictions. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How does the Fund Invest its Assets?" and "Investment Restrictions" in the
SAI.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The Fund is designed for long-term investors and not as a trading vehicle.
Before investing in the Fund, you should take into account your overall
financial plan, as well as how this Fund could aid in achieving your investment
objective.
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock market as a whole.
Foreign Securities. Although the Fund invests primarily in quality blue chip
securities, the Fund is not restricted geographically in its security selection.
Advisers believes this can improve the Fund's ability to meet its objective of
long-term capital appreciation, as many of today's quality industry leaders are
domiciled outside the U.S. You should consider the risks of foreign securities
before buying shares of the Fund.
While foreign securities are subject to many of the same influences as U.S.
securities, such as general economic conditions and individual company and
industry earnings prospects, they involve additional risks that can increase the
potential for losses in the Fund. These risks can be significantly greater for
investments in emerging markets.
Currency fluctuations. The Fund's investments may be denominated in foreign
currencies. Fluctuations in foreign exchange rates may significantly increase or
decrease the value of the Fund's foreign investments. These fluctuations may
increase or offset any return on the underlying investment.
Costs. It is more expensive for the Fund to trade in foreign markets than in the
U.S. Brokerage and custodial costs are often higher, as are other costs. While
the Fund offers an efficient way for you to invest in quality blue chip
companies across the world, its overall expense ratio may be higher than funds
investing exclusively in U.S. securities.
Political and Economic Factors. The political, economic and social structures of
some countries in which the Fund invests may not compare favorably with the U.S.
and may be less stable and more volatile. The risks of investing in these
countries include, among others, the possibility of the imposition of exchange
controls, expropriation, restrictions on removal of currency or other assets,
nationalization of assets, and punitive taxes.
Legal, Regulatory and Operational Factors. There may be less publicly available
information about a foreign company than about a U.S. company. Certain countries
may not have uniform accounting, auditing and financial reporting standards and
may have less government supervision of financial markets. Foreign securities
markets may have substantially lower trading volumes than U.S. markets,
resulting in less liquidity and more volatility than experienced in the U.S.,
and may have settlement practices that result in delays.
Market and Currency Risk. If there is a general market decline in any country
where the Fund is invested, the Fund's share price may also decline. Changes in
currency valuations will also affect the price of Fund shares. The value of
worldwide stock markets and currency valuations has increased and decreased in
the past. These changes are unpredictable and may happen again in the future.
Please see "What are the Fund's Potential Risks?" in the SAI for more
information on the risks associated with an investment in the Fund.
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 $150 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 since the Fund's inception is: Suzanne Willoughby Killea and
Shan C. Green.
Suzanne Willoughby Killea
Portfolio Manager of Advisers
Ms. Killea holds a Master of Business Administration degree from Stanford
University and a Bachelor of Arts degree from Princeton University. She has been
with the Franklin Templeton Group since earning her MBA degree in 1991. She is a
member of several securities industry-related associations.
Shan C. Green
Portfolio Manager of Advisers
Ms. Green holds a Master of Business Administration degree from the University
of California at Berkeley. She earned her Bachelor of Science degree from State
University of New York at Stony Brook. Ms. Green has been with the Franklin
Templeton Group since 1994.
Management Fees. The Fund pays its own operating expenses. These expenses
include Advisers' management fees; taxes, if any; custodian, legal and auditing
fees; the fees and expenses of Board members who are not members of, affiliated
with, or interested persons of Advisers; salaries of any personnel not
affiliated with Advisers; insurance premiums; trade association dues; expenses
of obtaining quotations for calculating the Fund's Net Asset Value; and printing
and other expenses that are not expressly assumed by Advisers.
Under its management agreement, the Fund pays Advisers a management fee equal to
a annual rate of 0.75% of the Fund's average daily net assets up to and
including $500 million; 0.625% of the Fund's average daily net assets over $500
million up to and including $1 billion; and 0.50% of the Fund's average daily
net assets over $1 billion. The fee is computed daily and paid monthly.
During the Fund's start-up period, Advisers has agreed in advance to limit its
management fees and make certain payments to reduce expenses so the Fund's total
operating expenses do not exceed 1.25% for the current fiscal year. After April
30, 1997, 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, consistent with internal policies 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. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. Please see
"Investment Management and Other Services" in the SAI for more information.
THE FUND'S RULE 12B-1 PLAN
The Fund has a distribution plan or "Rule 12b-1 Plan" under which it may
reimburse Distributors or others for activities primarily intended to sell
shares of the Fund. These expenses may include, among others, distribution or
service fees paid to Securities Dealers or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates, printing prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and advertisements, and a prorated portion of Distributors' overhead expenses.
Payments by the Fund under the plan may not exceed 0.35% per year of the Fund's
average daily net assets. Of this amount, the Fund may reimburse up to 0.25% to
Distributors or others and may reimburse an additional 0.10% to Distributors for
distribution expenses. All distribution expenses over this amount will be borne
by those who have incurred them. 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 IS THE TRUST ORGANIZED?
The Fund is a diversified series of Franklin Strategic Series (the "Trust"), an
open-end management investment company, commonly called a mutual fund. It was
organized as a Delaware business trust on January 25, 1991, and is registered
with the SEC under the 1940 Act. Shares of each series of the Trust have equal
and exclusive rights to dividends and distributions declared by that series and
the net assets of the series in the event of liquidation or dissolution. Shares
of the Fund are considered Class I shares for redemption, exchange and other
purposes. In the future, additional series and classes of shares may be offered.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
removing members of the Board.
As of November 20, 1996, Resources owned of record and beneficially more than
25% of the outstanding shares of the Fund.
HOW TAXATION AFFECTS YOU AND THE FUND
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund intends to qualify and elect to be treated as a regulated investment
company under Subchapter M of the Code. By distributing all of its income and
meeting certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will not be liable for federal income or
excise taxes.
Foreign securities that meet the Code's definition of a passive foreign
investment company ("PFIC") may subject the Fund to an income tax and interest
charge with respect to those investments. To the extent possible, the Fund will
avoid that treatment by not investing in PFIC securities or by adopting other
tax strategies for any PFIC securities it does buy.
For federal income tax purposes, any income dividends that you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Pursuant to the Code, certain distributions that are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated for tax purposes as if received by
you on December 31 of the calendar year in which they are declared.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned shares of the Fund and whether the distributions
are received in cash or additional shares.
The Fund anticipates that a portion of the dividends that it will pay to you
will qualify for the dividends-received deduction, and may be treated by
corporate shareholders as qualifying dividends for this purpose, subject to
holding period and debt financing restrictions which are discussed in more
detail in the SAI.
Sales and exchanges of Fund shares are taxable events on which you may realize a
gain or loss. Any loss you incur on the sale or exchange of Fund shares, held
for six months or less, will be treated as a long-term capital loss to the
extent of capital gain dividends you received with respect to those shares.
The Fund will inform you of the source of 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 those dividends
and distributions.
If you are not considered a U.S. person for federal income taxation purposes,
you should consult with your financial or tax advisor regarding the
applicability of U.S. withholding or other taxes to distributions you receive
from the Fund and the application of foreign tax laws to those distributions.
You should consult your tax advisor with respect to the applicability of state
and local intangible property or income taxes to your shares in the Fund and
distributions and sale proceeds you receive from the Fund.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check.
MINIMUM
INVESTMENTS*
To Open Your Account $100
To Add to Your Account $ 25
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares.
SALES CHARGE REDUCTIONS AND WAIVERS
- - If you qualify to buy shares under one of the sales charge reduction or
waiver categories described below, please include a written statement with each
purchase order explaining which privilege applies. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
Quantity Discounts. The sales charge you pay depends on the dollar amount you
invest, as shown in the table below.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
Under $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 or more* None None None
*If you invest $1 million or more, a Contingent Deferred Sales Charge may be
imposed on an early redemption. Please see "How Do I Sell Shares? - Contingent
Deferred Sales Charge." Please also see "Other Payments to Securities Dealers"
below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases.
Cumulative Quantity Discounts. To determine if you may pay a reduced sales
charge, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your Class I and Class II shares in the Franklin
Templeton Funds, as well as those of your spouse, children under the age of 21
and grandchildren under the age of 21. If you are the sole owner of a company,
you may also add any company accounts, including retirement plan accounts.
Companies with one or more retirement plans may add together the total plan
assets invested in the Franklin Templeton Funds to determine the sales charge
that applies.
Letter of Intent. You may buy shares at a reduced sales charge by completing the
Letter of Intent section of the shareholder application. A Letter of Intent is a
commitment by you to invest a specified dollar amount during a 13 month period.
The amount you agree to invest determines the sales charge you pay.
By completing the Letter of Intent section of the shareholder application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Fund shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
Group Purchases. If you are a member of a qualified group, you may buy Fund
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
Sales Charge Waivers. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying shares with money from
the following sources:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds, 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:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares were subject to a
Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
5. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front-end or contingent deferred sales charges at
the time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to purchases by:
6. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
7. Group annuity separate accounts offered to retirement plans
8. Retirement plans that (i) are sponsored by an employer with at least 100
employees, (ii) have plan assets of $1 million or more, or (iii) agree to
invest at least $500,000 in the Franklin Templeton Funds over a 13 month
period. Retirement plans that are not Qualified Retirement Plans or SEPS,
such as 403(b) or 457 plans, must also meet the requirements described
under "Group Purchases" above.
9. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments by the
Fund on arbitrage rebate calculations.
10. Broker-dealers, registered investment advisors or certified financial
planners who have entered into a supplemental agreement with Distributors
for clients participating in comprehensive fee programs
11. Registered Securities Dealers and their affiliates, for their investment
accounts only
12. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
13. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
14. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
15. Accounts managed by the Franklin Templeton Group
16. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments below apply to Securities Dealers who initiate and are responsible
for certain purchases made without a sales charge. A Securities Dealer may only
receive one of these payments for each qualifying purchase. Securities Dealers
who receive payments under items 1 or 2 below will earn the Rule 12b-1 fee
associated with the purchase starting in the thirteenth calendar month after the
purchase. The payments described below are paid by Distributors or one of its
affiliates, at its own expense, and not by the Fund or its shareholders.
1. Securities Dealers will receive up to 1% of the purchase price for purchases
of $1 million or more.
2. Securities Dealers may, in the sole discretion of Distributors, receive up to
1% of the purchase price for purchases made under waiver category 8 above.
