As filed with the Securities and Exchange Commission on August 29, 1997.
File Nos.
33-39088
811-6243
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 26 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 29 (X)
FRANKLIN STRATEGIC SERIES
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BOULEVARD, SAN MATEO, CA 94404 (Address of
Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (650) 312-2000
HARMON E. BURNS, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404 (Name and
Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[x] on September 1, 1997 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
DECLARATION PURSUANT TO RULE 24F-2. The issuer has registered an indefinite
number or amount of securities under the Securities Act of 1933 pursuant to
Section 24f-2 under the Investment Company Act of 1940. The Rule 24f-2 Notice
for the issuer's most recent fiscal year was filed on June 26, 1997.
FRANKLIN STRATEGIC SERIES
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN PROSPECTUS
Franklin California Growth Fund
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial Information "Financial Highlights"; "How does
the Fund Measure Performance?"
4. General Description of the "How is the Trust Organized?";
Registrant "How does the Fund Invest its
Assets?" "What are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "How is the Trust Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions
Might I Receive from the Fund?";
"How Taxation Affects the Fund
and its Shareholders"; "What If I
Have Questions About My Account?"
7. Purchase of Securities Being "How Do I Buy Shares?"; "May I
Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Who
Manages the Fund?"; "Useful Terms
and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage Your
Account"; "What If I Have
Questions About My Account?"
9. Legal Proceedings Not Applicable
FRANKLIN STRATEGIC SERIES
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN PROSPECTUS
Franklin Strategic Income Fund
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial Information "Financial Highlights"; "How does
the Fund Measure Performance?"
4. General Description of the "How is the Trust Organized?";
Registrant "How does the Fund Invest its
Assets?" "What are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "How is the Trust Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions
Might I Receive from the Fund?";
"How Taxation Affects the Fund
and its Shareholders"; "What If I
Have Questions About My Account?"
7. Purchase of Securities Being "How Do I Buy Shares?"; "May I
Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Who
Manages the Fund?"; "Useful Terms
and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage Your
Account"; "What If I Have
Questions About My Account?"
9. Legal Proceedings Not Applicable
FRANKLIN STRATEGIC SERIES
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN PROSPECTUS
Franklin MidCap Growth Fund
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial Information "Financial Highlights"; "How does
the Fund Measure Performance?"
4. General Description of the "How is the Trust Organized?";
Registrant "How does the Fund Invest its
Assets?" "What are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "How is the Trust Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions
Might I Receive from the Fund?";
"How Taxation Affects the Fund
and its Shareholders"; "What If I
Have Questions About My Account?"
7. Purchase of Securities Being "How Do I Buy Shares?"; "May I
Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Who
Manages the Fund?"; "Useful Terms
and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage Your
Account"; "What If I Have
Questions About My Account?"
9. Legal Proceedings Not Applicable
FRANKLIN STRATEGIC SERIES
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN PROSPECTUS
Franklin Global Utilities Fund
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial Information "Financial Highlights"; "How does
the Fund Measure Performance?"
4. General Description of the "How is the Trust Organized?";
Registrant "How does the Fund Invest its
Assets?" "What are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "How is the Trust Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions
Might I Receive from the Fund?";
"How Taxation Affects the Fund
and its Shareholders"; "What If I
Have Questions About My Account?"
7. Purchase of Securities Being "How Do I Buy Shares?"; "May I
Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Who
Manages the Fund?"; "Useful Terms
and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage Your
Account"; "What If I Have
Questions About My Account?"
9. Legal Proceedings Not Applicable
FRANKLIN STRATEGIC SERIES
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN PROSPECTUS
Franklin Small Cap Growth Fund
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial Information "Financial Highlights"; "How does
the Fund Measure Performance?"
4. General Description of the "How is the Trust Organized?";
Registrant "How does the Fund Invest its
Assets?" "What are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "How is the Trust Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions
Might I Receive from the Fund?";
"How Taxation Affects the Fund
and its Shareholders"; "What If I
Have Questions About My Account?"
7. Purchase of Securities Being "How Do I Buy Shares?"; "May I
Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Who
Manages the Fund?"; "Useful Terms
and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage Your
Account"; "What If I Have
Questions About My Account?"
9. Legal Proceedings Not Applicable
FRANKLIN STRATEGIC SERIES
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN PROSPECTUS
Franklin Small Cap Growth Fund - Advisor Class
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial Information "Financial Highlights"; "How does
the Fund Measure Performance?"
4. General Description of the "How is the Trust Organized?";
Registrant "How does the Fund Invest its
Assets?" "What are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "How is the Trust Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions
Might I Receive from the Fund?";
"How Taxation Affects the Fund
and its Shareholders"; "What If I
Have Questions About My Account?"
7. Purchase of Securities Being "How Do I Buy Shares?"; "May I
Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Who
Manages the Fund?"; "Useful Terms
and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage Your
Account"; "What If I Have
Questions About My Account?"
9. Legal Proceedings Not Applicable
FRANKLIN STRATEGIC SERIES
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN PROSPECTUS
Franklin Global Health Care Fund
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial Information "Financial Highlights"; "How does
the Fund Measure Performance?"
4. General Description of the "How is the Trust Organized?";
Registrant "How does the Fund Invest its
Assets?" "What are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "How is the Trust Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions
Might I Receive from the Fund?";
"How Taxation Affects the Fund
and its Shareholders"; "What If I
Have Questions About My Account?"
7. Purchase of Securities Being "How Do I Buy Shares?"; "May I
Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Who
Manages the Fund?"; "Useful Terms
and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage Your
Account"; "What If I Have
Questions About My Account?"
9. Legal Proceedings Not Applicable
FRANKLIN STRATEGIC SERIES
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN PROSPECTUS
Franklin Natural Resources Fund
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial Information "Financial Highlights"; "How does
the Fund Measure Performance?"
4. General Description of the "How is the Trust Organized?";
Registrant "How does the Fund Invest its
Assets?" "What are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "How is the Trust Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions
Might I Receive from the Fund?";
"How Taxation Affects the Fund
and its Shareholders"; "What If I
Have Questions About My Account?"
7. Purchase of Securities Being "How Do I Buy Shares?"; "May I
Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Who
Manages the Fund?"; "Useful Terms
and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage Your
Account"; "What If I Have
Questions About My Account?"
9. Legal Proceedings Not Applicable
FRANKLIN STRATEGIC SERIES
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN PROSPECTUS
Franklin Natural Resources Fund - Advisor Class
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial Information "Financial Highlights"; "How does
the Fund Measure Performance?"
4. General Description of the "How is the Trust Organized?";
Registrant "How does the Fund Invest its
Assets?" "What are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "How is the Trust Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions
Might I Receive from the Fund?";
"How Taxation Affects the Fund
and its Shareholders"; "What If I
Have Questions About My Account?"
7. Purchase of Securities Being "How Do I Buy Shares?"; "May I
Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Who
Manages the Fund?"; "Useful Terms
and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage Your
Account"; "What If I Have
Questions About My Account?"
9. Legal Proceedings Not Applicable
FRANKLIN STRATEGIC SERIES
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN PROSPECTUS
Franklin Blue Chip Fund
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial Information "Financial Highlights"; "How does
the Fund Measure Performance?"
4. General Description of the "How is the Trust Organized?";
Registrant "How does the Fund Invest its
Assets?" "What are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "How is the Trust Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions
Might I Receive from the Fund?";
"How Taxation Affects the Fund
and its Shareholders"; "What If I
Have Questions About My Account?"
7. Purchase of Securities Being "How Do I Buy Shares?"; "May I
Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Who
Manages the Fund?"; "Useful Terms
and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage Your
Account"; "What If I Have
Questions About My Account?"
9. Legal Proceedings Not Applicable
FRANKLIN STRATEGIC SERIES
CROSS REFERENCE SHEET
FORM N-1A
PART B: INFORMATION REQUIRED IN
STATEMENT OF ADDITIONAL INFORMATION
Franklin California Growth Fund
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and History See Prospectus "How is the Trust
Organized?"
13. Investment Objectives and "How does the Fund Invest its
Policies Assets?"; "Investment
Restrictions"
14. Management of the Trust "Officers and Trustees";
"Investment Management and Other
Services"
15. Control Persons and Principal "Officers and Trustees";
Holders of Securities "Investment Management and Other
Services"; "Miscellaneous
Information"
16. Investment Advisory and Other "Investment Management and Other
Services Services"; "The Fund's
Underwriter"
17. Brokerage Allocation "How does the Fund Buy
Securities for its Portfolio?"
18. Capital Stock and Other How Do I Buy, Sell and Exchange
Securities Shares?"; "How are Fund Shares
Valued?"; Miscellaneous
Information"
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Being Shares?"; "How are Fund Shares
Offered Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance Data "How does the Fund Measure
Performance?"
23. Financial Statements "Financial Statements"
FRANKLIN STRATEGIC SERIES
CROSS REFERENCE SHEET
FORM N-1A
PART B: INFORMATION REQUIRED IN
STATEMENT OF ADDITIONAL INFORMATION
Franklin Strategic Income Fund
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and History See Prospectus "How is the Trust
Organized?"
13. Investment Objectives and "How does the Fund Invest its
Policies Assets?"; "Investment
Restrictions"
14. Management of the Trust "Officers and Trustees";
"Investment Management and Other
Services"
15. Control Persons and Principal "Officers and Trustees";
Holders of Securities "Investment Management and Other
Services"; "Miscellaneous
Information"
16. Investment Advisory and Other "Investment Management and Other
Services Services"; "The Fund's
Underwriter"
17. Brokerage Allocation "How does the Fund Buy
Securities for its Portfolio?"
18. Capital Stock and Other How Do I Buy, Sell and Exchange
Securities Shares?"; "How are Fund Shares
Valued?"; Miscellaneous
Information"
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Being Shares?"; "How are Fund Shares
Offered Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance Data "How does the Fund Measure
Performance?"
23. Financial Statements "Financial Statements"
FRANKLIN STRATEGIC SERIES
CROSS REFERENCE SHEET
FORM N-1A
PART B: INFORMATION REQUIRED IN
STATEMENT OF ADDITIONAL INFORMATION
Franklin MidCap Growth Fund
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and History See Prospectus "How is the Trust
Organized?"
13. Investment Objectives and "How does the Fund Invest its
Policies Assets?"; "Investment
Restrictions"
14. Management of the Trust "Officers and Trustees";
"Investment Management and Other
Services"
15. Control Persons and Principal "Officers and Trustees";
Holders of Securities "Investment Management and Other
Services"; "Miscellaneous
Information"
16. Investment Advisory and Other "Investment Management and Other
Services Services"; "The Fund's
Underwriter"
17. Brokerage Allocation "How does the Fund Buy
Securities for its Portfolio?"
18. Capital Stock and Other How Do I Buy, Sell and Exchange
Securities Shares?"; "How are Fund Shares
Valued?"; Miscellaneous
Information"
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Being Shares?"; "How are Fund Shares
Offered Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance Data "How does the Fund Measure
Performance?"
23. Financial Statements "Financial Statements"
FRANKLIN STRATEGIC SERIES
CROSS REFERENCE SHEET
FORM N-1A
PART B: INFORMATION REQUIRED IN
STATEMENT OF ADDITIONAL INFORMATION
Franklin Global Utilities Fund
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and History See Prospectus "How is the Trust
Organized?"
13. Investment Objectives and "How does the Fund Invest its
Policies Assets?"; "Investment
Restrictions"
14. Management of the Trust "Officers and Trustees";
"Investment Management and Other
Services"
15. Control Persons and Principal "Officers and Trustees";
Holders of Securities "Investment Management and Other
Services"; "Miscellaneous
Information"
16. Investment Advisory and Other "Investment Management and Other
Services Services"; "The Fund's
Underwriter"
17. Brokerage Allocation "How does the Fund Buy
Securities for its Portfolio?"
18. Capital Stock and Other How Do I Buy, Sell and Exchange
Securities Shares?"; "How are Fund Shares
Valued?"; Miscellaneous
Information"
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Being Shares?"; "How are Fund Shares
Offered Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance Data "How does the Fund Measure
Performance?"
23. Financial Statements "Financial Statements"
FRANKLIN STRATEGIC SERIES
CROSS REFERENCE SHEET
FORM N-1A
PART B: INFORMATION REQUIRED IN
STATEMENT OF ADDITIONAL INFORMATION
Franklin Small Cap Growth Fund
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and History See Prospectus "How is the Trust
Organized?"
13. Investment Objectives and "How does the Fund Invest its
Policies Assets?"; "Investment
Restrictions"
14. Management of the Trust "Officers and Trustees";
"Investment Management and Other
Services"
15. Control Persons and Principal "Officers and Trustees";
Holders of Securities "Investment Management and Other
Services"; "Miscellaneous
Information"
16. Investment Advisory and Other "Investment Management and Other
Services Services"; "The Fund's
Underwriter"
17. Brokerage Allocation "How does the Fund Buy
Securities for its Portfolio?"
18. Capital Stock and Other How Do I Buy, Sell and Exchange
Securities Shares?"; "How are Fund Shares
Valued?"; Miscellaneous
Information"
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Being Shares?"; "How are Fund Shares
Offered Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance Data "How does the Fund Measure
Performance?"
23. Financial Statements "Financial Statements"
FRANKLIN STRATEGIC SERIES
CROSS REFERENCE SHEET
FORM N-1A
PART B: INFORMATION REQUIRED IN
STATEMENT OF ADDITIONAL INFORMATION
Franklin Small Cap Growth Fund - Advisor Class
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and History See Prospectus "How is the Trust
Organized?"
13. Investment Objectives and "How does the Fund Invest its
Policies Assets?"; "Investment
Restrictions"
14. Management of the Trust "Officers and Trustees";
"Investment Management and Other
Services"
15. Control Persons and Principal "Officers and Trustees";
Holders of Securities "Investment Management and Other
Services"; "Miscellaneous
Information"
16. Investment Advisory and Other "Investment Management and Other
Services Services"; "The Fund's
Underwriter"
17. Brokerage Allocation "How does the Fund Buy
Securities for its Portfolio?"
18. Capital Stock and Other How Do I Buy, Sell and Exchange
Securities Shares?"; "How are Fund Shares
Valued?"; Miscellaneous
Information"
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Being Shares?"; "How are Fund Shares
Offered Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance Data "How does the Fund Measure
Performance?"
23. Financial Statements "Financial Statements"
FRANKLIN STRATEGIC SERIES
CROSS REFERENCE SHEET
FORM N-1A
PART B: INFORMATION REQUIRED IN
STATEMENT OF ADDITIONAL INFORMATION
Franklin Global Heath Care Fund
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and History See Prospectus "How is the Trust
Organized?"
13. Investment Objectives and "How does the Fund Invest its
Policies Assets?"; "Investment
Restrictions"
14. Management of the Trust "Officers and Trustees";
"Investment Management and Other
Services"
15. Control Persons and Principal "Officers and Trustees";
Holders of Securities "Investment Management and Other
Services"; "Miscellaneous
Information"
16. Investment Advisory and Other "Investment Management and Other
Services Services"; "The Fund's
Underwriter"
17. Brokerage Allocation "How does the Fund Buy
Securities for its Portfolio?"
18. Capital Stock and Other How Do I Buy, Sell and Exchange
Securities Shares?"; "How are Fund Shares
Valued?"; Miscellaneous
Information"
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Being Shares?"; "How are Fund Shares
Offered Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance Data "How does the Fund Measure
Performance?"
23. Financial Statements "Financial Statements"
FRANKLIN STRATEGIC SERIES
CROSS REFERENCE SHEET
FORM N-1A
PART B: INFORMATION REQUIRED IN
STATEMENT OF ADDITIONAL INFORMATION
Franklin Natural Resources Fund
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and History See Prospectus "How is the Trust
Organized?"
13. Investment Objectives and "How does the Fund Invest its
Policies Assets?"; "Investment
Restrictions"
14. Management of the Trust "Officers and Trustees";
"Investment Management and Other
Services"
15. Control Persons and Principal "Officers and Trustees";
Holders of Securities "Investment Management and Other
Services"; "Miscellaneous
Information"
16. Investment Advisory and Other "Investment Management and Other
Services Services"; "The Fund's
Underwriter"
17. Brokerage Allocation "How does the Fund Buy
Securities for its Portfolio?"
18. Capital Stock and Other How Do I Buy, Sell and Exchange
Securities Shares?"; "How are Fund Shares
Valued?"; Miscellaneous
Information"
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Being Shares?"; "How are Fund Shares
Offered Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance Data "How does the Fund Measure
Performance?"
23. Financial Statements "Financial Statements"
FRANKLIN STRATEGIC SERIES
CROSS REFERENCE SHEET
FORM N-1A
PART B: INFORMATION REQUIRED IN
STATEMENT OF ADDITIONAL INFORMATION
Franklin Natural Resources Fund - Advisor Class
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and History See Prospectus "How is the Trust
Organized?"
13. Investment Objectives and "How does the Fund Invest its
Policies Assets?"; "Investment
Restrictions"
14. Management of the Trust "Officers and Trustees";
"Investment Management and Other
Services"
15. Control Persons and Principal "Officers and Trustees";
Holders of Securities "Investment Management and Other
Services"; "Miscellaneous
Information"
16. Investment Advisory and Other "Investment Management and Other
Services Services"; "The Fund's
Underwriter"
17. Brokerage Allocation "How does the Fund Buy
Securities for its Portfolio?"
18. Capital Stock and Other How Do I Buy, Sell and Exchange
Securities Shares?"; "How are Fund Shares
Valued?"; Miscellaneous
Information"
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Being Shares?"; "How are Fund Shares
Offered Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance Data "How does the Fund Measure
Performance?"
23. Financial Statements "Financial Statements"
FRANKLIN STRATEGIC SERIES
CROSS REFERENCE SHEET
FORM N-1A
PART B: INFORMATION REQUIRED IN
STATEMENT OF ADDITIONAL INFORMATION
Franklin Blue Chip Fund
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and History See Prospectus "How is the Trust
Organized?"
13. Investment Objectives and "How does the Fund Invest its
Policies Assets?"; "Investment
Restrictions"
14. Management of the Trust "Officers and Trustees";
"Investment Management and Other
Services"
15. Control Persons and Principal "Officers and Trustees";
Holders of Securities "Investment Management and Other
Services"; "Miscellaneous
Information"
16. Investment Advisory and Other "Investment Management and Other
Services Services"; "The Fund's
Underwriter"
17. Brokerage Allocation "How does the Fund Buy
Securities for its Portfolio?"
18. Capital Stock and Other How Do I Buy, Sell and Exchange
Securities Shares?"; "How are Fund Shares
Valued?"; Miscellaneous
Information"
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Being Shares?"; "How are Fund Shares
Offered Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance Data "How does the Fund Measure
Performance?"
23. Financial Statements "Financial Statements"
PROSPECTUS & APPLICATION
FRANKLIN CALIFORNIA GROWTH FUND
INVESTMENT STRATEGY
GROWTH
SEPTEMBER 1, 1997
FRANKLIN STRATEGIC SERIES
This prospectus describes the Franklin California Growth Fund (the "Fund"). It
contains information you should know before investing in the Fund. Please keep
it for future reference.
The Fund has a Statement of Additional Information ("SAI"), dated September 1,
1997, which may be amended from time to time. It 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 its
address.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
FRANKLIN CALIFORNIA GROWTH FUND
September 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? .................................. 10
Who Manages the Fund? ................................................. 13
How does the Fund Measure Performance? ................................ 15
How Taxation Affects the Fund and its Shareholders .................... 16
How is the Trust Organized? ........................................... 17
ABOUT YOUR ACCOUNT
How Do I Buy Shares? .................................................. 18
May I Exchange Shares for Shares of Another Fund? ..................... 24
How Do I Sell Shares? ................................................. 27
What Distributions Might I Receive from the Fund? ..................... 30
Transaction Procedures and Special Requirements ....................... 32
Services to Help You Manage Your Account .............................. 36
What If I Have Questions About My Account? ............................ 38
GLOSSARY
Useful Terms and Definitions .......................................... 39
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of each class for the fiscal year
ended April 30, 1997. The Class II expenses are annualized. The Fund's actual
expenses may vary.
CLASS I CLASS II
- --------------------------------------------------------------------------------
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge
(as a percentage of Offering Price) 4.50% 1.99%
Paid at time of purchase 4.50%++ 1.00%+++
Paid at redemption++++ None 0.99%
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.56% 0.56%
Rule 12b-1 Fees 0.22%* 1.00%*
Other Expenses 0.30% 0.30%
----- -----
Total Fund Operating Expenses 1.08% 1.86%
===== =====
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown. These
are the projected expenses for each $1,000 that you invest in the Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Class I $56** $78 $102 $171
Class II $48 $77 $118 $234
For the same Class II investment, you would pay projected expenses of $38 if you
did not sell your shares at the end of the first year. Your projected expenses
for the remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of each class and are not directly charged to
your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more in Class I
shares.
+++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? - Deciding Which Class to Buy."
++++A Contingent Deferred Sales Charge may apply to any Class II purchase if you
sell the shares within 18 months and to Class I purchases of $1 million or more
if you sell the shares within one year. A Contingent Deferred Sales Charge may
also apply to purchases by certain retirement plans that qualify to buy Class I
shares without a front-end sales charge. The charge is 1% of the value of the
shares sold or the Net Asset Value at the time of purchase, whichever is less.
The number in the table shows the charge as a percentage of Offering Price.
While the percentage is different depending on whether the charge is shown based
on the Net Asset Value or the Offering Price, the dollar amount paid by you
would be the same. See "How Do I Sell Shares? - Contingent Deferred Sales
Charge" for details.
*These fees may not exceed 0.25% for Class I. The combination of front-end sales
charges and Rule 12b-1 fees could cause long-term shareholders to pay more than
the economic equivalent of the maximum front-end sales charge permitted under
the NASD's rules.
**Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent five years appears in the
financial statements in the Trust's Annual Report to Shareholders for the fiscal
year ended April 30, 1997. The Annual Report to Shareholders also includes more
information about the Fund's performance. For a free copy, please call Fund
Information.
<TABLE>
<CAPTION>
Class I Shares:
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Year Ended April 30, 1997 1996 1995 1994 1993 19921
===========================================================================================================================
Per Share Operating Performance
Net Asset Value at Beginning of Period $18.26 $14.03 $12.05 $10.21 $9.87 $10.04
- ---------------------------------------------------------------------------------------------------------------------------
Net Investment Income .13 .20 .16 .14 .12 .07
Net Realized & Unrealized Gain (Loss) on Securities 1.510 6.032 3.043 2.425 .340 (.168)
- ---------------------------------------------------------------------------------------------------------------------------
Total From Investment Operations 1.640 6.232 3.203 2.565 .460 (.098)
- ---------------------------------------------------------------------------------------------------------------------------
Distributions From Net Investment Income (.122) (.227) (.124) (.145) (.120) (.072)
Distributions From Realized Capital Gains (.428) (1.775) (1.099) (.580) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total Distributions (.550) (2.002) (1.223) (.725) (.120) (.072)
Net Asset Value at End of Period 19.35 18.26*** 14.03 12.05 10.21 9.87
- --------------------------------------------------------------------------------------------------------------------------
Total Return* 8.94% 47.42% 29.09% 25.55% 4.72% (1.77)%**
Ratios/Supplemental Data
Net Assets at End of Period (in 000's) $282,898 $81,175 $13,844 $4,646 $3,412 $3,091
Ratio of Expenses to Average Net Assets++ 1.08% .71% .25% .09% -- --
Ratio of Net Investment Income to Average Net Assets .84% 1.42% 1.63% 1.16% 1.23% 1.27%**
Portfolio Turnover Rate 44.81% 61.82% 79.52% 135.12% 38.28% 13.73%
Average Commission Rate+ .0544 .0536 -- -- -- --
</TABLE>
Class II Shares:
Year Ended April 30, 19972
================================================================
Per Share Operating Performance
Net Asset Value at Beginning of Period $18.05
- ----------------------------------------------------------------
Net Investment Income .05
Net Realized & Unrealized Gain (Loss) on Securities 1.646
- ----------------------------------------------------------------
Total From Investment Operations 1.696
- ----------------------------------------------------------------
Distributions From Net Investment Income (.048)
Distributions From Realized Capital Gains (.428)
- ----------------------------------------------------------------
Total Distributions (.476)
Net Asset Value at End of Period 19.27
- ----------------------------------------------------------------
Total Return* 9.32%
Ratios/Supplemental Data
Net Assets at End of Period (in 000's) $24,556
Ratio of Expenses to Average Net Assets 1.86%**
Ratio of Net Investment Income to Average Net Assets .05%**
Portfolio Turnover Rate 44.81%
Average Commission Rate+ .0544
1For the period October 18, 1991 (effective date) to April 30, 1992.
2For the period September 3, 1996 (effective date) to April 30, 1997.
*Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum front-end sales
charge or Contingent Deferred Sales Charge and assumes reinvestment of dividends
and capital gains, if any, at Net Asset Value.
*Annualized.
***The Net Asset Value differs from the Net Asset Value used to process
shareholder activity as of the reporting date, which does not include market
adjustment for portfolio trades made on that date. These adjustments are
generally accounted for on the day following the trade date.
+Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
++During the periods indicated, Advisers agreed in advance to waive a portion of
its management fees and make payment of other expenses incurred by the Fund. Had
such action not been taken, the ratios of expenses to average net assets would
have been as follows:
RATIO OF EXPENSES
CLASS I SHARES TO AVERAGE NET ASSETS
19921 1.61%**
1993 1.99
1994 1.89
1995 1.27
1996 1.09
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is to seek capital appreciation. The objective
is a fundamental policy of the Fund and may not be changed without shareholder
approval. Of course, there is no assurance that the Fund's objective will be
achieved.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
Under normal market conditions, the Fund invests at least 65% of its assets in
the securities of companies headquartered or conducting a majority of their
operations, in the state of California. The Fund may invest in common stock,
preferred stock, warrants for the purchase of common stock, debt securities
convertible or exchangeable for common or preferred stock, and fixed-income
securities issued by these companies. The securities in which the Fund invests
are traded primarily on the NYSE or AMEX or in over-the-counter markets.
In attempting to achieve its objective, the Fund expects to invest a significant
portion of its assets in small to mid-size capitalization companies with market
capitalizations of up to $2.5 billion at the time of the Fund's investment. The
Fund may also invest in relatively well known, larger capitalization companies
in mature industries which Advisers believes have the potential for capital
appreciation.
Although the Fund's assets are invested primarily in securities of
California-linked companies, the Fund may invest up to 35% of its assets in the
securities of companies headquartered or conducting a majority of their
operations outside the state of California. The Fund may invest in common stock,
preferred stock, warrants for the purchase of common stock, debt securities
convertible or exchangeable for common or preferred stock, and fixed-income
securities issued by these companies. In this way, the Fund seeks to benefit
from its research into companies and industries within or beyond the Fund's
primary region.
The Fund may also invest up to 35% of its total assets in debt securities,
including bonds, notes and debentures, if Advisers believes the investment
presents a favorable investment opportunity consistent with the Fund's
objective. The Fund may invest up to 5% of its assets in fixed-income
securities, including convertible debt and preferred stocks, bonds, notes and
debentures rated below investment grade, but no lower than B by Moody's or S&P,
or that are not rated but determined by Advisers to be of comparable quality.
The remainder of the Fund's fixed-income securities (up to 30% of total assets)
will be limited to investment grade obligations that are rated no lower than BBB
by S&P or Baa by Moody's or, if unrated, that are determined by Advisers to be
of comparable quality. The Fund may seek capital appreciation by investing in
debt securities which Advisers believes have the potential for capital
appreciation as a result of improvement in the creditworthiness of the issuer.
The prices of these securities generally increase when interest rates decline
while the prices generally decrease when interest rates rise. The receipt of
income from such debt securities will be incidental to the Fund's investment
objective.
Fixed-income securities within the top three rating categories (AAA, AA and A by
S&P or Aaa, Aa or A by Moody's) are generally known as high-grade securities and
are regarded as having a strong capacity to pay interest or dividends, as the
case may be. Medium-grade securities (securities rated BBB by S&P or Baa by
Moody's) are regarded as having an adequate capacity to pay interest or
dividends but with greater vulnerability to adverse economic conditions and some
speculative characteristics. Lower rated (below investment grade) securities,
those rated BB or lower by S&P or Ba or lower by Moody's, are considered by S&P
and Moody's, on balance, to be predominantly speculative with respect to
capacity to pay in accordance with the terms of the obligation and will
generally involve more credit risk than securities in the higher rating
categories. These lower rated fixed-income securities are subject to credit and
other risks that are greater than those of higher rated securities while
typically offering relatively higher yields. Please see the SAI for more
information about the risks of investing in lower rated securities and a
description of these ratings.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities. A
convertible security is generally a debt obligation or preferred stock that may
be converted within a specified period of time into a certain amount of common
stock of the same or a different issuer. A convertible security provides a
fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance in
its underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. The value of a
convertible security also tends to increase as the market value of the
underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because its value can be influenced by both interest
rate and market movements, a convertible security is not as sensitive to
interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the Fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the Fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
OPTIONS AND FINANCIAL FUTURES. The Fund may write (sell) covered put and call
options and buy put and call options on securities and securities indices that
trade on securities exchanges and in the over-the-counter market. The Fund may
buy and sell financial futures and options on financial futures with respect to
securities indices. Additionally, the Fund may buy and sell financial futures
and options to "close out" financial futures and options it has previously
entered into. The Fund will not enter into any financial futures contract or
related options (except for closing transactions) if, immediately thereafter,
the sum of the amount of its initial deposits and premiums on open contracts and
options would exceed 5% of the Fund's total assets (taken at current value). The
Fund will not engage in any stock options or stock index options if the option
premiums paid regarding its open option positions exceed 5% of the value of the
Fund's total assets. The Fund will not engage in transactions in options or
financial futures contracts or related options for speculation but only as a
hedge against changes resulting from market conditions in the values of its
securities or securities which it intends to buy and, to the extent consistent
therewith, to accommodate cash flows. Notwithstanding the Fund's ability to
enter into these transactions for hedging purposes, it is not obligated to hedge
its investment positions, but may do so when deemed prudent and consistent with
the Fund's objective and policies.
The Fund understands the current position of the staff of the SEC to be that
purchased OTC options are illiquid securities. The Fund and Advisers disagree
with this position. Nevertheless, pending a change in the staff's position, the
Fund will treat OTC options as subject to its limitation on illiquid securities.
Please see "Illiquid Investments" below.
The Fund's transactions in options and financial futures contracts may be
limited by the requirements of the Fund for qualification as a regulated
investment company. The Fund's investments in options and financial futures
contracts and certain security transactions (including loans of portfolio
securities) may also reduce the portion of the Fund's dividends which otherwise
would be eligible for the corporate dividends-received deduction. These
securities require the application of complex and special tax rules and
elections, more information about which is included in the SAI.
Options, futures and options on futures are generally considered "derivative
securities."
SMALL COMPANIES. To the extent that the Fund may invest in smaller
capitalization companies or other companies, the Fund may place greater emphasis
upon investments in relatively new or unseasoned companies that are in their
early stages of development, or in new and emerging industries where the
opportunity for rapid growth is expected to be above average. Securities of
unseasoned companies present greater risks than securities of larger, more
established companies. Please see "What are the Fund's Potential Risks? - Small
Companies." Any investments in these types of companies, however, will be
limited in the case of issuers that have less than three years continuous
operation, including the operations of any predecessor companies, to no more
than 5% of the Fund's total assets.
FOREIGN SECURITIES. The Fund may, to the extent consistent with its investment
objective, buy foreign securities traded in the U.S. or American Depositary
Receipts ("ADRs") and may buy securities of foreign issuers directly in foreign
markets.
OTHER INVESTMENT POLICIES OF THE FUND
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors, if
such loans do not exceed 10% of the value of the Fund's total assets at the time
of the most recent loan. The borrower must deposit with the Fund's custodian
bank collateral with an initial market value of at least 102% of the initial
market value of the securities loaned, including any accrued interest, with the
value of the collateral and loaned securities marked-to-market daily to maintain
collateral coverage of at least 100%. This collateral shall consist of cash,
securities issued by the U.S. government, its agencies or instrumentalities, or
irrevocable letters of credit. The lending of securities is a common practice in
the securities industry. The Fund may engage in security loan arrangements with
the primary objective of increasing the Fund's income either through investing
the cash collateral in short-term interest bearing obligations or by receiving a
loan premium from the borrower. Under the securities loan agreement, the Fund
continues to be entitled to all dividends or interest on any loaned securities.
As with any extension of credit, there are risks of delay in recovery and loss
of rights in the collateral should the borrower of the security fail
financially.
BORROWING. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of its assets, except that the Fund may borrow up to 10% of its
total assets to meet redemption requests and for other temporary or emergency
purposes. While borrowings exceed 5% of the Fund's total assets, the Fund will
not make any additional investments.
SECURITIES INDUSTRY RELATED INVESTMENTS. To the extent consistent with its
investment objective and certain limitations under the federal securities laws,
the Fund may invest its assets in securities issued by companies engaged in
securities related businesses, including companies that are securities brokers,
dealers, underwriters or investment advisors. These companies are considered
part of the financial services industry sector.
Under the federal securities laws, the Fund may not acquire a security or any
interest in a securities related business to the extent the acquisition would
exceed certain limitations. The Fund does not believe that these limitations
will impede the attainment of its investment objective.
SHORT-TERM INVESTMENTS. The Fund may invest its cash, including cash resulting
from purchases and sales of Fund shares, in short-term debt instruments,
including U.S. government securities, high grade commercial paper, repurchase
agreements and other money market equivalents and, subject to an order of
exemption from the SEC, the shares of affiliated money market funds that invest
primarily in short-term debt securities. Temporary investments may be made
either for liquidity purposes, to meet redemption requirements or as a temporary
defensive measure.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions, in which
the Fund buys a U.S. government security subject to resale to a bank or dealer
at an agreed-upon price and date. The transaction requires the collateralization
of the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller may cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund may
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks that are deemed creditworthy by Advisers. A
repurchase agreement is deemed to be a loan by the Fund under federal securities
laws. The U.S. government security subject to resale (the collateral) is held on
behalf of the Fund by a custodian bank approved by the Board and is held
pursuant to a written agreement.
ILLIQUID INVESTMENTS. The Fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them. Illiquid securities
include illiquid equity securities, securities with legal or contractual
restriction on resale, repurchase agreements of more than seven days duration,
illiquid real estate investment trusts, securities of issuers with less than
three years continuous operation and other securities that are not readily
marketable. The Board has authorized the Fund to invest in restricted securities
(which might otherwise be considered illiquid) where the investment is
consistent with the Fund's investment objective and has authorized such
securities to be considered liquid (and thus not subject to the foregoing 10%
limitation), to the extent Advisers determines on a daily basis that there is a
liquid institutional or other market for the securities. The Board will review
Advisers' determinations of liquidity, retain ultimate responsibility for such
determinations and will consider appropriate action, consistent with the Fund's
objective and policies, if a security should become illiquid after its purchase.
See "How does the Fund Invest its Assets?-Illiquid Investments" in the SAI.