3. Securities Dealers may receive up to 0.25% of the purchase price for
purchases made under waiver categories 6, 9 and 10 above.
Please see "How Do I Buy, Sell and Exchange Shares - Other Payments to
Securities Dealers" in the SAI for any breakpoints that may apply.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. Securities Dealers may not use sales of the Fund's shares to qualify for
this compensation if prohibited by the laws of any state or self-regulatory
agency, such as the NASD.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you're exchanging
By Phone Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone to
apply to your account, please let us know.
Through Your Dealer Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
Contingent Deferred Sales Charge. We will not impose a Contingent Deferred Sales
Charge when you exchange shares. Any shares subject to a Contingent Deferred
Sales Charge at the time of exchange, however, will remain so in the new fund.
For accounts with shares subject to a Contingent Deferred Sales Charge, shares
are exchanged into the new fund in the order they were purchased. If you
exchange shares into one of our money funds, the time your shares are held in
that fund will not count towards the completion of any Contingency Period. For
more information about the Contingent Deferred Sales Charge, please see that
section under "How Do I Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class.
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically registered
money fund account requiring only one signature for all transactions. Please
notify us in writing if you do not want this option to be available on your
account(s). Additional procedures may apply. Please see "Transaction Procedures
and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you: (i) request an exchange out
of the Fund within two weeks of an earlier exchange request, (ii) exchange
shares out of the Fund more than twice in a calendar quarter, or (iii) exchange
shares equal to at least $5 million, or more than 1% of the Fund's net assets.
Shares under common ownership or control are combined for these limits. If you
exchange shares as described in this paragraph, you will be considered a Market
Timer. Each exchange by a Market Timer, if accepted, will be charged $5.00. Some
of our funds do not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may
have additional requirements.
By Phone
(Only available Call Shareholder Services
if you have
completed and Telephone requests will be accepted:
sent to us the
telephone o If the request is $50,000 or less. Institutional accounts
redemption may exceed $50,000 by completing a separate agreement. Call
agreement Institutional Services to receive a copy.
included with
this prospectus) o If there are no share certificates issued for the shares
you want to sell or you have already returned them to the
Fund
o Unless you are selling shares in a Trust Company retirement
plan account
o Unless the address on your account was changed by phone
within the last 30 days
Through Your Dealer Call your investment representative
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
CONTINGENT DEFERRED SALES CHARGE
If you did not pay a front-end sales charge because you invested $1 million or
more 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.
We will first redeem shares not subject to the charge in the following order:
1) A calculated number of shares equal to the capital appreciation on shares
held less than the Contingency Period,
2) Shares purchased with reinvested dividends and capital gain distributions,
and
3) Shares held longer than the Contingency Period.
We then redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated dollar amount, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated number of shares, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
Waivers. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual balance of
$1 million, you can withdraw up to $120,000 annually through a systematic
withdrawal plan free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to termination
or plan transfer
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income annually in December
to shareholders of record on the first business day before the 15th of that
month and pays them on or about the last business day of that month. Capital
gains, if any, may be distributed annually, usually in December.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy additional shares of the Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge) by
reinvesting capital gain distributions, or both dividend and capital gain
distributions. This is a convenient way to accumulate additional shares and
maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge).
Many shareholders find this a convenient way to diversify their investments.
3. Receive distributions in cash - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
To select one of these options, please complete sections 6 and 7 of the
shareholder application included with this prospectus or tell your investment
representative which option you prefer. If you do not select an option, we will
automatically reinvest dividend and capital gain distributions in the Fund. For
Trust Company retirement plans, special forms are required to receive
distributions in cash. You may change your distribution option at any time by
notifying us by mail or phone. Please allow at least seven days prior to the
record date for us to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the 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.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. You should
verify that the institution is an eligible guarantor prior to signing. A
notarized signature is not sufficient.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We will 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 written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by telephone, we will not be liable for any loss.
Trust Company Retirement Plan Accounts. You may not sell shares or change
distribution options on Trust Company retirement plans by phone. While you may
exchange shares of Trust Company IRA and 403(b) retirement accounts by phone,
certain restrictions may be imposed on other retirement plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
Joint Ownership. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Trusts. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
Required Documents. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
Corporation Corporate Resolution
Partnership 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
Trust 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
Street or Nominee Accounts. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
Electronic Instructions. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We can accept electronic instructions directly from your dealer or
representative without further inquiry. Electronic instructions may be processed
through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
TAX IDENTIFICATION NUMBER
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below.
You will generally receive your payment by the fifth business day of the month
in which a payment is scheduled. Beginning with your February 1997 payment,
however, 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.
Because of the Fund's front-end sales charge, you may not want to set up a
systematic withdrawal plan if you plan to buy shares on a regular basis. Shares
sold under the plan may also be subject to a Contingent Deferred Sales Charge.
Please see "Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips.
You will need the Fund's code number to use TeleFACTS. The Fund's code is 283.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. Please verify the
accuracy of your statements when you receive them.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. For further information, call Institutional
Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Trustees of the Trust
CD - Certificate of deposit
Class I and Class II - Certain funds in the Franklin Templeton Funds offer two
classes of shares, designated "Class I" and "Class II." The two classes have
proportionate interests in the same portfolio of investment securities. They
differ, however, primarily in their sales charge structures and Rule 12b-1
plans. Because the Fund's sales charge structure and Rule 12b-1 plan are similar
to those of Class I shares, shares of the Fund are considered Class I shares for
redemption, exchange and other purposes.
Code - Internal Revenue Code of 1986, as amended
Contingency Period - The 12 month period during which a Contingent Deferred
Sales Charge may apply. Regardless of when during the month you purchased
shares, they will age one month on the last day of that month and each following
month.
Contingent Deferred Sales Charge (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
Eligible Governmental Authority - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
Franklin Funds - The mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust
Franklin Templeton Funds - The Franklin Funds and the Templeton Funds
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
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 Timer(s) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
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 4.50% sales charge.
Qualified Retirement Plan(s) - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
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.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TeleFACTS(R) - Franklin Templeton's automated customer servicing system
Templeton Funds - The U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund
Trust Company - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
FRANKLIN
BLUE CHIP
FUND
Franklin Strategic Series
STATEMENT OF
ADDITIONAL INFORMATION
JUNE 3, 1996, as amended January 1, 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?................ 2
What are the Fund's Potential Risks?................ 5
Investment Restrictions............................. 6
Officers and Trustees............................... 7
Investment Management
and Other Services................................. 11
How does the Fund Buy
Securities for its Portfolio?...................... 11
How Do I Buy, Sell and
Exchange Shares?................................... 12
How are Fund Shares Valued?......................... 15
Additional Information on
Distributions and Taxes............................ 16
The Fund's Underwriter.............................. 19
How does the Fund
Measure Performance?............................... 20
Miscellaneous Information........................... 22
Useful Terms and Definitions........................ 23
Appendix
Description of Commercial Paper Ratings............ 24
Financial Statements................................ 25
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 Blue Chip Fund (the "Fund") is a diversified series of Franklin
Strategic Series (the "Trust"), an open-end management investment company. The
Fund's investment objective is long-term capital appreciation. The Fund seeks to
achieve its objective by investing in equity securities of blue chip companies.
The Fund may also seek current income incidental to long-term capital
appreciation, although this is not a fundamental policy of the Fund.
The Prospectus, dated June 3, 1996, as amended January 1, 1997, and as may be
further 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:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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?"
American Depositary Receipts. The Fund may buy sponsored or unsponsored American
Depositary Receipts ("ADRs"). With a sponsored ADR, the issuing facility is
established by the participation of the issuer and the depositary institution
under a deposit agreement that sets out the rights and responsibilities of the
issuer, the depositary and the ADR holder. Under the terms of most sponsored
arrangements, depositaries agree to distribute notices of shareholder meetings
and voting instructions. This ensures ADR holders will be able to exercise
voting rights through the depositary with respect to the deposited securities.
An unsponsored ADR has no sponsorship by the issuing facility and more than one
depositary institution may be involved in its issuance. An unsponsored ADR
typically clears through a depositary, such as the Depository Trust Company, so
there should be no additional delays in selling the security or in obtaining
dividends. Although not required, the depositary normally requests a letter of
non-objection from the issuer and is not required to distribute notices of
shareholder meetings or financial information to the ADR holder.
Forward Currency Exchange Transactions. The Fund may enter into forward currency
exchange transactions in order to (i) "lock-in" the U.S. dollar price of a
security in its portfolio denominated in a foreign currency; (ii) sell an amount
of a foreign currency approximating the value of some or all of its portfolio
securities denominated in that foreign currency when Advisers believes the
foreign currency may decline substantially against the U.S. dollar; or (iii) buy
a foreign currency for a fixed dollar amount when Advisers believes the U.S.
dollar may substantially decline against that foreign currency.
The value of securities denominated in a foreign currency may change during the
time between when a forward transaction is entered into and the time it settles.
It is therefore generally not possible to match precisely the forward
transaction amount and the value of the securities in the Fund's portfolio
denominated in the currency involved. Using a forward currency transaction to
protect the value of the Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange that the Fund can
achieve at some future time. The precise projection of short-term currency
market movements is not possible and short-term hedging provides a way to fix
the dollar value of only a portion of the Fund's foreign securities.
To limit the potential risks of buying currency under forward currency
transactions, the Fund will keep cash, cash equivalents or readily marketable
high-grade debt securities equal to the amount of the purchase in a segregated
account with its custodian bank to be used to pay for the commitment. The Fund
will cover any commitments under these transactions to sell currency by owning
the underlying currency or an absolute right to acquire the underlying currency.
The segregated account will be marked-to-market daily.
Convertible Securities. A convertible security is usually issued either by an
operating company or an investment bank. If it's issued by an operating company,
it tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security. If the parity price
of the convertible security is less than the call price, however, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of that bank and is
convertible through the bank. The holder of a convertible security has recourse
only to the issuer. Therefore, the issuer may be important in determining the
security's true value.
The Fund uses the same criteria to rate a convertible debt security that it uses
to rate a more conventional debt security and treats a convertible preferred
stock as a preferred stock for the Fund's financial reporting, credit rating,
and investment limitation purposes. A preferred stock is subordinated to all
debt obligations in the event of an issuer's insolvency. An issuer's failure to
make a dividend payment is generally not an event of default entitling the
holder of preferred stock to take action. A preferred stock generally has no
maturity date, so its market value is dependent on the issuer's business
prospects for an indefinite period of time. Distributions from preferred stock
are dividends, not interest payments, and are usually treated as dividends for
corporate tax purposes.
Options. The Fund may buy or write (sell) put and call options on securities
listed on a national securities exchange for portfolio hedging purposes. All
options written by the Fund will be covered. This means so long as the Fund is
obligated as the writer of a call option, it will own the underlying security
subject to the call or an absolute right to acquire the security without
additional cash consideration (or for additional cash consideration if the
amount is held in a segregated account with its custodian bank) upon conversion
of other securities in its portfolio. A call option is also covered if the Fund
holds a call on the same security and in the same principal amount as the call
written where the exercise price of the call held is (a) equal to or less than
the exercise price of the call written or (b) greater than the exercise price of
the call written if the difference is held in cash or high-grade debt securities
in a segregated account with the Fund's custodian bank.
A put option written by the Fund is covered if the Fund maintains cash or
high-grade debt securities with a value equal to the exercise price of the
written put in a segregated account with its custodian bank. A put is also
covered if the Fund holds a put on the same security and in the same principal
amount as the put written where the exercise price of the put held is equal to
or greater than the exercise price of the put written.
The premium paid by the buyer of an option will reflect, among other things, the
relationship of the exercise price to the market price and volatility of the
underlying security, the remaining term of the option, supply and demand, and
interest rates.
The writer of an option may have no control over when the underlying securities
must be sold, in the case of a call option, or purchased, in the case of a put
option, since the writer may be assigned an exercise notice at any time prior to
the termination of the obligation. Whether or not an option expires unexercised,
the writer retains the amount of the premium. This amount may, in the case of a
covered call option, be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised, the
writer experiences a profit or loss from the sale of the underlying security. If
a put option is exercised, the writer must fulfill the obligation to buy the
underlying security at the exercise price, which will usually exceed the market
value of the underlying security at that time.
If the writer of an option wants to terminate its obligation, the writer may
effect a "closing purchase transaction." This is done by buying an option of the
same series as the option previously written. The effect of the purchase is that
the writer's position will be canceled by the clearing corporation. However, a
writer may not effect a closing purchase transaction after being notified of the
exercise of an option. Likewise, the holder of an option may liquidate its
position by effecting a "closing sale transaction." This is done by selling an
option of the same series as the option previously purchased. There is no
guarantee that either a closing purchase or a closing sale transaction may be
made at the time desired by the Fund.
Effecting a closing transaction in the case of a written call option allows the
Fund to write another call option on the underlying security with a different
exercise price, expiration date or both. In the case of a written put option, a
closing transaction allows the Fund to write another covered put option.
Effecting a closing transaction also allows the cash or proceeds from the sale
of any securities subject to the option to be used for other Fund investments.
If the Fund wants to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing transaction prior to or at
the same time as the sale of the security.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to buy the option. Likewise, the Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to buy
the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
The writing of covered put options involves certain risks. For example, if the
market price of the underlying security rises or otherwise is above the exercise
price, the put option will expire worthless and the Fund's gain will be limited
to the premium received. If the market price of the underlying security declines
or otherwise is below the exercise price, the Fund may elect to close the
position or take delivery of the security at the exercise price and the Fund's
return will be the premium received from the put option minus the amount by
which the market price of the security is below the exercise price.
The Fund may buy call options on securities it intends to buy in order to limit
the risk of a substantial increase in the market price of the security before
the purchase is effected. The Fund may also buy call options on securities held
in its portfolio and on which it has written call options. Prior to its
expiration, a call option may be sold in a closing sale transaction. Profit or
loss from the sale will depend on whether the amount received is more or less
than the premium paid for the call option plus any related transaction costs.
The Fund may buy put options on securities to protect against a decline in the
market value of the underlying security below the exercise price less the
premium paid for the option. The ability to buy put options allows the Fund to
protect the unrealized gain in an appreciated security in its portfolio without
actually selling the security. In addition, the Fund continues to receive
interest or dividend income on the security. The Fund may sell a put option it
has previously purchased prior to the sale of the security underlying the
option. The sale of the option will result in a net gain or loss depending on
whether the amount received on the sale is more or less than the premium and
other transaction costs paid for the put option. Any gain or loss may be wholly
or partially offset by a change in the value of the underlying security that the
Fund owns or has the right to acquire.
The Fund may write covered put and call options and buy put and call options
that trade in the over-the-counter ("OTC") market to the same extent that it may
engage in exchange traded options. Like exchange traded options, OTC options
give the holder the right to buy, in the case of OTC call options, or sell, in
the case of OTC put options, an underlying security from or to the writer at a
stated exercise price. However, OTC options differ from exchange traded options
in certain material respects.
OTC options are arranged directly with dealers and not with a clearing
corporation. Thus, there is a risk of non-performance by the dealer. Because
there is no exchange, pricing is typically done based on information from market
makers. OTC options are available for a greater variety of securities and in a
wider range of expiration dates and exercise prices, however, than exchange
traded options and the writer of an OTC option is paid the premium in advance by
the dealer.
Futures. The Fund may buy and sell futures contracts for securities and
currencies. The Fund may also enter into closing purchase and sale transactions
with respect to these futures contracts. The Fund will engage in futures
transactions only for bona fide hedging or other appropriate risk management
purposes. All futures contracts entered into by the Fund are traded on U.S.
exchanges or boards of trade licensed and regulated by the Commodities Futures
Trading Commission ("CFTC") or on foreign exchanges.
When securities prices are falling, the Fund may offset a decline in the value
of its current portfolio securities through the sale of futures contracts. When
prices are rising, the Fund can attempt to secure better prices than might be
available when it intends to buy securities through the purchase of futures
contracts. Similarly, the Fund can sell futures contracts on a specified
currency to protect against a decline in the value of that currency and its
portfolio securities denominated in that currency. The Fund can buy futures
contracts on a foreign currency to fix the price in U.S. dollars of a security
denominated in that currency that the Fund has purchased or expects to buy.
Although futures contracts by their terms generally call for the actual delivery
or acquisition of underlying securities or currency, in most cases the
contractual obligation is fulfilled before the date of the contract without
having to make or take delivery. The contractual obligation is offset by buying
(or selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. This transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the securities or currency underlying the contractual obligation.
The Fund may incur brokerage fees when it buys or sells futures contracts.
Positions taken in the futures markets are not normally held to maturity, but
are liquidated through offsetting transactions that may result in a profit or a
loss. While the Fund's futures contracts on securities and currencies will
usually be liquidated in this manner, the Fund may instead make or take delivery
of the underlying securities or currencies whenever it appears economically
advantageous for it to do so. A clearing corporation associated with the
exchange on which futures on securities or currencies are traded guarantees
that, if still open, the sale or purchase will be performed on the settlement
date.
To the extent the Fund enters into a futures contract, it will deposit in a
segregated account with its custodian bank cash or U.S. Treasury obligations
equal to a specified percentage of the value of the futures contract (the
"initial margin"), as required by the relevant contract market and futures
commission merchant. The futures contract will be marked-to-market daily. Should
the value of the futures contract decline relative to the Fund's position, the
Fund will be required to pay the futures commission merchant an amount equal to
the change in value.
When-Issued or Delayed Delivery Transactions. If the Fund buys securities on a
when-issued basis, it will do so for the purpose of acquiring securities
consistent with its investment objective and polices and not for investment
leverage. The Fund may sell securities purchased on a when-issued basis before
the settlement date, however, if Advisers believes it is advisable to do so.
When the Fund is the buyer in one of these transactions, it relies on the seller
to complete the transaction. If the seller fails to do so, the Fund may miss an
advantageous price or yield for the underlying security. When the Fund is the
buyer, it will keep cash or high-grade marketable securities in a segregated
account with its custodian bank until payment is made. The amount held in the
account will equal the amount the Fund must pay for the securities at delivery.
Standby Commitment Agreements. The Fund may enter into a standby commitment
agreement to invest in the security underlying the commitment at a yield or
price that Advisers believes is advantageous to the Fund. The Fund will not
enter into a standby commitment if the remaining term of the commitment is more
than 45 days. If the Fund enters into a standby commitment, it will keep cash or
high-grade marketable securities in a segregated account with its custodian bank
in an amount equal to the purchase price of the securities underlying the
commitment.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the Fund's books on the date the
security can reasonably be expected to be issued. The value of the security will
then be reflected in the calculation of the Fund's net asset value. The cost
basis of the security will be adjusted by the amount of the commitment fee. If
the security is not issued, the commitment fee will be recorded as income on the
expiration date of the standby commitment.
Restricted Securities. The Board has authorized the Fund to invest in restricted
securities, if consistent with the Fund's investment objective. If Advisers
determines on a daily basis that there is a liquid institutional or other market
for these securities, the Board has authorized them to be considered liquid
securities and not subject to the Fund's policy on illiquid investments. When
determining whether a restricted security is properly considered a liquid
security, Advisers and the Board will consider: (i) the frequency of trades and
quotes for the security; (ii) the number of dealers willing to buy or sell the
security and the number of other potential buyers; (iii) dealer undertakings to
make a market in the security; and (iv) the nature of the security and the
marketplace trades, for example the time needed to sell the security, the method
of soliciting offers, and the mechanics of transfer.
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?
Forward Currency Exchange Transactions. While the Fund may enter into forward
currency transactions to reduce currency exchange rate risks, these transactions
involve certain other risks. Forward currency exchange transactions may limit
the potential gain to the Fund from a positive change in the relationship
between the U.S. dollar and foreign currencies or between foreign currencies.
Unanticipated changes in currency exchange rates may result in poorer overall
performance for the Fund than if it had not entered into these transactions.
Furthermore, there may be imperfect correlation between the Fund's portfolio
securities denominated in a particular currency and forward currency
transactions entered into by the Fund. This may cause the Fund to sustain losses
that will prevent the Fund from achieving a complete hedge or expose the Fund to
the risk of foreign exchange loss.
Convertible Securities. The value of a convertible debt security may be
influenced by both interest rate and market movements. Like a regular debt
security, it tends to increase in market value when interest rates decline and
decrease in value when interest rates rise. Like a common stock, it also tends
to increase as the market value of the underlying stock rises and decrease as
the market value of the underlying stock declines. Because its value is
influenced by both these factors, a convertible security is not as sensitive to
interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock.