DIVERSIFICATION. The Fund is non-diversified under the federal securities laws.
As a non-diversified Fund, there is no restriction under the federal securities
laws on the percentage of the Fund's assets that may be invested in the
securities of any one issuer. The Fund, however, intends to comply with the
diversification and other requirements of the Code applicable to regulated
investment companies such as the Fund, so that it will not be subject to U.S.
federal income tax on income and capital gain distributions to shareholders.
Accordingly, the Fund will not buy securities if, as a result, more than 25% of
its total assets would be invested in the securities of any one issuer and, with
respect to 50% of its total assets, more than 5% would be invested in the
securities of any one issuer or more than 10% would be invested in the
outstanding voting securities of any one issuer. To the extent the Fund is not
fully diversified, it may be more susceptible than a more fully diversified fund
to adverse economic, political or regulatory developments affecting a single
issuer.
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.
Each of the Fund's policies and restrictions discussed in this prospectus and in
the SAI is considered at the time the Fund makes an investment. The Fund is
generally not required to sell a security because of a change in circumstances.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock market as a whole.
RISK FACTORS IN CALIFORNIA. The following information about certain California
risk factors is given to you in view of the Fund's policy of investing primarily
in companies headquartered or conducting a majority of their operations in
California. Although the financial prospects of a number of the companies in
which the Fund invests, at any given time, may depend on the strength of the
California economy, the Fund tends to invest a significant portion of its assets
in companies whose financial prospects are dependent on the global economy,
thereby reducing the effect on the Fund of fluctuations in economic conditions
in California. This information is only a brief discussion, does not purport to
be a complete description, and is based primarily upon information derived from
independent credit reports and historically reliable sources. It has not been
independently verified by the Fund.
Like many other states, California was significantly affected by the national
recession of the early 1990s, especially in the southern portion of the state.
Between 1990 and 1993, the state's employment dropped 2.8% on an annualized
basis and real per capita income declined by 4%. Almost half of the state's job
losses resulted from military cutbacks and close to 40% were caused by a
downturn in the construction industry. Downsizing in the state's aerospace
industry, excess office space capacity, and slow growth in California's
significant export market also contributed to the state's recession.
Since mid-1993, California's economic recovery has been fueled by growth in the
export, entertainment, tourism and computer services sectors. In 1996, the
state's employment reached pre-recession levels. The employment base is diverse
with manufacturing accounting for 14% of employment, trade 22.8%, services 29%
and government 16.4% at the end of 1995. Despite its strong employment growth,
California's unemployment rate is expected to remain above the national average
and wages, although still above national levels, have declined with the loss of
high-paying aerospace jobs. Gross state product is expected to grow at an
inflation-adjusted rate of 4.5% in 1997 and 4% in 1998. Personal income levels
are expected to rise 6.8% in 1997 and 6% in 1998. Exports of California-produced
goods are expected to reach $108 billion in 1997 and $120 billion in 1998.
The Fund's policy of investing primarily in the securities of California
companies does involve certain additional risks, including the risk that
economic, business, political, regulatory or other developments or changes
affecting one portfolio security or industry may have a greater impact on the
Fund's portfolio than would be the case if the Fund were diversified among more
issuers.
OPTIONS AND FUTURES. The Fund's option and futures investments involve certain
risks. Such risks include the risks that the effectiveness of an options and
futures strategy depends on the degree to which price movements in the
underlying index or securities correlate with price movements in the relevant
portion of the Fund's portfolio. The Fund bears the risk that the prices of its
portfolio securities will not move in the same amount as the option or future it
has purchased, or that there may be a negative correlation that would result in
a loss on both the securities and the option or future.
Positions in exchange traded options and financial futures may be closed out
only on an exchange that provides a secondary market. There may not always be a
liquid secondary market for a futures or option contract at a time when the Fund
seeks to "close out" its position. If the Fund were unable to "close out" a
futures position, and if prices moved adversely, the Fund would have to continue
to make daily cash payments to maintain its required margin and, if the Fund had
insufficient cash, it might have to sell portfolio securities at a
disadvantageous time. In addition, the Fund might be required to deliver the
securities underlying the futures or options contracts it holds.
Over-the-counter ("OTC") options may not be closed out on an exchange and the
Fund may be able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer that
issued it. There can be no assurance that a liquid secondary market will exist
for any particular option or financial futures contract at any specific time.
Thus, it may not be possible to close an option or financial futures position.
The Fund will enter into an option or financial futures position only if there
appears to be a liquid secondary market for option or financial futures.
In addition, adverse market movements could cause the Fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a financial futures contract that it has purchased.
There is also the risk of loss by the Fund of margin deposits in the event of
bankruptcy of a broker with whom the Fund has an open position in a financial
futures contract or option. Please see the SAI for more information on the
Fund's investments in options and financial futures, including the risks
associated with these investments.
SMALL COMPANIES. The Fund may invest in companies that have relatively small
revenues, limited product lines, and a small share of the market for their
products or services. Small companies may lack depth of management, they may be
unable to internally generate funds necessary for growth or potential
development or to generate such funds through external financing on favorable
terms, and they may be developing or marketing new products or services for
which markets are not yet established and may never become established. Due to
these and other factors, small companies may suffer significant losses, as well
as realize substantial growth.
Historically, small capitalization stocks have been more volatile than larger
capitalization stocks and are therefore more speculative than investments in
larger companies. Among the reasons for the greater price volatility are the
less certain growth prospects of smaller firms, the lower degree of liquidity in
the markets for such stocks, and the greater sensitivity of small companies to
changing economic conditions. Besides exhibiting greater volatility, small
company stocks may, to a degree, fluctuate independently of larger company
stocks. Small company stocks may decline in price as large company stocks rise,
or rise in price as large company stocks decline. You should therefore expect
that the value of the Fund's shares may be more volatile than the shares of a
fund that invests in larger capitalization stocks.
Technology Companies, Currency Risk and Foreign Securities. Consistent with its
investment objective, the Fund expects to have a portion of its assets invested
in securities of companies involved in computing technologies or computing
technology-related companies. Typically, the Fund's investments in this sector
reflect companies whose products or services are marketed on a global, rather
than a predominantly domestic or regional basis. The technology sector as a
whole has historically been volatile and issues from this sector tend to be
subject to abrupt or erratic price movements. The Fund seeks to reduce such
risks through extensive research, and emphasis on more globally-competitive
companies. To the extent the Fund holds securities of companies whose products
or services are distributed globally, securities issued by such companies, and
companies such as the Fund that hold such securities, may be subject to
fluctuations in value due to the effect of changes in the relative values of
currencies on such company's business. The history of these markets reflect both
decreases and increases in worldwide currency valuations, and these may reoccur
unpredictably in the future. In addition, the Fund may invest in foreign
securities, which involves special risks, including currency fluctuations and
economic and political uncertainties. See "What are the Fund's Potential
Risks?-Foreign Securities" in the SAI.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
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 $207 billion in assets. Please see "Investment Management
and Other Services" and "Miscellaneous Information" in the SAI for information
on securities transactions and a summary of the Fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is: Conrad B. Herrmann since 1993, Nicholas Moore since 1993
and Kei Yamamoto since 1995.
Conrad B. Herrmann, CFA
Vice President of Advisers
Mr. Herrmann is a Chartered Financial Analyst and holds a Master of Business
Administration degree from Harvard University. He earned a Bachelor of Arts
degree from Brown University. Mr. Herrmann has been with the Franklin Templeton
Group since 1989 and is a member of several securities industry-related
associations.
Nicholas Moore
Portfolio Manager of Advisers
Mr. Moore holds a Bachelor of Science degree in Business Administration from
Menlo College. He has been with the Franklin Templeton Group since 1986.
Kei Yamamoto, CFA
Portfolio Manager of Advisers
Ms. Yamamoto is a Chartered Financial Analyst and has a Master of Science degree
and a Bachelor of Science degree in Material Science and Engineering from the
Massachusetts Institute of Technology. Prior to joining the Franklin Templeton
Group in 1994, Ms. Yamamoto worked at Goldman Sachs & Co. as a financial analyst
and at Wasserstein Perella & Co. as an associate and vice president. Ms.
Yamamoto has been in the securities industry since 1987.
Frank Felicelli, CFA
Vice President of Advisers
Mr. Felicelli has been generally involved with investment strategy of the Fund's
portfolio since its inception. Mr. Felicelli is a Chartered Financial Analyst
and has a Master of Business Administration degree from Golden Gate University.
He earned a Bachelor of Arts degree in Economics from the University of
Illinois. He has been with the Franklin Templeton Group since 1986. He is a
member of several securities industry-related associations.
MANAGEMENT FEES. During the fiscal year ended April 30, 1997, management fees
totaling 0.56% of the average daily net assets of the Fund were paid to
Advisers. Total expenses, including fees paid to Advisers, were 1.08% for Class
I and 1.86% for Class II.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares, as well as shares of other funds in the Franklin Templeton Group
of Funds, when selecting a broker or dealer. Please see "How does the Fund Buy
Securities for its Portfolio?" in the SAI for more information.
ADMINISTRATIVE SERVICES. 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 RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
Fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by the Fund under the Class I plan may not exceed 0.25% per year of
Class I's average daily net assets. All distribution expenses over this amount
will be borne by those who have incurred them. During the first year after
certain Class I purchases made without a sales charge, Distributors may keep the
Rule 12b-1 fees associated with the purchase.
Under the Class II plan, the Fund may pay Distributors up to 0.75% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the purchase.
The Fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, each class of the Fund advertises its performance. A commonly
used measure of performance is total return. Performance figures are usually
calculated using the maximum sales charges, but certain figures may not include
sales charges.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund is treated as a separate entity for federal income tax purposes. The
Fund has elected and intends to continue to qualify as a regulated investment
company under Subchapter M of the Code. By distributing all of its income and
meeting certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will generally not be liable for federal
income or excise taxes.
For federal income tax purposes, any income dividends which you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
For corporate shareholders, 30.26% of the ordinary income distributions
(including short-term capital gain distributions) paid by the Fund for the
fiscal year ended April 30, 1997, qualified for the corporate dividends-received
deduction, subject to certain holding period and debt financing restrictions
imposed under the Code on the corporation claiming the deduction. These
restrictions are discussed in the SAI.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated for tax purposes as if you received
them on December 31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on the sale or exchange of Fund shares
held for six months or less will be treated as a long-term capital loss to the
extent of capital gain dividends received with respect to such shares.
The Fund will inform you of the source of its dividends and distributions at the
time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of such dividends
and distributions.
Each shareholder who is not a U.S. person for U.S. federal income tax purposes
should consult with their financial or tax advisor regarding the applicability
of U.S. withholding or other taxes on distributions received from the Fund and
the application of foreign tax laws to these distributions. You should also
consult your tax advisor with respect to the applicability of any state and
local intangible property or income taxes to your shares of the Fund and
distributions and redemption proceeds received from the Fund.
HOW IS THE TRUST ORGANIZED?
The Fund is a non-diversified series of Franklin Strategic Series (the "Trust"),
an open-end management investment company, commonly called a mutual fund. It was
organized as a Delaware business trust on January 25, 1991, and is registered
with the SEC. Before July 12, 1993, the Fund was named the Franklin California
250 Growth Fund. On that date, the Fund's investment objective and various
investment policies were changed. Consistent with these changes, the Fund's name
was changed to the Franklin California Growth Fund. The Fund offers two classes
of shares: Franklin California Growth Fund - Class I and Franklin California
Growth Fund Class II. All shares outstanding before the offering of Class II
shares are considered Class I shares. Additional series and classes of shares
may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters affecting only that class, or expressly required
to be voted on separately by state or federal law. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of the Trust for matters that affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares. In
certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check. Please indicate which class of shares you want to buy. IF YOU DO NOT
SPECIFY A CLASS, YOUR PURCHASE WILL BE AUTOMATICALLY INVESTED IN CLASS I SHARES.
CURRENTLY, THE FUND DOES NOT ALLOW INVESTMENTS BY MARKET TIMERS.
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.
DECIDING WHICH CLASS TO BUY
You should consider a number of factors when deciding which class of shares to
buy. IF YOU PLAN TO BUY $1 MILLION OR MORE IN A SINGLE PAYMENT OR YOU QUALIFY TO
BUY CLASS I SHARES WITHOUT A SALES CHARGE, YOU MAY NOT BUY CLASS II SHARES.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds;
and
o you plan to sell a substantial number of your shares within approximately
six years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
PURCHASE PRICE OF FUND SHARES
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE
AS A PERCENTAGE OF AMOUNT PAID
------------------------ TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- --------------------------------------------------------------------------------
CLASS I
Under $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 or more* None None None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Deciding Which
Class to Buy."
SALES CHARGE REDUCTIONS AND WAIVERS
IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH
EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't
include this statement, we cannot guarantee that you will receive the sales
charge reduction or waiver.
CUMULATIVE QUANTITY DISCOUNTS - CLASS I ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds, as well as those of your spouse, children under the
age of 21 and grandchildren under the age of 21. If you are the sole owner of a
company, you may also add any company accounts, including retirement plan
accounts. Companies with one or more retirement plans may add together the total
plan assets invested in the Franklin Templeton Funds to determine the sales
charge that applies.
LETTER OF INTENT - CLASS I ONLY. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES - CLASS I ONLY. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
SALES CHARGE WAIVERS. The Fund's front-end sales charge and Contingent Deferred
Sales Charge do not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) 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 do not apply if you are buying Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 4:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a real estate investment trust (REIT) sponsored or advised by Franklin
Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds, the Templeton Variable Annuity Fund,
the Templeton Variable Products Series Fund, or the Franklin Government
Securities Trust. You should contact your tax advisor for information on
any tax consequences that may apply.
4. Redemptions from any Franklin Templeton Fund if you:
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.
The Fund's sales charges also do not apply to Class I purchases by:
5. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
6. Group annuity separate accounts offered to retirement plans
7. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
8. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments by the
Fund on arbitrage rebate calculations.
9. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
10. Registered Securities Dealers and their affiliates, for their investment
accounts only
11. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
12. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
13. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
14. Accounts managed by the Franklin Templeton Group
15. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with at
least 100 employees, or (ii) have plan assets of $1 million or more, or (iii)
agree to invest at least $500,000 in the Franklin Templeton Funds over a 13
month period may buy Class I shares without a front-end sales charge. Retirement
plans that are not Qualified Retirement Plans or SEPs, such as 403(b) or 457
plans, must also meet the requirements described under "Group Purchases - Class
I Only" above. For retirement plan accounts opened on or after May 1, 1997, a
Contingent Deferred Sales Charge may apply if the account is closed within 365
days of the retirement plan account's initial purchase in the Franklin Templeton
Funds. Please see "How Do I Sell Shares? - Contingent Deferred Sales Charge" for
details.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not by
the Fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 1% of the amount invested.
3. Class I purchases made without a front-end sales charge by certain
retirement plans described under "Sales Charge Reductions and Waivers -
Retirement Plans" above - up to 1% of the amount invested. For retirement
plan accounts opened on or after May 1, 1997, a Contingent Deferred Sales
Charge will not apply to the account if the Securities Dealer chooses to
receive a payment of 0.25% or less or if no payment is made.
4. Class I purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the amount
invested.
5. Class I purchases by Chilean retirement plans - up to 1% of the amount
invested.
A Securities Dealer may receive only one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1, 2 or 5 above or a payment of up to 1% for investments
described in paragraph 3 will be eligible to receive the Rule 12b-1 fee
associated with the purchase starting in the thirteenth calendar month after the
purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums. Some Franklin Templeton Funds do not offer Class II shares.
METHOD STEPS TO FOLLOW
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BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares you
want to exchange
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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.
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THROUGH YOUR DEALER Call your investment representative
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Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
CONTINGENT DEFERRED SALES CHARGE - CLASS I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, we will first exchange any shares
in your account that are not subject to the charge. If there are not enough of
these to meet your exchange request, we will exchange shares subject to the
charge in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
CONTINGENT DEFERRED SALES CHARGE - CLASS II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
Contingent Deferred Sales Charge, such as shares from the reinvestment of
dividends and capital gains ("free shares"), $2,000 in shares that are no longer
subject to a Contingent Deferred Sales Charge because you have held them for
longer than 18 months ("matured shares"), and $3,000 in shares that are still
subject to a Contingent Deferred Sales Charge ("CDSC liable shares"). If you
exchange $3,000 into a new fund, $500 will be exchanged from free shares, $1,000
from matured shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. The tax consequences of a sale or exchange are determined by the
Code and not by the method used by the Fund to transfer shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. Please notify us in writing if you do not want this
option to be available on your account. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Advisor Class" or "Class Z" shares. Because the
Fund does not currently offer an Advisor Class, you may exchange Advisor Class
shares of any Franklin Templeton Fund for Class I shares of the Fund at Net
Asset Value. If you do so and you later decide you would like to exchange into a
fund that offers an Advisor Class, you may exchange your Class I shares for
Advisor Class shares of that fund. Certain shareholders of Class Z shares of
Franklin Mutual Series Fund Inc. may also exchange their Class Z shares for
Class I shares of the Fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
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BY MAIL 1. Send us written instructions signed by all account owners. If you
would like your redemption proceeds wired to a bank account, your
instructions should include:
o The name, address and telephone number of the bank where you
want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit union, the
name of the corresponding bank and the account number
2. Include any outstanding share certificates for the shares you are
selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may have
other requirements.
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METHOD STEPS TO FOLLOW
BY PHONE Call Shareholder Services. If you would like your redemption
proceeds wired to a bank account, other than an escrow account,
you must first sign up for the wire feature. To sign up, send us
written instructions, with a signature guarantee. To avoid any
delay in processing, the instructions should include the items listed
in "By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts
may exceed $50,000 by completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for the shares you
want to sell or you have already returned them to the Fund
o Unless you are selling shares in a Trust Company retirement
plan account
o Unless the address on your account was changed by phone
within the last 15 days
If you do not want the ability to redeem by phone to apply to
your account, please let us know.
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THROUGH YOUR DEALER Call your investment representative
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We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
For Class I purchases, 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 Class I 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. For any Class II purchase, a Contingent
Deferred Sales Charge may apply if you sell the shares within the Contingency
Period. The charge is 1% of the value of the shares sold or the Net Asset Value
at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class I shares without a front-end sales charge may also be
subject to a Contingent Deferred Sales Charge if the retirement plan account is
closed within 365 days of the account's initial purchase in the Franklin
Templeton Funds.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997, or
(ii) the Securities Dealer of record received a payment from Distributors of
0.25% or less, or (iii) Distributors did not make any payment in connection
with the purchase, as described under "How Do I Buy Shares? - Other Payments
to Securities Dealers"
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, at a rate of up to 1% a month of an account's Net Asset Value. For
example, if you maintain an annual balance of $1 million in Class I shares,
you can redeem up to $120,000 annually through a systematic withdrawal plan
free of charge. Likewise, if you maintain an annual balance of $10,000 in
Class II shares, $1,200 may be redeemed annually free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Redemptions by Trust Company employee benefit plans or employee benefit plans
serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee benefit
plans
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income semiannually to
shareholders of record on the first business day before the 15th of the month
and pays them on or about the last day of that month.
Capital gains, if any, may be distributed annually, usually in December.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of Class I and Class II.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
Distribution Options
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the
same class of the Fund (without a sales charge or imposition of a Contingent
Deferred Sales Charge) by reinvesting capital gain distributions, or both
dividend and capital gain distributions. If you own Class II shares, you may
also reinvest your distributions in Class I shares of the Fund. This is a
convenient way to accumulate additional shares and maintain or increase your
earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a Contingent Deferred Sales
Charge). If you own Class II shares, you may also direct your distributions
to buy Class I shares of another Franklin Templeton Fund. Many shareholders
find this a convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to
another person or to a checking account, you may need a signature guarantee.
If you send the money to a checking account, please see "Electronic Fund
Transfers Class I Only" under "Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days before the record date for us
to process the new option. For Trust Company retirement plans, special forms are
required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value per
share of the class you wish to purchase, plus any applicable sales charges. When
you sell shares, you receive the Net Asset Value per share minus any applicable
Contingent Deferred Sales Charges.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
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 of each class 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 for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by phone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
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CORPORATION Corporate Resolution
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PARTNERSHIP 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
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TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
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STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have let us know
that you do not want telephone privileges to apply to your account.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION - CLASS I ONLY
You may have money transferred from your paycheck to the Fund to buy additional
Class I 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 - Class I Only" below.
Once your plan is established, any distributions paid by the Fund will be
automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS - CLASS I ONLY
You may choose to have dividend and capital gain distributions from Class I
shares of the Fund or payments under a systematic withdrawal plan sent directly
to a checking account. If the checking account is with a bank that is a member
of the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If you choose this option, please allow at least
fifteen days for initial processing. We will send any payments made during that
time to the address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the code number for each class to use TeleFACTS(R). The code
number is 180 for Class I and 280 for Class II.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- ------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
AMEX - American Stock Exchange
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
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.
PROSPECTUS & APPLICATION
FRANKLIN STRATEGIC INCOME FUND
INVESTMENT STRATEGY
GROWTH & INCOME
SEPTEMBER 1, 1997
FRANKLIN STRATEGIC SERIES
This prospectus describes the Franklin Strategic Income Fund (the "Fund"). It
contains information you should know before investing in the Fund. Please keep
it for future reference.
The Fund has a Statement of Additional Information ("SAI") dated September 1,
1997, which may be amended from time to time. It 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 its
address.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE FUND MAY INVEST UP TO 100% OF ITS NET ASSETS IN NON-INVESTMENT GRADE BONDS
OF BOTH U.S. AND FOREIGN ISSUERS. THESE ARE COMMONLY KNOWN AS "JUNK BONDS."
THEIR DEFAULT AND OTHER RISKS ARE GREATER THAN THOSE OF HIGHER RATED SECURITIES.
YOU SHOULD CAREFULLY CONSIDER THESE RISKS BEFORE INVESTING IN THE FUND. PLEASE
SEE "WHAT ARE THE FUND'S POTENTIAL RISKS?"
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
FRANKLIN STRATEGIC INCOME FUND
September 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? ............................. 15
Who Manages the Fund? ............................................ 21
How does the Fund Measure Performance? ........................... 22
How Taxation Affects the Fund and its Shareholders ............... 23
How is the Trust Organized? ...................................... 24
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ............................................. 25
May I Exchange Shares for Shares of Another Fund? ................ 30
How Do I Sell Shares? ............................................ 32
What Distributions Might I Receive from the Fund? ................ 35
Transaction Procedures and Special Requirements .................. 36
Services to Help You Manage Your Account ......................... 41
What If I Have Questions About My Account? ....................... 43
GLOSSARY
Useful Terms and Definitions ..................................... 44
APPENDIX
Description of Ratings ........................................... 46
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the Fund's historical expenses for the fiscal year ended
April 30, 1997. The Fund's actual expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge Imposed on Purchases
(as a percentage of Offering Price) 4.25%++
Deferred Sales Charge None+++
Exchange Fee (per transaction) $5.00*
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.63%**
Rule 12b-1 Fees 0.15%***
Other Expenses 0.27%
Total Fund Operating Expenses 1.05%**
C. EXAMPLE
Assume the Fund's annual return is 5%, operating expenses are as described
above, and you sell your shares after the number of years shown. These are the
projected expenses for each $1,000 that you invest in the Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$53**** $74 $98 $165
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
its Net Asset Value or dividends and are not directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more.
+++A Contingent Deferred Sales Charge of 1% may apply to purchases of $1 million
or more if you sell the shares within one year. A Contingent Deferred Sales
Charge may also apply to purchases by certain retirement plans that qualify to
buy shares without a front-end sales charge. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**For the period shown, Advisers had agreed in advance to waive its management
fees and make certain payments to reduce the Fund's expenses. With this
reduction, the Fund paid no management fees and total Fund operating expenses
were 0.23%.
***These fees may not exceed 0.25%. The combination of front-end sales charges
and Rule 12b-1 fees could cause long-term shareholders to pay more than the
economic equivalent of the maximum front-end sales charge permitted under the
NASD's rules.
****Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering the periods shown below appears in the financial
statements in the Trust's Annual Report to Shareholders for the fiscal year
ended April 30, 1997. The Annual Report to Shareholders also includes more
information about the Fund's performance. For a free copy, please call Fund
Information.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
<S> <C> <C> <C>
1997 1996 1995*
Per Share Operating Performance
Net Asset Value at Beginning of Period $10.77 $10.18 $10.00
Net Investment Income 0.93 0.85 0.70
Net Realized & Unrealized Gain on Securities 0.385 0.670 0.154
Total From Investment Operations 1.315 1.520 0.854
Distributions From Net Investment Income (0.956) (0.823) (0.674)
Distributions From Capital Gains (0.269) (0.107) -
Total Distributions (1.225) (0.930) (0.674)
Net Asset Value at End of Year $10.86 $10.77 $10.18
Total Return** 12.64% 15.59% 8.94%
Ratios/Supplemental Data
Net Assets at End of Year (in 000's) $34,864 $13,022 $6,736
Ratio of Expenses to Average Net Assets*** 0.23% 0.25% 0.25%+
Ratio of Net Investment Income to Average Net Assets 8.60% 8.53% 7.93%+
Portfolio Turnover Rate 114.26% 73.95% 68.43%
Average Commission Rate++ 0.0500 0.0514 -
</TABLE>
*For the period May 24, 1994 (effective date) to April 30, 1995.
**Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum front-end sales
charge or Contingent Deferred Sales Charge, and assumes reinvestment of
dividends and capital gains, if any, at Net Asset Value.
*** During the periods indicated, Advisers agreed in advance to waive its
management fees and make payments to reduce the Fund's expenses. Had such action
not been taken, the ratio of operating expenses to average net assets for 1995,
1996, and 1997 would have been 1.38%,+ 1.08%, and 1.05% respectively.
+Annualized
++Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's primary investment objective is to obtain a high level of current
income, with capital appreciation over the long term as a secondary objective.
The objectives are fundamental policies of the Fund and may not be changed
without shareholder approval. Of course, there is no assurance that the Fund's
objectives will be achieved.
The Fund will seek to achieve its objectives by using an active asset allocation
process and a flexible policy of investing in securities of U.S. and foreign
governments, their agencies, authorities and instrumentalities; U.S. and foreign
corporate high yield fixed-income securities; various types of fixed or
adjustable rate mortgage securities; asset-backed securities; common stocks that
pay dividends; preferred stocks; and income producing securities that are
convertible into common stocks, generally with particular consideration to
current income but which may also be purchased for long-term capital
appreciation. Because of the Fund's ability to invest in lower rated U.S. and
foreign corporate bonds, an investment in the Fund is subject to a higher degree
of risk than an investment in a more conservative type of income fund.
Under normal circumstances, at least 65% of the Fund's assets will be invested
in U.S. and foreign debt securities which include bonds, notes, mortgage-backed
securities and asset-backed securities, U.S. and foreign corporate high yield
securities, convertible securities, and preferred stock. The Fund may invest the
remainder of its assets, up to 35%, in common stocks, generally with particular
consideration to current income but which may also be purchased for potential
long-term capital appreciation. There are no restrictions, other than those
above, as to the proportion of the Fund's assets that may be invested in a
particular type of security. This determination is entirely within the Advisers'
discretion.
The Fund will use an active asset allocation strategy in order to maximize both
income and capital appreciation. This means the Fund will allocate its assets
among securities in various market sectors in anticipation of, and in response
to, varying economic, market, industry and issuer conditions. The Advisers will
use a two-sided analysis to take advantage of varying sector reactions to
economic events. The Advisers will use a "top-down" macroeconomic analysis
combined with a "bottom-up" fundamental sector, industry and issuer analysis.
Country risk, business cycles, yield curves and values between and within
markets will be evaluated.
TYPES OF SECURITIES THE FUND MAY INVEST IN
HIGH YIELD CORPORATE SECURITIES. The Fund may invest in securities rated in any
category by S&P or Moody's, two nationally recognized statistical rating
agencies, including, without limitation, lower rated, fixed-income U.S. and
foreign corporate high yield securities and unrated securities of comparable
quality, commonly called "junk bonds." Please see "High Yielding, Fixed-Income
Securities" and "Foreign Securities" under "What Are the Fund's Potential
Risks?" As an operating policy, the Fund will generally invest in securities
that are rated at least Caa by Moody's or CCC by S&P, or in unrated securities
of comparable quality as determined by Advisers. While unrated debt securities
are not necessarily of lower quality, they may not be as attractive of an
investment as rated securities to many buyers. Please see the appendix in this
prospectus and in the SAI for a description of the ratings assigned by S&P and
Moody's. Regardless of ratings, all debt securities considered for purchase
(whether rated or unrated) will be carefully analyzed by Advisers to insure, to
the extent possible, that the planned investment is consistent with the Fund's
investment objectives.
FOREIGN SECURITIES. The Fund may invest in foreign government and corporate debt
securities and in American Depositary Receipts ("ADRs"), which are certificates
issued by U.S. banks representing the right to receive securities of a foreign
issuer deposited with that bank or a correspondent bank. The Fund's investment
in ADRs may be sponsored and unsponsored. More information about ADRs is
included in the SAI. The Fund may buy foreign securities that are traded in the
U.S. and may buy the securities of foreign issuers directly in foreign markets.
The Fund may also buy securities of U.S. issuers that are denominated in a
foreign currency. See "What Are the Fund's Potential Risks? - Foreign
Securities."
GOVERNMENT SECURITIES. The Fund may invest in Treasury bills and bonds, which
are obligations of, or guaranteed by, the U.S. government and are supported by
the full faith and credit of the U.S. Treasury. The Fund may also invest in U.S.
government agency securities, which are obligations of, or guaranteed by, U.S.
government agencies or instrumentalities, such as Federal Home Loan Banks, and
are supported by the right of the issuer to borrow from the Treasury. Securities
of other agencies, such as those issued or guaranteed by the Federal National
Mortgage Association, which are supported only by the credit of the
instrumentality, may also be purchased by the Fund. See the discussion of
mortgage securities below.
MORTGAGE SECURITIES - GENERAL CHARACTERISTICS. The Fund may invest in mortgage
securities issued or guaranteed by the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC"), adjustable rate mortgage securities
("ARMs"), collateralized mortgage obligations ("CMOs"), and stripped
mortgage-backed securities, any of which may be privately issued. The Fund may
also invest in asset-backed securities. Please see the discussion below for a
description of the types of municipal or asset-backed securities in which the
Fund may invest.
A mortgage security is an interest in a pool of mortgage loans. The primary
issuers or guarantors of mortgage securities are GNMA, FNMA and FHLMC. GNMA
creates mortgage securities from pools of government guaranteed or insured
(Federal Housing Authority or Veterans Administration) mortgages originated by
mortgage bankers, commercial banks, and savings and loan associations. FNMA and
FHLMC issue mortgage securities from pools of conventional and federally insured
and/or guaranteed residential mortgages obtained from various entities,
including savings and loan associations, savings banks, commercial banks, credit
unions, and mortgage bankers. The principal and interest on GNMA securities are
guaranteed by GNMA and backed by the full faith and credit of the U.S.
government. Mortgage securities from FNMA and FHLMC are not backed by the full
faith and credit of the U.S. government. FNMA guarantees full and timely payment
of all interest and principal, and FHLMC guarantees timely payment of interest
and the ultimate collection of principal. Securities issued by FNMA are
supported by the agency's right to borrow money from the U.S. Treasury under
certain circumstances. Securities issued by FHLMC are supported only by the
credit of the agency. There is no guarantee that the government would support
government agency securities and, accordingly, they may involve a risk of
non-payment of principal and interest. Nonetheless, because FNMA and FHLMC are
instrumentalities of the U.S. government, these securities are generally
considered to be high quality investments having minimal credit risks.
Most mortgage securities are pass-through securities, which means that they
provide investors with monthly payments consisting of a pro rata share of both
regular interest and principal payments, as well as unscheduled early
prepayments, on the underlying mortgage pool. The Fund invests in both
"modified" and "straight" pass-through securities. For "modified pass-through"
type mortgage securities, principal and interest are guaranteed, whereas such
guarantee is not available for "straight pass-through" securities. CMOs and
stripped mortgage securities are not pass-through securities.
Guarantees as to the timely payment of principal and interest do not extend to
the value or yield of mortgage securities nor do they extend to the value of the
Fund's shares. In general, the value of fixed-income securities varies with
changes in market interest rates. Fixed-rate mortgage securities generally
decline in value during periods of rising interest rates, whereas interest rates
of ARMs move with market interest rates, and thus their value tends to fluctuate
to a lesser degree. In view of these factors, the ability of the Fund to obtain
a high level of total return may be limited under varying market conditions.
ADJUSTABLE RATE MORTGAGE SECURITIES. ARMs, like traditional mortgage securities,
are an interest in a pool of mortgage loans and are issued or guaranteed by a
federal agency or by private issuers. Unlike fixed-rate mortgages, which
generally decline in value during periods of rising interest rates, the interest
rates on the mortgages underlying ARMs are reset periodically and thus allow the
Fund to participate in increases in interest rates, resulting in both higher
current yields and lower price fluctuations. During periods of declining
interest rates, of course, the coupon rates may readjust downward, resulting in
lower current yields. Because of this feature, the value of an ARM is unlikely
to rise during periods of declining interest rates to the same extent as a
fixed-rate instrument. The rate of amortization of principal, as well as
interest payments, for certain types of ARMs change in accordance with movements
in a pre-specified, published interest rate index. There are several categories
of indices, including those based on U.S. Treasury securities, those derived
from a calculated measure, such as a cost of funds index, or a moving average of
mortgage rates and actual market rates. The amount of interest due to an ARM
security holder is calculated by adding a specified additional amount, the
"margin," to the index, subject to limitations or "caps" on the maximum and
minimum interest that is charged to the mortgagor during the life of the
mortgage or to maximum and minimum changes to that interest rate during a given
period. The interest rates paid on the ARMs in which the Fund may invest are
generally readjusted at intervals of one year or less, although instruments with
longer resets such as three years and five years are also permissible
investments.
The underlying mortgages that collateralize the ARMs in which the Fund may
invest will frequently have caps and floors which limit the maximum amount by
which the loan rate to the residential borrower may change up or down (1) per
reset or adjustment interval and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting interest
rate changes. These payment caps may result in negative amortization, which can
extend the average life of the securities. Since most ARMs in the Fund's
portfolio will generally have annual reset limits or caps of 100 to 200 basis
points, fluctuations in interest rates above these levels could cause the
mortgage securities to "cap out" and to behave more like long-term, fixed-rate
debt securities.
STRIPPED MORTGAGE-BACKED SECURITIES. The Fund may invest in stripped
mortgage-backed securities to achieve a higher yield than may be available from
fixed-rate mortgage securities. The stripped mortgage securities in which the
Fund may invest will not be limited to those issued or guaranteed by agencies or
instrumentalities of the U.S. government, although such securities are more
liquid than privately issued stripped mortgage securities. Stripped
mortgage-backed securities are usually structured with two classes, each
receiving different proportions of the interest and principal distributions on a
pool of mortgage assets. Typically, one class will receive some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity of an IO and PO class is
extremely sensitive not only to changes in prevailing interest rates but also to
the rate of principal payments (including prepayments) on the related underlying
mortgage assets.
Stripped mortgage-backed securities have greater market volatility than other
types of mortgage securities in which the Fund invests and are purchased and
sold by institutional investors, such as the Fund, through several investment
banking firms acting as brokers or dealers. As these securities were only
recently developed, traditional trading markets have not yet been established
for all stripped mortgage securities. Accordingly, some of these securities may
be illiquid. The staff of the SEC has indicated that only government-issued IO
or PO securities that are backed by fixed-rate mortgages may be deemed to be
liquid, if procedures with respect to determining liquidity are established by a
fund's board. The Board may, in the future, adopt procedures that would permit
the Fund to acquire, hold, and treat as liquid government-issued IO and PO
securities. At the present time, however, all such securities will continue to
be treated as illiquid and will, together with any other illiquid investments,
not exceed 10% of the Fund's net assets. This position may be changed in the
future, without notice to shareholders, in response to the staff's continued
reassessment of this matter, as well as to changing market conditions.
COLLATERALIZED MORTGAGE OBLIGATIONS. CMOs are fixed-income securities that are
collateralized by pools of mortgage loans created by commercial banks, savings
and loan institutions, private mortgage insurance companies, mortgage bankers
and other issuers in the U.S. Timely payment of interest and principal (but not
the market value) of some of these pools is supported by various forms of
insurance or guarantees issued by private issuers, those who pool the mortgage
assets and, in some cases, by U.S. government agencies. The Fund may buy CMOs
that are rated in any category by the rating agencies without insurance or
guarantee if, in the opinion of Advisers, the sponsor is creditworthy.
Prepayments of the mortgages underlying a CMO, which usually increase when
interest rates decrease, will generally reduce the life of the mortgage pool,
thus impacting the CMO's yield. Under these circumstances, the reinvestment of
prepayments will generally be at a rate lower than the rate applicable to the
original CMO.
With a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of a CMO, often referred to as a "tranche," is issued at a specified
coupon rate or adjustable rate and has a stated maturity or final distribution
date. Principal prepayments on collateral underlying a CMO, however, may cause
it to be retired substantially earlier than the stated maturities or final
distribution dates. Interest is paid or accrues on all classes of a CMO on a
monthly, quarterly or semiannual basis. The principal and interest on the
underlying mortgages may be allocated among several classes of a series in many
ways. In a common structure, payments of principal, including any principal
prepayments, on the underlying mortgages are applied to the classes of a series
of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class of
a CMO until all other classes having an earlier stated maturity or final
distribution date have been paid in full.
To the extent any privately issued CMOs in which the Fund invests are considered
by the SEC to be an investment company, the Fund will limit its investments in
such securities in a manner consistent with the provisions of the 1940 Act.
ASSET-BACKED SECURITIES. The Fund may invest in various asset-backed securities
rated in any category by the rating agencies. The underlying assets may include,
but are not limited to, receivables on home equity and credit card loans, and
automobile, mobile home and recreational vehicle loans and leases. There may be
other types of asset-backed securities that are developed in the future in which
the Fund may invest. Asset-backed securities are issued in either a pass-through
structure (similar to a mortgage pass-through structure) or in a pay-through
structure (similar to a CMO structure). In general, asset-backed securities
contain shorter maturities than bonds or mortgage loans and historically have
been less likely to experience substantial prepayment.
Asset-backed securities entail certain risks not presented by mortgage-backed
securities as they do not have the benefit of the same type of security
interests in the underlying collateral. Credit card receivables are generally
unsecured and a number of state and federal consumer credit laws give debtors
the right to set off certain amounts owed on the credit cards, thereby reducing
the outstanding balance. In the case of automobile receivables, there is a risk
that the holders may not have either a proper or first security interest in all
of the obligations backing such receivables due to the large number of vehicles
involved in a typical issuance and the technical requirements imposed under
state laws. Therefore, recoveries on repossessed collateral may not always be
available to support payments on securities backed by these receivables.
OPTIONS ON SECURITIES, INDICES AND FUTURES CONTRACTS. The Fund may write (sell)
covered put and call options and buy put and call options on securities,
securities indices or futures contracts that are traded on U. S. or foreign
exchanges or in the over-the-counter markets. An option on a security or futures
contract is a contract that grants the buyer of the option, in return for the
premium paid, the right to buy a specified security or futures contract (in the
case of a call option) or to sell a specified security or futures contract (in
the case of a put option) from or to the writer of the option at a designated
price during the term of the option. An option on a securities index grants the
buyer of the option, in return for the premium paid, the right to receive from
the seller cash equal to the difference between the closing price of the index
and the exercise price of the option. The Fund may write a call or put option
only if the option is "covered." This means that so long as the Fund is
obligated as the writer of a call option, it will own the underlying securities
or futures contracts subject to the call, or hold a call at the same or lower
exercise price, for the same exercise period, and on the same securities or
futures contracts as the written call. A put is covered if the Fund maintains
liquid assets with a value equal to the exercise price in a segregated account,
or holds a put on the same underlying securities or futures contracts at an
equal or greater exercise price. The Fund will not engage in any stock options
or stock index options if the option premiums paid on its open option positions
exceed 5% of the value of the Fund's total assets.
OPTIONS ON FOREIGN CURRENCIES. The Fund may buy and write put and call options
on foreign currencies traded on U.S. and foreign exchanges or in the
over-the-counter markets. The Fund will buy and write such options for hedging
purposes to protect against declines in the U.S. dollar value of foreign
portfolio securities and against increases in the U.S. dollar cost of foreign
securities or other assets to be acquired.
FUTURES CONTRACTS. For hedging purposes only, the Fund may buy and sell
financial futures contracts, stock and bond index futures contracts and foreign
currency futures contracts. A financial futures contract is an agreement between
two parties to buy or sell a specified debt security at a set price on a future
date. An index futures contract is an agreement to take or make delivery of an
amount of cash based on the difference between the value of the index at the
beginning and at the end of the contract period. A futures contract on a foreign
currency is an agreement to buy or sell a specified amount of a currency for a
set price on a future date. The Fund may not commit more than 5% of its total
assets to initial margin deposits on futures contracts. Please see "How Does the
Fund Invest Its Assets? - Futures Contracts" in the SAI for more information.
FORWARD CURRENCY EXCHANGE CONTRACTS. The Fund may enter into forward currency
exchange contracts to attempt to minimize the risk to the Fund from adverse
changes in the relationship between currencies or to enhance income. A forward
currency exchange contract is an obligation to buy or sell a specific currency
for an agreed price at a future date which is individually negotiated and
privately traded by currency traders and their customers.
The Fund's investment in options, forward currency exchange contracts and
futures contracts, as described above, may be limited by the requirements of the
Code for qualification as a regulated investment company and is subject to
special tax rules that may affect the amount, timing and character of
distributions to you. These securities require the application of complex and
special tax rules and elections. Please see the SAI for more information.
INVERSE FLOATERS. The Fund may invest up to 5% of its total assets in inverse
floaters. Inverse floaters are instruments with floating or variable interest
rates that move in the opposite direction, usually at an accelerated speed, to
short-term interest rates or interest rate indices.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities. A
convertible security is generally a debt obligation or a preferred stock that
may be converted within a specified period of time into a certain amount of
common stock of the same or a different issuer. A convertible security may also
be subject to redemption by the issuer but only after a specified date and under
circumstances established at the time the security is issued. Convertible
securities provide a fixed-income stream and the opportunity, through their
conversion feature, to participate in the capital appreciation resulting from a
market price advance in the convertible security's underlying common stock.
Though the Fund intends to invest in liquid convertible securities there can be
no assurance that this will always be achieved. For more information on
convertible securities, including liquidity issues, please see the SAI.
OTHER INVESTMENT POLICIES OF THE FUND
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may buy U.S. government
obligations on a "when issued" or "delayed delivery" basis. These transactions
are arrangements under which the Fund buys securities that have been authorized
but not yet issued with payment for and delivery of the security scheduled for a
future time, generally in 30 to 60 days. Purchases of U.S. government securities
on a when issued or delayed delivery basis are subject to the risk that the
value or yields at delivery may be more or less than the purchase price or the
yields available when the transaction was entered into. Although the Fund will
generally buy U.S. government securities on a when issued basis with the
intention of holding the securities, it may sell the securities before the
settlement date if it is deemed advisable. When the Fund is the buyer in this
type of transaction, it will maintain, in a segregated account with its
custodian bank, cash or high-grade marketable securities having an aggregate
value equal to the amount of the Fund's purchase commitments until payment is
made. To the extent the Fund engages in when issued and delayed delivery
transactions, it will do so only for the purpose of acquiring portfolio
securities consistent with its investment objectives and policies, and not for
the purpose of investment leverage. In when issued and delayed delivery
transactions, the Fund relies on the seller to complete the transaction. The
seller's failure to do so may cause the Fund to miss a price or yield considered
advantageous to the Fund. Securities purchased on a when issued or delayed
delivery basis do not generally earn interest until their scheduled delivery
date. Entering into a when issued or delayed delivery date. Entering into a when
issued or delayed delivery transaction is a form of leverage that may affect
changes in Net Asset Value to a greater extent.
MORTGAGE DOLLAR ROLLS. The Fund may enter into mortgage dollar rolls in which
the Fund sells mortgage-backed securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (name, type, coupon
and maturity) securities on a specified future date. During the period between
the sale and repurchase, the Fund forgoes principal and interest paid on the
mortgage-backed securities. The Fund is compensated by the difference between
the current sale price and the lower price for the future purchase (often
referred to as the "drop"), as well as by the interest earned on the cash
proceeds of the initial sale. A "covered roll" is a specific type of mortgage
dollar roll for which there is an offsetting cash position or a cash equivalent
security position. The Fund could suffer a loss if the contracting party fails
to perform the future transaction in that the Fund may not be able to buy back
the mortgage-backed securities it initially sold. The Fund intends to enter into
mortgage dollar rolls only with government securities dealers recognized by the
Federal Reserve Board or with member banks of the Federal Reserve System.
INTEREST RATE AND CURRENCY SWAPS. Interest rate swaps involve an exchange
between the Fund and another party of their respective commitments to pay or
receive interest, such as an exchange of fixed rate payments for floating rate
payments. Currency swaps involve the exchange of the parties' respective rights
to make or receive payments in specified currencies. Since interest rate and
currency swaps are individually negotiated, the Fund expects to achieve an
acceptable degree of correlation between its portfolio investments and its
interest rate or currency swap positions.
The use of interest rate and currency swaps is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. If Advisers is incorrect in its
forecasts of market values, interest rates and currency exchange rates, the
investment performance of the Fund would be less favorable than it would have
been if this investment technique was not used.
LOAN PARTICIPATIONS AND DEFAULTED DEBT SECURITIES. Loan participations are
interests in floating or variable rate senior loans to U.S. corporations,
partnerships and other entities. While loan participations generally trade at
par value, the Fund will acquire those selling at a discount because of the
borrower's credit problems. To the extent the borrower's credit problems are
resolved, the loan participation may appreciate in value. Advisers may acquire
loan participations for the Fund when they believe, over the long term,
appreciation will occur. An investment in these securities, however, carries
substantially the same risks associated with an investment in defaulted debt
securities and may result in the loss of the Fund's entire investment. The Fund
will buy defaulted debt securities if, in the opinion of Advisers, it appears
the issuer may resume interest payments or other advantageous developments
appear likely in the near future. Loan participations and defaulted debt
securities may be considered illiquid and, if so, will be included in the 10%
limitation discussed under "Illiquid Investments." See also "What Are the Fund's
Potential Risks? - High Yielding, Fixed-Income Securities."
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors, if
such loans do not exceed 331/3% of the value of the Fund's total assets at the
time of the most recent loan. The Fund currently intends, however, not to exceed
10% of the value of the Fund's total assets at the time of the most recent loan.
The borrower must deposit with the Fund's custodian bank collateral with an
initial market value of at least 102% of the initial market value of the
securities loaned, including any accrued interest, with the value of the
collateral and loaned securities marked-to-market daily to maintain collateral
coverage of at least 100%. This collateral shall consist of cash, securities
issued by the U.S. government, its agencies or instrumentalities, or irrevocable
letters of credit. The lending of securities is a common practice in the
securities industry. The Fund may engage in security loan arrangements with the
primary objective of increasing the Fund's income either through investing cash
collateral in short-term interest bearing obligations or by receiving a loan
premium from the borrower. Under the securities loan agreement, the Fund
continues to be entitled to all dividends or interest on any loaned securities.
As with any extension of credit, there are risks of delay in recovery and loss
of rights in the collateral should the borrower of the security fail
financially.
BORROWING. The Fund does not borrow money or mortgage or pledge any of its
assets, except that the Fund may borrow for temporary or emergency purposes, in
an amount not to exceed 5% of its total assets.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions, in which
the Fund buys a U.S. government security subject to resale to a bank or dealer
at an agreed-upon price and date. The transaction requires the collateralization
of the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller may cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund may
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks that are deemed creditworthy by Advisers. A
repurchase agreement is deemed to be a loan by the Fund under federal securities
laws. The U.S. government security subject to resale (the collateral) is held on
behalf of the Fund by a custodian bank approved by the Board and is held
pursuant to a written agreement.
SHORT-TERM INVESTMENTS. The Fund may invest its cash, including cash resulting
from purchases and sales of Fund shares, in short-term debt instruments,
including U.S. government securities, high grade commercial paper, repurchase
agreements and other money market equivalents and, subject to the terms of an
order of exemption from the SEC, the shares of affiliated money market funds
that invest primarily in short-term debt securities. These temporary investments
may be made either for liquidity purposes, to meet shareholder redemption
requirements or as a temporary defensive measure.
ILLIQUID INVESTMENTS. The Fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them. Subject to this
limitation, the Board has authorized the Fund to invest in restricted securities
where such investments are consistent with the Fund's investment objectives and
has authorized such securities to be considered liquid to the extent Advisers
determines on a daily basis that there is a liquid institutional or other market
for such securities.
NON-DIVERSIFICATION. The Fund is non-diversified under the federal securities
laws. As a non-diversified Fund, there is no restriction under the 1940 Act on
the percentage of the Fund's assets that may be invested in the securities of
any one issuer. The Fund, however, intends to comply with the diversification
and other requirements of the Code applicable to regulated investment companies,
such as the Fund, so that it will not be subject to U.S. federal income tax on
income and capital gain distributions to shareholders. Accordingly, the Fund
will not buy securities if, as a result, more than 25% of its total assets would
be invested in the securities of a single issuer, or with respect to 50% of its
total assets, more than 5% of those assets would be invested in the securities
of a single issuer. To the extent the Fund is not fully diversified, it may be
more susceptible to adverse economic, political or regulatory developments
affecting a single issuer than if it were more fully diversified.
In addition, it is the present policy of the Fund (which may be changed without
shareholder approval) not to invest more than 5% of its total assets in
companies that have a record of less than three years continuous operation,
including predecessors. These investments, together with any illiquid
securities, may not exceed 10% of the Fund's net assets. In addition the Fund
may not engage in joint or joint and several trading accounts in securities,
except that an order to purchase or sell may be combined with orders from other
persons to obtain lower brokerage commissions and except that the Fund may
engage in joint repurchase agreement arrangements.
The Fund will not invest more than 25% of its total assets in any one industry.
To the extent required by and in conformance with an interpretive position taken
by the SEC, securities issued by a foreign government, its agencies or
instrumentalities are deemed to be an "industry" for purposes of this
limitation.
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.
Each of the Fund's policies and restrictions discussed in this prospectus and in
the SAI is considered at the time the Fund makes an investment. The Fund is
generally not required to sell a security because of a change in circumstances.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
HIGH YIELD SECURITIES. Because the Fund may invest in securities below
investment grade, an investment in the Fund is subject to a higher degree of
risk than an investment in a fund that invests primarily in higher-quality
securities. You should consider the increased risk of loss to principal that is
present with an investment in higher risk securities, such as those in which the
Fund invests. Accordingly, an investment in the Fund should not be considered a
complete investment program and should be carefully evaluated for its
appropriateness in light of your overall investment needs and goals.
The market value of high yield, lower-quality fixed-income securities, commonly
known as junk bonds, tends to reflect individual developments affecting the
issuer to a greater degree than the market value of higher-quality securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality securities also tend to be more sensitive to economic conditions
than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with buying the securities of these issuers is generally
greater than the risk associated with higher-quality securities. For example,
during an economic downturn or a sustained period of rising interest rates,
issuers of lower-quality securities may experience financial stress and may not
have sufficient cash flow to make interest payments. The issuer's ability to
make timely interest and principal payments may also be adversely affected by
specific developments affecting the issuer, including the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the Fund's portfolio defaults, the Fund may have unrealized losses on the
security, which may lower the Fund's Net Asset Value. Defaulted securities tend
to lose much of their value before they default. Thus, the Fund's Net Asset
Value may be adversely affected before an issuer defaults. In addition, the Fund
may incur additional expenses if it must try to recover principal or interest
payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the Fund. Although these
securities are typically not callable for a period of time, usually for three to
five years from the date of issue, if an issuer calls its securities during
periods of declining interest rates, Advisers may find it necessary to replace
the securities with lower-yielding securities, which could result in less net
investment income for the Fund. The premature disposition of a high yield
security due to a call or buy-back feature, the deterioration of an issuer's
creditworthiness, or a default by an issuer may make it more difficult for the
Fund to manage the timing of its income. Under the Code and U.S. Treasury
regulations, the Fund may have to accrue income on defaulted securities and
distribute the income to shareholders for tax purposes, even though the Fund is
not currently receiving interest or principal payments on the defaulted
securities. To generate cash to satisfy these distribution requirements, the
Fund may have to sell portfolio securities that it otherwise may have continued
to hold or use cash flows from other sources, such as the sale of Fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse impact
on market price of a security and on the Fund's ability to sell a security in
response to a specific economic event, such as a deterioration in the
creditworthiness of the issuer, or if necessary to meet the Fund's liquidity
needs. Reduced liquidity may also make it more difficult to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
The Fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry restrictions
on resale. While many high yielding securities have been sold with registration
rights, covenants and penalty provisions for delayed registration, if the Fund
is required to sell restricted securities before the securities have been
registered, it may be deemed an underwriter of the securities under the
Securities Act of 1933, which entails special responsibilities and liabilities.
The Fund may also incur special costs in disposing of restricted securities,
although the Fund will generally not incur any costs when the issuer is
responsible for registering the securities.
The Fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other characteristics.
The Fund has no arrangement with its underwriter or any other person concerning
the acquisition of these securities.
The high yield securities market is relatively new and much of its growth before
1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yield securities and adversely affected the value
of outstanding securities, as well as the ability of issuers of high yield
securities to make timely principal and interest payments. Although the economy
has improved and high yield securities have performed more consistently since
that time, the adverse effects previously experienced may reoccur. For example,
the highly publicized defaults on some high yield securities during 1989 and
1990 and concerns about a sluggish economy that continued into 1993, depressed
the prices of many of these securities. While market prices may be temporarily
depressed due to these factors, the ultimate price of any security generally
reflects the true operating results of the issuer. Factors adversely impacting
the market value of high yield securities may lower the Fund's Net Asset Value.
The Fund relies on Advisers' judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, Advisers takes into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
The table below shows the percentage of the Fund's assets invested in
fixed-income securities rated in each of the rating categories shown. A credit
rating by a rating agency evaluates the safety of principal and interest based
on an evaluation of the security's credit quality, but does not consider the
market risk or the risk of fluctuation in the price of the security. The
information shown is based on a dollar-weighted average of the Fund's portfolio
composition based on month-end assets for each of the 12 months in the fiscal
year ended April 30, 1997.
AVERAGE WEIGHTED
S&P RATING PERCENTAGE OF ASSETS
AAA 18.24%
AA+ 8.67%
AA 4.98%
A- 0.25%
BBB 0.77%
BBB- 0.55%
BB+ 1.64%
BB 6.34%
BB- 6.33%
B+ 10.65%
B 13.40%
B- 6.73%
CCC+ 1.20%
N/R 9.41%*
*Not rated by a rating agency.
FOREIGN SECURITIES. Investments in the securities of companies organized outside
the U.S. or whose securities are principally traded outside the U.S. ("foreign
issuers") or investments in securities denominated or quoted in a foreign
currency ("non-dollar securities") may offer potential benefits not available
from investments solely in securities of U.S. issuers or U.S. dollar denominated
securities. Such benefits may include the opportunity to invest in foreign
issuers that appear, in the opinion of Advisers, to offer more potential for
long-term capital appreciation or current earnings than investments in U.S.
issuers, the opportunity to invest in foreign countries with economic policies
or business cycles different from those of the U.S. and the opportunity to
reduce fluctuations in portfolio value by taking advantage of foreign securities
markets that do not necessarily move in a manner parallel to U.S. markets.
Investments in non-dollar securities or in the securities of foreign issuers
involve significant risks that are not typically associated with investments in
U.S. dollar denominated securities or in securities of U.S. issuers. These
risks, which may involve possible losses, include political, social or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of the imposition of exchange
controls, expropriation, limits on removal of currency or other assets,
nationalization of assets, foreign withholding and income taxation and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Changes in government administrations and economic or
monetary policies in the U.S. or abroad, circumstances surrounding dealings
between nations, and currency convertibility or exchange rates could result in
investment losses for the Fund. In addition, public information may not be as
available for a foreign company as it is for a U.S. domiciled company, as
foreign companies are generally not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to U.S. companies,
and there is usually less government regulation of securities exchanges, brokers
and listed companies. Confiscatory taxation or diplomatic developments could
also affect these investments.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with applicable U.S. and foreign currency
restrictions and other laws limiting the amount and types of foreign
investments. Investments may be in securities of foreign issuers located in
developed, emerging or developing countries, but investments will not be made in
any securities issued without stock certificates or comparable stock documents.
Foreign securities may be subject to greater fluctuations in price than U.S.
corporate debt or U.S. government securities. The markets on which foreign
securities trade may have less volume and liquidity, and may be more volatile
than securities markets in the U.S. Under certain market conditions, these
investments may be less liquid than U.S. debt securities and are certainly less
liquid than U.S. government securities. Finally, in the event of a default of
any foreign debt obligations, it may be more difficult for the Fund to obtain or
to enforce a judgment against the issuer of the security.
Securities that may be acquired by the Fund outside the U.S. and which are
publicly traded in the U.S. or on a foreign securities exchange or in a foreign
securities market will not be considered an illiquid asset so long as the Fund
acquires and holds the security with the intention of reselling the security in
the foreign trading market, the Fund reasonably believes it can readily dispose
of the security for cash in the U.S. or foreign market, and current market
quotations are readily available.
The Fund may buy securities in any foreign country, developed, emerging or
developing. Investors should consider carefully the substantial risks involved
in investing in securities issued by companies and governments of foreign
countries, risks that are often heightened for investments in developing or
emerging markets. For example, the small size, inexperience and limited volume
of trading of securities markets in certain countries may make the Fund's
investments illiquid and more volatile than investments in more developed
countries, and the Fund may be required to establish special custody or other
arrangements before making certain investments in such countries. The laws of
some foreign countries may also limit the ability of the Fund to invest in
securities of certain issuers located in those countries.
MORTGAGE SECURITIES. Mortgage securities differ from conventional bonds in that
principal is paid back over the life of the mortgage security rather than at
maturity. As a result, the holder of a mortgage security (i.e., the Fund)
receives scheduled monthly payments of principal and interest, and may receive
unscheduled principal payments representing prepayments on the underlying
mortgages. When the holder reinvests the payments and any unscheduled
prepayments of principal it receives, it may receive a rate of interest which is
lower than the rate on the existing mortgage security. For this reason, mortgage
securities may be less effective than other types of U.S. government securities
as a means of "locking in" long-term interest rates.
The market value of mortgage securities, like other U.S. government securities,
will generally vary inversely with changes in market interest rates, declining
when interest rates rise and rising when interest rates decline. Mortgage
securities may have less potential for capital appreciation than other
investments of comparable maturities due to the likelihood of increased
prepayments of mortgages as interest rates decline. In addition, to the extent
mortgage securities are purchased at a premium, unscheduled principal
prepayments, including prepayments resulting from mortgage foreclosures, may
result in some loss of the holder's principal investment to the extent of the
premium paid. On the other hand, if mortgage securities are purchased at a
discount, both a scheduled payment of principal and an unscheduled prepayment of
principal will increase current and total returns and will accelerate the
recognition of income which, when distributed to you, will be taxable as
ordinary income.
OPTIONS AND FUTURES CONTRACTS. The purchase and sale of futures contracts and
options thereon, as well as the purchase and writing of options on securities
and securities indices and currencies, involve risks different from those
involved with direct investments in securities. A liquid secondary market for a
futures or options contract may not be available when a futures or options
position is sought to be closed and the inability to close a position may have
an adverse impact on the Fund's ability to effectively hedge securities or
foreign currency exposure. In addition, there may be an imperfect correlation
between movements in the securities or foreign currency on which the futures or
options contract is based and movements in the securities or currency in the
Fund's portfolio. Successful use of futures or options contracts is further
dependent on Advisers' ability to correctly predict movements in the securities
or foreign currency markets and no assurance can be given that their judgment
will be correct. In addition, by writing covered call options, the Fund gives up
the opportunity to profit from any price increase in the underlying security
above the option exercise price, while the option is in effect. Options, futures
and options on futures are generally considered derivative securities.
INTEREST RATE, CURRENCY AND MARKET RISK. To the extent the Fund invests in debt
securities, changes in interest rates in any country where the Fund is invested
will affect the value of the Fund's portfolio and its share price. Rising
interest rates, which often occur during times of inflation or a growing
economy, are likely to have a negative effect on the value of the Fund's shares.
To the extent the Fund invests in common stocks, a general market decline in any
country where the Fund is invested, may cause the value of what the Fund owns,
and thus the Fund's share price to decline. Changes in currency valuations may
also affect the price of Fund shares. The value of stock markets, currency
valuations, and interest rates throughout the world has increased and decreased
in the past. These changes are unpredictable.
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 $199 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.
Under an agreement with Advisers, TICI is the sub-advisor of the Fund. TICI
provides Advisers with investment management advice and assistance. TICI's
activities are subject to the Board's review and control, as well as Advisers'
instruction and supervision.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is: Mr. Molumphy since inception and Mr. Dickson since June
1995.
Christopher Molumphy
Vice President of Advisers
Mr. Molumphy is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of Chicago. He earned his Bachelor of
Arts degree in economics from Stanford University. He has been with Advisers or
an affiliate since 1988. Mr. Molumphy is a member of several securities
industry-related associations.
Thomas J. Dickson
Portfolio Manager of TICI
Mr. Dickson received his Bachelor of Science degree in managerial economics from
the University of California at Davis. Mr. Dickson joined Franklin in 1992 and
Templeton in 1994.
MANAGEMENT FEES. During the fiscal year ended April 30, 1997, management fees,
before any advance waiver, totaled 0.63% and operating expenses, before any
advance waiver, totaled 1.05% of the average daily net assets of the Fund. Under
an agreement by Advisers to waive its fees, the Fund paid no management fees and
operating expenses totaling 0.23%. Advisers may end this arrangement at any time
upon notice to the Board.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares, 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 RULE 12B-1 PLAN
The Fund has a distribution plan or "Rule 12b-1 Plan" under which it may
reimburse Distributors or others for the expenses of activities that are
primarily intended to sell shares of the Fund. These expenses may include, among
others, distribution or service fees paid to Securities Dealers or others who
have executed a servicing agreement with the Fund, Distributors or its
affiliates; a prorated portion of Distributors' overhead expenses; and the
expenses of printing prospectuses and reports used for sales purposes, and
preparing and distributing sales literature and advertisements.
Payments by the Fund under the plan may not exceed 0.25% per year of the Fund's
average daily net assets. All distribution expenses over this amount will be
borne by those who have incurred them. During the first year after certain
puchases 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
measures of performance are total return, current yield and current distribution
rate. Performance figures are usually calculated using the maximum sales charge,
but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield shows the
income per share earned by the Fund. The current distribution rate shows the
dividends or distributions paid to shareholders by the Fund. This rate is
usually computed by annualizing the dividends paid per share during a certain
period and dividing that amount by the current Offering Price. Unlike current
yield, the current distribution rate may include income distributions from
sources other than dividends and interest received by the Fund.
The Fund's investment results will vary. Performance figures are always based on
past performance and do not guarantee future results. For a more detailed
description of how the Fund calculates its performance figures, please see "How
does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund is treated as a separate entity for federal income tax purposes. The
Fund has elected and intends to continue to qualify as a regulated investment
company under Subchapter M of the Code. By distributing all of its income and
meeting certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will generally not be liable for federal
income or excise taxes.
For federal income tax purposes, any income dividends that you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned Fund shares and regardless of whether you receive
such distributions in cash or in additional shares.
Pursuant to the Code, certain distributions that are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated for tax purposes as if received by
you on December 31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to such shares.
For corporate investors, 4.63% of the ordinary income distributions (including
short-term capital gain distributions) paid by the Fund for the fiscal year
ended April 30, 1997, qualified for the corporate dividends-received deduction
because of the Fund's principal investment in debt securities. The availability
of the deduction is subject to certain holding period and debt financing
restrictions imposed under the Code on the corporation claiming the deduction.
These restrictions are discussed under "Additional Information on Distribution
and Taxes" in the SAI.
The Fund will inform you of the source of its dividends and distributions at the
time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of such dividends
and distributions.
If you are not considered a U.S. person for federal income tax purposes, you
should consult with your financial or tax advisor regarding the applicability of
U.S. withholding or other taxes to distributions received by you from the Fund
and the application of foreign tax laws to these distributions.
You should also consult your tax advisor with respect to the applicability of
any state and local intangible property or income taxes on your shares of the
Fund and distributions and redemption proceeds received from the Fund.
HOW IS THE TRUST ORGANIZED?
The Fund is a non-diversified series of Franklin Strategic Series (the "Trust"),
an open-end management investment company, commonly called a mutual fund. It was
organized as a Delaware business trust on January 22, 1991, and is registered
with the SEC under the 1940 Act. Shares of each series of the Trust have equal
and exclusive rights to dividends and distributions declared by that series and
the net assets of the series in the event of liquidation or dissolution. Shares
of the Fund are considered Class I shares for redemption, exchange and other
purposes. Additional series and classes of shares may be offered in the future.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the Trust may hold a special meeting, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares. In
certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check.
MINIMUM
INVESTMENTS*
To Open Your Account $100
To Add to Your Account$ 25
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares.
SALES CHARGE REDUCTIONS AND WAIVERS
IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH
EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't
include this statement, we cannot guarantee that you will receive the sales
charge reduction or waiver.
QUANTITY DISCOUNTS. The sales charge you pay depends on the dollar amount you
invest, as shown in the table below.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS
AMOUNT OF PURCHASE OFFERING NET AMOUNT A PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- ------------------------------------------------------------------------------
Under $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more* None None None
*If you invest $1 million or more, a Contingent Deferred Sales Charge may be
imposed on an early redemption. Please see "How Do I Sell Shares? - Contingent
Deferred Sales Charge." Please also see "Other Payments to Securities Dealers"
below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases.
CUMULATIVE QUANTITY DISCOUNTS. To determine if you may pay a reduced sales
charge, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your existing shares in the Franklin Templeton
Funds, as well as those of your spouse, children under the age of 21 and
grandchildren under the age of 21. If you are the sole owner of a company, you
may also add any company accounts, including retirement plan accounts. Companies
with one or more retirement plans may add together the total plan assets
invested in the Franklin Templeton Funds to determine the sales charge that
applies.
LETTER OF INTENT. You may buy shares at a reduced sales charge by completing the
Letter of Intent section of the shareholder application. A Letter of Intent is a
commitment by you to invest a specified dollar amount during a 13 month period.
The amount you agree to invest determines the sales charge you pay.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Fund shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Fund
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
SALES CHARGE WAIVERS. The Fund's front-end sales charge and Contingent Deferred
Sales Charge do not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) the distributions may be from either Class I or
Class II shares of a fund.
The Fund's sales charges do not apply if you are buying shares with money from
the following sources:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a real estate investment trust (REIT) sponsored or advised by Franklin
Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds, the Templeton Variable Annuity Fund,
the Templeton Variable Products Series Fund, or the Franklin Government
Securities Trust. You should contact your tax advisor for information on
any tax consequences that may apply.
4. Redemptions from any Franklin Templeton Fund if you:
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.
The Fund's sales charges also do not apply to purchases by:
5. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
6. Group annuity separate accounts offered to retirement plans
7. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
8. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments by the
Fund on arbitrage rebate calculations.
9. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs.
10. Registered Securities Dealers and their affiliates, for their investment
accounts only
11. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
12. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
13. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
14. Accounts managed by the Franklin Templeton Group
15. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with at
least 100 employees, or (ii) have plan assets of $1 million or more, or (iii)
agree to invest at least $500,000 in the Franklin Templeton Funds over a 13
month period may buy shares without a front-end sales charge. Retirement plans
that are not Qualified Retirement Plans or SEPs, such as 403(b) or 457 plans,
must also meet the requirements described under "Group Purchases" above. For
retirement plan accounts opened on or after May 1, 1997, a Contingent Deferred
Sales Charge may apply if the account is closed within 365 days of the
retirement plan account's initial purchase in the Franklin Templeton Funds.
Please see "How Do I Sell Shares? - Contingent Deferred Sales Charge" for
details.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for certain purchases made without a sales charge. The payments
are subject to the sole discretion of Distributors, and are paid by Distributors
or one of its affiliates and not by the Fund or its shareholders.
1. Purchases of $1 million or more - up to 0.75% of the amount invested.
2. Purchases made without a front-end sales charge by certain retirement plans
described under "Sales Charge Reductions and Waivers - Retirement Plans" above -
up to 1% of the amount invested. For retirement plan accounts opened on or after
May 1, 1997, a Contingent Deferred Sales Charge will not apply to the account if
the Securities Dealer chooses to receive a payment of 0.25% or less or if no
payment is made.
3. Purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the amount
invested.
4. Purchases by Chilean retirement plans - up to 1% of the amount invested.
A Securities Dealer may receive only one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1 or 4 above or a payment of up to 1% for investments
described in paragraph 2 will be eligible to receive the Rule 12b-1 fee
associated with the purchase starting in the thirteenth calendar month after the
purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums.
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 want to exchange
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to exchange by phone to apply to
your account, please let us know.
- --------------------------------------------------------------------------------
THROUGH
YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred Sales
Charge when you exchange shares. Any shares subject to a Contingent Deferred
Sales Charge at the time of exchange, however, will remain so in the new fund.
For accounts with shares subject to a Contingent Deferred Sales Charge, we will
first exchange any shares in your account that are not subject to the charge. If
there are not enough of these to meet your exchange request, we will exchange
shares subject to the charge 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, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. Please notify us in writing if you do not want this
option to be available on your account. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the Fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the Fund more than twice in a calendar
quarter, or (iii) exchanged shares equal to at least $5 million, or more
than 1% of the Fund's net assets. Shares under common ownership or control
are combined for these limits. If you have exchanged shares as described in
this paragraph, you will be considered a Market Timer. Each exchange by a
Market Timer, if accepted, will be charged $5.00. Some of our funds do not
allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Advisor Class" or "Class Z" shares. Because the
Fund does not currently offer an Advisor Class, you may exchange Advisor Class
shares of any Franklin Templeton Fund for shares of the Fund at Net Asset Value.