Options and Futures. The Fund's options and futures investments involve certain
risks. These risks include, among others, the risk that the effectiveness of an
options and futures strategy depends on the degree that price movements in the
underlying securities or currency, in the case of the Fund's futures
transactions, correlate with price movements in the relevant portion of the
Fund's portfolio. The Fund bears the risk that the prices of its portfolio
securities will not move in the same amount as the option or future it has
purchased, or that there may be a negative correlation that would result in a
loss on both the securities and the option or futures contract. There is also
the risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or option.
Positions in exchange traded options and futures may be closed out only on an
exchange that provides a secondary market. There can be no assurance that a
liquid secondary market will exist for any particular option or futures contract
at any specific time. Thus, it may not be possible to close an option or futures
position. The inability to close options or futures positions may have an
adverse impact on the Fund's ability to effectively hedge its securities.
Furthermore, if the Fund is unable to close out a futures or options position
and if prices move adversely, the Fund will have to continue to make daily cash
payments to maintain its required margin. If the Fund does not have sufficient
cash to do this, it may have to sell portfolio securities at a disadvantageous
time. Of course, the Fund will enter into an option or futures position only if
there appears to be a liquid secondary market for those options or futures.
Similarly, there can be no assurance that a continuous liquid secondary market
will exist for any particular OTC option at any specific time. Consequently, the
Fund may be able to realize the value of an OTC option it has purchased only by
exercising it or by entering into a closing sale transaction with the dealer
that issued it. When the Fund writes an OTC option, it generally can close out
that option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it.
When-Issued or Delayed Delivery Transactions. The securities underlying these
transactions are subject to market fluctuation prior to delivery and generally
do not earn interest until their scheduled delivery date. There is the risk that
the value or yield of the security at the time of delivery may be more or less
than the price paid for the security or the yield available when the transaction
was entered into.
Standby Commitment Agreements. There can be no assurance that the securities
underlying a standby commitment agreement will be issued. If issued, the value
of the security may be more or less than its purchase price. Since the issuance
of the security is at the option of the issuer, the Fund may bear the risk of a
decline in value of the security and may not benefit if the security appreciates
in value during the commitment period.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies. 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. Borrow money or mortgage or pledge any of its assets, except it may borrow up
to 15% of its total assets (including the amount borrowed) to meet redemption
requests that might otherwise require the untimely disposition of portfolio
securities or for other temporary or emergency purposes and may pledge its
assets in connection with these borrowings. The Fund may borrow from banks,
other Franklin Templeton Funds or other persons to the extent permitted by
applicable law. The Fund will not make any additional investments while
borrowings exceed 5% of its total assets.
2. Underwrite securities of other issuers, except insofar as the Fund may be
technically deemed an underwriter under the federal securities laws in
connection with the disposition of portfolio securities. This does not preclude
the Fund from obtaining short-term credit necessary for the clearance of
purchases and sales of its portfolio securities.
3. Invest directly in interests in real estate, oil, gas or other mineral
leases, exploration or development programs, including limited partnership
interests. This restriction does not preclude investments in marketable
securities of issuers engaged in these activities.
4. Loan money, except as is consistent with the Fund's investment objective, and
except that the Fund may (a) buy a portion of an issue of publicly distributed
bonds, debentures, notes and other evidences of indebtedness, (b) enter into
repurchase agreements, (c) lend its portfolio securities, and (d) participate in
an interfund lending program with other Franklin Templeton Funds to the extent
permitted by the 1940 Act and any rules or orders thereunder.
5. Buy or sell commodities or commodity contracts, except that the Fund may
enter into financial futures contracts, options thereon, and forward contracts.
6. Invest more than 25% of the Fund's assets (at the time of the most recent
investment) in any industry, except that all or substantially all of the assets
of the Fund may be invested in another registered investment company having the
same investment objective and policies as the Fund.
7. Issue securities senior to the Fund's presently authorized shares of
beneficial interest, except that the Fund may borrow as permitted by these
restrictions.
Additional Restrictions. The Fund has adopted the following additional
restrictions. These restrictions are not fundamental and may be changed without
shareholder approval. Under these restrictions, the Fund may not:
1. Invest in any company for the purpose of exercising control or management,
except that all or substantially all of the assets of the Fund may be invested
in another registered investment company having the same investment objective
and policies as the Fund.
2. Buy securities on margin or sell securities short, except that the Fund may
make margin payments in connection with futures, options and currency
transactions.
3. Buy or retain securities of any company in which officers, trustees or
directors of the Fund or its investment manager individually own more than
one-half of 1% of the securities of such company, and in the aggregate own more
than 5% of the securities of such company.
4. Buy securities of open-end or closed-end investment companies, except that
securities of an open-end or closed-end investment company may be acquired (i)
in compliance with the 1940 Act, (ii) to the extent that the Fund may invest all
or substantially all of its assets in another registered investment company
having the same investment objective and policies as the Fund, and (iii) to the
extent the Fund's shares are qualified for sale in the state of Ohio and
notwithstanding (i) and (ii) above, by purchase in the open market where no
commission or profit to a sponsor or dealer results from the purchase other than
the customary broker's commission, or except when the purchase is part of a plan
of merger, consolidation, reorganization or acquisition.
5. Invest more than 5% of its assets in securities of issuers with less than
three years continuous operation, including the operations of any predecessor
companies, except that all or substantially all of the assets of the Fund may be
invested in another registered investment company having the same investment
objective and policies as the Fund.
6. Hold or purchase the securities of any issuer if, as a result, in the
aggregate, more than 10% of the value of the Fund's net assets would be invested
in (i) securities that are not readily marketable or (ii) repurchase agreements
maturing in more than seven days. The Fund may, however, invest all or
substantially all of its assets in another registered investment company having
the same investment objective and policies as the Fund.
7. Invest directly in warrants (valued at the lower of cost or market) in excess
of 5% of the value of the Fund's net assets. No more than 2% of the value of the
Fund's net assets may be invested in warrants (valued at the lower of cost or
market) that are not listed on the New York or American Stock Exchange.
As a diversified fund, with respect to 75% of its total assets, the Fund may not
invest more than 5% in any one issuer nor may it own more than 10% of the
outstanding voting securities of any one issuer, except that all or
substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and policies
as the Fund.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value 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 (*).
Frank H. Abbott, III (75) Trustee
1045 Sansome St.
San Francisco, CA 94111
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 31 of the
investment companies in the Franklin Group of Funds.
Harris J. Ashton (64) Trustee
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 55 of the investment companies in the Franklin
Templeton Group of Funds.
*Harmon E. Burns (51) Vice President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 60 of the investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (64) Trustee
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 57 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (81) Trustee
111 New Montgomery St., #402
San Francisco, CA 94105
Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director, trustee or managing
general partner, as the case may be, of 30 of the investment companies in the
Franklin Group of Funds.
*Charles B. Johnson (63) Chairman
777 Mariners Island Blvd. of the Board
San Mateo, CA 94404 and Trustee
President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general partner,
as the case may be, of most other subsidiaries of Franklin Resources, Inc. and
of 56 of the investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (56) President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
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. and
Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director, trustee or managing
general partner, as the case may be, of most other subsidiaries of Franklin
Resources, Inc. and of 60 of the investment companies in the Franklin Templeton
Group of Funds.
Frank W. T. LaHaye (67) Trustee
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or trustee or managing
general partner, as the case may be, of 26 of the investment companies in the
Franklin Group of Funds.
Gordon S. Macklin (68) Trustee
8212 Burning Tree Road
Bethesda, MD 20817
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),
Source One Mortgage Services Corporation (financial services), Shoppers Express
(home shopping), Spacelab, Inc. (aerospace technology); and director, trustee or
managing general partner, as the case may be, of 52 of the investment companies
in the Franklin Templeton Group of Funds; formerly Chairman, Hambrecht and Quist
Group; Director, H & Q Healthcare Investors; and President, National Association
of Securities Dealers, Inc.
Kenneth V. Domingues (64) Vice President -
777 Mariners Island Blvd. Financial Reporting
San Mateo, CA 94404 and Accounting Standards
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and
Franklin Templeton Distributors, Inc.; officer and/or director, as the case may
be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of 37 of the investment companies
in the Franklin Group of Funds.
Martin L. Flanagan (36) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; Treasurer, Franklin Advisory Services, Inc. and Franklin Investment
Advisory Services, Inc.; officer of most other subsidiaries of Franklin
Resources, Inc.; and officer, director and/or trustee of 60 of the investment
companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (48) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; Vice President, Franklin
Advisers, Inc., Franklin Advisory Services, Inc. and Franklin Investment
Advisory Services, Inc.; and officer of 60 of the investment companies in the
Franklin Templeton Group of Funds.
Charles E. Johnson (40) Vice President
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc. and Franklin Institutional Services Corporation;
officer and/or director, as the case may be, of some of the subsidiaries of
Franklin Resources, Inc. and officer and/or director or trustee, as the case may
be, of 39 of the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (57) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey (59) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 32 of the investment companies in the Franklin Group of
Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. As of February 1, 1996, nonaffiliated members of the
Board are paid fees of $300 for each regularly scheduled meeting and $300 per
meeting attended. As shown above, some of the nonaffiliated Board members also
serve as directors, trustees or managing general partners 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 Templeton
Total Fees Received from the Group of Funds
Received from Franklin Templeton on Which
Name the Trust* Group of Funds** Each Serves***
Frank H. Abbott, III............ $1,200 $162,420 31
Harris J. Ashton................ 1,200 327,925 55
S. Joseph Fortunato............. 1,200 344,745 57
David Garbellano................ 1,200 146,100 30
Frank W.T. LaHaye............... 900 143,200 26
Gordon S. Macklin............... 1,200 321,525 52
*For the fiscal year ended April 30, 1996.
**For the calendar year ended December 31, 1995.
***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 61 registered investment companies, with approximately 171 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.
As of November 20, 1996, the officers and Board members, as a group, owned none
of the Fund's total outstanding shares. 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 is covered by fidelity insurance on its officers, directors
and employees 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 February 13,
1998. 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. Under an agreement with Advisers, 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.
Under its administration agreement, Advisers 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.
The fee is paid by Advisers. It is not a separate expense of the Fund.
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.
Custodians. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York 10286, acts as custodian of the securities and other assets of
the Fund. Bank of America NT & SA, 555 California Street, 4th Floor, San
Francisco, California 94104, acts as custodian for cash received in connection
with the purchase of Fund shares. Citibank Delaware, One Penn's Way, New Castle,
Delaware 19720, acts as custodian in connection with transfer services through
bank automated clearing houses. The custodians do not participate in decisions
relating to the purchase and sale of portfolio securities.
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?
The selection of brokers and dealers to execute transactions in the Fund's
portfolio is made by Advisers 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. When portfolio transactions are done
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 in connection with portfolio transactions are based to a large degree on
the professional opinions of the persons responsible for the placement and
review of 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.
The amount of commission is not the only factor Advisers considers in the
selection of a broker to execute a trade. If Advisers believes it is in the
Fund's best interest, it may place portfolio transactions with brokers who
provide the types of services described below, even if it means the Fund will
pay a higher commission than if no weight were given to the broker's furnishing
of these services. This will be done only if, in the opinion of Advisers, the
amount of any additional commission is reasonable in relation to the value of
the services. Higher commissions will be paid only when the brokerage and
research services received are bona fide and produce a direct benefit to the
Fund or assist Advisers in carrying out its responsibilities to the Fund, or
when it is otherwise in the best interest of the Fund to do so, whether or not
such services may also be useful to Advisers in advising other clients.
When Advisers believes several brokers are equally able to provide the best net
price and execution, it may decide to execute transactions through brokers who
provide quotations and other services to the Fund, in an amount of total
brokerage as may reasonably be required in light of these services.
Specifically, these services may include providing the quotations necessary to
determine the Fund's Net Asset Value, as well as research, statistical and other
data.
It is not possible to place a dollar value on the special executions or on the
research services received by Advisers from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staff of other securities firms. As long as it is lawful and
appropriate to do so, 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, consistent with
internal policies 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:
Sales
Size of Purchase - U.S. dollars Charge
Under $30,000.................... 3.0%
$30,000 but less than $50,000.... 2.5%
$50,000 but less than $100,000... 2.0%
$100,000 but less than $200,000.. 1.5%
$200,000 but less than $400,000.. 1.0%
$400,000 or more................. 0%
Other Payments to Securities Dealers. Distributors will pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of $1 million or more: 1% on sales of $1 million
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 pursuant to a sales charge waiver, 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, including Class II shares, acquired more than 90 days before the Letter
is filed, will be counted towards completion of the Letter but will not be
entitled to a retroactive downward adjustment in the sales charge. Any
redemptions you make 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. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the 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. The Franklin Templeton Institutional Services Department
provides specialized services, including recordkeeping, for institutional
investors. The cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions that maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such owners. For each beneficial owner in
the omnibus account, the Fund may reimburse Investor Services an amount not to
exceed the per account fee 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 mean between the current bid and ask prices is used.
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 a year in December to reflect any net
short-term and net long-term capital gains realized by the Fund as of October 31
of the current fiscal year and any undistributed capital gains from the prior
fiscal year. The Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or adjust the timing of
these distributions for operational or other reasons.
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 such deduction will not exceed the aggregate qualifying dividends
received by the Fund for the taxable year. The amount or percentage of income
qualifying for the corporate dividends-received deduction will be provided by
the Fund annually in a notice to shareholders mailed shortly after the end of
the Fund's fiscal year.
Corporate shareholders should note that dividends paid by the Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividend-received deduction. For example, any interest income and net short-term
capital gain (in excess of any net long-term capital loss or capital loss
carryover) included in investment company taxable income and distributed by the
Fund as a dividend will not qualify for the dividends-received deduction.
Corporate shareholders should also note that the availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless Fund shares have been held (or deemed held)
for at least 46 days in a substantially unhedged manner. The dividends-received
deduction may also be reduced to the extent interest paid or accrued by a
corporate shareholder is directly attributable to its investment in Fund shares.
The entire dividend, including the portion which is treated as a deduction, is
includable in the tax base on which the federal alternative minimum tax is
computed and may also result in a reduction in the shareholder's tax basis in
its Fund shares, under certain circumstances, if the shares have been held for
less than two years. Corporate shareholders whose investment in the Fund is
"debt financed" for these tax purposes should consult with their tax advisor
concerning the availability of the dividends-received deduction.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. Under these rules, certain distributions
which are declared in October, November or December but which, for operational
reasons, may not be paid to you until the following January, will be treated for
tax purposes as if paid by the Fund and received by you on December 31 of the
calendar year in which they are declared. The Fund intends as a matter of policy
to declare such dividends, if any, in December and to pay these dividends in
December or January to avoid the imposition of this tax, but does not guarantee
that its distributions will be sufficient to avoid any or all federal excise
taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between your basis in the shares
and the amount received, subject to the rules described below. If such shares
are a capital asset in your hands, gain or loss will be capital gain or loss and
will be long-term for federal income tax purposes if the shares have been held
for more than one year.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares purchased.
Any loss realized upon the redemption of shares within six months from the date
of their purchase will be treated as long-term capital loss to the extent of
amounts treated as distributions of net long-term capital gain during such
six-month period.
All or a portion of the sales charge incurred in purchasing shares of the Fund
will not be included in the federal tax basis of such shares sold or exchanged
within 90 days of their purchase (for purposes of determining gain or loss with
respect to such shares) if the sales proceeds are reinvested in the Fund or in
another fund in the Franklin Templeton Funds and a sales charge which would
otherwise apply to the reinvestment is reduced or eliminated. Any portion of
such sales charge excluded from the tax basis of the shares sold will be added
to the tax basis of the shares acquired in the reinvestment. You should consult
with your tax advisor concerning the tax rules applicable to the redemption or
exchange of Fund shares.
The Fund's investment in options, futures and forward contracts, including
transactions involving actual or deemed short sales, or foreign exchange gains
or losses are subject to many complex and special tax rules. For example, OTC
options on debt securities and equity options, including options on stock and on
narrow-based stock indexes, will be subject to tax under Section 1234 of the
Code, generally producing a long-term or short-term capital gain or loss upon
exercise, lapse, or closing out of the option or sale of the underlying stock or
security. By contrast, the Fund's treatment of certain other options, futures
and forward contracts entered into by the Fund is generally governed by Section
1256 of the Code. These "Section 1256" positions generally include listed
options on debt securities, options on broad-based stock indexes, options on
securities indexes, options on futures contracts, regulated futures contracts
and certain foreign currency contracts and options thereon.
Absent a tax election to the contrary, each such Section 1256 position held by
the Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Fund's fiscal year, and all gain
or loss associated with fiscal year transactions and mark-to-market positions at
fiscal year end (except certain foreign currency gain or loss covered by Section
988 of the Code) will generally be treated as 60% long-term capital gain or loss
and 40% short-term capital gain or loss. The effect of Section 1256
mark-to-market rules may be to accelerate income or to convert what otherwise
would have been long-term capital gains into short-term capital gains or
short-term capital losses into long-term capital losses within the Fund. The
acceleration of income on Section 1256 positions may require the Fund to accrue
taxable income without the corresponding receipt of cash. In order to generate
cash to satisfy the distribution requirements of the Code, the Fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares. In these ways, any or all of these rules may affect the amount,
character and timing of income distributed to shareholders by the Fund.
When the Fund holds an option or contract that substantially diminishes the
Fund's risk of loss with respect to another position of the Fund (as might occur
in some hedging transactions), this combination of positions could be treated as
a "straddle" for tax purposes, resulting in possible deferral of losses,
adjustments in the holding periods of Fund securities and conversion of
short-term capital losses into long-term capital losses.
As a regulated investment company, the Fund is also subject to the requirement
that less than 30% of its annual gross income be derived from the sale or other
disposition of securities and certain other investments held for less than three
months ("short-short income"). This requirement may limit the Fund's ability to
engage in options and hedging transactions because these transactions are often
consummated in less than three months, may require the sale of portfolio
securities held less than three months and may, as in the case of short sales of
portfolio securities, reduce the holding periods of certain securities within
the Fund, resulting in additional short-short income for the Fund.
The Fund will monitor its transactions in such options and contracts and may
make certain other tax elections in order to mitigate the effect of the above
rules and prevent disqualification of the Fund as a regulated investment company
under Subchapter M of the Code.
Gain realized by the Fund from transactions that are deemed to constitute
"conversion transactions" under the Code and which would otherwise produce
capital gain may be recharacterized as ordinary income to the extent that such
gain does not exceed an amount defined by the Code as the "applicable imputed
income amount." A conversion transaction is any transaction in which
substantially all of the Fund's expected return is attributable to the time
value of the Fund's net investment in such transaction and any one of the
following criteria are met: 1) there is an acquisition of property with a
substantially contemporaneous agreement to sell the same or substantially
identical property in the future; 2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the Fund on the basis that it would
have the economic characteristics of a loan but would be taxed as capital gain;
or 4) the transaction is specified in Treasury regulations to be promulgated in
the future. The applicable imputed income amount, which represents the deemed
return on the conversion transaction based upon the time value of money, is
computed using a yield equal to 120 percent of the applicable federal rate,
reduced by any prior recharacterizations under this provision or Section 263(g)
of the Code concerning capitalized carrying costs.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currencies, foreign currency payables or
receivables, or foreign currency-denominated debt securities, foreign currency
forward contracts, and options or futures contracts on foreign currencies are
subject to special tax rules which may cause such gains and losses to be treated
as ordinary income and losses rather than capital gains and losses and may
affect the amount and timing of the Fund's income or loss from such transactions
and, in turn, its distributions to shareholders.
In order for the Fund to qualify as a regulated investment company, at least 90%
of the Fund's annual gross income must consist of dividends, interest and
certain other types of qualifying income, and no more than 30% of its annual
gross income may be derived from the sale or other disposition of securities or
certain other instruments held for less than three months. Foreign exchange
gains are presently treated as qualifying income for purposes of this 90%
limitation. Foreign exchange gains derived by the Fund with respect to the
Fund's business of investing in stock or securities or options or futures with
respect to such stock or securities is qualifying income for purposes of this
90% limitation.
If the Fund owns shares in a foreign corporation that constitutes a "passive
foreign investment company" (a "PFIC") for federal income tax purposes and the
Fund does not elect to treat the foreign corporation as a "qualified electing
fund" within the meaning of the Code, the Fund may be subject to U.S. federal
income taxation on a portion of any "excess distribution" it receives from the
PFIC or any gain it derives from the disposition of such shares, even if such
income is distributed as a taxable dividend by the Fund to its U.S.
shareholders. The Fund may also be subject to additional interest charges with
respect to deferred taxes arising from such distributions or gains. Any tax paid
by the Fund as a result of its ownership of shares in a PFIC will not give rise
to a deduction or credit to the Fund or to any shareholder. A PFIC means any
foreign corporation if, for the taxable year involved, either (i) it derives at
least 75 percent of its gross income from "passive income" (including, but not
limited to, interest, dividends, royalties, rents and annuities), or (ii) on
average, at least 50 percent of the value (or adjusted basis, if elected) of the
assets held by the corporation produce "passive income."