If you do so and you later decide you would like to exchange into a fund that
offers an Advisor Class, you may exchange your Fund shares for Advisor Class
shares of that fund. Certain shareholders of Class Z shares of Franklin Mutual
Series Fund Inc. may also exchange their Class Z shares for shares of the Fund
at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL 1. Send us written instructions signed by all account
owners. If you would like your redemption proceeds wired to
a bank account, your instructions should include:
o The name, address and telephone number of the bank where you
want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit union, the
name of the corresponding bank and the account number
2. Include any outstanding share certificates for the shares
you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may
have other requirements.
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other than an
escrow account, you must first sign up for the wire feature. To
sign up, send us written instructions, with a signature
guarantee. To avoid any delay in processing, the instructions
should include the items listed in "By Mail" above.
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY PHONE (CONT.) Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts may
exceed $50,000 by completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for the shares you
want to sell or you have already returned them to the Fund
o Unless you are selling shares in a Trust Company retirement
plan account
o Unless the address on your account was changed by phone
within the last 15 days.
If you do not want the ability to redeem by phone to apply
to your account, please let us know.
- --------------------------------------------------------------------------------
THROUGH
YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
If you did not pay a front-end sales charge because you invested $1 million or
more or agreed to invest $1 million or more under a Letter of Intent, a
Contingent Deferred Sales Charge may apply if you sell all or a part of your
investment within the Contingency Period. Once you have invested $1 million or
more, any additional investments you make without a sales charge may also be
subject to a Contingent Deferred Sales Charge if they are sold within the
Contingency Period. The charge is 1% of the value of the shares sold or the Net
Asset Value at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy shares without a front-end sales charge may also be subject to a
Contingent Deferred Sales Charge if the retirement plan account is closed within
365 days of the account's initial purchase in the Franklin Templeton Funds.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997, or
(ii) the Securities Dealer of record received a payment from Distributors of
0.25% or less, or (iii) Distributors did not make any payment in connection
with the purchase, as described under "How Do I Buy Shares? - Other Payments
to Securities Dealers"
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, at a rate of up to 1% a month of an account's Net Asset Value. For
example, if you maintain an annual balance of $1 million, you can redeem up
to $120,000 annually through a systematic withdrawal plan free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Redemptions by Trust Company employee benefit plans or employee benefit plans
serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee benefit
plans
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income monthly to
shareholders of record on the last business day of that month and pays them on
or about the 15th day of the next month.
Capital gains, if any, may be distributed annually, usually in December.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy additional shares of the Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge) by
reinvesting capital gain distributions, or both dividend and capital gain
distributions. This is a convenient way to accumulate additional shares and
maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge).
Many shareholders find this a convenient way to diversify their investments.
3. Receive distributions in cash - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE FUND. You
may change your distribution option at any time by notifying us by mail or
phone. Please allow at least seven days before the record date for us to process
the new option. For Trust Company retirement plans, special forms are required
to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value per
share, plus any applicable sales charges. When you sell shares, you receive the
Net Asset Value per share.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
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.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by phone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, ALL owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- --------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- --------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have let us know
that you do not want telephone privileges to apply to your account.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below. Once your plan
is established, any distributions paid by the Fund will be automatically
reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the Fund's code number to use TeleFACTS(R). The Fund's code number
is 194.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. TICI is
located at Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida
33394-3091. You may also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION PACIFIC TIME
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - Certain funds in the Franklin Templeton Funds offer
multiple classes of shares. The different classes have proportionate interests
in the same portfolio of investment securities. They differ, however, primarily
in their sales charge structures and Rule 12b-1 plans. Because the Fund's sales
charge structure and Rule 12b-1 plan are similar to those of Class I shares,
shares of the Fund are considered Class I shares for redemption, exchange and
other purposes.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - The 12 month period during which a Contingent Deferred
Sales Charge may apply. Regardless of when during the month you purchased
shares, they will age one month on the last day of that month and each following
month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
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 TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds.
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the front-end sales charge. The maximum front-end sales
charge is 4.25%.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
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
TICI - Templeton Investment Counsel, Inc., the Fund's sub-advisor
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.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
COMMERCIAL PAPER RATINGS
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
PROSPECTUS & APPLICATION
FRANKLIN MIDCAP GROWTH FUND
INVESTMENT STRATEGY
GROWTH
SEPTEMBER 1, 1997
FRANKLIN STRATEGIC SERIES
This prospectus describes the Franklin MidCap Growth Fund (the "Fund"). It
contains information you should know before investing in the Fund. Please keep
it for future reference.
The Fund has a Statement of Additional Information ("SAI"), dated September 1,
1997, as may be amended from time to time. It 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 its
address.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
FRANKLIN MIDCAP GROWTH FUND
September 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? ................................... 10
Who Manages the Fund? .................................................. 12
How does the Fund Measure Performance? ................................. 14
How Taxation Affects the Fund and its Shareholders ..................... 15
How is the Trust Organized? ............................................ 16
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ................................................... 17
May I Exchange Shares for Shares of Another Fund? ...................... 22
How Do I Sell Shares? .................................................. 24
What Distributions Might I Receive from the Fund? ...................... 27
Transaction Procedures and Special Requirements ........................ 28
Services to Help You Manage Your Account ............................... 33
What If I Have Questions About My Account? ............................. 35
GLOSSARY
Useful Terms and Definitions ........................................... 36
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the Fund's historical expenses for the fiscal year ended
April 30, 1997. The Fund's actual expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge Imposed on Purchases
(as a percentage of Offering Price) 4.50%++
Deferred Sales Charge None+++
Exchange Fee (per transaction) $5.00*
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.65%
Rule 12b-1 Fees 0.14%**
Other Expenses 0.28%
Total Fund Operating Expenses 1.07%
C. EXAMPLE
Assume the Fund's annual return is 5%, operating expenses are as described
above, and you sell your shares after the number of years shown. These are the
projected expenses for each $1,000 that you invest in the Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$55*** $78 $101 $170
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected
in its Net Asset Value or dividends and are not directly charged to your
account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more.
+++A Contingent Deferred Sales Charge of 1% may apply to purchases of $1 million
or more if you sell the shares within one year. A Contingent Deferred Sales
Charge may also apply to purchases by certain retirement plans that qualify to
buy shares without a front-end sales charge. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**These fees may not exceed 0.35%. The combination of front-end sales charges
and Rule 12b-1 fees could cause long-term shareholders to pay more than the
economic equivalent of the maximum front-end sales charge permitted under the
NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering the periods shown below appears in the financial
statements in the Trust's Annual Report to Shareholders for the fiscal year
ended April 30, 1997. The Annual Report to Shareholders also includes more
information about the Fund's performance. For a free copy, please call Fund
Information.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Year Ended April 30, 1997 1996 1995 19941
====================================================================================
Per Share Operating Performance
Net Asset Value at Beginning of Period $14.24 $10.81 $10.05 $10.00
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
Net Investment Income (Loss) (.02) .18 .21 .15
Net Realized & Unrealized Gain on Securities .933 3.585 .769 .014
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
Total From Investment Operations .913 3.765 .979 .164
- ------------------------------------------------------------------------------------
Distributions From Net Investment Income (.050) (.208) (.204) (.079)
Distributions From Realized Capital Gains (1.763) (.127) (.015) (.035)
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
Total Distributions (1.813) (.335) (.219) (.114)
Net Asset Value at End of Period $13.34*** $14.24 $10.81 $10.05
- ------------------------------------------------------------------------------------
Total Return* 6.31% 35.40% 10.06% 1.62%
Ratios/Supplemental Data
Net Assets at End of Period (in 000's) $12,853 $7,575 $5,591 $5,079
Ratios of Expenses to Average Net Assets 1.07% .16%++ --++ --++
Ratio of Net Investment Income (Loss)
to Average Net Assets (.22)% 1.42% 2.12% 2.21%**
Portfolio Turnover Rate 76.35% 102.65% 163.54% 70.53%
Average Commission Rate+ .0550 .0467 -- --
</TABLE>
1For the period August 17, 1993 (effective date) to April 30, 1994.
*Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum front-end sales
charge or the Contingent Deferred Sales Charge and assumes reinvestment of
dividends and capital gains at Net Asset Value.
**Annualized.
***The Net Asset Value differs from the Net Asset Value used to process
shareholder activity as of the reporting date, which does not include market
adjustment for portfolio trades made on that date. These adjustments are
generally accounted for on the day following the trade date.
+Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
++During the periods indicated, the investment manager agreed in advance to
waive a portion or all of its management fees and made payments of other
expenses incurred by the Fund. Had such action not been taken, the ratios of
operating expenses to average net assets would have been as follows:
RATIO OF EXPENSES
TO AVERAGE NET ASSETS
- ------------------------------------------
1994 .91%**
1995 .98%
1996 .96%
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is long-term capital growth. The objective is a
fundamental policy of the Fund and may not be changed without shareholder
approval. Of course, there is no assurance that the Fund's objective will be
achieved.
The Fund seeks to accomplish its objective by investing primarily in equity
securities of medium capitalization companies that Advisers believes are
positioned for rapid growth in revenues or earnings and assets, characteristics
that may provide for significant capital appreciation. The Fund will invest in
medium capitalization companies that have a market capitalization range between
$200 million and $5 billion. Market capitalization is defined as the total
market value of a company's outstanding stock. The securities of medium
capitalization companies are traded on the NYSE and AMEX and in the
over-the-counter market. Investing in medium capitalization stocks may involve
greater risk than investing in large capitalization stocks, since they can be
subject to more abrupt or erratic movements. They tend, however, to involve less
risk than stocks of small capitalization companies. Medium capitalization
companies may offer greater potential for capital appreciation as these
companies are often growing more rapidly than larger companies, but tend to be
more stable and established than small capitalization or emerging companies.
Advisers selects medium capitalization equity securities for the Fund based on
characteristics such as the financial strength of the company, the expertise of
management, the growth potential of the company within its industry and the
growth potential of the industry itself.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
Under normal market conditions, the Fund will invest at least 65% of its total
assets in equity securities of medium capitalization growth companies. Equity
securities of these companies consist of:
o common or preferred stock;
o warrants for the purchase of common or preferred stock; and
o debt securities convertible into or exchangeable for common or preferred
stock.
The Fund may also buy options on stocks and stock indices, and futures and
options on futures contracts on stock indices as a hedge against changes
resulting from market conditions in the values of its securities, securities
that it intends to buy and to accommodate cash flows. Options, futures and
options on futures are generally considered "derivative securities."
Consistent with its objective, the Fund attempts to be fully invested at all
times in equity securities and, under normal market conditions, its assets will
be invested primarily in a diversified portfolio of medium capitalization
stocks.
The Fund may invest up to 35% of its total assets in equity securities that are
outside the medium market capitalization range but with similar potential for
capital appreciation, or in corporate debt securities, if the Fund believes the
investment presents a favorable investment opportunity. The Fund may invest in
corporate debt securities including bonds, notes and debentures. The Fund will
invest in debt securities that Advisers believes present an opportunity for
capital appreciation as a result of improvement in the creditworthiness of the
issuer. The receipt of income from debt securities is incidental to the Fund's
objective. The Fund will invest in debt securities rated B or above by Moody's
or S&P or in securities that are unrated if, in Advisers' opinion, the
securities are comparable in quality to securities rated B or above by Moody's
or S&P. The Fund will not invest more than 5% of its assets in debt securities
rated lower than BBB or Baa. Securities rated below BBB or Baa are regarded, on
balance, as predominantly speculative with respect to the capacity to pay
interest and repay principal in accordance with the terms of the obligation. A
description of these ratings is included in the "Appendix" in the SAI.
WARRANT. The Fund may invest in warrants. A warrant is a security that gives the
holder the right, but not the obligation, to subscribe for newly created
securities of the issuer or a related company at a fixed price either at a
certain date or during a set period.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities. A
convertible security is generally a debt obligation or preferred stock that may
be converted within a specified period of time into a certain amount of common
stock of the same or a different issuer. A convertible security provides a
fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance in
its underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Like a common stock, the
value of a convertible security also tends to increase as the market value of
the underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because its value can be influenced by both interest
rate and market movements, a convertible security is not as sensitive to
interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the Fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the Fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
The Fund may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stocks ("PERCS"), which
provide an investor, such as the Fund, with the opportunity to earn higher
dividend income than is available on a company's common stock. PERCS are
preferred stocks that generally feature a mandatory conversion date, as well as
a capital appreciation limit which is usually expressed in terms of a stated
price. Most PERCS expire three years from the date of issue, at which time they
are convertible into common stock of the issuer. PERCS are generally not
convertible into cash at maturity. Under a typical arrangement, after three
years PERCS convert into one share of the issuer's common stock if the issuer's
common stock is trading at a price below that set by the capital appreciation
limit, and into less than one full share if the issuer's common stock is trading
at a price above that set by the capital appreciation limit. The amount of that
fractional share of common stock is determined by dividing the price set by the
capital appreciation limit by the market price of the issuer's common stock.
PERCS can be called at any time prior to maturity, and hence do not provide call
protection. If called early, however, the issuer must pay a call premium over
the market price to the investor. This call premium declines at a preset rate
daily, up to the maturity date.
The Fund may also invest in other enhanced convertible securities. These include
but are not limited to ACES (Automatically Convertible Equity Securities), PEPS
(Participating Equity Preferred Stock), PRIDES (Preferred Redeemable Increased
Dividend Equity Securities), SAILS (Stock Appreciation Income Linked
Securities), TECONS (Term Convertible Notes), QICS (Quarterly Income Cumulative
Securities), and DECS (Dividend Enhanced Convertible Securities). ACES, PEPS,
PRIDES, SAILS, TECONS, QICS, and DECS all have the following features: they are
issued by the company, the common stock of which will be received in the event
the convertible preferred stock is converted, unlike PERCS they do not have a
capital appreciation limit, they seek to provide the investor with high current
income with some prospect of future capital appreciation, they are typically
issued with three to four-year maturities, they typically have some built-in
call protection for the first two to three years, investors have the right to
convert them into shares of common stock at a preset conversion ratio or hold
them until maturity, and upon maturity they will automatically convert to either
cash or a specified number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked as
senior or subordinated debt in the issuer's corporate structure according to the
terms of the debt indenture. There may be additional types of convertible
securities not specifically referred to herein which may be similar to those
described above in which a Fund may invest, consistent with its objectives and
policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the Fund. The Fund may have difficulty disposing of
such securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the Fund's ability to dispose of particular securities, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the credit worthiness of an issuer.
Reduced liquidity in the secondary market for certain securities may also make
it more difficult for the Fund to obtain market quotations based on actual
trades for purposes of valuing the Fund's portfolio. The Fund, however, intends
to acquire liquid securities, though there can be no assurances that this will
be achieved.
OPTIONS AND FINANCIAL FUTURES. The Fund may write (sell) covered put and call
options and buy put and call options that trade on securities exchanges and in
the over-the-counter market. The Fund may buy and sell futures and options on
futures with respect to securities indices and enter into futures and options to
close-out futures and options it may have purchased or sold. The Fund will not
enter into any futures contract or related options (except for closing
transactions) if, immediately thereafter, the sum of the amount of its initial
deposits and premiums on open contracts and options would exceed 5% of the
Fund's total assets. The Fund will not engage in any stock options or stock
index options if the option premiums paid regarding its open option positions
exceed 5% of the value of the Fund's total assets.
A call option written by the Fund is covered if the Fund owns the underlying
security that is subject to the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian bank) upon
conversion or exchange of other securities held in its portfolio. A call option
is also covered if the Fund holds a call on the same security and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash and high grade debt securities in a segregated
account with its custodian bank. A put option written by the Fund is covered if
the Fund maintains cash and high grade debt securities with a value equal to the
exercise price in a segregated account with its custodian bank, or holds a put
on the same security and in the same principal amount as the put written where
the exercise price of the put held is equal to or greater than the exercise
price of the put written.
SECURITIES INDUSTRY RELATED INVESTMENTS. To the extent it is consistent with its
investment objective and certain limitations under federal securities laws, the
Fund may invest its assets in securities issued by companies engaged in
securities related businesses, including companies that are securities brokers,
dealers, underwriters or investment advisors. These companies are considered
part of the financial services industry sector.
Under federal securities laws, the Fund may not acquire a security or any
interest in a securities related business, to the extent such acquisition would
exceed certain limitations. The Fund does not believe that these limitations
will impede the attainment of its investment objective.
FOREIGN SECURITIES. The Fund may invest in foreign securities if these
investments are consistent with the Fund's investment objective and policies.
The Fund will ordinarily buy foreign securities that are traded in the U.S. or
buy sponsored or unsponsored American Depositary Receipts, which are
certificates issued by U.S. banks representing the right to receive securities
of a foreign issuer deposited with that bank or a correspondent bank. The Fund
may buy the securities of foreign issuers directly in foreign markets, and may
buy the securities of issuers in developing nations. The Fund intends to limit
its investment in foreign securities to 5% of its total assets. See "What are
the Fund's Potential Risks? - Foreign Securities."
OTHER INVESTMENT POLICIES OF THE FUND
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors, if
such loans do not exceed 20% of the value of the Fund's total assets at the time
of the most recent loan. The borrower must deposit with the Fund's custodian
bank collateral with an initial market value of at least 102% of the initial
market value of the securities loaned, including any accrued interest, with the
value of the collateral and loaned securities marked-to-market daily to maintain
collateral coverage of at least 100%. This collateral shall consist of cash,
securities issued by the U.S. government, its agencies or instrumentalities, or
irrevocable letters of credit. The lending of securities is a common practice in
the securities industry. The Fund may engage in security loan arrangements with
the primary objective of increasing the Fund's income either through investing
cash collateral in short-term interest bearing obligations or by receiving a
loan premium from the borrower. Under the securities loan agreement, the Fund
continues to be entitled to all dividends or interest on any loaned securities.
As with any extension of credit, there are risks of delay in recovery and loss
of rights in the collateral should the borrower of the security fail
financially.
BORROWING. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of its assets, except that the Fund may borrow from banks up to
10% of its total asset value to meet redemption requests and for other temporary
or emergency purposes. While borrowings exceed 5% of the Fund's total assets,
the Fund will not make any additional investments.
SHORT-TERM INVESTMENTS. The Fund may invest its cash, including cash resulting
from purchases and sales of Fund shares, temporarily in short-term debt
instruments, including high grade commercial paper, repurchase agreements and
other money market equivalents and, subject to the terms of an exemption order
from the SEC, the shares of affiliated money market funds that invest primarily
in short-term debt securities. Temporary investments will be made with cash held
to maintain liquidity to meet redemption requirements or pending investment and
will be consistent with the Fund's overall policy of being fully invested. In
addition, for temporary defensive purposes in the event of, or when Advisers
anticipates, a general decline in the market prices of stocks in which the Fund
invests, the Fund may invest an unlimited amount of its assets in short-term
debt instruments.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions, in which
the Fund buys a U.S. government security subject to resale to a bank or dealer
at an agreed-upon price and date. The transaction requires the collateralization
of the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller may cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund may
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks that are deemed creditworthy by Advisers. A
repurchase agreement is deemed to be a loan by the Fund under federal securities
laws. The U.S. government security subject to resale (the collateral) is held on
behalf of the Fund by a custodian bank approved by the Board and is held
pursuant to a written agreement.
ILLIQUID INVESTMENTS. The Fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them.
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.
Each of the Fund's policies and restrictions discussed in this prospectus and in
the SAI is considered at the time the Fund makes an investment. The Fund is
generally not required to sell a security because of a change in circumstances.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
MEDIUM AND SMALL CAPITALIZATION RISK. Historically, medium market capitalization
stocks, which constitute the majority of the investments of the Fund, have been
more volatile in price than larger capitalization stocks. Among the reasons for
greater price volatility of these securities are the less certain growth
prospects of smaller firms, the lower degree of liquidity in the market for such
stocks, and the greater sensitivity of small and medium size companies to
changing economic conditions. Besides exhibiting greater volatility, medium and
small company stocks may fluctuate independently of larger company stocks.
Medium and small company stocks may decline in price as large company stocks
rise or vice versa. You should therefore expect that the value of the Fund's
shares may be more volatile than the shares of a fund that invests in larger
capitalization stocks. In addition, medium size companies may have products and
management that have not been thoroughly tested by time or by the marketplace.
These companies may also be more dependent on a limited number of key personnel
and their financial resources may not be as substantial as those of more
established companies. Adversity that leads to a decline in the value of such a
security will have a negative impact on the Fund's share price as well.
OPTIONS AND FUTURES RISK. The Fund's option and futures investments involve
certain risks. These include the risks that the effectiveness of an options and
futures strategy depends on the degree to which price movements in the
underlying index or securities correlate with price movements in the relevant
portion of the Fund's portfolio. The Fund bears the risk that the prices of its
portfolio securities will not move in the same amount as the option or future it
has purchased, or that there may be a negative correlation that would result in
a loss on both the securities and the option or future.
Positions in exchange traded options and futures may be closed out only on an
exchange that provides a secondary market. There may not always be a liquid
secondary market for a futures or option contract at a time when the Fund seeks
to close out its position. If the Fund were unable to close out a futures or
option position, and if prices moved adversely, the Fund would have to continue
to make daily cash payments to maintain its required margin, and if the Fund had
insufficient cash, it might have to sell portfolio securities at a
disadvantageous time. In addition, the Fund might be required to deliver the
stocks underlying futures or options contracts it holds. Over-the-counter
("OTC") options may not be closed out on an exchange and the Fund may be able to
realize the value of an OTC option it has purchased only by exercising it or
entering into a closing sale transaction with the dealer that issued it. There
can be no assurance that a liquid secondary market will exist for any particular
option or futures contract at any specific time. Thus, it may not be possible to
close an option or futures position. The Fund will enter into an option or
futures position only if there appears to be a liquid secondary market for the
option or futures.
The Fund understands the current position of the staff of the SEC to be that
purchased OTC options are illiquid securities and that the assets used to cover
the sale of an OTC option are considered illiquid. The Fund and Advisers
disagree with this position. Nevertheless, pending a change in the staff's
position, the Fund will treat OTC options and cover assets as subject to the
Fund's limitation on illiquid securities.
In addition, adverse market movements could cause the Fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a futures contract. There is also the risk of loss by
the Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a futures contract or option.
The Fund's option and futures investments may be limited by the requirements of
the Code for qualification as a regulated investment company. These investments
and certain securities transactions, including loans of portfolio securities may
reduce the portion of the Fund's dividends that is eligible for the corporate
dividends-received deduction. These transactions are also subject to special tax
rules that may affect the amount, timing and character of certain distributions
to you. For more information please see the tax section of the SAI.
FOREIGN SECURITIES RISK. Investments in securities of foreign issuers involve
significant risks, including possible losses, that are not typically associated
with investments in securities of U.S. issuers. These risks include political,
social or economic instability in the country of the issuer, the difficulty of
predicting international trade patterns, the possibility of the imposition of
exchange controls, expropriation, limits on removal of currency or other assets,
nationalization of assets, foreign withholding and income taxation and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Changes in government administrations and economic or
monetary policies in the U.S. or abroad, changes in circumstances surrounding
dealings between nations, and changes in currency convertibility or exchange
rates could result in investment losses for the Fund. In addition, public
information may not be as readily available for a foreign company as it is for a
U.S. domiciled company, foreign companies are generally not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to U.S. companies, and there is usually less government regulation of
securities exchanges, brokers and listed companies. Confiscatory taxation or
diplomatic developments could also affect these investments.
INTEREST RATE AND MARKET RISK. To the extent the Fund invests in debt
securities, changes in interest rates will affect the value of the Fund's
portfolio and its share price. Rising interest rates, which often occur during
times of inflation or a growing economy, are likely to have a negative effect on
the value of the Fund's shares. To the extent the Fund invests in common stocks,
a general market decline, shown for example by a drop in the Dow Jones
Industrials or other equity based index, may cause the value of what the Fund
owns, and thus the Fund's share price, to decline. The value of stock markets
and interest rates throughout the world has increased and decreased in the past.
These changes are unpredictable.
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 $207 billion in assets. Please see "Investment Management
and Other Services" and "Miscellaneous Information" in the SAI for information
on securities transactions and a summary of the Fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is: Edward B. Jamieson, Catherine Roberts Bowman and Dan
Prislin since 1996.
Edward B. Jamieson
Senior Vice President of Advisers
Mr. Jamieson holds a Master's degree in Accounting and Finance from the
University of Chicago Graduate School of Business and a Bachelor of Arts degree
from Bucknell University. He has been with the Franklin Templeton Group since
1987. Mr. Jamieson is a member of several securities industry-related committees
and associations.
Catherine Roberts Bowman
Portfolio Manager of Advisers
Ms. Bowman holds a Master of Business Administration degree from the J.L.
Kellogg Graduate School of Management at Northwestern University. She received
her Bachelor of Arts degree from Princeton University. She joined the Franklin
Templeton Group in 1990.
Dan Prislin
Portfolio Manager of Advisers
Mr. Prislin is a Level III candidate in the CFA program. He holds a Master of
Business Administration degree from University of California at Berkeley and a
Bachelor of Science degree from University of California at Berkeley. Mr.
Prislin joined the Franklin Templeton Group in July 1994. Before July 1994, he
was a real estate salesperson with Blickman Turkus.
MANAGEMENT FEES. During the fiscal year ended April 30, 1997, management fees
totaling 0.65% of the average daily net assets of the Fund were paid to
Advisers. Total expenses of the Fund, including fees paid to Advisers, were
1.07%.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares, as well as shares of other funds in the Franklin Templeton Group
of Funds, when selecting a broker or dealer. Please see "How does the Fund Buy
Securities for its Portfolio?" in the SAI for more information.
ADMINISTRATIVE SERVICES. 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 RULE 12B-1 PLAN
The Fund has a distribution plan or "Rule 12b-1 Plan" under which it may
reimburse Distributors or others for the expenses of activities that are
primarily intended to sell shares of the Fund. These expenses may include, among
others, distribution or service fees paid to Securities Dealers or others who
have executed a servicing agreement with the Fund, Distributors or its
affiliates; a prorated portion of Distributors' overhead expenses; and the
expenses of printing prospectuses and reports used for sales purposes, and
preparing and distributing sales literature and advertisements.
Payments by the Fund under the plan may not exceed 0.35% per year of the Fund's
average daily net assets. 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. A commonly used measure
of performance is total return. Performance figures are usually calculated using
the maximum sales charge, but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested.
The Fund's investment results will vary. Performance figures are always based on
past performance and do not guarantee future results. For a more detailed
description of how the Fund calculates its performance figures, please see "How
does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund is treated as a separate entity for federal income tax purposes. The
Fund has elected and intends to continue to qualify as a regulated investment
company under Subchapter M of the Code. By distributing all of its income and
meeting certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will generally not be liable for federal
income or excise taxes.
For federal income tax purposes, any income dividends that you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned Fund shares and whether you receive them in cash
or in additional shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated for tax purposes as if you received
them on December 31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to the shares. You
should consult your tax advisor concerning the tax rules applicable to the
redemption or exchange of Fund shares.
For the fiscal year ended April 30, 1997, 6.74% of the ordinary income
distributions (including short-term capital gain distributions) paid by the Fund
qualified for the corporate dividends-received deduction, subject to certain
holding period, hedging and debt financing restrictions imposed under the Code
on the corporation claiming the deduction.
If you are a corporate shareholder, you should note that dividends paid by the
Fund from sources other than the qualifying dividends it receives will not
qualify for the dividends-received deduction. For example, any interest income
and net short-term capital gain (in excess of any net long-term capital loss or
capital loss carryover) included in investment company taxable income and
distributed by the Fund as a dividend will not qualify for the
dividends-received deduction.
The Fund will inform you of the source of its dividends and distributions at the
time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes.
If you are not considered a U.S. person for federal income tax purposes, you
should consult with your financial or tax advisor regarding the applicability of
U.S. withholding or other taxes to distributions you receive from the Fund and
the application of foreign tax laws to these distributions. You should also
consult your tax advisor with respect to the applicability of any state and
local intangible property or income taxes to your Fund shares and distributions
and redemption proceeds received from the Fund.
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. The Fund changed its name from FISCO MidCap Growth Fund to
Franklin Institutional MidCap Growth Fund on September 1, 1994, and to its
current name on April 18, 1996. Shares of each series of the Trust have equal
and exclusive rights to dividends and distributions declared by that series and
the net assets of the series in the event of liquidation or dissolution. Shares
of the Fund are considered Class I shares for redemption, exchange and other
purposes. Additional series and classes of shares may be offered in the future.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares. In
certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
As of August 5, 1997, Resources owned of record and beneficially more than 25%
of the outstanding shares of 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 existing shares in the Franklin Templeton
Funds, as well as those of your spouse, children under the age of 21 and
grandchildren under the age of 21. If you are the sole owner of a company, you
may also add any company accounts, including retirement plan accounts. Companies
with one or more retirement plans may add together the total plan assets
invested in the Franklin Templeton Funds to determine the sales charge that
applies.
LETTER OF INTENT. You may buy shares at a reduced sales charge by completing the
Letter of Intent section of the shareholder application. A Letter of Intent is a
commitment by you to invest a specified dollar amount during a 13 month period.
The amount you agree to invest determines the sales charge you pay.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Fund shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Fund
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
SALES CHARGE WAIVERS. The Fund's front-end sales charge and Contingent Deferred
Sales Charge do not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) the distributions may be from either Class I or
Class II shares of a fund.
The Fund's sales charges do not apply if you are buying shares with money from
the following sources:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a real estate investment trust (REIT) sponsored or advised by Franklin
Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds, the Templeton Variable Annuity Fund,
the Templeton Variable Products Series Fund, or the Franklin Government
Securities Trust. You should contact your tax advisor for information on
any tax consequences that may apply.
4. Redemptions from any Franklin Templeton Fund if you:
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.
The Fund's sales charges also do not apply to purchases by:
5. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
6. Group annuity separate accounts offered to retirement plans
7. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
8. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments by the
Fund on arbitrage rebate calculations.
9. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
10. Registered Securities Dealers and their affiliates, for their investment
accounts only
11. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
12. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
13. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
14. Accounts managed by the Franklin Templeton Group
15. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with at
least 100 employees, or (ii) have plan assets of $1 million or more, or (iii)
agree to invest at least $500,000 in the Franklin Templeton Funds over a 13
month period may buy shares without a front-end sales charge. Retirement plans
that are not Qualified Retirement Plans or SEPs, such as 403(b) or 457 plans,
must also meet the requirements described under "Group Purchases" above. For
retirement plan accounts opened on or after May 1, 1997, a Contingent Deferred
Sales Charge may apply if the account is closed within 365 days of the
retirement plan account's initial purchase in the Franklin Templeton Funds.
Please see "How Do I Sell Shares? - Contingent Deferred Sales Charge" for
details.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for certain purchases made without a sales charge. The payments
are subject to the sole discretion of Distributors, and are paid by Distributors
or one of its affiliates and not by the Fund or its shareholders.
1. Purchases of $1 million or more - up to 1% of the amount invested.
2. Purchases made without a front-end sales charge by certain retirement plans
described under "Sales Charge Reductions and Waivers - Retirement Plans"
above - up to 1% of the amount invested. For retirement plan accounts opened
on or after May 1, 1997, a Contingent Deferred Sales Charge will not apply
to the account if the Securities Dealer chooses to receive a payment of
0.25% or less or if no payment is made.
3. Purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the amount
invested.
4. Purchases by Chilean retirement plans - up to 1% of the amount invested.
A Securities Dealer may receive only one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1 or 4 above or a payment of up to 1% for investments
described in paragraph 2 will be eligible to receive the Rule 12b-1 fee
associated with the purchase starting in the thirteenth calendar month after the
purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums.
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 want to exchange
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to exchange by phone to apply
to your account, please let us know.
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred Sales
Charge when you exchange shares. Any shares subject to a Contingent Deferred
Sales Charge at the time of exchange, however, will remain so in the new fund.
For accounts with shares subject to a Contingent Deferred Sales Charge, we will
first exchange any shares in your account that are not subject to the charge. If
there are not enough of these to meet your exchange request, we will exchange
shares subject to the charge 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, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. PLEASE NOTIFY US IN WRITING IF YOU DO NOT WANT THIS
OPTION TO BE AVAILABLE ON YOUR ACCOUNT. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the Fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the Fund more than twice in a calendar
quarter, or (iii) exchanged shares equal to at least $5 million, or more
than 1% of the Fund's net assets. Shares under common ownership or control
are combined for these limits. If you have exchanged shares as described in
this paragraph, you will be considered a Market Timer. Each exchange by a
Market Timer, if accepted, will be charged $5.00. Some of our funds do not
allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Advisor Class" or "Class Z" shares. Because the
Fund does not currently offer an Advisor Class, you may exchange Advisor Class
shares of any Franklin Templeton Fund for shares of the Fund at Net Asset Value.
If you do so and you later decide you would like to exchange into a fund that
offers an Advisor Class, you may exchange your Fund shares for Advisor Class
shares of that fund. Certain shareholders of Class Z shares of Franklin Mutual
Series Fund Inc. may also exchange their Class Z shares for shares of the Fund
at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL 1. Send us written instructions signed by all account owners. If
you would like your redemption proceeds wired to a bank
account, your instructions should include:
o The name, address and telephone number of the bank where you
want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit union, the
name of the corresponding bank and the account number
2. Include any outstanding share certificates for the shares you
are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may
have other requirements.
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your redemption
proceeds wired to a bank account, other than an escrow account,
you must first sign up for the wire feature. To sign up, send us
written instructions, with a signature guarantee.
- --------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY PHONE (cont.)To avoid any delay in processing, the instructions should
include the items listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts may
exceed $50,000 by completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for the shares you
want to sell or you have already returned them to the Fund
o Unless you are selling shares in a Trust Company retirement
plan account
o Unless the address on your account was changed by phone
within the last 15 days
If you do not want the ability to redeem by phone to apply to
your account, please let us know.
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
If you did not pay a front-end sales charge because you invested $1 million or
more or agreed to invest $1 million or more under a Letter of Intent, a
Contingent Deferred Sales Charge may apply if you sell all or a part of your
investment within the Contingency Period. Once you have invested $1 million or
more, any additional investments you make without a sales charge may also be
subject to a Contingent Deferred Sales Charge if they are sold within the
Contingency Period. The charge is 1% of the value of the shares sold or the Net
Asset Value at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy shares without a front-end sales charge may also be subject to a
Contingent Deferred Sales Charge if the retirement plan account is closed within
365 days of the account's initial purchase in the Franklin Templeton Funds.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997, or
(ii) the Securities Dealer of record received a payment from Distributors of
0.25% or less, or (iii) Distributors did not make any payment in connection
with the purchase, as described under "How Do I Buy Shares? - Other Payments
to Securities Dealers"
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan, at a rate of up to 1% a
month of an account's Net Asset Value. For example, if you maintain an annual
balance of $1 million, you can redeem up to $120,000 annually through a
systematic withdrawal plan free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Redemptions by Trust Company employee benefit plans or employee benefit plans
serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee benefit
plans
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income semiannually in June
and December to shareholders of record on the first business day before the 15th
of the month and pays them on or about the last day of that month.