On April 1, 1992, proposed U.S. Treasury regulations were issued regarding a
special mark-to-market election for regulated investment companies. Under these
regulations, the annual mark-to-market gain, if any, on shares held by the Fund
in a PFIC would be treated as an excess distribution received by the Fund in the
current year, eliminating the deferral and the related interest charge. These
excess distribution amounts are treated as ordinary income, which the Fund will
be required to distribute to shareholders even though the Fund has not received
any cash to satisfy this distribution requirement. These regulations would be
effective for taxable years ending after the promulgation of the proposed
regulations as final regulations.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, 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.
THE FUND'S 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 0.25%
per year of its average daily net assets, payable quarterly, for expenses
incurred in the promotion and distribution of its shares. In addition, the Fund
is permitted to pay Distributors up to an additional 0.10% per year of its
average daily net assets for reimbursement of distribution expenses.
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:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five- or ten-year periods at the end of the one-, five-
or ten-year periods (or fractional portion thereof)
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. The
Fund's cumulative total return for the period ended October 31, 1996, was
- -2.20%.
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 both the Franklin Group of Funds and Templeton Group
of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials 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 Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed on
the 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, Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
l) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
m) Standard & Poor's 100 Stock Index - an unmanaged index based on the prices of
100 blue-chip stocks, including 92 industrials, one utility, two transportation
companies, and 5 financial institutions. The S&P 100 Stock Index is a smaller
more flexible index for options trading.
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.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the Fund's performance to the
return on 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 2.5 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Together, the Franklin Templeton Group has over $152
billion in assets under management for more than 4.2 million U.S. based mutual
fund shareholder and other accounts. The Franklin Templeton Group of Funds
offers 121 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 eight years.
As of November 20, 1996, the principal shareholder of the Fund, beneficial or of
record, was as follows:
Share
Name and Address Amount Percentage
Franklin Resources, Inc.
Corporate Treasury
1850 Gateway Dr., 6th Floor
San Mateo, CA 94404.... 200,000 57.39%
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, prior to
executing instructions regarding the account; (b) interplead disputed funds or
accounts with a court of competent jurisdiction; or (c) surrender ownership of
all or a portion of the account to the IRS in response to a Notice of Levy.
Summary of Code of Ethics. Employees of Resources or its subsidiaries who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed within 24 hours after clearance; (ii) copies of all brokerage
confirmations must be sent to a compliance officer and, within 10 days after the
end of each calendar quarter, a report of all securities transactions must be
provided to the compliance officer; and (iii) access persons involved in
preparing and making investment decisions must, in addition to (i) and (ii)
above, file annual reports of their securities holdings each January and inform
the compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they are
recommending a security in which they have an ownership interest for purchase or
sale by a fund or other client.
USEFUL TERMS AND DEFINITIONS
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Trustees of the Trust
CD - Certificate of deposit
Class I and Class II - Certain funds in the Franklin Templeton Funds offer two
classes of shares, designated "Class I" and "Class II." The two classes have
proportionate interests in the same portfolio of investment securities. They
differ, however, primarily in their sales charge structures and Rule 12b-1
plans. Because the Fund's sales charge structure and Rule 12b-1 plan are similar
to those of Class I shares, shares of the Fund are considered Class I shares for
redemption, exchange and other purposes.
Code - Internal Revenue Code of 1986, as amended
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
Franklin Funds - The mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust
Franklin Templeton Funds - The Franklin Funds and the Templeton Funds
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
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
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 4.50% sales charge.
Prospectus - The prospectus for the Fund dated June 3, 1996, as amended January
1, 1997, and as may be further 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 which, 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.
Templeton Funds - The U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund
U.S. - United States
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 COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Fund, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FRANKLIN STRATEGIC SERIES
===============================================================================
Franklin Blue Chip Fund
Statement of Investments in Securities and Net Assets, October 31, 1996
(unaudited)
Value
Country*Shares (Note 1)
- --------------------------------------------------------------------------------
Common Stocks 77.3%
Automotive and Transportation 3.3%
JP 1,000 Bridgestone Corp............................... $ 16,875
US 800 aFritz Companies, Inc........................... 12,800
US 700 Mark IV Industries, Inc........................ 15,138
JP 2,000 Nippon Express Co., Ltd........................ 16,259
SD 2,000 Singapore Airlines, Ltd........................ 17,604
US 500 Tata Engineering and Locomotive Co., Ltd., GDR. 6,188
JP 1,000 Toyota Motor Corp.............................. 23,642
----------
108,506
----------
Banking 8.7%
US 100 Banco Frances del Rio de la Plata, SA, ADR..... 2,625
TB 1,600 Bangkok Bank Public Co., Ltd................... 17,070
CA 700 Bank of Montreal............................... 21,171
US 1,400 Bank of Tokyo-Mitsubishi, ADR.................. 28,875
US 300 Citicorp....................................... 29,700
JP 1,000 Dai-Ichi Kangyo Bank, Ltd...................... 16,259
DK 100 Den Danske Bank................................ 7,174
DD 700 Deutsche Bank, AG.............................. 32,533
BE 23 Generale De Banque, SA......................... 8,038
HK 1,000 Hang Seng Bank, Ltd............................ 11,866
GB 1,600 HSBC Holding, Plc.............................. 33,596
US 200 J.P. Morgan & Co., Inc......................... 17,275
MR 1,000 Malayan Banking Berhad......................... 9,895
PP 237 Metropolitan Bank & Trust Co................... 5,242
JP 1,000 Mitsui Trust & Banking......................... 9,668
US 300 National Australia Bank, Ltd., ADR............. 16,463
SA 400 Nedcor, Ltd.................................... 5,837
JP 1,000 Sanwa Bank..................................... 17,050
----------
290,337
----------
Chemicals 2.4%
DD 500 Bayer, AG....................................... 18,880
US 100 E.I. du Pont de Nemours and Co.................. 9,275
US 500 Monsanto Co..................................... 19,813
US 300 Praxair, Inc.................................... 13,275
JP 1,000 Shin-Etsu Chemical Co........................... 17,138
----------
78,381
----------
Computer Hardware 1.8%
US 100 aCompaq Computer Corp........................... $ 6,963
US 400 Hewlett-Packard Co............................. 17,650
US 350 Intel Corp..................................... 38,456
----------
63,069
----------
Computer Software 3.9%
US 200 a3Com Corp...................................... 13,525
US 200 aCisco Systems, Inc............................. 12,375
US 100 First Data Corp................................ 7,975
US 200 aMicrosoft Corp................................. 27,450
US 400 aNewbridge Networks Corp........................ 12,650
US 300 aOracle Systems Corp............................ 12,694
DD 200 SAP, AG........................................ 26,888
US 500 aXilinx, Inc.................................... 16,375
----------
129,932
----------
Consumer Products 5.1%
DD 300 Adidas, AG..................................... 25,269
US 200 Estee Lauder Companies, Class A................ 8,600
US 200 Gillette Co.................................... 14,950
JP 2,000 Kao Corp....................................... 23,554
FR 43 L'OREAL........................................ 14,866
US 500 Mattel, Inc.................................... 14,438
US 400 Procter & Gamble Co............................ 39,600
IR 1,000 PT Hanjaya Mandala Sampoerna................... 9,295
US 200 aTAG Heuer International, SA, ADR............... 3,200
US 100 Unilever, New York Shares...................... 15,288
----------
169,060
----------
Electronics 6.0%
US 100 AMP, Inc....................................... 3,388
BE 44 Barco Industries............................... 7,237
US 300 Canon, Inc., ADR............................... 28,913
US 100 Ericsson (L.M.) Telecommunications, ADR........ 2,763
US 350 General Electric Co............................ 33,863
US 100 Hitachi, Ltd., ADR............................. 8,938
US 100 Matsushita Electric Industrial Co., Ltd., ADR.. 16,163
US 100 Motorola, Inc.................................. 4,600
US 300 NEC Corp., ADR................................. 16,425
US 200 Oy Nokia Corp., ADR............................ 9,275
DD 400 Siemens, AG.................................... 20,694
Electronics (cont.)
JP 500 Sony Corp...................................... $ 30,014
JP 3,000 Toshiba Corp................................... 18,773
----------
201,046
----------
Financial Services 4.0%
US 250 American International Group, Inc.............. 27,156
IT 320 Assicurazioni Generali......................... 6,177
FR 161 AXA, SA........................................ 10,057
US 200 Charles Schwab Corp............................ 5,000
US 400 Federal National Mortgage Association.......... 15,650
US 100 General Re Corp................................ 14,725
AU 400 Lend Lease Corp., Ltd.......................... 6,780
SA 200 Liberty Life Association of Africa, Ltd........ 5,464
US 100 Merrill Lynch & Co., Inc....................... 7,025
JP 1,000 Nomura Securites Co., Ltd...................... 16,523
SF 8 Swiss Reinsurance Co., Zurich.................. 8,591
US 200 Tokio Marine & Fire Insurance Co., ADR......... 11,050
----------
134,198
----------
Food and Beverages 4.5%
US 600 The Coca-Cola Co............................... 30,300
US 100 CPC International, Inc......................... 7,888
US 100 Kirin Brewery Co., Ltd., ADR................... 10,450
FR 57 LVMH........................................... 13,058
SF 21 Nestle, SA..................................... 22,834
US 100 Panamerican Beverages, Inc., A Shares.......... 4,363
IT 3,800 Parmalat Finanziaria, S.p.A.................... 5,435
US 800 PepsiCo, Inc................................... 23,700
US 200 Phillip Morris Companies, Inc.................. 18,525
CA 200 Seagram Co., Ltd............................... 7,533
SA 200 South African Breweries, Ltd................... 5,198
----------
149,284
----------
Gaming and Leisure 1.2%
US 100 Disney (Walt) Co............................... 6,588
MR 1,000 Genting Berhad................................. 7,481
US 100 aHFS, Inc....................................... 7,325
US 100 Marriott International, Inc.................... 5,688
US 400 aSabre Group Holdings, Inc...................... 12,200
----------
39,282
----------
Health Care 1.3%
US 200 Baxter International, Inc...................... $ 8,325
US 200 aBoston Scientific Corp......................... 10,875
US 300 Columbia/HCA Healthcare Corp................... 10,725
US 200 HBO & Co....................................... 12,025
----------
41,950
----------
Media and Broadcasting 1.7%
US 600 News Corp. Ltd., ADR............................ 13,575
GB 1,500 Reuters Holdings, Plc........................... 18,666
NG 200 Wolters Kluwer.................................. 25,711
----------
57,952
----------
Metals, Mining, and Construction 4.2%
SK 100 ABB AB, B Shares............................... 11,155
GB 700 Antofagasta Holdings, Plc...................... 4,045
AS 110 Boehler-Uddeholm, AG........................... 8,232
US 800 Broken Hill Proprietary Co. Ltd., ADR.......... 21,500
US 500 Cemex, SA de CV, ADR, B Shares................. 3,593
US 400 Cia Vale Do Rio Doce, ADR...................... 8,293
US 200 DeBeers Consolidated Mines, Ltd., ADR.......... 5,900
JP 2,000 Komatsu, Ltd................................... 16,382
JP 2,000 Mitsubishi Heavy Industries, Ltd............... 15,381
JP 4,000 Nippon Steel Co................................ 11,672
US 200 Pohang Iron & Steel Co., Ltd., ADR............. 4,150
US 200 RTZ Corp., Plc................................. 12,950
SK 400 Sandvik AB, B Shares........................... 9,435
TB 200 Siam Cement Public Co., Ltd.................... 6,841
----------
139,529
----------
Miscellaneous 1.4%
HK 2,000 Hutchinson Whampoa, Ltd........................ 13,968
CA 200 Loewen Group, Inc.............................. 7,906
MR 3,000 Sime Darby Berhad.............................. 10,627
US 100 United Technologies Corp....................... 12,875
----------
45,376
----------
Oil and Gas 6.4%
US 100 British Petroleum Co., Plc., ADR............... 12,863
IT 1,000 ENI, S.p.A..................................... 4,785
US 300 Enron Corp..................................... 13,950
US 300 Exxon Corp..................................... 26,588
Oil and Gas (cont.)