Capital gains, if any, may be distributed annually, usually in December.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge) by
reinvesting capital gain distributions, or both dividend and capital gain
distributions. This is a convenient way to accumulate additional shares and
maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge).
Many shareholders find this a convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE FUND. You
may change your distribution option at any time by notifying us by mail or
phone. Please allow at least seven days before the record date for us to process
the new option. For Trust Company retirement plans, special forms are required
to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value per
share, plus any applicable sales charges. When you sell shares, you receive the
Net Asset Value per share.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
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.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by phone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- --------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- --------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have let us know
that you do not want telephone privileges to apply to your account.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below. Once your plan
is established, any distributions paid by the Fund will be automatically
reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the Fund's code number to use TeleFACTS(R). The Fund's code number
is 196.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- --------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
AMEX - American Stock Exchange
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - Certain funds in the Franklin Templeton Funds offer
multiple classes of shares. The different classes have proportionate interests
in the same portfolio of investment securities. They differ, however, primarily
in their sales charge structures and Rule 12b-1 plans. Because the Fund's sales
charge structure and Rule 12b-1 plan are similar to those of Class I shares,
shares of the Fund are considered Class I shares for redemption, exchange and
other purposes.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - The 12 month period during which a Contingent Deferred
Sales Charge may apply. Regardless of when during the month you purchased
shares, they will age one month on the last day of that month and each following
month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
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 TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the front-end sales charge. The maximum front-end sales
charge is 4.50%.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
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.
PROSPECTUS & APPLICATION
FRANKLIN GLOBAL UTILITIES FUND
INVESTMENT STRATEGY
GLOBAL GROWTH
AND INCOME
SEPTEMBER 1, 1997
FRANKLIN STRATEGIC SERIES
This prospectus describes the Franklin Global Utilities Fund (the "Fund"). It
contains information you should know before investing in the Fund. Please keep
it for future reference.
The Fund has a Statement of Additional Information ("SAI"), dated September 1,
1997, which may be amended from time to time. It 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 its
address.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
FRANKLIN GLOBAL UTILITIES FUND
SEPTEMBER 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? ................................ 11
Who Manages the Fund? ............................................... 14
How does the Fund Measure Performance? .............................. 16
How Taxation Affects the Fund and its Shareholders .................. 16
How is the Trust Organized? ......................................... 18
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ................................................ 19
May I Exchange Shares for Shares of Another Fund? ................... 25
How Do I Sell Shares? ............................................... 28
What Distributions Might I Receive from the Fund? ................... 31
Transaction Procedures and Special Requirements ..................... 32
Services to Help You Manage Your Account ............................ 37
What If I Have Questions About My Account? .......................... 39
GLOSSARY
Useful Terms and Definitions ........................................ 40
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
FRANKLIN GLOBAL UTILITIES FUND
ABOUT THE FUND
Expense Summary
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of each class for the fiscal year
ended April 30, 1997. The Fund's actual expenses may vary.
CLASS I CLASS II
- --------------------------------------------------------------------------------
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge
(as a percentage of Offering Price) 4.50% 1.99%
Paid at time of purchase 4.50%++ 1.00%+++
Paid at redemption++++ None 0.99%
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.57% 0.57%
Rule 12b-1 Fees 0.23%* 1.00%*
Other Expenses 0.20% 0.20%
-------------
Total Fund Operating Expenses 1.00% 1.77%
=============
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -----------------------------------------------------------------
Class I $55** $75 $ 98 $162
Class II $47 $75 $114 $224
For the same Class II investment, you would pay projected expenses of $38 if
you did not sell your shares at the end of the first year. Your projected
expenses for the remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected
in the Net Asset Value or dividends of each class and are not directly charged
to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more in Class I
shares.
+++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? - Deciding Which Class to Buy."
++++A Contingent Deferred Sales Charge may apply to any Class II purchase if you
sell the shares within 18 months and to Class I purchases of $1 million or more
if you sell the shares within one year. A Contingent Deferred Sales Charge may
also apply to purchases by certain retirement plans that qualify to buy Class I
shares without a front-end sales charge. The charge is 1% of the value of the
shares sold or the Net Asset Value at the time of purchase, whichever is less.
The number in the table shows the charge as a percentage of Offering Price.
While the percentage is different depending on whether the charge is shown based
on the Net Asset Value or the Offering Price, the dollar amount paid by you
would be the same. See "How Do I Sell Shares? - Contingent Deferred Sales
Charge" for details.
*These fees may not exceed 0.25% for Class I. The combination of front-end sales
charges and Rule 12b-1 fees could cause long-term shareholders to pay more than
the economic equivalent of the maximum front-end sales charge permitted under
the NASD's rules.
**Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent five years appears in the
financial statements in the Trust's Annual Report to Shareholders for the fiscal
year ended April 30, 1997. The Annual Report to Shareholders also includes more
information about the Fund's performance. For a free copy, please call Fund
Information.
<TABLE>
<CAPTION>
CLASS I
<S> <C> <C> <C> <C> <C>
Year Ended April 30 1997 1996 1995 1994 19931
===========================================================================================================================
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $14.28 $12.23 $12.60 $11.36 $10.00
- ---------------------------------------------------------------------------------------------------------------------------
Net Investment Income .42 .37 .42 .30 .22
Net Realized & Unrealized Gain (Loss) on Securities 1.351 2.395 (.067) 1.280 1.270
- ---------------------------------------------------------------------------------------------------------------------------
Total From Investment Operations 1.771 2.765 .353 1.580 1.490
- ---------------------------------------------------------------------------------------------------------------------------
Distributions From Net Investment Income (.383) (.391) (.365) (.299) (.130)
Distributions From Realized Capital Gains (1.208) (.324) (.358) (.042) --
Total Distributions (1.591) (.715) (.723) (.341) (.130)
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value at End of Period $14.46 $14.28 $12.23 $12.60 $11.36
- ---------------------------------------------------------------------------------------------------------------------------
Total Return* 12.94% 23.27% 3.17% 14.04% 18.08%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) $174,023 $167,225 $119,250 $124,188 $14,227
Ratio of Expenses to Average Net Assets*** 1.00% 1.04% 1.12% .84% --
Ratio of Net Investment Income to Average Net Assets2.82% 2.85% 3.47% 2.95% 3.89%**
Portfolio Turnover Rate 47.55% 50.51% 16.65% 16.28% --
Average Commission Rate+ .0150 .0313 -- -- --
</TABLE>
Class II
Year Ended April 30, 1997 1996
- ------------------------------------------------------------------------------
Per Share Operating Performance
Net Asset Value at Beginning of Period $14.24 $12.23
- ------------------------------------------------------------------------------
Net Investment Income .32 .37
Net Realized & Unrealized Gain (Loss) on Securities 1.328 2.322
Total From Investment Operations 1.648 2.692
- -------------------------------------------------------------------------------
Distributions From Net Investment Income (.310) (.358)
Distributions From Realized Capital Gains (1.208) (.324)
Total Distributions (1.518) (.682)
Net Asset Value at End of Period $14.37 $14.24
- ------------------------------------------------------------------------------
Total Return* 12.04% 22.63%
Ratios/Supplemental Data
Net Assets at End of Period (in 000's) $8,467 $2,727
Ratio of Expenses to Average Net Assets 1.77% 1.81%
Ratio of Net Investment Income to Average Net Assets 1.98% 2.10%
Portfolio Turnover Rate 47.55% 50.51%
Average Commission Rate+ .0150 .0313
1For the period July 2, 1992 (effective date) to April 30, 1993.
*Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum front-end sales
charge or the Contingent Deferred Sales Charge, and assumes reinvestment of
dividends and capital gains at Net Asset Value.
**Annualized.
***During the periods indicated, Advisers agreed in advance to waive a portion
or all of its management fees and made payments of other expenses incurred by
the Fund. Had such action not been taken, the ratios of operating expenses to
average net assets would have been as follows:
Ratio of expenses
to average net assets
Class I shares
19931 1.51%**
1994 1.28
+Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is to seek to provide total return, without
incurring undue risk, by investing at least 65% of its total assets in
securities issued by companies that are, in the opinion of Advisers, primarily
engaged in the ownership or operation of facilities used to generate, transmit
or distribute electricity, telephone communications, cable and other pay
television services, wireless telecommunications, gas or water. Total return
consists of both capital appreciation and current dividend and interest income.
The objective is a fundamental policy of the Fund and may not be changed without
shareholder approval. Of course, there is no assurance that the Fund's objective
will be achieved.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
The Fund invests in common stocks, preferred stocks and debt securities
including preferred or debt securities convertible into common stocks. The
mixture of common stocks, debt securities and preferred stocks varies from time
to time based upon Advisers' assessment as to whether investments in each
category will contribute to meeting the Fund's investment objective. The Fund
may invest, without percentage limitation, in fixed-income securities having at
the time of purchase one of the four highest ratings of Moody's (Aaa, Aa, A,
Baa) or S&P (AAA, AA, A, BBB), or in unrated securities of comparable quality.
Securities rated within the four highest ratings categories are considered to be
"investment grade" securities, although securities rated Baa are regarded as
having an adequate capacity to pay principal and interest but with greater
vulnerability to adverse economic conditions and some speculative
characteristics. The Fund's commercial paper investments will be rated "A-1" or
"A-2" by S&P or "Prime-1" or "Prime-2" by Moody's at the time of purchase or, if
not rated, will be of comparable quality. The Fund may also invest up to 5% of
its total assets at the time of purchase in lower rated fixed-income securities
and unrated securities of comparable quality. These investments will be rated no
lower than Caa by Moody's or CCC by S&P. (See the SAI for a more complete
discussion of these investments.) In the event the rating on an issue held in
the Fund's portfolio is changed by Moody's and S&P, it will be considered by the
Fund in its evaluation of the overall investment merits of that security but
will not necessarily result in an automatic sale of the security. A description
of these ratings is included in the Appendix to the SAI.
Under normal circumstances, the Fund will invest at least 65% of its total
assets in issuers domiciled in at least three different countries, one of which
may be the U.S., although Advisers expects the Fund's portfolio to be more
geographically diversified. Under normal conditions, it is anticipated that the
percentage of assets invested in U.S. securities will be higher than that
invested in securities of any other single country. It is possible that at times
the Fund may have 65% or more of its total assets invested in foreign
securities. Securities that are issued by foreign companies or are denominated
in foreign currencies are subject to certain risks outlined below. See "What are
the Fund's Potential Risks?"
The Fund at all times, except during temporary defensive periods, will maintain
at least 65% of its total assets invested in securities issued by companies in
the utilities industries. The Fund may invest up to 35% of its assets in
securities of issuers that are outside the utilities industries. These
investments will consist of common stocks, debt securities or preferred stocks
and will be selected to meet the Fund's investment objective of providing total
return without incurring undue risk. These securities may be issued by either
U.S. or non-U.S. companies, governments, or governmental instrumentalities. Some
of these issuers may be in industries related to utility industries and,
therefore, may be subject to similar risks.
The Fund reserves the right to hold, as a temporary defensive measure or as a
reserve for redemptions, short-term U.S. government securities, high quality
money market securities, including repurchase agreements, or cash in such
proportions as, in the opinion of Advisers, prevailing market or economic
conditions warrant.
UTILITY INDUSTRIES. Under normal circumstances, the Fund will invest at least
65% of its total assets in common stocks, debt securities and preferred stocks,
including preferred or debt securities convertible into common stocks, of
companies in the utility industries. These companies include ones primarily
engaged in the ownership or operation of facilities used to provide electricity,
telephone communications, cable and other pay television services, wireless
telecommunications, gas or water. "Primarily engaged," for this purpose, means
that (1) more than 50% of the company's assets are devoted to the ownership or
operation of one or more facilities as described above or (2) more than 50% of
the company's operating revenues are derived from the business or combination of
businesses described above. See "Investment Restrictions" in the SAI.
The utility companies in which the Fund invests may be domestic or foreign. To
meet its objective, the Fund may invest in domestic utility companies that pay
higher than average dividends, but have less potential for capital appreciation.
There can be no assurance that the historically positive relative returns on
utility securities will continue to occur in the future. Advisers believes that
the average dividend yields of common stocks issued by foreign utility companies
have also historically exceeded those of foreign industrial companies' common
stocks. To meet its objective, the Fund may invest in foreign utility companies
that pay lower than average dividends, but have a greater potential for capital
appreciation.
DEPOSITARY RECEIPTS. The Fund may buy sponsored or unsponsored American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global
Depositary Receipts ("GDRs"). ADRs are depositary receipts typically used by a
U.S. bank or trust company which evidence ownership of underlying securities
issued by a foreign corporation. EDRs and GDRs are typically issued by foreign
banks or trust companies, although they also may be issued by U.S. banks or
trust companies, and evidence ownership of underlying securities issued by
either a foreign or a U.S. corporation. Generally, depositary receipts in
registered form are designed for use in the U.S. securities market and
depositary receipts in bearer form are designed for use in securities markets
outside the U.S. Depositary receipts may not necessarily be denominated in the
same currency as the underlying securities into which they may be converted.
Depositary receipts may be issued pursuant to sponsored or unsponsored programs.
In sponsored programs, an issuer has made arrangements to have its securities
traded in the form of depositary receipts. In unsponsored programs, the issuer
may not be directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs and there may not be a correlation
between such information and the market value of the depositary receipts.
Depositary receipts also involve the risks of other investments in foreign
securities, as discussed below. For purposes of the Fund's investment policies,
the Fund's investments in depositary receipts will be deemed to be investments
in the underlying securities.
FOREIGN GOVERNMENT SECURITIES. The Fund may invest in securities issued or
guaranteed by foreign governments. The foreign government securities in which
the Fund intends to invest generally will consist of obligations issued by
national, state or local governments or similar political subdivisions. Foreign
government securities also include debt obligations of supranational entities,
including international organizations designed or supported by governmental
entities to promote economic reconstruction or development and international
banking institutions and related government agencies. Examples include the
International Bank of Reconstruction and Development (the World Bank), the
European Investment Bank, the Asian Development Bank and the Inter-American
Development Bank. These securities are typically denominated in foreign
currencies and are subject to currency fluctuation and other risks of foreign
securities investments. Please see "What are the Fund's Potential Risks?"
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units. An example of a multinational currency unit is the European
Currency Unit. A European Currency Unit represents specified amounts of the
currencies of certain of the 15 member states of the European Community. Debt
securities of quasi-governmental agencies are issued by entities owned by either
a national or local government or are obligations of a political unit that is
not backed by the national government's full faith and credit and general taxing
powers. Foreign government securities also include mortgage-related securities
issued or guaranteed by national or local governmental instrumentalities,
including quasi-governmental agencies.
U.S. GOVERNMENT SECURITIES. The Fund may invest in securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities ("U.S.
government securities"), including U.S. Treasury bills, notes and bonds as well
as certain agency securities and mortgage-backed securities issued or guaranteed
by the Government National Mortgage Association ("GNMA"), which securities may
be backed by the "full faith and credit" of the U.S. government or carry a
guarantee that is backed by the U.S. government. Any guarantee will extend to
the payment of interest and principal due on the securities and will not provide
any protection from fluctuations in either the securities' yield or value or to
the yield or value of the Fund's shares. Other securities issued by U.S.
government agencies or instrumentalities are not necessarily backed by the "full
faith and credit" of the U.S. government, such as certain securities issued by
the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage
Corporation, the Student Loan Marketing Association and the Farm Credit Bank.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities. A
convertible security is generally a debt obligation or a preferred stock that
may be converted within a specified period of time into a certain amount of
common stock of the same or a different issuer. A convertible security may also
be subject to redemption by the issuer but only after a specified date and under
circumstances established at the time the security is issued. Convertible
securities provide a fixed-income stream and the opportunity, through their
conversion feature, to participate in the capital appreciation resulting from a
market price advance in the convertible security's underlying common stock.
Though the Fund intends to invest in liquid convertible securities there can be
no assurance that this will always be achieved. For more information on
convertible securities, including liquidity issues, please see the SAI.
OTHER INVESTMENT POLICIES OF THE FUND
The Fund may use a variety of strategies to enhance income and to hedge against
market and currency risk, as described more fully under "How does the Fund
Invest Its Assets - Options, Futures, Forward Contracts and Related Options" in
the SAI. Options, futures and options on futures are generally considered
"derivative securities."
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS. The Fund may buy debt obligations
on a "when-issued" or "delayed delivery" basis. These securities are subject to
market fluctuation before delivery to the Fund and generally do not earn
interest until their scheduled delivery date. Therefore, the value or yields at
delivery may be more or less than the purchase price or the yields available
when the transaction was entered into. When the Fund is the buyer, it will
maintain, in a segregated account with its custodian bank, cash or high-grade
marketable securities having an aggregate value equal to the amount of its
purchase commitments until payment is made. To the extent the Fund engages in
when-issued and delayed delivery transactions, it will do so only for the
purpose of acquiring portfolio securities consistent with its investment
objective and policies, and not for the purpose of investment leverage. See the
SAI for a more complete discussion regarding when-issued and delayed delivery
transactions.
STANDBY COMMITMENT AGREEMENTS. The Fund may from time to time enter into standby
commitment agreements. These agreements commit the Fund, for a stated period of
time, to buy a stated amount of a fixed-income security that may be issued and
sold to the Fund at the option of the issuer. The price and coupon of the
security is fixed at the time of the commitment. At the time the Fund enters
into the agreement, the Fund is paid a commitment fee, regardless of whether the
security is ultimately issued, which is typically approximately 0.5% of the
aggregate purchase price of the security that the Fund has committed to buy. The
Fund will enter into these agreements only for the purpose of investing in the
security underlying the commitment at a yield and price that is considered
advantageous to the Fund. The Fund will not enter into a standby commitment with
a remaining term in excess of 45 days and will limit its investment in these
commitments so that the aggregate purchase price of the securities subject to
these commitments, together with the value of portfolio securities subject to
legal restrictions on resale, will not exceed 15% of its assets, at the time of
purchase. The Fund will at all times maintain, in a segregated account with its
custodian bank, cash, cash equivalents, U.S. government securities or other high
grade liquid debt securities denominated in U.S. dollars or non-U.S. currencies
in an aggregate amount equal to the purchase price of the securities underlying
the commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued, and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, the Fund may bear the
risk of a decline in the value of the security and may not benefit from an
appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will then be
reflected in the calculation of the Fund's Net Asset Value. The cost basis of
the security will be adjusted by the amount of the commitment fee. In the event
the security is not issued, the commitment fee will be recorded as income on the
expiration date of the standby commitment.
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors, if
such loans do not exceed one-third of the value of the Fund's total assets at
the time of the most recent loan. The borrower must deposit with the Fund's
custodian bank collateral with an initial market value of at least 102% of the
initial market value of the securities loaned, including any accrued interest,
with the value of the collateral and loaned securities marked-to-market daily to
maintain collateral coverage of at least 100%. This collateral shall consist of
cash, securities issued by the U.S. government, its agencies or
instrumentalities, or irrevocable letters of credit. The lending of securities
is a common practice in the securities industry. The Fund may engage in security
loan arrangements with the primary objective of increasing the Fund's income
either through investing cash collateral in short-term interest bearing
obligations or by receiving a loan premium from the borrower. Under the
securities loan agreement, the Fund continues to be entitled to all dividends or
interest on any loaned securities. As with any extension of credit, there are
risks of delay in recovery and loss of rights in the collateral should the
borrower of the security fail financially.
BORROWING. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of its assets, except that the Fund may enter into reverse
repurchase agreements or borrow money from banks in an amount up to 33% of its
total asset value (computed at the time the loan is made) for temporary or
emergency purposes. While borrowings exceed 5% of the Fund's total assets, the
Fund will not make any additional investments.
SHORT-TERM INVESTMENTS. The Fund may invest its cash, including cash resulting
from purchases and sales of Fund shares, temporarily in short-term debt
instruments, including high grade commercial paper, repurchase agreements and
other money market equivalents and, pursuant to an exemption from the
requirements of the 1940 Act, the shares of affiliated money market funds, which
invest primarily in short-term debt securities. To the extent the Fund invests
in affiliated money market funds, such as the Franklin Money Fund, Advisers has
agreed to waive its management fee on any portion of the Fund's assets invested
in an affiliated fund. Temporary investments will only be made with cash held to
maintain liquidity or pending investment. In addition, for temporary defensive
purposes in the event of, or when Advisers anticipates, a general decline in the
market prices of stocks in which the Fund invests, the Fund may invest an
unlimited amount of its assets in short-term debt instruments.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions in which
the Fund buys a U.S. government security subject to resale to a bank or dealer
at an agreed-upon price and date. The transaction requires the collateralization
of the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller may cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund may
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks that are deemed creditworthy by Advisers. A
repurchase agreement is deemed to be a loan by the Fund under the 1940 Act. The
U.S. government security subject to resale (the collateral) is held on behalf of
the Fund by a custodian bank approved by the Board and is held pursuant to a
written agreement.
The Fund may also enter into reverse repurchase agreements. These transactions
involve the sale of securities held by the Fund pursuant to an agreement to
repurchase the securities at an agreed upon price, date and interest payment.
Cash or high grade liquid debt securities of a dollar amount equal in value to
the Fund's obligation under the agreement, including accrued interest, will be
maintained in a segregated account with the Fund's custodian bank, and the
securities subject to the reverse repurchase agreement will be marked-to-market
each day. Although reverse repurchase agreements are borrowings under the 1940
Act, the Fund does not treat these arrangements as borrowings under its
investment restriction 2 (please see "Investment Restrictions" in the SAI) so
long as the segregated account is properly maintained.
ILLIQUID INVESTMENTS. The Fund's policy is not to invest more than 15% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them.
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.
Each of the Fund's policies and restrictions discussed in this prospectus and in
the SAI is considered at the time the Fund makes an investment. The Fund is
generally not required to sell a security because of a change in circumstances.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
FOREIGN RISK. Foreign securities involve certain risks that you should consider
carefully. These risks include political, social or economic instability in the
country of the issuer, the difficulty of predicting international trade
patterns, the possibility of the imposition of exchange controls, expropriation,
restrictions on removal of currency or other assets, nationalization of assets,
foreign withholding and income taxation, and foreign trading practices
(including higher trading commissions, custodial charges and delayed
settlements). Foreign securities may be subject to greater fluctuations in price
than securities issued by U.S. corporations or issued or guaranteed by the U.S.
government, its instrumentalities or agencies. The markets on which foreign
securities trade may have less volume and liquidity, and may be more volatile
than securities markets in the U.S. In addition, there may be less publicly
available information about a foreign company than about a U.S. domiciled
company. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
U.S. domestic companies. There is generally less government regulation of
securities exchanges, brokers and listed companies abroad than in the U.S.
Confiscatory taxation or diplomatic developments could also affect investment in
foreign securities.
In many instances, foreign debt securities may provide higher yields than
securities of domestic issuers that have similar maturities and quality. Under
certain market conditions, these investments may be less liquid than the
securities of U.S. corporations and are certainly less liquid than securities
issued or guaranteed by the U.S. government, its instrumentalities or agencies.
Finally, in the event of a default of any foreign debt obligation, it may be
more difficult for the Fund to obtain or to enforce a judgment against the
issuer of the security.
The operating expense ratio of the Fund can be expected to be higher than that
of an investment company investing exclusively in U.S. securities because of the
additional expenses of the Fund attributable to its foreign investment activity,
such as custodial costs, valuation costs and communication costs, although the
Fund's expenses are expected to be similar to expenses of other investment
companies investing in a mix of U.S. securities and securities of one or more
foreign countries.
Investments of the Fund may be denominated in foreign currencies. Changes in the
relative values of these foreign currencies and the U.S. dollar, therefore, will
affect the value of investments in the Fund. However, the Fund will utilize
forward futures and options contracts to attempt to minimize these changes. For
a discussion of forward futures and options contracts, please see the SAI.
Many of the countries in which the Fund may invest are considered developing or
emerging markets. Investments in these markets are subject to all of the risks
of foreign investing generally, and have additional and heightened risks due to
the small size and lesser liquidity of these markets and other factors. As a
non-fundamental policy, the Fund will limit its investments in Russian
securities to 5% of its total assets. Russian securities involve additional
significant risks, including political and social uncertainty (for example,
regional conflicts and risk of war), currency exchange rate volatility,
pervasiveness of corruption and crime in the Russian economic system, delays in
settling portfolio transactions and risk of loss arising out of Russia's system
of share registration and custody. For more information on these and other risks
associated with Russian securities, please see "What are the Fund's Potential
Risks?"0 in the SAI.
INDUSTRY RISK. Utility companies in the U.S. and in foreign countries are
generally subject to substantial regulations. These regulations are intended to
ensure appropriate standards of service and adequate ability to meet public
demand. The nature of regulations of utility industries is evolving both in the
U.S. and in foreign countries. Although certain companies may develop more
profitable opportunities, others may be forced to defend their core businesses
and may be less profitable. Electric utility companies have historically been
subject to the risks associated with increases in fuel and other operating
costs, high interest costs on borrowings, costs associated with compliance with
environmental, nuclear facility and other safety regulations and changes in the
regulatory climate. Increased scrutiny of electric utilities might result in
higher costs and higher capital expenditures, with the risk that regulators may
disallow inclusion of these costs in rate authorizations. Increasing competition
due to past regulatory changes in the telephone communications industry
continues and, whereas certain companies have benefited, many companies may be
adversely affected in the future. The cable television industry is regulated in
most countries and, although such companies typically have a local monopoly,
emerging technologies and pro-competitive legislation are combining to threaten
these monopolies and could change the future outlook. The wireless
telecommunications industry is in its early developmental stages, and is
predominantly characterized by emerging, rapidly growing companies. Gas
transmission and distribution companies continue to undergo significant changes
as well. Many companies have diversified into oil and gas exploration and
development, making returns more sensitive to energy prices. The water supply
industry is highly fragmented due to local ownership. Generally, these companies
are more mature and expect little or no per capita volume growth. There is no
assurance that favorable developments will occur in the utility industries
generally or that investment opportunities will continue to undergo significant
changes or growth. Please see "What are the Fund's Potential Risks?" in the SAI
for more information.
NON-DIVERSIFICATION RISK. The Fund is non-diversified under the federal
securities laws. As a non-diversified Fund, there is no restriction under the
1940 Act on the percentage of its assets that may be invested at any time in the
securities of any one issuer. However, the Fund intends to comply with the
diversification and other requirements of the Code, applicable to "regulated
investment companies" so that it will not be subject to U.S. federal income tax
on income and capital gains. Accordingly, the Fund will not buy securities if,
as a result, more than 25% of its total assets would be invested in the
securities of a single issuer or, with respect to 50% of its total assets, more
than 5% of such assets would be invested in the securities of a single issuer.
Because the Fund is non-diversified and concentrates its investments in a
limited group of related industries, the value of the Fund's shares may
fluctuate more widely, and the Fund may present greater risk than other
investments.
INTEREST RATE, CURRENCY AND MARKET RISK. To the extent the Fund invests in debt
securities, changes in interest rates in any country where the Fund is invested
will affect the value of the Fund's portfolio and its share price. Rising
interest rates, which often occur during times of inflation or a growing
economy, are likely to have a negative effect on the value of the Fund's shares.
To the extent the Fund invests in common stocks, a general market decline, in
any country where the Fund is invested, may cause the value of what the Fund
owns, and thus the Fund's share price to decline. Changes in currency valuations
may also affect the price of Fund shares. The value of stock markets, currency
valuations and interest rates throughout the world has increased and decreased
in the past. These changes are unpredictable.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
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 $207 billion in assets. Please see "Investment Management
and Other Services" and "Miscellaneous Information" in the SAI for information
on securities transactions and a summary of the Fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is: Sally Edwards Haff and Gregory Johnson since the Fund's
inception in 1992, and Ian Link since February 1995.
Sally Edwards Haff
Vice President of Advisers
Ms. Haff is a Chartered Financial Analyst and holds a Bachelor of Arts degree in
Economics from the University of California at Santa Barbara. She has been with
the Franklin Templeton Group since 1986. Ms. Haff is a member of several
securities industry-related associations.
Gregory E. Johnson
Vice President of Advisers
Mr. Johnson holds a Bachelor of Science degree in Accounting and Business
Administration from Washington and Lee University and a certificate as a
Certified Public Accountant. He has been with the Franklin Templeton Group since
1986. Mr. Johnson is a member of several securities industry-related
associations.
Ian Link
Portfolio Manager of Advisers
Mr. Link is a Chartered Financial Analyst and holds a Bachelor of Arts degree in
Economics from the University of California at Davis. He has been with the
Franklin Templeton Group since 1989. He is a member of several securities
industry-related associations.
MANAGEMENT FEES. During the fiscal year ended April 30, 1997, management fees
totaling 0.57% of the average daily net assets of the Fund were paid to
Advisers. Total expenses, including fees paid to Advisers, were 1.00% for Class
I and 1.77% for Class II.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares, as well as shares of other funds in the Franklin Templeton Group
of Funds, when selecting a broker or dealer. Please see "How does the Fund Buy
Securities for its Portfolio?" in the SAI for more information.
ADMINISTRATIVE SERVICES. 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 RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
Fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by the Fund under the Class I plan may not exceed 0.25% per year of
Class I's average daily net assets. All distribution expenses over this amount
will be borne by those who have incurred them. During the first year after
certain Class I purchases made without a sales charge, Distributors may keep the
Rule 12b-1 fees associated with the purchase.
Under the Class II plan, the Fund may pay Distributors up to 0.75% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the purchase.
The Fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, each class of the Fund advertises its performance. Commonly
used measures of performance include total return, current yield and current
distribution rate. Performance figures are usually calculated using the maximum
sales charges, but certain figures may not include sales charges.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund is treated as a separate entity for federal income tax purposes. The
Fund has elected and intends to continue to qualify as a regulated investment
company under Subchapter M of the Code. By distributing all of its income and
meeting certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will generally not be liable for federal
income or excise taxes.
For federal income tax purposes, any income dividends which you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December, but which, for operational reasons, may not be paid to you
until the following January, will be treated for tax purposes as if received by
you on December 31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on sale or exchange of the Fund's
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to such shares.
For corporate investors, 41.38% of the ordinary income dividends (including
short-term capital gain distributions) paid by the Fund for the fiscal year
ended April 30, 1997, qualified for the corporate dividends-received deduction,
subject to certain holding period and debt financing restrictions imposed under
the Code on the corporation claiming the deduction. These restrictions are
discussed in the SAI.
The Fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of the total assets of the Fund at the
end of its fiscal year are invested in securities of foreign corporations, the
Fund may elect to pass-through to you the pro rata share of foreign taxes paid
by the Fund. If this election is made, you will be (i) required to include in
your gross income your pro rata share of foreign source income (including any
foreign taxes paid by the fund), and (ii) entitled either to deduct your share
of such foreign taxes in computing your taxable income or to claim a credit for
such taxes against your U.S. income tax, subject to certain limitations under
the Code. You will be informed by the Fund at the end of each calendar year
regarding the availability of any credits and the amount of foreign source
income (including any foreign taxes paid by the Fund) to be included on your
income tax returns.
The Fund will inform you of the source of its dividends and distributions at the
time they are paid and, after the close of each calendar year, will promptly
advise you of the tax status for federal income tax purposes of such dividends
and distributions.
If you are not considered a U.S. person for federal income tax purposes, you
should consult with your financial or tax advisor regarding the applicability of
U.S. withholding or other taxes to distributions received by you from the Fund
and the application of foreign tax laws to these distributions. You should also
consult your tax advisor with respect to the applicability of any state and
local intangible property or income taxes to your shares of the Fund and
distributions and redemption proceeds received from the Fund.
HOW IS THE TRUST ORGANIZED?
The Fund is a non-diversified series of Franklin Strategic Series (the "Trust"),
an open-end management investment company, commonly called a mutual fund. It was
organized as a Delaware business trust on January 22, 1991, and is registered
with the SEC. The Fund offers two classes of shares: Franklin Global Utilities
Fund Class I and Franklin Global Utilities Fund - Class II. All shares
outstanding before the offering of Class II shares are considered Class I
shares. Additional series and classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters affecting only that class, or expressly required
to be voted on separately by state or federal law. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of the Trust for matters that affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares. In
certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check. Please indicate which class of shares you want to buy. If you do not
specify a class, your purchase will be automatically invested in Class I shares.
CURRENTLY, THE FUND DOES NOT ALLOW INVESTMENTS BY MARKET TIMERS.
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.
DECIDING WHICH CLASS TO BUY
You should consider a number of factors when deciding which class of shares to
buy. IF YOU PLAN TO BUY $1 MILLION OR MORE IN A SINGLE PAYMENT OR YOU QUALIFY TO
BUY CLASS I SHARES WITHOUT A SALES CHARGE, YOU MAY NOT BUY CLASS II SHARES.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds; and
o you plan to sell a substantial number of your shares within approximately six
years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders.
If you qualify to buy Class I shares at a reduced sales charge based upon the
size of your purchase or through our Letter of Intent or cumulative quantity
discount programs, but plan to hold your shares less than approximately six
years, you should evaluate whether it is more economical for you to buy Class I
or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
PURCHASE PRICE OF FUND SHARES
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
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CLASS I
Under $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 or more* None None None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares?
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Deciding Which
Class to Buy."
SALES CHARGE REDUCTIONS AND WAIVERS
IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH
EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't
include this statement, we cannot guarantee that you will receive the sales
charge reduction or waiver.
CUMULATIVE QUANTITY DISCOUNTS - CLASS I ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds, as well as those of your spouse, children under the
age of 21 and grandchildren under the age of 21. If you are the sole owner of a
company, you may also add any company accounts, including retirement plan
accounts. Companies with one or more retirement plans may add together the total
plan assets invested in the Franklin Templeton Funds to determine the sales
charge that applies.
LETTER OF INTENT - CLASS I ONLY. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES - CLASS I ONLY. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.A
qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
SALES CHARGE WAIVERS. The Fund's front-end sales charge and Contingent Deferred
Sales Charge do not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) 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 do not apply if you are buying Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 4:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a real estate investment trust (REIT) sponsored or advised by Franklin
Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds, the Templeton Variable Annuity Fund,
the Templeton Variable Products Series Fund, or the Franklin Government
Securities Trust. You should contact your tax advisor for information on
any tax consequences that may apply.
4. Redemptions from any Franklin Templeton Fund if you:
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.
The Fund's sales charges also do not apply to Class I purchases by:
5. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
6. Group annuity separate accounts offered to retirement plans
7. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
8. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments by the
Fund on arbitrage rebate calculations.
9. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
10. Registered Securities Dealers and their affiliates, for their investment
accounts only
11. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
12. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
13. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
14. Accounts managed by the Franklin Templeton Group
15. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with at
least 100 employees, or (ii) have plan assets of $1 million or more, or (iii)
agree to invest at least $500,000 in the Franklin Templeton Funds over a 13
month period may buy Class I shares without a front-end sales charge. Retirement
plans that are not Qualified Retirement Plans or SEPs, such as 403(b) or 457
plans, must also meet the requirements described under "Group Purchases - Class
I Only" above. For retirement plan accounts opened on or after May 1, 1997, a
Contingent Deferred Sales Charge may apply if the account is closed within 365
days of the retirement plan account's initial purchase in the Franklin Templeton
Funds. Please see "How Do I Sell Shares? - Contingent Deferred Sales Charge" for
details.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not by
the Fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 1% of the amount invested.
3. Class I purchases made without a front-end sales charge by certain retirement
plans described under "Sales Charge Reductions and Waivers - Retirement
Plans" above - up to 1% of the amount invested. For retirement plan accounts
opened on or after May 1, 1997, a Contingent Deferred Sales Charge will not
apply to the account if the Securities Dealer chooses to receive a payment of
0.25% or less or if no payment is made.
4. Class I purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the amount
invested.
5. Class I purchases by Chilean retirement plans - up to 1% of the amount
invested.
A Securities Dealer may receive only one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1, 2 or 5 above or a payment of up to 1% for investments
described in paragraph 3 will be eligible to receive the Rule 12b-1 fee
associated with the purchase starting in the thirteenth calendar month after the
purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums. Some Franklin Templeton Funds do not offer Class II shares.
METHOD STEPS TO FOLLOW
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BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you want to exchange
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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.
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THROUGH YOUR DEALER Call your investment representative
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Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges.
If you have held your shares less than six months, however, you will pay the
percentage difference between the sales charge you previously paid and the
applicable sales charge of the new fund. If you have never paid a sales charge
on your shares because, for example, they have always been held in a money fund,
you will pay the Fund's applicable sales charge no matter how long you have held
your shares. These charges may not apply if you qualify to buy shares without a
sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
CONTINGENT DEFERRED SALES CHARGE - CLASS I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, we will first exchange any shares
in your account that are not subject to the charge. If there are not enough of
these to meet your exchange request, we will exchange shares subject to the
charge in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
CONTINGENT DEFERRED SALES CHARGE - CLASS II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
Contingent Deferred Sales Charge, such as shares from the reinvestment of
dividends and capital gains ("free shares"), $2,000 in shares that are no longer
subject to a Contingent Deferred Sales Charge because you have held them for
longer than 18 months ("matured shares"), and $3,000 in shares that are still
subject to a Contingent Deferred Sales Charge("CDSC liable shares"). If you
exchange $3,000 into a new fund, $500 will be exchanged from free shares, $1,000
from matured shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. The tax consequences of a sale or exchange are determined by the
Code and not by the method used by the Fund to transfer shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange shares
from a Fund account requiring two or more signatures into an identically
registered money fund account requiring only one signature for all
transactions. Please notify us in writing if you do not want this option to be
available on your account. Additional procedures may apply. Please see
"Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Advisor Class" or "Class Z" shares. Because the
Fund does not currently offer an Advisor Class, you may exchange Advisor Class
shares of any Franklin Templeton Fund for Class I shares of the Fund at Net
Asset Value. If you do so and you later decide you would like to exchange into a
fund that offers an Advisor Class, you may exchange your Class I shares for
Advisor Class shares of that fund. Certain shareholders of Class Z shares of
Franklin Mutual Series Fund Inc. may also exchange their Class Z shares for
Class I shares of the Fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
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BY MAIL 1. Send us written instructions signed by all account
owners. If you would like your redemption proceeds wired to
a bank account, your instructions should include:
o The name, address and telephone number of the bank where you
want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit union, the name
of the corresponding bank and the account number
2. Include any outstanding share certificates for the shares you
are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may
have other requirements.
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BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other than an
escrow account, you must first sign up for the wire feature. To
sign up, send us written instructions, with a signature
guarantee.
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METHOD STEPS TO FOLLOW
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BY PHONE (cont.) To avoid any delay in processing, the instructions should
include the items listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts may
exceed $50,000 by completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for the shares you
want to sell or you have already returned them to the Fund
o Unless you are selling shares in a Trust Company retirement plan
account
o Unless the address on your account was changed by phone within
the last 15 days
If you do not want the ability to redeem by phone to apply to
your account, please let us know.
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THROUGH
YOUR DEALER Call your investment representative
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We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
591/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
For Class I purchases, 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 Class I 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. For any Class II purchase, a Contingent
Deferred Sales Charge may apply if you sell the shares within the Contingency
Period. The charge is 1% of the value of the shares sold or the Net Asset Value
at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class I shares without a front-end sales charge may also be
subject to a Contingent Deferred Sales Charge if the retirement plan account is
closed within 365 days of the account's initial purchase in the Franklin
Templeton Funds.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997, or
(ii) the Securities Dealer of record received a payment from Distributors of
0.25% or less, or (iii) Distributors did not make any payment in connection
with the purchase, as described under "How Do I Buy Shares? - Other Payments
to Securities Dealers"
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, at a rate of up to 1% a month of an account's Net Asset Value. For
example, if you maintain an annual balance of $1 million in Class I shares,
you can redeem up to $120,000 annually through a systematic withdrawal plan
free of charge. Likewise, if you maintain an annual balance of $10,000 in
Class II shares, $1,200 may be redeemed annually free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Redemptions by Trust Company employee benefit plans or employee benefit plans
serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee benefit
plans
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income semiannually in June
and December to shareholders of record on the first business day before the 15th
of the month and pays them on or about the last day of that month.
Capital gains, if any, may be distributed annually, usually in December.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of Class I and Class II.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the same
class of the Fund (without a sales charge or imposition of a Contingent Deferred
Sales Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. If you own Class II shares, you may also reinvest
your distributions in Class I shares of the Fund. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge). If
you own Class II shares, you may also direct your distributions to buy Class I
shares of another Franklin Templeton Fund. Many shareholders find this a
convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers - Class I
Only" under "Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days before the record date for us
to process the new option. For Trust Company retirement plans, special forms are
required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value per
share of the class you wish to purchase, plus any applicable sales charges. When
you sell shares, you receive the Net Asset Value per share minus any applicable
Contingent Deferred Sales Charges.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
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 of each class 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 for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by phone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, ALL owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- --------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- --------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- -------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have let us know
that you do not want telephone privileges to apply to your account.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION - CLASS I ONLY
You may have money transferred from your paycheck to the Fund to buy additional
Class I 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 - Class I Only" below.
Once your plan is established, any distributions paid by the Fund will be
automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS - CLASS I ONLY
You may choose to have dividend and capital gain distributions from Class I
shares of the Fund or payments under a systematic withdrawal plan sent directly
to a checking account. If the checking account is with a bank that is a member
of the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If you choose this option, please allow at least
fifteen days for initial processing. We will send any payments made during that
time to the address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the code number for each class to use TeleFACTS(R). The code
number is 197 for Class I and 297 for Class II.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- --------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
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.
PROSPECTUS & APPLICATION
FRANKLIN SMALL CAP GROWTH FUND
INVESTMENT STRATEGY
GROWTH
SEPTEMBER 1, 1997
FRANKLIN STRATEGIC SERIES
This prospectus describes Class I and Class II shares of the Franklin Small Cap
Growth Fund (the "Fund"). It contains information you should know before
investing in the Fund. Please keep it for future reference.
The Fund currently offers another class of shares with a different sales charge
and expense structure, which affects performance. This class is described in a
separate prospectus. For more information, contact your investment
representative or call 1-800/DIAL BEN.
The Fund has a Statement of Additional Information ("SAI") for its Class I and
Class II shares, dated September 1, 1997, which may be amended from time to
time. It 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 its address.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
FRANKLIN SMALL CAP GROWTH FUND
September 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? ............................... 12
Who Manages the Fund? .............................................. 15
How does the Fund Measure Performance? ............................. 17
How Taxation Affects the Fund and its Shareholders ................. 17
How is the Trust Organized? ........................................ 18
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ............................................... 19
May I Exchange Shares for Shares of Another Fund? .................. 25
How Do I Sell Shares? .............................................. 28
What Distributions Might I Receive from the Fund? .................. 31
Transaction Procedures and Special Requirements .................... 32
Services to Help You Manage Your Account ........................... 37
What If I Have Questions About My Account? ......................... 39
GLOSSARY
Useful Terms and Definitions ....................................... 40
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
FRANKLIN SMALL CAP GROWTH FUND
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of each class for the fiscal year
ended April 30, 1997. The Fund's actual expenses may vary.
CLASS I CLASS II
- --------------------------------------------------------------------------------
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge
(as a percentage of Offering Price) 4.50% 1.99%
Paid at time of purchase 4.50%++ 1.00%+++
PAID AT REDEMPTION++++ NONE 0.99%
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.48% 0.48%
Rule 12b-1 Fees 0.23%* 1.00%*
Other Expenses 0.21% 0.21%
Total Fund Operating Expenses 0.92% 1.69%
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -----------------------------------------------------------
Class I $54** $73 $ 94 $153
Class II $46 $72 $110 $216
For the same Class II investment, you would pay projected expenses of $37 if
you did not sell your shares at the end of the first year. Your projected
expenses for the remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected
in the Net Asset Value or dividends of each class and are not directly charged
to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more in Class I
shares.
+++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? - Deciding Which Class to Buy."
++++A Contingent Deferred Sales Charge may apply to any Class II purchase if you
sell the shares within 18 months and to Class I purchases of $1 million or more
if you sell the shares within one year. A Contingent Deferred Sales Charge may
also apply to purchases by certain retirement plans that qualify to buy Class I
shares without a front-end sales charge. The charge is 1% of the value of the
shares sold or the Net Asset Value at the time of purchase, whichever is less.
The number in the table shows the charge as a percentage of Offering Price.
While the percentage is different depending on whether the charge is shown based
on the Net Asset Value or the Offering Price, the dollar amount paid by you
would be the same. See "How Do I Sell Shares? - Contingent Deferred Sales
Charge" for details.
*These fees may not exceed 0.25% for Class I. The combination of front-end sales
charges and Rule 12b-1 fees could cause long-term shareholders to pay more than
the economic equivalent of the maximum front-end sales charge permitted under
the NASD's rules.
**Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent five years appears in the
financial statements in the Trust's Annual Report to Shareholders for the fiscal
year ended April 30, 1997. The Annual Report to Shareholders also includes more
information about the Fund's performance. For a free copy, please call Fund
Information.
<TABLE>
<CAPTION>
CLASS I SHARES:
<S> <C> <C> <C> <C> <C> <C>
Year Ended April 30 1997 1996 1995 1994 1993 1992+
===========================================================================================================================
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $19.75 $14.90 $12.75 $10.22 $9.58 $10.00
- ---------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) .03 .01 .03 .03 .07 .04
Net Realized & Unrealized Gain
(Loss) on Securities .044 6.230 3.138 2.944 .657 (.460)
- ---------------------------------------------------------------------------------------------------------------------------
Total From Investment Operations .074 6.240 3.168 2.974 .727 (.420)
Distributions From Net Investment Income (.067) (.014) (.021) (.043) (.087) --
Distributions From Realized Capital Gains (.797) (1.376) (.997) (.401) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total Distributions (.864) (1.390) (1.018) (.444) (.087) --
Net Asset Value at End of Period $18.96++ $19.75 $14.90 $12.75 $10.22 $9.58
Total Return+++ .14% 44.06% 27.05% 29.26% 7.66% (19.96)%*
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) $1,071,352 $444,912 $63,010 $23,915 $6,026 $1,268
Ratio of Expenses to Average Net Assets2 .92% .97% .69% .30% -- --
Ratio of Net Investment Income (Loss)
to Average Net Assets .10% .09% .25% .24% .84% 2.45%
Portfolio Turnover Rate 55.27% 87.92% 104.84% 89.60% 63.15% 2.41%
Average Commission Rate** .0499 .0505 -- -- -- --
</TABLE>
Class II Shares:
YEAR ENDED APRIL 30 1997 19961
- ------------------------------------------------------------------
Per Share Operating Performance
NET ASSET VALUE AT BEGINNING OF PERIOD $19.66 $17.94
- -----------------------------------------------------------------
Net Investment Income (Loss) (.05) (.03)
Net Realized & Unrealized Gain
(Loss) on Securities (.033) 2.714
TOTAL FROM INVESTMENT OPERATIONS (.083) 2.684
- ------------------------------------------------------------------
Distributions From Net Investment Income -- --
Distributions From Realized Capital Gains (.797) (.964)
Total Distributions (.797) (.964)
NET ASSET VALUE AT END OF PERIOD $18.78++ $19.66
- -----------------------------------------------------------------
Total Return+++ (.65)% 15.98%
Ratios/Supplemental Data
Net Assets at End of Period (in 000's) $146,164 $24,102
Ratio of Expenses to Average Net Assets 1.69% 1.76%*
Ratio of Net Investment Income (Loss)
to Average Net Assets (.70)% (.69)%*
Portfolio Turnover Rate 55.27% 87.92%
Average Commission Rate** .0499 .0505
+For the period February 14, 1992 (effective date) to April 30, 1992.
++The Net Asset Value differs from the Net Asset Value used to process
shareholder activity as of the reporting date, which does not include market
adjustment for portfolio trades made on that date. These adjustments are
generally accounted for on the day following the trade date.
+++Total return measures the change in value of an investment over the periods
indicated. It is not annualized except where indicated. It does not include the
maximum front-end sales charge or Contingent Deferred Sales Charge, and assumes
reinvestment of dividends and capital gains, if any, at Net Asset Value.
*Annualized
**Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
1For the period October 1, 1995 (effective date) to April 30, 1996.
2During the periods indicated, Advisers agreed in advance to waive or limit its
management fees and made payments of other expenses incurred by the Fund. Had
such action not been taken, the ratios of expenses to average net assets would
have been as follows:
Ratio of Expenses
TO AVERAGE NET ASSETS
Class I
1992 1.74%+,*
1993 1.95
1994 1.58
1995 1.16
1996 1.00
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is long-term capital growth. The objective is a
fundamental policy of the Fund and may not be changed without shareholder
approval. Of course, there is no assurance that the Fund's objective will be
achieved.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
The Fund seeks to achieve its objective by investing primarily in equity
securities of small capitalization growth companies. Small capitalization growth
companies typically are companies with relatively small market capitalization
which Advisers believes to be positioned for rapid growth in revenues or
earnings and assets, characteristics that may provide for significant capital
appreciation. Small companies often pay no dividends and current income is not a
factor in the selection of stocks. In general, companies in which the Fund will
invest have a market capitalization of less than $1 billion at the time of the
Fund's investment. Market capitalization is defined as the total market value of
a company's outstanding common stock. The securities of small capitalization
companies are traded on the NYSE and American Stock Exchange and in the
over-the-counter market.
Under normal market conditions, the Fund will invest at least 65% of its total
assets in equity securities of small capitalization growth companies. Equity
securities of these companies consist of common stock, preferred stock, warrants
for the purchase of common stock and debt securities convertible into or
exchangeable for common or preferred stock. A warrant is a security that gives
the holder the right, but not the obligation, to subscribe for newly created
securities of the issuer or a related company at a fixed price either at a
certain date or during a set period. A convertible security is a security that
may be converted either at a stated price or rate within a specified period of
time into a specified number of shares of common or preferred stock. By
investing in convertible securities, the Fund seeks to participate in the
capital appreciation of the common stock into which the securities are
convertible through the conversion feature.
In addition, the Fund seeks to invest at least one-third of its assets in
companies with a market capitalization of $550 million or less. There is no
assurance, however, that it will always be able to find suitable companies to
include in this one-third portion. Advisers will monitor the availability of
securities suitable for investment by the Fund and recommend appropriate action
to the Board if it appears that the goal of investing one-third of the Fund's
assets in companies with market capitalization of $550 million or less may not
be attainable under the Fund's current objective and policies. The Board will
review the availability of suitable investments quarterly, including Advisers'
assessment of the availability of suitable investments. Advisers will also
present to the Board Advisers' views and recommendations regarding the Fund's
ability to meet this goal in the future. If the Board should determine, based
upon one or more quarterly periods, that under the circumstances it is not
likely that sufficient suitable investments will be available to permit the Fund
to meet its goal of investing one-third of its assets in companies with market
capitalization of $550 million or less, it may determine to take appropriate
remedial action. Any changes will be consistent with the requirements of federal
securities laws and the rules adopted thereunder.
Although the Fund's assets will be invested primarily in equity securities of
small companies, the Fund may invest up to 35% (measured at the time of
purchase) of its total assets in equity securities of larger capitalization
companies which Advisers believes have strong growth potential, in relatively
well-known, larger companies in mature industries which Advisers believes have
the potential for capital appreciation, or in corporate debt securities
including bonds, notes and debentures, if the Fund deems the investment to
present a favorable investment opportunity consistent with the Fund's objective.
The Fund may invest in debt securities which Advisers believes have the
potential for capital appreciation as a result of improvement in the
creditworthiness of the issuer. The receipt of income from such debt securities
is incidental to the Fund's investment objective of capital growth. The Fund
will invest in debt securities rated B or above by Moody's or S&P, or in
securities which are unrated if, in Advisers' opinion, the securities are
comparable in quality to securities rated B or above by Moody's or S&P. The Fund
will not invest more than 5% of its assets in debt securities rated lower than
BBB or Baa. Securities rated B are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. For a description of
ratings, please see the appendix in the SAI.
The Fund may also invest in short-term money market instruments for liquidity
purposes to meet redemption requirements. Short-term investments that the Fund
may hold include U.S. government securities, CDs, high grade commercial paper
and repurchase agreements.
The Fund has been designed to provide investors with potentially greater
long-term rewards by investing in securities of small companies that may offer
greater potential for capital appreciation since they are often overlooked by
investors or undervalued in relation to their earnings power. Small companies
generally are not as well known to the investing public and have less of an
investor following than larger companies, and therefore may provide greater
opportunities for long-term capital growth as a result of relative
inefficiencies in the marketplace. These companies may be undervalued because
they are part of an industry that is out of favor with investors, although the
individual companies may have high rates of earning growth and be financially
sound. Selection of small company equity securities for the Fund will be based
on characteristics such as the financial strength of the company, the expertise
of management, the growth potential of the company within its industry and the
growth potential of the industry itself.
FOREIGN SECURITIES. The Fund may invest up to 25% of its total assets in foreign
securities, including those of developing or undeveloped markets, and sponsored
or unsponsored American Depositary Receipts ("ADRs"), which are certificates
issued by U.S. banks representing the right to receive securities of a foreign
issuer deposited with that bank or a correspondent bank.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with applicable U.S. and foreign currency
restrictions and other laws limiting the amount and types of foreign
investments. Investments may be in securities of foreign issuers located in both
developed or undeveloped countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents.
Securities that are acquired by the Fund outside the U.S. and that are publicly
traded in the U.S. or on a foreign securities exchange or in a foreign
securities market are not considered to be an illiquid asset so long as the Fund
reasonably believes it can readily dispose of the security for cash in the U.S.
or foreign market, or current market quotations are readily available.
OTHER INVESTMENT POLICIES OF THE FUND
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors,
provided that such loans do not exceed 20% of the value of the Fund's total
assets at the time of the most recent loan. The borrower must deposit with the
Fund's custodian bank collateral with an initial market value of at least 102%
of the initial market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 100%. This
collateral shall consist of cash, securities issued by the U.S. government, its
agencies or instrumentalities, or irrevocable letters of credit. The lending of
securities is a common practice in the securities industry. The Fund may engage
in security loan arrangements with the primary objective of increasing the
Fund's income either through investing the cash collateral in short-term
interest bearing obligations or by receiving a loan premium from the borrower.
Under the securities loan agreement, the Fund continues to be entitled to all
dividends or interest on any loaned securities. As with any extension of credit,
there are risks of delay in recovery and loss of rights in the collateral should
the borrower of the security fail financially.
BORROWING. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of its assets, except that the Fund may enter into reverse
repurchase agreements or borrow from banks up to 10% of its total asset value to
meet redemption requests and for other temporary or emergency purposes. While
borrowings exceed 5% of the Fund's total assets, the Fund will not make any
additional investments.
SECURITIES INDUSTRY RELATED INVESTMENTS. To the extent it is consistent with the
Fund's investment objective and certain limitations under federal securities
laws, the Fund may invest its assets in securities issued by companies engaged
in securities related businesses, including companies that are securities
brokers, dealers, underwriters or investment advisors. These companies are
considered part of the financial services industry sector. The Fund does not
believe that the limitations imposed under federal securities laws will impede
the attainment of its investment objective.
SHORT-TERM INVESTMENTS. The Fund may invest its cash, including cash resulting
from purchases and sales of Fund shares, temporarily in short-term debt
instruments, including high grade commercial paper, repurchase agreements and
other money market equivalents and the shares of money market funds managed by
Advisers which invest primarily in short-term debt securities. These temporary
investments will only be made with cash held to maintain liquidity or pending
investment. In addition, for temporary defensive purposes in the event of, or
when Advisers anticipates, a general decline in the market prices of stocks in
which the Fund invests, the Fund may invest an unlimited amount of its assets in
short-term debt instruments.
OPTIONS AND FINANCIAL FUTURES. The Fund may write (sell) covered put and call
options and buy put and call options on securities and indices that trade on
securities exchanges and in the over-the-counter market. The Fund may buy and
sell futures and options on futures with respect to securities, indices and
currencies. Additionally, the Fund may sell futures and options to "close out"
futures and options it may have purchased and it may buy futures and options to
"close out" futures and options it may have sold. The Fund will not enter into
any futures contract or related options (except for closing transactions) if,
immediately thereafter, the sum of the amount of its initial deposits and
premiums on open contracts and options would exceed 5% of the Fund's total
assets (taken at current value). The Fund will not engage in any stock options
or stock index options if the option premiums paid regarding its open option
positions exceed 5% of the value of the Fund's total assets.
The Fund's option and futures investments may be limited by the requirements of
the Code for qualification as a regulated investment company and may reduce the
portion of the Fund's dividends that is eligible for the corporate
dividends-received deduction. These transactions are also subject to special tax
rules that may affect the amount, timing and character of certain distributions
to shareholders. Please see "Additional Information on Distributions and Taxes"
in the SAI.
The Fund understands the current position of the staff of the SEC to be that
purchased OTC options are illiquid securities and that the assets used to cover
the sale of an OTC option are considered illiquid. The Fund and Advisers
disagree with this position. Nevertheless, pending a change in the staff's
position, the Fund will treat OTC options and "cover" assets as subject to the
Fund's limitation on illiquid securities. Please see "Illiquid Investments"
below.
WARRANTS AND RIGHTS. The Fund may invest up to 5% of its total assets in
warrants or rights (other than those acquired in units or attached to other
securities) which entitle the holder to buy equity securities at a specific
price during or at the end of a specific period of time. The Fund will not
invest more than 2% of its total assets in warrants or rights which are not
listed on the New York or American stock exchanges.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions in which
the Fund buys a U.S. government security subject to resale to a bank or dealer
at an agreed-upon price and date. The transaction requires the collateralization
of the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller may cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund might
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks that are deemed creditworthy by Advisers. A
repurchase agreement is deemed to be a loan by the Fund under federal securities
laws. The U.S. government security subject to resale (the collateral) is held on
behalf of the Fund by a custodian bank approved by the Board and is held
pursuant to a written agreement.
The Fund may also enter into reverse repurchase agreements. These agreements
involve the sale of securities held by the Fund pursuant to an agreement to
repurchase the securities at an agreed-upon price, date and interest payment.
When effecting reverse repurchase transactions, cash or high grade liquid debt
securities of a dollar amount equal in value to the Fund's obligation under the
agreement, including accrued interest, will be maintained in a segregated
account with the Fund's custodian bank, and the securities subject to the
reverse repurchase agreement will be marked-to-market each day. Although reverse
repurchase agreements are borrowings under federal securities laws, the Fund
does not treat these arrangements as borrowings under investment restriction 3
in the SAI so long as the segregated account is properly maintained.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities. A
convertible security is generally a debt obligation or preferred stock that may
be converted within a specified period of time into a certain amount of common
stock of the same or a different issuer. A convertible security provides a
fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance in
its underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. The value of a
convertible security also tends to increase as the market value of the
underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because its value can be influenced by both interest
rate and market movements, a convertible security is not as sensitive to
interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the Fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the Fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
The Fund may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stocks ("PERCS"), which
provide an investor, such as the Fund, with the opportunity to earn higher
dividend income than is available on a company's common stock. PERCS are
preferred stocks that generally feature a mandatory conversion date, as well as
a capital appreciation limit which is usually expressed in terms of a stated
price. Most PERCS expire three years from the date of issue, at which time they
are convertible into common stock of the issuer. PERCS are generally not
convertible into cash at maturity. Under a typical arrangement, after three
years PERCS convert into one share of the issuer's common stock if the issuer's
common stock is trading at a price below that set by the capital appreciation
limit, and into less than one full share if the issuer's common stock is trading
at a price above that set by the capital appreciation limit. The amount of that
fractional share of common stock is determined by dividing the price set by the
capital appreciation limit by the market price of the issuer's common stock.
PERCS can be called at any time prior to maturity, and hence do not provide call
protection. If called early, however, the issuer must pay a call premium over
the market price to the investor. This call premium declines at a preset rate
daily, up to the maturity date.
The Fund may also invest in other enhanced convertible securities. These include
but are not limited to ACES (Automatically Convertible Equity Securities), PEPS
(Participating Equity Preferred Stock), PRIDES (Preferred Redeemable Increased
Dividend Equity Securities), SAILS (Stock Appreciation Income Linked
Securities), TECONS (Term Convertible Notes), QICS (Quarterly Income Cumulative
Securities), and DECS (Dividend Enhanced Convertible Securities). ACES, PEPS,
PRIDES, SAILS, TECONS, QICS, and DECS all have the following features: they are
issued by the company, the common stock of which will be received in the event
the convertible preferred stock is converted, unlike PERCS they do not have a
capital appreciation limit, they seek to provide the investor with high current
income with some prospect of future capital appreciation, they are typically
issued with three to four-year maturities, they typically have some built-in
call protection for the first two to three years, investors have the right to
convert them into shares of common stock at a preset conversion ratio or hold
them until maturity, and upon maturity they will automatically convert to either
cash or a specified number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked as
senior or subordinated debt in the issuer's corporate structure according to the
terms of the debt indenture. There may be additional types of convertible
securities not specifically referred to herein which may be similar to those
described above in which a Fund may invest, consistent with its objectives and
policies.
ILLIQUID INVESTMENTS. The Fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them.
The Board has authorized the Fund to invest in restricted securities (securities
not registered with the SEC, which might otherwise be considered illiquid) where
such investment is consistent with the Fund's investment objective and has
authorized these securities to be considered liquid (and thus not subject to the
foregoing 10% limitation), to the extent Advisers determines on a daily basis
that there is a liquid institutional or other market for these securities.
Notwithstanding Advisers determination in this regard, the Board will remain
responsible for these determinations and will consider appropriate action,
consistent with the Fund's objective and policies, if a security should become
illiquid after its purchase. In this regard, if qualified institutional buyers
are no longer interested in buying restricted securities previously designated
as liquid or if the market for these securities contracts, these securities will
be redesignated as illiquid and subject to the 10% limitation. See "How does the
Fund Invest its Assets? - Illiquid Securities" in the SAI.
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.
Each of the Fund's policies and restrictions discussed in this prospectus and in
the SAI is considered at the time the Fund makes an investment. The Fund is
generally not required to sell a security because of a change in circumstances.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock market as a whole.
SMALLER COMPANIES. The Fund may invest in relatively new or unseasoned companies
that are in their early stages of development, or small companies positioned in
new and emerging industries where the opportunity for rapid growth is expected
to be above average. Securities of unseasoned companies present greater risks
than securities of larger, more established companies. The Fund may not invest
more than 10% of its net assets in securities of issuers with less than three
years continuous operation. The companies in which the Fund may invest may have
relatively small revenues, limited product lines, and may have a small share of
the market for their products or services. Small companies may lack depth of
management, they may be unable to internally generate funds necessary for growth
or potential development or to generate such funds through external financing on
favorable terms, or they may be developing or marketing new products or services
for which markets are not yet established and may never become established. Due
to these and other factors, small companies may suffer significant losses as
well as realize substantial growth, and investments in small companies tend to
be volatile and are therefore speculative.
Historically, small capitalization stocks have been more volatile in price than
larger capitalization stocks. Among the reasons for the greater price volatility
of these securities are the less certain growth prospects of smaller firms, the
lower degree of liquidity in the markets for such stocks, and the greater
sensitivity of small companies to changing economic conditions. Besides
exhibiting greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks. Small company stocks may decline in
price as large company stocks rise, or rise in price as large company stocks
decline. You should therefore expect that the value of the Fund's shares may be
more volatile than the shares of a fund that invests in larger capitalization
stocks.
The Fund should not be considered suitable for investors who are unable or
unwilling to assume the risks of loss inherent in such a program, nor should
investment in the Fund be considered a balanced or complete investment program.
FOREIGN SECURITIES. Investing in securities of foreign issuers involves risks
that are not typically associated with investing in U.S. dollar denominated
securities or in securities of domestic issuers. These risks can be
significantly greater for investments in emerging markets. These risks, which
may involve possible losses, include political, social or economic instability
in the country of the issuer, the difficulty of predicting international trade
patterns, the possibility of the imposition of exchange controls, expropriation,
limits on removal of currency or other assets, foreign investment controls on
daily stock market movements, nationalization of assets, foreign withholding and
income taxation and foreign trading practices (including higher trading
commissions, custodial charges and delayed settlements). Changes of governmental
administrations or of economic or monetary policies, in the U.S. or abroad, or
changed circumstances in dealings between nations or currency convertibility or
exchange rates could result in investment losses for the Fund. In addition,
there may be less publicly available information about a foreign company than
about a U.S. domiciled company. Foreign companies generally are not subject to
uniform accounting, auditing and financial reporting standards comparable to
those applicable to U.S. domestic companies. The Fund may also encounter
difficulties or be unable to vote proxies, exercise shareholder rights, pursue
legal remedies and obtain judgments in foreign courts. There is generally less
government supervision and regulation of business and industry practices,
securities exchanges, brokers and listed companies abroad than in the U.S.
OPTIONS AND FINANCIAL FUTURES. The Fund's option and futures investments involve
certain risks. These risks include the risk that the effectiveness of an options
and futures strategy depends on the degree to which price movements in the
underlying index, securities or currencies correlate with price movements in the
relevant portion of the Fund's portfolio. The Fund bears the risk that the
prices of its portfolio securities will not move in the same amount as the
option or future it has purchased, or that there may be a negative correlation
which would result in a loss on both the securities and the option or future.
Positions in exchange traded options and futures may be closed out only on an
exchange that provides a secondary market. There may not always be a liquid
secondary market for a futures or option contract at a time when the Fund seeks
to "close out" its position. If the Fund were unable to "close out" a futures or
option position, and if prices moved adversely, the Fund would have to continue
to make daily cash payments to maintain its required margin, and if the Fund had
insufficient cash, it might have to sell portfolio securities at a
disadvantageous time. In addition, the Fund might be required to deliver the
securities underlying the futures or option contracts it holds.
Over-the-counter ("OTC") options may not be closed out on an exchange and the
Fund may be able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer that
issued it. There can be no assurance that a liquid secondary market will exist
for any particular option or futures contract at any specific time. Thus, it may
not be possible to close such an option or futures position. The Fund will enter
into an option or futures position only if there appears to be a liquid
secondary market for such option or futures.
Adverse market movements could cause the Fund to lose up to its full investment
in a call option contract and/or to experience substantial losses on an
investment in a futures contract. There is also the risk of loss by the Fund of
margin deposits in the event of bankruptcy of a broker with whom the Fund has an
open position in a futures contract or option. Options, futures and options on
futures are generally considered "derivative securities." Derivatives are
broadly defined as financial instruments whose performance is derived, at least
in part, from the performance of an underlying asset, such as stock prices or
indices of securities, interest rates, currency exchange rates, or commodity
prices. Please see "How does the Fund Invest its Assets? - Options, Futures and
Options on Financial Futures" in the SAI for more information on the Fund's
investments in options and futures, including the risks associated with these
activities.
ENHANCED CONVERTIBLE SECURITIES. An investment in an enhanced convertible
security or any other security may involve additional risks to the Fund. The
Fund may have difficulty disposing of such securities because there may be a
thin trading market for a particular security at any given time. Reduced
liquidity may have an adverse impact on market price and the Fund's ability to
dispose of particular securities, when necessary, to meet the Fund's liquidity
needs or in response to a specific economic event, such as the deterioration in
the credit worthiness of an issuer. Reduced liquidity in the secondary market
for certain securities may also make it more difficult for the Fund to obtain
market quotations based on actual trades for purposes of valuing the Fund's
portfolio. The Fund, however, intends to acquire liquid securities, though there
can be no assurances that this will be achieved.
MARKET AND CURRENCY RISK. If there is a general market decline in any country
where the Fund is invested, the Fund's share price may also decline. Changes in
currency valuations will also affect the value of what the Fund owns, and thus
the price of Fund shares. The value of stock markets and currency valuations
throughout the world has increased and decreased in the past. These changes are
unpredictable.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
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 $207 billion in assets. Please see "Investment Management
and Other Services" and "Miscellaneous Information" in the SAI for information
on securities transactions and a summary of the Fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is: Mr. Jamieson and Mr. Moore since inception and Mr. McCarthy
since March 1993.
Edward B. Jamieson
Senior Vice President of Advisers
Mr. Jamieson holds a Master's degree in Accounting and Finance from the
University of Chicago Graduate School of Business and a Bachelor of Arts degree
from Bucknell University. He has been with the Franklin Templeton Group since
1987. Mr. Jamieson is a member of several securities industry-related committees
and associations.
Nicholas Moore
Portfolio Manager of Advisers
Mr. Moore holds a Bachelor of Science degree in Business Administration from
Menlo College. He has been with the Franklin Templeton Group since 1989.
Michael McCarthy
Portfolio Manager of Advisers
Mr. McCarthy holds a Bachelor of Arts degree in History from the University of
California at Los Angeles. He has been with the Franklin Templeton Group since
1992.
MANAGEMENT FEES. During the fiscal year ended April 30, 1997, management fees
totaling 0.48% of the average daily net assets of the Fund were paid to
Advisers. Total expenses, including fees paid to Advisers, were 0.92% for Class
I and 1.69% for Class II.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares, as well as shares of other funds in the Franklin Templeton Group
of Funds, when selecting a broker or dealer. Please see "How does the Fund Buy
Securities for its Portfolio?" in the SAI for more information.
ADMINISTRATIVE SERVICES. 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 RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
Fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by the Fund under the Class I plan may not exceed 0.25% per year of
Class I's average daily net assets. All distribution expenses over this amount
will be borne by those who have incurred them. During the first year after
certain Class I purchases made without a sales charge, Distributors may keep the
Rule 12b-1 fees associated with the purchase.