US 300 Mobil Corp..................................... $ 35,025
US 500 Perez Co., SA, ADR............................. 6,351
CA 800 aRenaissance Energy, Ltd........................ 25,359
US 300 Repsol, SA..................................... 9,788
US 200 Royal Dutch Petroleum Co., New York Shares..... 33,075
US 600 Total, SA, ADR................................. 23,400
US 200 Williams Companies, Inc........................ 10,450
US 500 YPF Sociedad Anonima, ADR...................... 11,375
----------
213,009
----------
Pharmaceuticals 4.5%
US 200 aAmgen, Inc..................................... 12,263
SK 100 Astra AB, B Shares............................. 4,566
US 200 Eli Lilly & Co................................. 14,100
US 400 Johnson & Johnson.............................. 19,700
SF 6 Roche Holding.................................. 45,426
SF 20 Sandoz, AG..................................... 23,141
GB 2,400 Smithkline Beecham, Plc........................ 29,631
----------
148,827
----------
Real Estate 2.0%
PP 6,000 Ayala Land, Inc., B Shares..................... 6,393
HK 2,000 Cheung Kong Holdings, Ltd...................... 16,037
SD 1,000 City Developments, Ltd......................... 7,879
TB 500 Land and House Public Co., Ltd................. 4,158
JP 2,000 Sekisui House, Ltd............................. 21,093
HK 1,000 Sun Hung Kai Properties, Ltd................... 11,381
----------
66,941
----------
Restaurants and Food Service 1.0%
US 300 McDonald's Corp................................. 13,313
FR 33 Sodexho, SA..................................... 15,952
US 100 Starbucks Corp.................................. 3,250
----------
32,515
----------
Retail 3.4%
FR 31 Carrefour Supermarche.......................... 17,205
US 400 Home Depot, Inc................................ 21,900
US 100 Ito-Yokado Co., Ltd., ADR...................... 20,000
GB 2,800 Marks & Spencer, Plc........................... 23,494
US 100 May Department Stores Co....................... 4,738
Retail (cont.)
IT 1,000 La Rinacente, S.p.A............................ $ 5,923
US 700 Wal-Mart Stores, Inc........................... 18,638
----------
111,898
----------
Telecommunications 7.3%
US 500 aAirtouch Communications, Inc.................. 13,063
US 500 AT & T Corp................................... 17,438
US 500 BellSouth Corp................................ 20,375
US 200 British Telecommunications, Plc., ADR......... 11,525
US 600 Hong Kong Telecommunications, Ltd., ADR....... 10,575
IT 1,200 Italmobiliare................................. 14,482
US 300 aKorea Mobile Telecommunications, ADR.......... 3,750
US 162 Lucent Technologies, Inc...................... 7,616
US 700 Nippon Telegraph & Telephone, ADR............. 25,375
US 40 Philippine Long Distance Telephone Co., ADR... 2,395
IR 6,000 PT Telekomunikasi Indonesia................... 8,951
SD 4,000 Singapore Telecommunications, Ltd............. 9,313
US 700 aTele-Communications, Inc...................... 18,025
US 300 Tele Danmark, A/S, ADR........................ 7,500
US 200 Telecom Argentina, SA, ADR.................... 7,550
NZ 1,800 Telecom Corp. of New Zealand, Ltd............. 9,360
US 100 Telecomunicacoes Brasileiras, SA, ADR......... 7,450
US 200 Telefonica de Espana, ADR..................... 12,050
US 400 Telefonos de Mexico, SA, ADR.................. 12,200
MR 2,000 Telekom Malaysia Berhad....................... 17,653
US 1,000 Total Access Communication Public Co., Ltd.... 6,900
----------
243,546
----------
Utilities 3.2%
US 300 CEMIG, ADR.................................... 9,548
US 200 Duke Power Co................................. 9,775
US 600 Endesa, ADR................................... 11,025
US 300 Enersis, SA, ADR.............................. 8,813
US 300 Korea Electric Power Corp., ADR............... 5,400
JP 4,000 Osaka Gas Co.................................. 12,375
US 600 Southern Co................................... 13,275
DD 700 VEBA, AG...................................... 37,379
----------
107,590
----------
Total Common Stocks (Cost $2,511,535).......... 2,572,228
----------
Preferred Stocks 0.1%
BR 10,000 Banco Itau, SA (Cost $4,126).................. $ 4,331
Total Long Term Investments (Cost $2,515,661) 2,576,559
----------
Face
Amount
------------
dReceivable from Repurchase Agreements 22.9%
US 760,079 Joint Repurchase Agreement, 5.529%, 11/01/96
(Maturity Value $764,183)(Cost $764,066)
B.A. Securities, Inc., (Maturity Value $90,491)
Collateral: U.S. Treasury Bills, 03/06/97
U.S. Treasury Notes, 5.25% - 8.75%, 12/31/96 - 05/31/98
Bear, Stearns & Co., Inc., (Maturity Value $90,491)
Collateral: U.S. Treasury Notes, 5.625% - 8.875%,
10/31/97 - 08/15/98
B.T. Securities Corp., (Maturity Value $67,869)
Collateral: U.S. Treasury Notes, 5.875% , 10/31/98
CIBC Wood Gundy Securities Corp., (Maturity Value $67,869)
Collateral: U.S. Treasury Notes, 4.75% - 5.625%,
10/31/97 - 09/30/98
Donaldson, Lufkin & Jenrette Securities Corp.,
(Maturity Value $90,491)
Collateral: U.S. Treasury Notes, 4.75% - 6.875%,
07/31/97 - 07/31/99
Fuji Securities, Inc., (Maturity Value $79,180)
Collateral: U.S. Treasury Bills, 02/06/97
U.S. Treasury Notes, 5.625% - 6.875%, 02/28/97 -
08/31/97
Lehman Brothers, Inc., (Maturity Value $90,491)
Collateral: U.S. Treasury Notes, 5.625% - 8.00%,
11/30/00 - 06/30/01
SBC Warburg, Inc., (Maturity Value $6,319)
Collateral: U.S. Treasury Notes, 5.625% - 5.875%,
10/31/97 - 04/30/98
The Nikko Securities Co. International, Inc.,
(Maturity Value $90,491)
Collateral: U.S. Treasury Notes, 4.75% - 8.75%,
08/31/98 - 04/30/01
UBS Securities L.L.C., (Maturity Value $90,491)
Collateral: U.S. Treasury Notes, 5.875% - 7.75%,
04/30/98 - 09/30/00 .............................. 764,066
----------
Total Investments (Cost $3,279,727)100.3%........... 3,340,625
Liabilities in Excess of Other Assets(0.3)%......... (9,101)
----------
Net Assets100.0%....................................$3,331,524
==========
At October 31, 1996, the net unrealized appreciation
based on the cost of investments for income tax
purposes of $3,279,727 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there was an excess of
value over tax cost.............................. $ 160,830
Aggregate gross unrealized depreciation for all
investments in which there was an excess of
tax cost over value................................ (99,932)
----------
Net unrealized appreciation......................... $ 60,898
==========
PORTFOLIO ABBREVIATIONS:
L.L.C. - Limited Liability Corp.
COUNTRY LEGEND:
AU - Australia
AS - Austria
BE - Belgium
BR - Brazil
CA - Canada
DD - Germany
DK - Denmark
FR - France
GB - United Kingdom
HK - Hong Kong
IR - Indonesia
IT - Italy
JP - Japan
MR - Malaysia
NG - Netherlands
NZ - New Zealand
PP - Philippines
SA - South Africa
SD - Singapore
SF - Switzerland
SK - Sweden
TB - Thailand
US - United States
*Securities traded in currency of country indicated and valued in U.S. dollars
aNon-income producing.
dFace amount for repurchase agreements is for the underlying collateral. See
Note
1(h) regarding joint repurchase agreement.
The accompanying notes are an integral part of these financial statements.