Under the Class II plan, the Fund may pay Distributors up to 0.75% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the purchase.
The Fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, each class of the Fund advertises its performance. A commonly
used measure of performance is total return. Performance figures are usually
calculated using the maximum sales charges, but certain figures may not include
sales charges.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested.
The investment results of each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund is treated as a separate entity for federal income tax purposes. The
Fund has elected and intends to continue to qualify as a regulated investment
company under Subchapter M of the Code. By distributing all of its income and
meeting certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will generally not be liable for federal
income or excise taxes.
For federal income tax purposes, any income dividends which you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned Fund shares and regardless of whether you receive
distributions in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated for tax purposes as if you received
them on December 31 of the calendar year in which they are declared.
For corporate shareholders, 5.55% of the ordinary income distributions
(including short-term capital gain distributions) paid by the Fund for the
fiscal year ended April 30, 1997 qualified for the corporate dividends-received
deduction, subject to certain holding period and debt financing restrictions
imposed under the Code on the corporation claiming the deduction. These
restrictions are discussed in the SAI.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to such shares.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of such dividends
and distributions.
If you are not considered a U.S. person for federal income tax purposes, you
should consult with your financial or tax advisor regarding the applicability of
U.S. withholding or other taxes on distributions received by you from the Fund
and the application of foreign tax laws to these distributions. You should also
consult your tax advisor with respect to the applicability of any state and
local intangible property or income taxes to your shares of the Fund and
distributions and redemption proceeds received from the Fund.
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. As of January 1, 1997, the Fund began offering a new class of
shares designated Franklin Small Cap Growth Fund - Advisor Class. All shares
outstanding before the offering of Advisor Class shares have been designated
Franklin Small Cap Growth Fund Class I and Franklin Small Cap Growth Fund -
Class II. Additional series and classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters affecting only that class, or expressly required
to be voted on separately by state or federal law. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of the Trust for matters that affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares. In
certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check. PLEASE INDICATE WHICH CLASS OF SHARES YOU WANT TO BUY. IF YOU DO NOT
SPECIFY A CLASS, YOUR PURCHASE WILL BE AUTOMATICALLY INVESTED IN CLASS I SHARES.
CURRENTLY, THE FUND DOES NOT ALLOW INVESTMENTS BY MARKET TIMERS.
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.
DECIDING WHICH CLASS TO BUY
You should consider a number of factors when deciding which class of shares to
buy. IF YOU PLAN TO BUY $1 MILLION OR MORE IN A SINGLE PAYMENT OR YOU QUALIFY TO
BUY CLASS I SHARES WITHOUT A SALES CHARGE, YOU MAY NOT BUY CLASS II SHARES.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds; and
o you plan to sell a substantial number of your shares within approximately six
years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
PURCHASE PRICE OF FUND SHARES
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
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CLASS I
Under $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 or more* None None None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares?
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Deciding Which
Class to Buy."
SALES CHARGE REDUCTIONS AND WAIVERS
- - IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH
EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't include
this statement, we cannot guarantee that you will receive the sales charge
reduction or waiver.
CUMULATIVE QUANTITY DISCOUNTS - CLASS I ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds, as well as those of your spouse, children under the
age of 21 and grandchildren under the age of 21. If you are the sole owner of a
company, you may also add any company accounts, including retirement plan
accounts. Companies with one or more retirement plans may add together the total
plan assets invested in the Franklin Templeton Funds to determine the sales
charge that applies.
LETTER OF INTENT - CLASS I ONLY. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES - CLASS I ONLY. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
SALES CHARGE WAIVERS. The Fund's front-end sales charge and Contingent Deferred
Sales Charge do not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) 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 do not apply if you are buying Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 4:
1. Dividend and capital gain distributions from any Franklin Templeton Fund
or a real estate investment trust (REIT) sponsored or advised by Franklin
Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds, the Templeton Variable Annuity Fund,
the Templeton Variable Products Series Fund, or the Franklin Government
Securities Trust. You should contact your tax advisor for information on
any tax consequences that may apply.
4. Redemptions from any Franklin Templeton Fund if you:
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.
The Fund's sales charges also do not apply to Class I purchases by:
5. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
6. Group annuity separate accounts offered to retirement plans
7. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
8. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments by the
Fund on arbitrage rebate calculations.
9. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
10. Registered Securities Dealers and their affiliates, for their investment
accounts only
11. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
12. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
13. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
14. Accounts managed by the Franklin Templeton Group
15. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with at
least 100 employees, or (ii) have plan assets of $1 million or more, or (iii)
agree to invest at least $500,000 in the Franklin Templeton Funds over a 13
month period may buy Class I shares without a front-end sales charge. Retirement
plans that are not Qualified Retirement Plans or SEPs, such as 403(b) or 457
plans, must also meet the requirements described under "Group Purchases - Class
I Only" above. For retirement plan accounts opened on or after May 1, 1997, a
Contingent Deferred Sales Charge may apply if the account is closed within 365
days of the retirement plan account's initial purchase in the Franklin Templeton
Funds. Please see "How Do I Sell Shares? - Contingent Deferred Sales Charge" for
details.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not by
the Fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 1% of the amount invested.
3. Class I purchases made without a front-end sales charge by certain
retirement plans described under "Sales Charge Reductions and Waivers -
Retirement Plans" above - up to 1% of the amount invested. For retirement
plan accounts opened on or after May 1, 1997, a Contingent Deferred Sales
Charge will not apply to the account if the Securities Dealer chooses to
receive a payment of 0.25% or less or if no payment is made.
4. Class I purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the amount
invested.
5. Class I purchases by Chilean retirement plans - up to 1% of the amount
invested.
A Securities Dealer may receive only one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1, 2 or 5 above or a payment of up to 1% for investments
described in paragraph 3 will be eligible to receive the Rule 12b-1 fee
associated with the purchase starting in the thirteenth calendar month after the
purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums. Some Franklin Templeton Funds do not offer Class II shares.
METHOD STEPS TO FOLLOW
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BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you want to exchange
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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.
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THROUGH YOUR DEALER Call your investment representative
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Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
CONTINGENT DEFERRED SALES CHARGE - CLASS I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, we will first exchange any shares
in your account that are not subject to the charge. If there are not enough of
these to meet your exchange request, we will exchange shares subject to the
charge in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
CONTINGENT DEFERRED SALES CHARGE - CLASS II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
Contingent Deferred Sales Charge, such as shares from the reinvestment of
dividends and capital gains ("free shares"), $2,000 in shares that are no longer
subject to a Contingent Deferred Sales Charge because you have held them for
longer than 18 months ("matured shares"), and $3,000 in shares that are still
subject to a Contingent Deferred Sales Charge ("CDSC liable shares"). If you
exchange $3,000 into a new fund, $500 will be exchanged from free shares, $1,000
from matured shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. The tax consequences of a sale or exchange are determined by the
Code and not by the method used by the Fund to transfer shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. Please notify us in writing if you do not want this
option to be available on your account. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Class Z" shares. Certain shareholders of Class Z
shares of Franklin Mutual Series Fund Inc. may exchange their Class Z shares for
Class I shares of the Fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
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BY MAIL 1. Send us written instructions signed by all account owners.
If you would like your redemption proceeds wired to a bank
account, your instructions should include:
o The name, address and telephone number of the bank where you want the
proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit union, the name of the
corresponding bank and the account number
2. Include any outstanding share certificates for the shares you are
selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may have
other requirements.
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BY PHONE Call Shareholder Services. If you would like your redemption
proceeds wired to a bank account, other than an escrow account,
you must first sign up for the wire feature. To sign up, send us
written instructions, with a signature guarantee. To avoid any
delay in processing, the instructions should include the items
listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts may
exceed $50,000 by completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for the shares you want
to sell or you have already returned them to the Fund
o Unless you are selling shares in a Trust Company retirement plan
account
o Unless the address on your account was changed by phone within the
last 15 days
If you do not want the ability to redeem by phone to apply to your
account, please let us know.
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THROUGH
YOUR DEALER Call your investment representative
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We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
591/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
For Class I purchases, 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 Class I 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. For any Class II purchase, a Contingent
Deferred Sales Charge may apply if you sell the shares within the Contingency
Period. The charge is 1% of the value of the shares sold or the Net Asset Value
at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class I shares without a front-end sales charge may also be
subject to a Contingent Deferred Sales Charge if the retirement plan account is
closed within 365 days of the account's initial purchase in the Franklin
Templeton Funds.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997, or
(ii) the Securities Dealer of record received a payment from Distributors of
0.25% or less, or (iii) Distributors did not make any payment in connection
with the purchase, as described under "How Do I Buy Shares? - Other Payments
to Securities Dealers"
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, at a rate of up to 1% a month of an account's Net Asset Value. For
example, if you maintain an annual balance of $1 million in Class I shares,
you can redeem up to $120,000 annually through a systematic withdrawal plan
free of charge. Likewise, if you maintain an annual balance of $10,000 in
Class II shares, $1,200 may be redeemed annually free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Redemptions by Trust Company employee benefit plans or employee benefit plans
serviced by ValuSelect(R)
Participant initiated distributions from employee benefit plans or participant
initiated exchanges among investment choices in employee benefit plans
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income semiannually in June
and December to shareholders of record on the first business day before the 15th
of the month and pays them on or about the last day of that month.
Capital gains, if any, may be distributed annually, usually in December.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of Class I and Class II.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the
same class of the Fund (without a sales charge or imposition of a Contingent
Deferred Sales Charge) by reinvesting capital gain distributions, or both
dividend and capital gain distributions. If you own Class II shares, you may
also reinvest your distributions in Class I shares of the Fund. This is a
convenient way to accumulate additional shares and maintain or increase your
earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a Contingent Deferred Sales
Charge). If you own Class II shares, you may also direct your distributions
to buy Class I shares of another Franklin Templeton Fund. Many shareholders
find this a convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to
another person or to a checking account, you may need a signature guarantee.
If you send the money to a checking account, please see "Electronic Fund
Transfers Class I Only" under "Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days before the record date for us
to process the new option. For Trust Company retirement plans, special forms are
required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value per
share of the class you wish to purchase, plus any applicable sales charges. When
you sell shares, you receive the Net Asset Value per share minus any applicable
Contingent Deferred Sales Charges.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
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 of each class 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 for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by phone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- --------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- --------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have let us know
that you do not want telephone privileges to apply to your account.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION - CLASS I ONLY
You may have money transferred from your paycheck to the Fund to buy additional
Class I 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 - Class I Only" below.
Once your plan is established, any distributions paid by the Fund will be
automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS - CLASS I ONLY
You may choose to have dividend and capital gain distributions from Class I
shares of the Fund or payments under a systematic withdrawal plan sent directly
to a checking account. If the checking account is with a bank that is a member
of the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If you choose this option, please allow at least
fifteen days for initial processing. We will send any payments made during that
time to the address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the code number for each class to use TeleFACTS(R). The code
number is 198 for Class I and 298 for Class II.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- --------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
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.
PROSPECTUS & APPLICATION
FRANKLIN SMALL CAP GROWTH FUND
INVESTMENT STRATEGY
GROWTH
ADVISOR CLASS
SEPTEMBER 1, 1997
FRANKLIN STRATEGIC SERIES
This prospectus describes the Advisor Class shares of the Franklin Small Cap
Growth Fund (the "Fund"). It contains information you should know before
investing in the Fund. Please keep it for future reference.
The Fund currently offers other classes of shares with different sales charge
and expense structures, which affect performance. These classes are described in
a separate prospectus. For more information, contact your investment
representative or call 1-800/DIAL BEN.
The Fund has a Statement of Additional Information ("SAI") for its Advisor
Class, dated September 1, 1997, which may be amended from time to time. It
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 its address.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
FRANKLIN SMALL CAP GROWTH FUND-
ADVISOR CLASS
SEPTEMBER 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? ................................... 11
Who Manages the Fund? .................................................. 14
How does the Fund Measure Performance? ................................. 15
How Taxation Affects the Fund and its Shareholders ..................... 16
How is the Trust Organized? ............................................ 17
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ................................................... 18
May I Exchange Shares for Shares of Another Fund? ...................... 20
How Do I Sell Shares? .................................................. 22
What Distributions Might I Receive from the Fund? ...................... 24
Transaction Procedures and Special Requirements ........................ 25
Services to Help You Manage Your Account ............................... 29
What If I Have Questions About My Account? ............................. 30
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 historical expenses of each class for the fiscal year
ended March 31, 1997. The Fund's actual expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge None
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.48%
Rule 12b-1 Fees None
Other Expenses 0.21%
Total Fund Operating Expenses 0.69%
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------
$7 $22 $38 $86
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of the class and are not directly charged to
your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering the period shown below appears in the financial statements
in the Trust's Annual Report to Shareholders for the fiscal year ended April 30,
1997. The Annual Report to Shareholders also includes more information about the
Fund's performance. For a free copy, please call Fund Information.
PERIOD ENDED APRIL 30 1997+
- ------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $20.48
Net Investment Income .01
Net Realized & Unrealized Gain (Loss) on Securities (1.52)
Total From Investment Operations (1.51)
Distributions From Net Investment Income --
Distributions From Realized Capital Gains --
Total Distributions --
Net Asset Value at End of Period $18.97
-------
Total Return++ (7.37)%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) $18,777
Ratio of Expenses to Average Net Assets .69%*
Ratio of Net Investment Income (Loss) to Average Net Assets .30%*
Portfolio Turnover Rate 55.27%
Average Commission Rate** .0499
+For the period January 2, 1997 (effective date) to April 30, 1997.
++Total return measures the change in value of an investment over the period
indicated. It is not annualized. It assumes reinvestment of dividends and
capital gains, if any, at Net Asset Value.
*Annualized.
**Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is long-term capital growth. The objective is a
fundamental policy of the Fund and may not be changed without shareholder
approval. Of course, there is no assurance that the Fund's objective will be
achieved.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
The Fund seeks to achieve its objective by investing primarily in equity
securities of small capitalization growth companies. Small capitalization growth
companies typically are companies with relatively small market capitalization
which Advisers believes to be positioned for rapid growth in revenues or
earnings and assets, characteristics that may provide for significant capital
appreciation. Small companies often pay no dividends and current income is not a
factor in the selection of stocks. In general, companies in which the Fund will
invest have a market capitalization of less than $1 billion at the time of the
Fund's investment. Market capitalization is defined as the total market value of
a company's outstanding common stock. The securities of small capitalization
companies are traded on the NYSE and American Stock Exchange and in the
over-the-counter market.
Under normal market conditions, the Fund will invest at least 65% of its total
assets in equity securities of small capitalization growth companies. Equity
securities of these companies consist of common stock, preferred stock, warrants
for the purchase of common stock and debt securities convertible into or
exchangeable for common or preferred stock. A warrant is a security that gives
the holder the right, but not the obligation, to subscribe for newly created
securities of the issuer or a related company at a fixed price either at a
certain date or during a set period. A convertible security is a security that
may be converted either at a stated price or rate within a specified period of
time into a specified number of shares of common or preferred stock. By
investing in convertible securities, the Fund seeks to participate in the
capital appreciation of the common stock into which the securities are
convertible through the conversion feature.
In addition, the Fund seeks to invest at least one-third of its assets in
companies with a market capitalization of $550 million or less. There is no
assurance, however, that it will always be able to find suitable companies to
include in this one-third portion. Advisers will monitor the availability of
securities suitable for investment by the Fund and recommend appropriate action
to the Board if it appears that the goal of investing one-third of the Fund's
assets in companies with market capitalization of $550 million or less may not
be attainable under the Fund's current objective and policies. The Board will
review the availability of suitable investments quarterly, including Advisers'
assessment of the availability of suitable investments. Advisers will also
present to the Board Advisers' views and recommendations regarding the Fund's
ability to meet this goal in the future. If the Board should determine, based
upon one or more quarterly periods, that under the circumstances it is not
likely that sufficient suitable investments will be available to permit the Fund
to meet its goal of investing one-third of its assets in companies with market
capitalization of $550 million or less, it may determine to take appropriate
remedial action. Any changes will be consistent with the requirements of federal
securities laws and the rules adopted thereunder.
Although the Fund's assets will be invested primarily in equity securities of
small companies, the Fund may invest up to 35% (measured at the time of
purchase) of its total assets in equity securities of larger capitalization
companies which Advisers believes have strong growth potential, in relatively
well-known, larger companies in mature industries which Advisers believes have
the potential for capital appreciation, or in corporate debt securities
including bonds, notes and debentures, if the Fund deems the investment to
present a favorable investment opportunity consistent with the Fund's objective.
The Fund may invest in debt securities which Advisers believes have the
potential for capital appreciation as a result of improvement in the
creditworthiness of the issuer. The receipt of income from such debt securities
is incidental to the Fund's investment objective of capital growth. The Fund
will invest in debt securities rated B or above by Moody's or S&P, or in
securities which are unrated if, in Advisers' opinion, the securities are
comparable in quality to securities rated B or above by Moody's or S&P. The Fund
will not invest more than 5% of its assets in debt securities rated lower than
BBB or Baa. Securities rated B are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. For a description of
ratings, please see the appendix in the SAI.
The Fund may also invest in short-term money market instruments for liquidity
purposes to meet redemption requirements. Short-term investments that the Fund
may hold include U.S. government securities, CDs, high grade commercial paper
and repurchase agreements.
The Fund has been designed to provide investors with potentially greater
long-term rewards by investing in securities of small companies that may offer
greater potential for capital appreciation since they are often overlooked by
investors or undervalued in relation to their earnings power. Small companies
generally are not as well known to the investing public and have less of an
investor following than larger companies, and therefore may provide greater
opportunities for long-term capital growth as a result of relative
inefficiencies in the marketplace. These companies may be undervalued because
they are part of an industry that is out of favor with investors, although the
individual companies may have high rates of earning growth and be financially
sound. Selection of small company equity securities for the Fund will be based
on characteristics such as the financial strength of the company, the expertise
of management, the growth potential of the company within its industry and the
growth potential of the industry itself.
FOREIGN SECURITIES. The Fund may invest up to 25% of its total assets in foreign
securities, including those of developing or undeveloped markets, and sponsored
or unsponsored American Depositary Receipts ("ADRs"), which are certificates
issued by U.S. banks representing the right to receive securities of a foreign
issuer deposited with that bank or a correspondent bank.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with applicable U.S. and foreign currency
restrictions and other laws limiting the amount and types of foreign
investments. Investments may be in securities of foreign issuers located in both
developed or undeveloped countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents.
Securities that are acquired by the Fund outside the U.S. and that are publicly
traded in the U.S. or on a foreign securities exchange or in a foreign
securities market are not considered to be an illiquid asset so long as the Fund
reasonably believes it can readily dispose of the security for cash in the U.S.
or foreign market, or current market quotations are readily available.
OTHER INVESTMENT POLICIES OF THE FUND
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors,
provided that such loans do not exceed 20% of the value of the Fund's total
assets at the time of the most recent loan. The borrower must deposit with the
Fund's custodian bank collateral with an initial market value of at least 102%
of the initial market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 100%. This
collateral shall consist of cash, securities issued by the U.S. government, its
agencies or instrumentalities, or irrevocable letters of credit. The lending of
securities is a common practice in the securities industry. The Fund may engage
in security loan arrangements with the primary objective of increasing the
Fund's income either through investing the cash collateral in short-term
interest bearing obligations or by receiving a loan premium from the borrower.
Under the securities loan agreement, the Fund continues to be entitled to all
dividends or interest on any loaned securities. As with any extension of credit,
there are risks of delay in recovery and loss of rights in the collateral should
the borrower of the security fail financially.
BORROWING. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of its assets, except that the Fund may enter into reverse
repurchase agreements or borrow from banks up to 10% of its total asset value to
meet redemption requests and for other temporary or emergency purposes. While
borrowings exceed 5% of the Fund's total assets, the Fund will not make any
additional investments.
SECURITIES INDUSTRY RELATED INVESTMENTS. To the extent it is consistent with the
Fund's investment objective and certain limitations under federal securities
laws, the Fund may invest its assets in securities issued by companies engaged
in securities related businesses, including companies that are securities
brokers, dealers, underwriters or investment advisors. These companies are
considered part of the financial services industry sector. The Fund does not
believe that the limitations imposed under federal securities laws will impede
the attainment of its investment objective.
SHORT-TERM INVESTMENTS. The Fund may invest its cash, including cash resulting
from purchases and sales of Fund shares, temporarily in short-term debt
instruments, including high grade commercial paper, repurchase agreements and
other money market equivalents and the shares of money market funds managed by
Advisers which invest primarily in short-term debt securities. These temporary
investments will only be made with cash held to maintain liquidity or pending
investment. In addition, for temporary defensive purposes in the event of, or
when Advisers anticipates, a general decline in the market prices of stocks in
which the Fund invests, the Fund may invest an unlimited amount of its assets in
short-term debt instruments.
OPTIONS AND FINANCIAL FUTURES. The Fund may write (sell) covered put and call
options and buy put and call options on securities and indices that trade on
securities exchanges and in the over-the-counter market. The Fund may buy and
sell futures and options on futures with respect to securities, indices and
currencies. Additionally, the Fund may sell futures and options to "close out"
futures and options it may have purchased and it may buy futures and options to
"close out" futures and options it may have sold. The Fund will not enter into
any futures contract or related options (except for closing transactions) if,
immediately thereafter, the sum of the amount of its initial deposits and
premiums on open contracts and options would exceed 5% of the Fund's total
assets (taken at current value). The Fund will not engage in any stock options
or stock index options if the option premiums paid regarding its open option
positions exceed 5% of the value of the Fund's total assets.
The Fund's option and futures investments may be limited by the requirements of
the Code for qualification as a regulated investment company and may reduce the
portion of the Fund's dividends that is eligible for the corporate
dividends-received deduction. These transactions are also subject to special tax
rules that may affect the amount, timing and character of certain distributions
to shareholders. Please see "Additional Information on Distributions and Taxes"
in the SAI.
The Fund understands the current position of the staff of the SEC to be that
purchased OTC options are illiquid securities and that the assets used to cover
the sale of an OTC option are considered illiquid. The Fund and Advisers
disagree with this position. Nevertheless, pending a change in the staff's
position, the Fund will treat OTC options and "cover" assets as subject to the
Fund's limitation on illiquid securities. Please see "Illiquid Investments"
below.
WARRANTS AND RIGHTS. The Fund may invest up to 5% of its total assets in
warrants or rights (other than those acquired in units or attached to other
securities) which entitle the holder to buy equity securities at a specific
price during or at the end of a specific period of time. The Fund will not
invest more than 2% of its total assets in warrants or rights which are not
listed on the New York or American stock exchanges.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions in which
the Fund buys a U.S. government security subject to resale to a bank or dealer
at an agreed-upon price and date. The transaction requires the collateralization
of the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller may cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund might
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks that are deemed creditworthy by Advisers. A
repurchase agreement is deemed to be a loan by the Fund under federal securities
laws. The U.S. government security subject to resale (the collateral) is held on
behalf of the Fund by a custodian bank approved by the Board and is held
pursuant to a written agreement.
The Fund may also enter into reverse repurchase agreements. These agreements
involve the sale of securities held by the Fund pursuant to an agreement to
repurchase the securities at an agreed-upon price, date and interest payment.
When effecting reverse repurchase transactions, cash or high grade liquid debt
securities of a dollar amount equal in value to the Fund's obligation under the
agreement, including accrued interest, will be maintained in a segregated
account with the Fund's custodian bank, and the securities subject to the
reverse repurchase agreement will be marked-to-market each day. Although reverse
repurchase agreements are borrowings under federal securities laws, the Fund
does not treat these arrangements as borrowings under investment restriction 3
in the SAI so long as the segregated account is properly maintained.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities. A
convertible security is generally a debt obligation or preferred stock that may
be converted within a specified period of time into a certain amount of common
stock of the same or a different issuer. A convertible security provides a
fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance in
its underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. The value of a
convertible security also tends to increase as the market value of the
underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because its value can be influenced by both interest
rate and market movements, a convertible security is not as sensitive to
interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the Fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the Fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
The Fund may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stocks ("PERCS"), which
provide an investor, such as the Fund, with the opportunity to earn higher
dividend income than is available on a company's common stock. PERCS are
preferred stocks that generally feature a mandatory conversion date, as well as
a capital appreciation limit which is usually expressed in terms of a stated
price. Most PERCS expire three years from the date of issue, at which time they
are convertible into common stock of the issuer. PERCS are generally not
convertible into cash at maturity. Under a typical arrangement, after three
years PERCS convert into one share of the issuer's common stock if the issuer's
common stock is trading at a price below that set by the capital appreciation
limit, and into less than one full share if the issuer's common stock is trading
at a price above that set by the capital appreciation limit. The amount of that
fractional share of common stock is determined by dividing the price set by the
capital appreciation limit by the market price of the issuer's common stock.
PERCS can be called at any time prior to maturity, and hence do not provide call
protection. If called early, however, the issuer must pay a call premium over
the market price to the investor. This call premium declines at a preset rate
daily, up to the maturity date.
The Fund may also invest in other enhanced convertible securities. These include
but are not limited to ACES (Automatically Convertible Equity Securities), PEPS
(Participating Equity Preferred Stock), PRIDES (Preferred Redeemable Increased
Dividend Equity Securities), SAILS (Stock Appreciation Income Linked
Securities), TECONS (Term Convertible Notes), QICS (Quarterly Income Cumulative
Securities), and DECS (Dividend Enhanced Convertible Securities). ACES, PEPS,
PRIDES, SAILS, TECONS, QICS, and DECS all have the following features: they are
issued by the company, the common stock of which will be received in the event
the convertible preferred stock is converted, unlike PERCS they do not have a
capital appreciation limit, they seek to provide the investor with high current
income with some prospect of future capital appreciation, they are typically
issued with three to four-year maturities, they typically have some built-in
call protection for the first two to three years, investors have the right to
convert them into shares of common stock at a preset conversion ratio or hold
them until maturity, and upon maturity they will automatically convert to either
cash or a specified number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked as
senior or subordinated debt in the issuer's corporate structure according to the
terms of the debt indenture. There may be additional types of convertible
securities not specifically referred to herein which may be similar to those
described above in which a Fund may invest, consistent with its objectives and
policies.
ILLIQUID INVESTMENTS. The Fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them.
The Board has authorized the Fund to invest in restricted securities (securities
not registered with the SEC, which might otherwise be considered illiquid) where
such investment is consistent with the Fund's investment objective and has
authorized these securities to be considered liquid (and thus not subject to the
foregoing 10% limitation), to the extent Advisers determines on a daily basis
that there is a liquid institutional or other market for these securities.
Notwithstanding Advisers determination in this regard, the Board will remain
responsible for these determinations and will consider appropriate action,
consistent with the Fund's objective and policies, if a security should become
illiquid after its purchase. In this regard, if qualified institutional buyers
are no longer interested in buying restricted securities previously designated
as liquid or if the market for these securities contracts, these securities will
be redesignated as illiquid and subject to the 10% limitation. See "How does the
Fund Invest its Assets? - Illiquid Securities" in the SAI.
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.
Each of the Fund's policies and restrictions discussed in this prospectus and in
the SAI is considered at the time the Fund makes an investment. The Fund is
generally not required to sell a security because of a change in circumstances.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock market as a whole.
SMALLER COMPANIES. The Fund may invest in relatively new or unseasoned companies
that are in their early stages of development, or small companies positioned in
new and emerging industries where the opportunity for rapid growth is expected
to be above average. Securities of unseasoned companies present greater risks
than securities of larger, more established companies. The Fund may not invest
more than 10% of its net assets in securities of issuers with less than three
years continuous operation. The companies in which the Fund may invest may have
relatively small revenues, limited product lines, and may have a small share of
the market for their products or services. Small companies may lack depth of
management, they may be unable to internally generate funds necessary for growth
or potential development or to generate such funds through external financing on
favorable terms, or they may be developing or marketing new products or services
for which markets are not yet established and may never become established. Due
to these and other factors, small companies may suffer significant losses as
well as realize substantial growth, and investments in small companies tend to
be volatile and are therefore speculative.
Historically, small capitalization stocks have been more volatile in price than
larger capitalization stocks. Among the reasons for the greater price volatility
of these securities are the less certain growth prospects of smaller firms, the
lower degree of liquidity in the markets for such stocks, and the greater
sensitivity of small companies to changing economic conditions. Besides
exhibiting greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks. Small company stocks may decline in
price as large company stocks rise, or rise in price as large company stocks
decline. You should therefore expect that the value of the Fund's shares may be
more volatile than the shares of a fund that invests in larger capitalization
stocks.
The Fund should not be considered suitable for investors who are unable or
unwilling to assume the risks of loss inherent in such a program, nor should
investment in the Fund be considered a balanced or complete investment program.
FOREIGN SECURITIES. Investing in securities of foreign issuers involves risks
that are not typically associated with investing in U.S. dollar denominated
securities or in securities of domestic issuers. These risks can be
significantly greater for investments in emerging markets. These risks, which
may involve possible losses, include political, social or economic instability
in the country of the issuer, the difficulty of predicting international trade
patterns, the possibility of the imposition of exchange controls, expropriation,
limits on removal of currency or other assets, foreign investment controls on
daily stock market movements, nationalization of assets, foreign withholding and
income taxation and foreign trading practices (including higher trading
commissions, custodial charges and delayed settlements). Changes of governmental
administrations or of economic or monetary policies, in the U.S. or abroad, or
changed circumstances in dealings between nations or currency convertibility or
exchange rates could result in investment losses for the Fund. In addition,
there may be less publicly available information about a foreign company than
about a U.S. domiciled company. Foreign companies generally are not subject to
uniform accounting, auditing and financial reporting standards comparable to
those applicable to U.S. domestic companies. The Fund may also encounter
difficulties or be unable to vote proxies, exercise shareholder rights, pursue
legal remedies and obtain judgments in foreign courts. There is generally less
government supervision and regulation of business and industry practices,
securities exchanges, brokers and listed companies abroad than in the U.S.
OPTIONS AND FINANCIAL FUTURES. The Fund's option and futures investments involve
certain risks. These risks include the risk that the effectiveness of an options
and futures strategy depends on the degree to which price movements in the
underlying index, securities or currencies correlate with price movements in the
relevant portion of the Fund's portfolio. The Fund bears the risk that the
prices of its portfolio securities will not move in the same amount as the
option or future it has purchased, or that there may be a negative correlation
which would result in a loss on both the securities and the option or future.
Positions in exchange traded options and futures may be closed out only on an
exchange that provides a secondary market. There may not always be a liquid
secondary market for a futures or option contract at a time when the Fund seeks
to "close out" its position. If the Fund were unable to "close out" a futures or
option position, and if prices moved adversely, the Fund would have to continue
to make daily cash payments to maintain its required margin, and if the Fund had
insufficient cash, it might have to sell portfolio securities at a
disadvantageous time. In addition, the Fund might be required to deliver the
stocks underlying futures or option contracts it holds.
Over-the-counter ("OTC") options may not be closed out on an exchange and the
Fund may be able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer that
issued it. There can be no assurance that a liquid secondary market will exist
for any particular option or futures contract at any specific time. Thus, it may
not be possible to close such an option or futures position. The Fund will enter
into an option or futures position only if there appears to be a liquid
secondary market for such option or futures.
Adverse market movements could cause the Fund to lose up to its full investment
in a call option contract and/or to experience substantial losses on an
investment in a futures contract. There is also the risk of loss by the Fund of
margin deposits in the event of bankruptcy of a broker with whom the Fund has an
open position in a futures contract or option. Options, futures and options on
futures are generally considered "derivative securities." Derivatives are
broadly defined as financial instruments whose performance is derived, at least
in part, from the performance of an underlying asset, such as stock prices or
indices of securities, interest rates, currency exchange rates, or commodity
prices. Please see "How does the Fund Invest its Assets? - Options, Futures and
Options on Financial Futures" and "What are the Fund's Potential Risks?" in the
SAI for more information on the Fund's investments in options and futures,
including the risks associated with these activities.
ENHANCED CONVERTIBLE SECURITIES. An investment in an enhanced convertible
security or any other security may involve additional risks to the Fund. The
Fund may have difficulty disposing of such securities because there may be a
thin trading market for a particular security at any given time. Reduced
liquidity may have an adverse impact on market price and the Fund's ability to
dispose of particular securities, when necessary, to meet the Fund's liquidity
needs or in response to a specific economic event, such as the deterioration in
the credit worthiness of an issuer. Reduced liquidity in the secondary market
for certain securities may also make it more difficult for the Fund to obtain
market quotations based on actual trades for purposes of valuing the Fund's
portfolio. The Fund, however, intends to acquire liquid securities, though there
can be no assurances that this will be achieved.
MARKET AND CURRENCY RISK. If there is a general market decline in any country
where the Fund is invested, the Fund's share price may also decline. Changes in
currency valuations will also affect the value of what the Fund owns, and thus
the price of Fund shares. The value of stock markets and currency valuations
throughout the world has increased and decreased in the past. These changes are
unpredictable.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
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 $207 billion in assets. Please see "Investment Management
and Other Services" and "Miscellaneous Information" in the SAI for information
on securities transactions and a summary of the Fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is: Mr. Jamieson and Mr. Moore since inception, and Mr.
McCarthy since March 1993.
Edward B. Jamieson
Senior Vice President of Advisers
Mr. Jamieson holds a Master's degree in Accounting and Finance from the
University of Chicago Graduate School of Business and a Bachelor of Arts degree
from Bucknell University. He has been with the Franklin Templeton Group since
1987. Mr. Jamieson is a member of several securities industry-related committees
and associations.
Nicholas Moore
Portfolio Manager of Advisers
Mr. Moore holds a Bachelor of Science degree in Business Administration from
Menlo College. He has been with the Franklin Templeton Group since 1989.
Michael McCarthy
Portfolio Manager of Advisers
Mr. McCarthy holds a Bachelor of Arts degree in History from the University of
California at Los Angeles. He has been with the Franklin Templeton Group since
1992.
MANAGEMENT FEES. During the fiscal year ended April 30, 1997, management fees
totaling 0.48% of the average daily net assets of the Fund were paid to
Advisers. Total expenses of the class, including fees paid to Advisers, were
0.69%.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares, as well as shares of other funds in the Franklin Templeton Group
of Funds, when selecting a broker or dealer. Please see "How does the Fund Buy
Securities for its Portfolio?" in the SAI for more information.
ADMINISTRATIVE SERVICES. 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.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, the Advisor Class of the Fund advertises its performance. A
commonly used measure of performance is total return.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested.
The investment results of the Advisor Class will vary. Performance figures are
always based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund is treated as a separate entity for federal income tax purposes. The
Fund has elected and intends to continue to qualify as a regulated investment
company under Subchapter M of the Code. By distributing all of its income and
meeting certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will generally not be liable for federal
income or excise taxes.
For federal income tax purposes, any income dividends that you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional
shares.Distributions derived from the excess of net long-term capital gain over
net short-term capital loss are treated as long-term capital gain regardless of
the length of time you have owned Fund shares and regardless of whether you
receive distributions in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated for tax purposes as if you received
them on December 31 of the calendar year in which they are declared.