FRANKLIN STRATEGIC SERIES
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Franklin Blue Chip Fund
Financial Statements
Statement of Assets and Liabilities October 31, 1996 (unaudited) Assets:
Investments in securities:
At identified cost..................................................$2,515,661
=========
At value............................................................2,576,559
Receivables from repurchase agreements, at value and cost.......... 764,066
Foreign currencies (Cost $5,515)................................... 5,536
Receivables:
Dividends and interest.............................................. 2,687
Capital shares sold................................................. 7,973
Other assets....................................................... 11,654
--------
Total assets........................................................3,368,475
--------
Liabilities:
Payables:
Investment securities purchased..................................... 34,608
Management fees..................................................... 1,534
Distribution fees................................................... 510
Shareholder servicing costs......................................... 299
--------
Total liabilities................................................... 36,951
--------
Net assets, at value................................................$3,331,524
========
Net assets consist of:
Undistributed net investment income................................ $ 12,997
Unrealized appreciation on investments and translation of assets and
liabilities denominated in foreign currencies..................... 60,891
Undistributed net realized gain from investments and foreign currency
transactions...................................................... 1,403
Capital shares.....................................................3,256,233
--------
Net assets, at value................................................$3,331,524
========
Shares outstanding................................................. 325,226
========
Net asset value per share*......................................... $10.24
========
*Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
FRANKLIN STRATEGIC SERIES
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Franklin Blue Chip Fund
Financial Statements (cont.)
Statement of Operations
for the five months ended October 31, 1996 (unaudited)
Investment income:
Dividends...........................................................$ 8,845
Interest............................................................ 18,026
-------
Total Income......................................................... 26,871
-------
Expenses:
Management fees (Note 4)............................................ 8,255
Distribution fees (Note 4).......................................... 1,610
Shareholder servicing costs (Note 4)................................ 698
Reports to shareholders............................................. 3,301
Registration and filing fees........................................ 2,952
Custodian fees...................................................... 2,600
Trustees' fees and expenses......................................... 369
Professional fees................................................... 305
Management fees waived by manager (Note 4).......................... (6,216)
-------
Total expenses....................................................... 13,874
-------
Net investment income ............................................. 12,997
-------
Realized and unrealized gain (loss) from investments and foreign currency:
Net realized gain (loss) from:
Investments........................................................ (459)
Foreign currency transactions...................................... 1,862
Net unrealized appreciation on investments.......................... 60,891
-------
Net realized and unrealized gain from investments and foreign
currencies.......................................................... 62,294
-------
Net increase in net assets resulting from operations ................$75,291
=======
The accompanying notes are an integral part of these financial statements.
FRANKLIN STRATEGIC SERIES
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Franklin Blue Chip Fund
Financial Statements (cont.)
Statement of Changes in Net Assets
for the five months ended October 31, 1996 (unaudited)
Increase in net assets:
Operations:
Net investment income ........................................... $ 12,997
Net realized gain from investments and foreign currency transactions 1,403
Net unrealized appreciation on investments and translation of assets and
liabilities
denominated in foreign currencies................................ 60,891
----------
Net increase in net assets resulting from operations.............. 75,291
Increase in net assets from capital share transactions (Note 2)... 3,256,233
----------
Net increase in net assets........................................ 3,331,524
Net assets:
Beginning of period.............................................. --
----------
End of period.................................................... $3,331,524
==========
Undistributed net investment income included in net assets:
Beginning of period.............................................. $--
==========
End of period.................................................... $ 12,997
==========
The accompanying notes are an integral part of these financial statements.
FRANKLIN STRATEGIC SERIES
================================================================================
Franklin Blue Chip Fund
Notes to Financial Statements (unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Franklin Strategic Series (the Trust) is an open-end, management investment
company (mutual fund), registered under the Investment Company Act of 1940, as
amended. The Trust currently consists of nine separate series (the Funds). Each
of the Funds issues a separate series of shares and maintains a totally separate
investment portfolio. This report pertains to the diversified Blue Chip Fund
(the Fund) exclusively. The investment objective of the Fund is Capital Growth.
The Fund became effective on June 1, 1996.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
a. Security Valuation:
Portfolio securities listed on a securities exchange or on the NASDAQ for which
market quotations are readily available are valued at the last sale price or, if
there is no sale price, within the range of the most recent quoted bid and asked
prices. Other securities are valued based on a variety of factors, including
yield, risk, maturity, trade activity and recent developments related to the
securities. Portfolio securities which are traded both in the over the counter
market and on a securities exchange are valued according to the broadest and
most representative market as determined by the manager. The Trust may utilize a
pricing service, bank or broker/dealer experienced in such matters to perform
any of the pricing functions, under procedures approved by the Board. Securities
for which market quotations are not available, are valued in accordance with
procedures established by the Board.
The value of a foreign security is determined as of the earlier of the close of
trading on the foreign exchange on which it is traded or the close of trading on
the New York Stock Exchange. That value is then converted into its U.S. dollar
equivalent at the foreign exchange rate in effect at noon, New York time, on the
day the value of the foreign security is determined. If no sale is reported at
that time, the mean between the current bid and asked prices is used.
Occasionally, events which affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and the
close of the exchange and will, therefore, not be reflected in the computation
of the Fund's net asset value, unless material. If events which materially
affect the value of these foreign securities occur during such period, these
securities will be valued in accordance with procedures established by the
Board.
b. Income Taxes:
The Fund intends to continue to qualify for the tax treatment applicable to
regulated investment companies under the Internal Revenue Code and to make the
requisite distributions to shareholders which will be sufficient to relieve the
Fund from income and excise taxes.
c. Security Transactions:
Security transactions are accounted for on the date the securities are purchased
or sold (trade date). Realized gains and losses on security transactions are
determined on the basis of specific identification.
d. Investment Income, Expenses and Distributions:
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income and estimated expenses are accrued daily.
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions.
Net realized capital gains and losses differ for financial statement and tax
purposes due to differing treatments of foreign currency transactions.
e. Accounting Estimates:
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the amounts of income and expenses during
the reporting period.
Actual results could differ from those estimates.
1. SIGNIFICANT ACCOUNTING POLICIES (cont.)
f. Expense Allocation:
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each fund to the combined net assets. In all other
respects, expenses are charged to each fund as incurred on a specific
identification basis.
g. Foreign Currency Translation:
The accounting records of the Fund are maintained in U.S. dollars. All assets
and liabilities denominated in foreign currencies are translated into U.S.
dollars at the rate of exchange of the currencies against U.S. dollars on the
valuation date. Purchases and sales of securities, income and expenses are
translated at the rate of exchange quoted on the day that the transactions are
recorded. Differences between income and expense amounts recorded and collected
or paid are recognized when reported by the custodian.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from fluctuations arising
from changes in market prices of securities held. Such fluctuations are included
with the net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales and maturities of
short-term securities, sales of foreign currencies, gains or losses realized
between the trade and settlement dates on security transactions, the difference
between the amounts of dividends, interest, and foreign withholding taxes
recorded on the Funds' books and the U.S. dollar equivalent of the amounts
actually received or paid. Net unrealized appreciation or depreciation on
translation of assets and liabilities denominated in foreign currencies arises
from changes in the value of assets and liabilities other than investments in
securities at the end of the reporting period, resulting from changes in
exchange rates.
h. Repurchase Agreements:
The Fund may enter into a joint repurchase agreement whereby its uninvested cash
balance is deposited into a joint cash account to be used to invest in one or
more repurchase agreements with government securities dealers recognized by the
Federal Reserve Board and/or member banks of the Federal Reserve System. The
value and face amount of the joint repurchase agreement are allocated to the
Fund based on its pro-rata interest. A repurchase agreement is accounted for as
a loan by the Fund to the seller, collateralized by underlying U.S. government
securities, which are delivered to the Fund's custodian. The market value,
including accrued interest, of the initial collateralization is required to be
at least 102% of the dollar amount invested by the Fund, with the value of the
underlying securities marked to market daily to maintain coverage of at least
100%. At October 31, 1996, all outstanding repurchase agreements held by the
Fund had been entered into on that date.
2. TRUST SHARES
At October 31, 1996, there was an unlimited number of $.01 par value shares of
beneficial interest authorized. Transactions in the Fund's shares for the five
months ended October 31, 1996 were as follows:
Shares Amount
------ ---------
Shares:
Five months ended October 31,1996
Shares sold ..........346,522$ 3,470,480
Shares issued in reinvestment
of distributions ..... -- --
Shares redeemed ......(21,296)(214,247)
------ ---------
Net increase ..........325,226$ 3,256,233
====== =========
3. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding purchases and sales of short-term
securities) for the five months ended October 31, 1996, aggregated $2,530,672
and $14,553, respectively.
4. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
a. Management Agreement:
Under the terms of a separate management agreement, Franklin Advisers, Inc.
(Advisers), provides investment advice, administrative services, office space
and facilities to the Fund, and receives fees computed monthly based on the
average daily net assets as follows:
Annualized Fee Rate Average Daily Net Assets
-------------- -----------------------------
0.750% First $500 million
0.625% Over $500 million, up to and including $1 billion
0.500% Over $1 billion
The terms of the management agreement provide that aggregate annual expenses of
the Fund be limited to the extent necessary to comply with the limitations set
forth in the laws, regulations, and administrative interpretations of the states
in which the Fund's shares are registered. For the five months ended October 31,
1996, the Fund expenses did not exceed these limitations. However, Advisers
agreed in advance to waive management fees as noted in the Statement of
Operations.
b. Shareholder Services Agreement:
Under the terms of a shareholder services agreement with Franklin/Templeton
Investor Services, Inc. (Investor Services), the Fund pays costs on a per
shareholder account basis. Shareholder servicing costs incurred by the Fund for
the five months ended October 31, 1996, aggregated $698, all of which was paid
to Investor Services.
c. Distribution Plans and Underwriting Agreement:
Under the terms of a distribution plan pursuant to Rule 12b-1 of the Investment
Company Act of 1940 (the Plan), the Fund reimburses Distributors up to 0.35% per
annum of the Fund's average daily net assets, for costs incurred in the
promotion, offering and marketing of the Fund's shares. The Plan does not permit
nor require payments of excess costs after termination. Fees incurred by the
Fund under the Plan were $1,610 for the five months ended October 31, 1996.
In its capacity as underwriter for the shares of the Fund, Distributors receives
commissions on sales of the Fund's shares of beneficial interest. Commissions
are deducted from the gross proceeds received from the sale of the shares of the
Fund, and as such are not expenses of the Fund. Distributors may also make
payments, out of its own resources, to the dealers for certain sales of the Fund
shares. Commissions received by Distributors and the amounts paid to other
dealers, for the five months ended October 31, 1996 amounted to $28,451 and
$25,263, respectively.
d. Other Affiliated Parties and Transactions:
Certain officers and trustees of the Fund are also officers and/or directors of
Distributors, Advisers and Investors Services, all wholly-owned subsidiaries of
Franklin Resources, Inc. (Resources).
At October 31, 1996, Resources owned 61% of the Fund.
5. FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout the
period are set forth in the Prospectus under the caption "Financial Highlights."