For corporate shareholders, 5.55% of the ordinary income distributions
(including short-term capital gain distributions) paid by the Fund for the
fiscal year ended April 30, 1997 qualified for the corporate dividends-received
deduction, subject to certain holding period and debt financing restrictions
imposed under the Code on the corporation claiming the deduction. These
restrictions are discussed in the SAI.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to such shares.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of such dividends
and distributions.
If you are not considered a U.S. person for federal income tax purposes, you
should consult with your financial or tax advisor regarding the applicability of
U.S. withholding or other taxes on distributions received by you from the Fund
and the application of foreign tax laws to these distributions. You should also
consult your tax advisor with respect to the applicability of any state and
local intangible property or income taxes to your shares of the Fund and
distributions and redemption proceeds received from the Fund.
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. As of January 1, 1997, the Fund began offering a new class of
shares designated Franklin Small Cap Growth Fund - Advisor Class. All shares
outstanding before the offering of Advisor Class shares have been designated
Franklin Small Cap Growth Fund - Class I and Franklin Small Cap Growth Fund -
Class II. Additional series and classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters affecting only that class, or expressly required
to be voted on separately by state or federal law. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of the Trust for matters that affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares. In
certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
Shares of the Fund may be purchased without a sales charge. 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.
CURRENTLY, THE FUND DOES NOT ALLOW INVESTMENTS BY MARKET TIMERS.
MINIMUM
INVESTMENTS*
To Open Your Account $5,000,000
To Add to Your Account $ 25
*We waive or lower these minimums for certain investors listed below. We may
also refuse any order to buy shares.
To determine if you meet the minimum investment requirement, the amount of your
current purchase is added to the cost or current value, whichever is higher, of
your existing shares in the Franklin Templeton Funds. At least $1 million of
this amount, however, must be invested in Advisor Class or Class Z shares of any
of the Franklin Templeton Funds.
The Fund's minimum initial investment requirement will not apply to purchases
by:
1. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
2. Qualified registered investment advisors or certified financial planners
who have clients invested in the Franklin Mutual Series Fund Inc. on
October 31, 1996, or who buy through a broker-dealer or service agent who
has entered into an agreement with Distributors
3. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group and their immediate family
members, subject to a $100 minimum investment requirement
4. Accounts managed by the Franklin Templeton Group
5. The Franklin Templeton Profit Sharing 401(k) Plan
6. Each series of the Franklin Templeton Fund Allocator Series, subject to a
$1,000 minimum initial and subsequent investment requirement
7. Employer stock, bonus, pension or profit sharing plans that meet the
requirements for qualification under Section 401 of the Code, including
salary reduction plans qualified under Section 401(k) of the Code, and that
(i) are sponsored by an employer with at least 5,000 employees, or (ii)
have plan assets of $50 million or more
8. Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds 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
9. Defined benefit plans or governments, municipalities, and tax-exempt
entities that meet the requirements for qualification under Section 501 of
the Code, subject to a $1 million initial investment in Advisor Class
shares
10. Any other investor, including a private investment vehicle such as a family
trust or foundation, who is a member of a qualified group, if the group as
a whole meets the $5 million minimum investment requirement. A qualified
group is one that:
o Was formed at least six months ago
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
PAYMENTS TO SECURITIES DEALERS
Securities Dealers who initiate and are responsible for purchases of Advisor
Class shares may receive up to 0.25% of the amount invested. The payment is
subject to the sole discretion of Distributors, and is paid by Distributors or
one of its affiliates and not by the Fund or its shareholders.
For information on additional compensation payable to Securities Dealers in
connection with the sale of Fund shares, please see "How Do I Buy, Sell and
Exchange Shares? - Other Payments to Securities Dealers" in the SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and some do not offer Advisor
Class shares.
METHOD STEPS TO FOLLOW
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BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares you
want to exchange
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BY PHONE Call Shareholder Services
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.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. Please notify us in writing if you do not want this
option to be available on your account. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
If you want to exchange into a fund that does not currently offer an Advisor
Class, you may exchange your Advisor Class shares for Class I shares of that
fund at Net Asset Value. If you do not qualify to buy Advisor Class shares of
Templeton Developing Markets Trust, Templeton Foreign Fund or Templeton Growth
Fund, you may exchange the Advisor Class shares you own for Class I shares of
those funds or of Templeton Institutional Funds, Inc. at Net Asset Value. If you
do so and you later decide you would like to exchange into a fund that offers an
Advisor Class, you may exchange your Class I shares for Advisor Class shares of
that fund. You may also exchange your Advisor Class shares for Class Z shares of
Franklin Mutual Series Fund Inc.
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. If you would like your redemption proceeds wired to a
bank account, your instructions should include:
o The name, address and telephone number of the bank where you want
the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit union, the name of
the corresponding bank and the account number
2. Include any outstanding share certificates for the shares you are
selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may have
other requirements.
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your redemption
proceeds wired to a bank account, other than an escrow account, you
must first sign up for the wire feature. To sign up, send us written
instructions, with a signature guarantee. To avoid any delay in
processing, the instructions should include the items listed in "By
Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts may
exceed $50,000 by completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for the shares you want
to sell or you have already returned them to the Fund
o Unless you are selling shares in a Trust Company retirement plan
accountMethod Steps to Follow
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BY PHONE (CONT.)
o Unless the address on your account was changed by phone within
the last 15 days
If you do not want the ability to redeem by phone to apply to
your account, please let us know.
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
591/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income semiannually in June
and December to shareholders of record on the first business day before the 15th
of the month and pays them on or about the last day of that month.
Capital gains, if any, may be distributed annually, usually in December.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the same
class of the Fund 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. You may also direct your distributions to buy Class I shares of another
Franklin Templeton Fund. Many shareholders find this a convenient way to
diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days before the record date for us
to process the new option. For Trust Company retirement plans, special forms are
required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
You buy and sell Advisor Class shares at the Net Asset Value per share. The Net
Asset Value we use when you buy or sell shares is the one next calculated after
we receive your transaction request in proper form. If you buy or sell shares
through your Securities Dealer, however, we will use the Net Asset Value next
calculated after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
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 in many
newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.When you call, we will request personal or other
identifying information to confirm that instructions are genuine. We may also
record calls. We will not be liable for following instructions communicated by
telephone if we reasonably believe they are genuine. For your protection, we may
delay a transaction or not implement one if we are not reasonably satisfied that
the instructions are genuine. If this occurs, we will not be liable for any
loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by phone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- --------------------------------------------------------------------------------
CORPORATION Corporate ResolutionPartnership
1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have let us know
that you do not want telephone privileges to apply to your account.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
These minimums do not apply if you fall within categories 4, 5, 6 or 7 under
"How Do I Buy Shares? - Opening Your Account."
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 shareholder 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.
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. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
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.
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.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
Hours of Operation (Pacific time)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.(Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
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."
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
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.
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.
PROSPECTUS & APPLICATION
FRANKLIN GLOBAL HEALTH CARE FUND
INVESTMENT STRATEGY
GLOBAL GROWTH
SEPTEMBER 1, 1997
FRANKLIN STRATEGIC SERIES
This prospectus describes the Franklin Global Health Care Fund (the "Fund"). It
contains information you should know before investing in the Fund. Please keep
it for future reference.
The Fund has a Statement of Additional Information ("SAI"), dated September 1,
1997, which may be amended from time to time. It 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 its
address.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
FRANKLIN GLOBAL HEALTH CARE FUND
September 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? ............................... 5
What are the Fund's Potential Risks? ............................... 9
Who Manages the Fund? .............................................. 12
How does the Fund Measure Performance? ............................. 14
How Taxation Affects the Fund and its Shareholders ................. 15
How is the Trust Organized? ........................................ 16
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ............................................... 16
May I Exchange Shares for Shares of Another Fund? .................. 23
How Do I Sell Shares? .............................................. 26
What Distributions Might I Receive from the Fund? .................. 29
Transaction Procedures and Special Requirements .................... 30
Services to Help You Manage Your Account ........................... 34
What If I Have Questions About My Account? ......................... 37
GLOSSARY
Useful Terms and Definitions ....................................... 37
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of each class for the fiscal year
ended April 30, 1997. The Class II expenses are annualized. The Fund's actual
expenses may vary.
CLASS I CLASS II
A. Shareholder Transaction Expenses+
Maximum Sales Charge
(as a percentage of Offering Price) 4.50% 1.99%
Paid at time of purchase 4.50%++ 1.00%+++
Paid at redemption++++ None 0.99%
B. Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees 0.58% 0.58%
Rule 12b-1 Fees 0.22%* 1.00%*
Other Expenses 0.34% 0.34%
Total Fund Operating Expenses 1.14% 1.92%
C. Example
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------
CLASS I $56** $80 $105 $177
CLASS II $49 $79 $122 $240
For the same Class II investment, you would pay projected expenses of $39 if
you did not sell your shares at the end of the first year. Your projected
expenses for the remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected
in the Net Asset Value or dividends of each class and are not directly charged
to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more in Class I
shares.
+++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? - Deciding Which Class to Buy."
++++A Contingent Deferred Sales Charge may apply to any Class II purchase if you
sell the shares within 18 months and to Class I purchases of $1 million or more
if you sell the shares within one year. A Contingent Deferred Sales Charge may
also apply to purchases by certain retirement plans that qualify to buy Class I
shares without a front-end sales charge. The charge is 1% of the value of the
shares sold or the Net Asset Value at the time of purchase, whichever is less.
The number in the table shows the charge as a percentage of Offering Price.
While the percentage is different depending on whether the charge is shown based
on the Net Asset Value or the Offering Price, the dollar amount paid by you
would be the same. See "How Do I Sell Shares? - Contingent Deferred Sales
Charge" for details.
*These fees may not exceed 0.25% for Class I. The Rule 12b-1 fees for Class II
are annualized. The actual Rule 12b-1 fees for Class II for the period ended
April 30, 1997 were 0.67%. The combination of front-end sales charges and Rule
12b-1 fees could cause long-term shareholders to pay more than the economic
equivalent of the maximum front-end sales charge permitted under the NASD's
rules.
**Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent five years appears in the
financial statements in the Trust's Annual Report to Shareholders for the fiscal
year ended April 30, 1997. The Annual Report to Shareholders also includes more
information about the Fund's performance. For a free copy, please call Fund
Information.
<TABLE>
<CAPTION>
CLASS I
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED APRIL 30 1997 1996 1995 1994 1993 19921
- ----------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $19.34 $11.45 $10.43 $8.88 $8.84 $10.00
Net Investment Income (Loss) (.06) .11 .08 .07 .09 .02
Net Realized & Unrealized Gain
(Loss) on Securities (2.753) 8.955 1.560 1.856 .037 (1.180)
Total From Investment Operations (2.813) 9.065 1.640 1.926 .127 (1.160)
Distributions From Net Investment Income (.037) (.124) (.061) (.078) (.087) -
Distributions From Realized Capital Gains (.380) (1.051) (.559) (.298) - -
Total Distributions (.417) (1.175) (.620) (.376) (.087) -
RATIOS/SUPPLEMENTAL DATA
Net Asset Value at End of Period $16.11 $19.34 $11.45 $10.43 $8.88 $8.84
Total Return* (14.71)% 82.78% 16.33% 21.93% 1.41% (55.14)%**
Net Assets at End of Period (in 000's) $150,653 $108,914 $12,906 $5,795 $3,422 $1,368
Ratio of Expenses to Average Net Assets 1.14% .73%*** .25%*** .10%*** - -
Ratio of Net Investment Income (Loss)
to Average Net Assets (.39)% .50% .80% .68% 1.13% 1.68%**
Portfolio Turnover Rate 73.17% 54.78% 93.79% 110.82% 62. 74% 41.01%
Average Commission Rate+ .0368 .0709 - - - -
</TABLE>
CLASS II
PERIOD ENDED APRIL 30 19972
- -----------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $17.37
Net Investment Income (Loss) (.07)
Net Realized & Unrealized Gain
(Loss) on Securities (.850)
Total From Investment Operations (.920)
Distributions From Net Investment Income -
Distributions From Realized Capital Gains (.380)
Total Distributions (.380)
Net Asset Value at End of Period $16.07
Total Return* (5.47)%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) $10,099
Ratio of Expenses to Average Net Assets 1.92%**
Ratio of Net Investment Income (Loss)
to Average Net Assets (1.29)%**
Portfolio Turnover Rate 73.17%
Average Commission Rate+ .0368
1For the period February 14, 1992 (effective date) to April 30, 1992.
2For the period September 3, 1996 (effective date) to April 30, 1997.
*Total return measures the change in value of an investment over the periods
indicated. It is not annualized except where indicated. It does not include the
maximum front-end sales charge or Contingent Deferred Sales Charge, and assumes
reinvestment of dividends and capital gains at Net Asset Value.
**Annualized.
***During the periods indicated, Advisers agreed in advance to waive a portion
or all of its management fees and made payments of other expenses incurred by
the Fund. Had such action not been taken, the ratios of operating expenses to
average net assets would have been as follows:
RATIO OF EXPENSES
TO AVERAGE NET ASSETS
19921 1.62%**
1993 2.16
1994 1.74
1995 1.37
1996 1.16
+Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is to seek capital appreciation by investing
primarily in the equity securities of health care companies located throughout
the world. The Fund will seek to invest in companies that have, in the opinion
of Advisers, the potential for above average growth in revenues and/or earnings.
The objective is a fundamental policy of the Fund and may not be changed without
shareholder approval. Of course, there is no assurance that the Fund's objective
will be achieved.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
HEALTH CARE COMPANIES. The Fund will invest at least 70% of its total assets in
the equity securities of health care companies. A "health care" company is one
that derives at least 50% of its earnings or revenues from health care
activities, or has devoted at least 50% of its assets to such activities, based
upon the company's most recently reported fiscal year. Health care activities
include research, development, production or distribution of products and
services in industries such as pharmaceutical, biotechnology, health care
facilities, medical supplies, medical technology, managed care companies, health
care related information systems and personal health care products.
Equity securities consist of common stocks, preferred stocks, convertible
preferred stocks, securities convertible into common stocks, rights and
warrants. A warrant is a security that gives the holder the right, but not the
obligation, to subscribe for newly created securities of the issuer or a related
company at a fixed price either at a certain date or during a set period. A
convertible security is a security that may be converted either at a stated
price or rate within a specified period of time into a specified number of
shares of common stock. By investing in convertible securities, the Fund seeks
to participate in the capital appreciation of the common stock into which the
securities are convertible through the conversion feature.
FOREIGN SECURITIES. The Fund will mix its investments globally by investing 70%
of its assets in securities of issuers in at least three different countries.
The Fund, however, will not invest more than 40% of its net assets in any one
country (other than the U.S.). Advisers believes that by investing globally, the
Fund can reduce currency, political and economic risks associated with investing
in a single country. Global investing does entail certain risks, however, which
are discussed under "What are the Fund's Potential Risks?" The Fund expects from
time to time that a significant portion of its investments will be in securities
of domestic issuers.
Many major developments in health care come from companies based abroad. Thus,
in the opinion of Advisers, a portfolio of only U.S. based health care companies
is not sufficiently diversified to participate in global developments and
discoveries in the field of health care. Advisers believes that health care is
becoming an increasingly globalized industry and that many important investment
opportunities exist abroad. Therefore, Advisers believes that a portfolio of
global securities may provide a greater potential for investment participation
in present and future opportunities that may present themselves in the health
care related industries. Advisers also believes that the U.S. health care
industry may be subject to increasing regulation and government control, thus a
global portfolio may reduce the risk of a single government's actions on the
portfolio. The Fund concentrates its investments in a limited group of related
industries and is not intended to be a complete investment program.
As a global fund, the Fund may invest in securities issued in any currency and
may hold foreign currency. Securities of issuers within a given country may be
denominated in the currency of another country, or in multinational currency
units such as the European Currency Unit. Investments will not be made in
securities of foreign issuers issued without stock certificates or comparable
evidence of ownership. Securities which are acquired by the Fund outside the
U.S. and which are publicly traded in the U.S. or on a foreign securities
exchange or in a foreign securities market are not considered by the Fund to be
an illiquid asset so long as the Fund acquires and holds the security with the
intention of reselling the security in the foreign trading market, the Fund
reasonably believes it can readily dispose of the security for cash at
approximately the amount at which the Fund has valued the security in the U.S.
or foreign market, and current market quotations are readily available.
DEPOSITARY RECEIPTS. The Fund may buy sponsored or unsponsored American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global
Depositary Receipts ("GDRs"). ADRs are depositary receipts typically used by a
U.S. bank or trust company which evidence ownership of underlying securities
issued by a foreign corporation. EDRs and GDRs are typically issued by foreign
banks or trust companies, although they also may be issued by U.S. banks or
trust companies, and evidence ownership of underlying securities issued by
either a foreign or a U.S. corporation. Generally, depositary receipts in
registered form are designed for use in the U.S. securities market and
depositary receipts in bearer form are designed for use in securities markets
outside the U.S. Depositary receipts may not necessarily be denominated in the
same currency as the underlying securities into which they may be converted.
Depositary receipts may be issued pursuant to sponsored or unsponsored programs.
In sponsored programs, an issuer has made arrangements to have its securities
traded in the form of depositary receipts. In unsponsored programs, the issuer
may not be directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs and there may not be a correlation
between such information and the market value of the depositary receipts.
Depositary receipts also involve the risks of other investments in foreign
securities, as discussed below. For purposes of the Fund's investment policies,
the Fund's investments in depositary receipts will be deemed to be investments
in the underlying securities.
SMALL COMPANIES. The Fund may invest a substantial portion of its assets in
smaller capitalization companies (in general, companies with a market
capitalization of less than $1 billion at the time of the Fund's investment). To
the extent the Fund invests in these securities, it may place greater emphasis
upon investments in relatively new or unseasoned companies that are in their
early stages of development, or in new and emerging industries where the
opportunity for rapid growth is expected to be above average. Securities of
unseasoned companies present greater risks than securities of larger, more
established companies. Please see "What are the Fund's Potential Risks? - Small
Companies."
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities. A
convertible security is generally a debt obligation or a preferred stock that
may be converted within a specified period of time into a certain amount of
common stock of the same or a different issuer. A convertible security may also
be subject to redemption by the issuer but only after a specified date and under
circumstances established at the time the security is issued. Convertible
securities provide a fixed-income stream and the opportunity, through their
conversion feature, to participate in the capital appreciation resulting from a
market price advance in the convertible security's underlying common stock.
Though the Fund intends to invest in liquid convertible securities there can be
no assurance that this will always be achieved. For more information on
convertible securities, including liquidity issues, please see the SAI.
DEBT SECURITIES. The Fund may also invest up to 30% of its assets in domestic
and foreign debt securities, consisting of bonds, notes and debentures as well
as debt securities convertible into equity securities. These securities may be
issued by any type of issuer, such as foreign and domestic corporations and
foreign and domestic governments and their political subdivisions. The Fund may
seek capital appreciation through changes in relative foreign currency exchange
rates or improvement in the creditworthiness of the issuer related to
investments in debt securities. The receipt of income from debt securities is
incidental to the Fund's investment objective of capital appreciation. The Fund
will invest in debt securities rated B or above by Moody's or S&P, two
nationally recognized statistical ratings agencies, or in unrated securities of
comparable quality. Securities rated B are considered to be below investment
grade and are regarded, on balance, as predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation. It is the Fund's current intention to invest less than
5% in debt securities considered to be below investment grade. For a description
of these ratings, please see the SAI.
When Advisers believes that no attractive investment opportunities exist, the
Fund may maintain a significant portion of its assets in cash.
OTHER INVESTMENT POLICIES OF THE FUND
SHORT-TERM INVESTMENTS. The Fund may invest its cash, including cash resulting
from purchases of Fund shares and sales of portfolio securities, temporarily in
short-term debt instruments. These include high grade commercial paper,
repurchase agreements and other money market equivalents, as well as the shares
of money market funds with the same investment advisor as the Fund, and that
invest primarily in short-term debt securities. Temporary investments will only
be made with cash held to maintain liquidity or pending investment. In addition,
for temporary defensive purposes, if or when Advisers anticipates a general
decline in the market prices of stocks in which the Fund invests, the Fund may
invest an unlimited amount of its assets in short-term debt instruments.
FORWARD CURRENCY EXCHANGE CONTRACTS, FUTURES CONTRACTS AND OPTIONS. The Fund may
seek to protect capital through the use of forward currency exchange contracts,
options and futures contracts. The Fund may buy foreign currency futures
contracts and options if not more than 5% of the Fund's assets are then invested
as initial or variation margin deposits on contracts or options. The Fund may
buy and sell forward currency contracts in order to hedge against changes in the
level of future currency rates. Foreign currency contracts are an agreement to
buy or sell a specific currency at a future date at a price set in the contract.
Options, futures and options on futures are generally considered "derivative
securities."
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions, in which
the Fund buys a U.S. government security subject to resale to a bank or dealer
at an agreed-upon price and date. The transaction requires the collateralization
of the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller may cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund may
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks that are deemed creditworthy by Advisers. A
repurchase agreement is deemed to be a loan by the Fund under the 1940 Act. The
U.S. government security subject to resale (the collateral) is held on behalf of
the Fund by a custodian bank approved by the Board and is held pursuant to a
written agreement.
THE FUND MAY ALSO ENTER INTO REVERSE REPURCHASE AGREEMENTS. These transactions
involve the sale of securities held by the Fund pursuant to an agreement to
repurchase the securities at an agreed-upon price, date and interest payment.
Cash or high grade liquid debt securities of a dollar amount equal in value to
the Fund's obligation under the agreement, including accrued interest, will be
maintained in a segregated account with the Fund's custodian bank, and the
securities subject to the reverse repurchase agreement will be marked-to-market
each day. Although reverse repurchase agreements are borrowings under the 1940
Act, the Fund does not treat these arrangements as borrowings under its
fundamental investment restriction against borrowing so long as the segregated
account is properly maintained.
BORROWING. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of its assets, except that the Fund may enter into reverse
repurchase agreements or borrow from banks up to 10% of its total asset value to
meet redemption requests and for other temporary or emergency purposes. While
borrowings exceed 5% of the Fund's total assets, the Fund will not make any
additional investments.
ILLIQUID INVESTMENTS. The Fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them.
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.
Each of the Fund's policies and restrictions discussed in this prospectus and in
the SAI is considered at the time the Fund makes an investment. The Fund is
generally not required to sell a security because of a change in circumstances.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
FOREIGN RISK. Foreign securities involve certain risks that you should consider
carefully. These risks include political, social or economic instability in the
country of the issuer, the difficulty of predicting international trade
patterns, the possibility of the imposition of exchange controls, expropriation,
restrictions on removal of currency or other assets, nationalization of assets,
foreign withholding and income taxation, and foreign trading practices
(including higher trading commissions, custodial charges and delayed
settlements). Foreign securities may be subject to greater fluctuations in price
than securities issued by U.S. corporations or issued or guaranteed by the U.S.
government, its instrumentalities or agencies. The markets on which foreign
securities trade may have less volume and liquidity, and may be more volatile
than securities markets in the U.S. In addition, there may be less publicly
available information about a foreign company than about a U.S. domiciled
company. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
U.S. domestic companies. There is generally less government regulation of
securities exchanges, brokers and listed companies abroad than in the U.S.
Confiscatory taxation or diplomatic developments could also affect investment in
foreign securities.
In many instances, foreign debt securities may provide higher yields than
securities of domestic issuers that have similar maturities and quality. Under
certain market conditions, these investments may be less liquid than the
securities of U.S. corporations and are certainly less liquid than securities
issued or guaranteed by the U.S. government, its instrumentalities or agencies.
Finally, in the event of a default of any foreign debt obligation, it may be
more difficult for the Fund to obtain or to enforce a judgment against the
issuer of the security.
The operating expense ratio of the Fund can be expected to be higher than that
of an investment company investing exclusively in U.S. securities because of the
additional expenses of the Fund, such as custodial costs, valuation costs and
communication costs. The Fund's expenses, however, are expected to be similar to
expenses of other investment companies investing in a mix of U.S. securities and
securities of one or more foreign countries.
Investments of the Fund may be denominated in foreign currencies. Changes in the
relative values of these foreign currencies and the U.S. dollar, therefore, will
affect the value of investments in the Fund. The Fund, however, may utilize
forward currency contracts to attempt to minimize these changes. By entering
into forward currency contracts, the Fund is able to protect against a loss
resulting from an adverse change in the relationship between the U.S. dollar and
a foreign currency occurring between the trade and settlement dates of a
securities transaction. Forward contracts, however, also tend to limit the
potential gains that might result from a positive change in currency
relationships.
While the Fund may invest in foreign securities, it is generally not its
intention to invest in foreign equity securities of an issuer that meets the
definition in the Code of a passive foreign investment company ("PFIC").
However, to the extent that the Fund invests in these securities the Fund may be
subject to both an income tax and an additional tax in the form of an interest
charge with respect to its investment. To the extent possible, the Fund will
avoid the taxes by not investing in PFIC securities or by adopting other tax
strategies for any PFIC securities it does buy. Please see the SAI for more
information.
SMALL COMPANIES RISK. The Fund may invest in companies that have relatively
small revenues, limited product lines, and a small share of the market for their
products or services. Small companies may lack depth of management, they may be
unable to internally generate funds necessary for growth or potential
development or to generate such funds through external financing on favorable
terms, and they may be developing or marketing new products or services for
which markets are not yet established and may never become established. Due to
these and other factors, small companies may suffer significant losses, as well
as realize substantial growth.
Historically, small capitalization stocks have been more volatile than larger
capitalization stocks and are therefore more speculative than investments in
larger companies. Among the reasons for the greater price volatility are the
less certain growth prospects of smaller firms, the lower degree of liquidity in
the markets for such stocks, and the greater sensitivity of small companies to
changing economic conditions. Besides exhibiting greater volatility, small
company stocks may, to a degree, fluctuate independently of larger company
stocks. Small company stocks may decline in price as large company stocks rise,
or rise in price as large company stocks decline. You should therefore expect
that the value of the Fund's shares may be more volatile than the shares of a
fund that invests primarily in larger capitalization stocks.
NON-DIVERSIFICATION RISK. The Fund is non-diversified under the federal
securities laws. As a non-diversified Fund, there is no restriction under the
1940 Act on the percentage of the Fund's assets that may be invested at any time
in the securities of any one issuer. However, the Fund intends to comply with
the diversification and other requirements of the Code applicable to "regulated
investment companies" so that it will not be subject to U.S. federal income tax
on income and capital gains. Accordingly, the Fund will not buy securities if,
as a result, more than 25% of its total assets would be invested in the
securities of a single issuer or, with respect to 50% of its total assets, more
than 5% of such assets would be invested in the securities of a single issuer.
Because the Fund is non-diversified and concentrates its investments in a
limited group of related industries, the value of the Fund's shares may
fluctuate more widely, and the Fund may present greater risk than other
investments.
INDUSTRY RISK. Unlike more widely diversified mutual funds, the Fund is subject
to industry risk. Industry risk is the possibility that a particular group of
related stocks will decline in price. The activities of health care companies
may be funded or subsidized by federal and state governments. Consequently,
discontinuance of government subsidies could adversely affect the profitability
of these companies. Stocks held by the Fund will be affected by government
policies on health care reimbursements, regulatory approval for new drugs and
medical instruments, and similar matters. Health care companies are also subject
to legislative risk, the risk of a reform of the health care system through
legislation. Health care companies may face lawsuits related to product
liability issues. Also, many products and services provided by health care
companies are subject to rapid obsolescence. The value of an investment in the
Fund may fluctuate significantly over relatively short periods of time.
INTEREST RATE, CURRENCY AND MARKET RISK. To the extent the Fund invests in debt
securities, changes in interest rates in any country where the Fund is invested
will affect the value of the Fund's portfolio and its share price. Rising
interest rates, which often occur during times of inflation or a growing
economy, are likely to have a negative effect on the value of the Fund's shares.
To the extent the Fund invests in common stocks, a general market decline in any
country where the Fund is invested, may cause the value of what the Fund owns,
and thus the Fund's share price, to decline. Changes in currency valuations may
also affect the price of Fund shares. The value of stock markets, currency
valuations and interest rates throughout the world has increased and decreased
in the past. These changes are unpredictable.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
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 $207 billion in assets. Please see "Investment Management
and Other Services" and "Miscellaneous Information" in the SAI for information
on securities transactions and a summary of the Fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is: Kurt von Emster and Rupert H. Johnson, Jr. since the Fund's
inception in 1992, and Evan McCulloch since 1994.
Kurt von Emster
Portfolio Manager of Advisers
Mr. von Emster is a Chartered Financial Analyst and holds a Bachelor of Arts
degree in Business and Economics from the University of California at Santa
Barbara. He has been with the Franklin Templeton Group since 1989.
Rupert H. Johnson, Jr.
President of Advisers
Mr. Johnson is a graduate of Washington and Lee University. He has been with the
Franklin Templeton Group since 1965 and prior thereto was an officer in the U.S.
Marine Corps. Mr. Johnson is a member of several securities industry-related
associations.
Evan McCulloch
Portfolio Manager of Advisers
Mr. McCulloch holds a Bachelor of Science degree in Economics from the
University of California at Berkeley. He has been with the Franklin Templeton
Group since 1992. He is a member of the Association for Investment Management
and Research.
MANAGEMENT FEES. During the fiscal year ended April 30, 1997, management fees
totaling 0.58% of the average daily net assets of the Fund were paid to
Advisers. Total expenses, including fees paid to Advisers, were 1.14% for Class
I and 1.92% for Class II.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares, as well as shares of other funds in the Franklin Templeton Group
of Funds, when selecting a broker or dealer. Please see "How does the Fund Buy
Securities for its Portfolio?" in the SAI for more information.
ADMINISTRATIVE SERVICES. 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 RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
Fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by the Fund under the Class I plan may not exceed 0.25% per year of
Class I's average daily net assets. All distribution expenses over this amount
will be borne by those who have incurred them. During the first year after
certain Class I purchases made without a sales charge, Distributors may keep the
Rule 12b-1 fees associated with the purchase.
Under the Class II plan, the Fund may pay Distributors up to 0.75% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the purchase.
The Fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, each class of the Fund advertises its performance. A commonly
used measure of performance is total return. Performance figures are usually
calculated using the maximum sales charges, but certain figures may not include
sales charges.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested.
The investment results of each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund is treated as a separate entity for federal income tax purposes. The
Fund has elected and intends to continue to qualify as a regulated investment
company under Subchapter M of the Code. By distributing all of its income and
meeting certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will generally not be liable for federal
income or excise taxes.
For federal income tax purposes, any income dividends that you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated for tax purposes as if received by
you on December 31 of the calendar year in which they are declared.
If you are a corporate investor, 6.43% of the ordinary income dividends
(including short-term capital gain distributions) paid by the Fund for the
fiscal year ended April 30, 1997, qualified for the corporate dividends-received
deduction, subject to certain holding period and debt financing restrictions
imposed under the Code on the corporation claiming the deduction. These
restrictions are discussed in the SAI.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to such shares.
The Fund will inform you of the source of its dividends and distributions at the
time they are paid, and will promptly after the close of each calendar year
advise you of the tax status for federal income tax purposes of such dividends
and distributions.
If you are not a U.S. person for U.S. federal income tax purposes, you should
consult with your financial or tax advisor regarding the applicability of U.S.
withholding or other taxes on distributions received by you from the Fund and
the application of foreign tax laws to these distributions. You should also
consult your advisor with respect to the applicability of any state and local
intangible property or income taxes to your shares of the Fund and distributions
and redemption proceeds received from the Fund.
HOW IS THE TRUST ORGANIZED?
The Fund is a non-diversified series of Franklin Strategic Series (the "Trust"),
an open-end management investment company, commonly called a mutual fund. It was
organized as a Delaware business trust on January 22, 1991, and is registered
with the SEC. The Fund offers two classes of shares: Franklin Global Health Care
Fund Class I and Franklin Global Health Care Fund - Class II. All shares
outstanding before the offering of Class II shares are considered Class I
shares. Additional series and classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters affecting only that class, or expressly required
to be voted on separately by state or federal law. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of the Trust for matters that affect the Trust as a whole.
THE TRUST HAS NONCUMULATIVE VOTING RIGHTS. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
THE TRUST DOES NOT INTEND TO HOLD ANNUAL SHAREHOLDER MEETINGS. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares. In
certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check. PLEASE INDICATE WHICH CLASS OF SHARES YOU WANT TO BUY. IF YOU DO NOT
SPECIFY A CLASS, YOUR PURCHASE WILL BE AUTOMATICALLY INVESTED IN CLASS I SHARES.
CURRENTLY, THE FUND DOES NOT ALLOW INVESTMENTS BY MARKET TIMERS.
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.
DECIDING WHICH CLASS TO BUY
You should consider a number of factors when deciding which class of shares to
buy. IF YOU PLAN TO BUY $1 MILLION OR MORE IN A SINGLE PAYMENT OR YOU QUALIFY TO
BUY CLASS I SHARES WITHOUT A SALES CHARGE, YOU MAY NOT BUY CLASS II SHARES.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds; and
o you plan to sell a substantial number of your shares within approximately six
years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
PURCHASE PRICE OF FUND SHARES
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
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CLASS I
Under $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 or more* None None None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares?
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Deciding Which
Class to Buy."
SALES CHARGE REDUCTIONS AND WAIVERS
IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH
EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't
include this statement, we cannot guarantee that you will receive the sales
charge reduction or waiver.
CUMULATIVE QUANTITY DISCOUNTS - CLASS I ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds, as well as those of your spouse, children under the
age of 21 and grandchildren under the age of 21. If you are the sole owner of a
company, you may also add any company accounts, including retirement plan
accounts. Companies with one or more retirement plans may add together the total
plan assets invested in the Franklin Templeton Funds to determine the sales
charge that applies.
LETTER OF INTENT - CLASS I ONLY. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES - CLASS I ONLY. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
SALES CHARGE WAIVERS. The Fund's front-end sales charge and Contingent Deferred
Sales Charge do not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) 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 do not apply if you are buying Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 4:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a real estate investment trust (REIT) sponsored or advised by Franklin
Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, the Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
4. Redemptions from any Franklin Templeton Fund if you:
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.
The Fund's sales charges also do not apply to Class I purchases by:
5. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following the order.
6. Group annuity separate accounts offered to retirement plans
7. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
8. An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is permissible and suitable
for you and the effect, if any, of payments by the Fund on arbitrage rebate
calculations.
9. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
10. Registered Securities Dealers and their affiliates, for their investment
accounts only
11. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
12. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
13. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
14. Accounts managed by the Franklin Templeton Group
15. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with at
least 100 employees, or (ii) have plan assets of $1 million or more, or (iii)
agree to invest at least $500,000 in the Franklin Templeton Funds over a 13
month period may buy Class I shares without a front-end sales charge. Retirement
plans that are not Qualified Retirement Plans or SEPs, such as 403(b) or 457
plans, must also meet the requirements described under "Group Purchases - Class
I Only" above. For retirement plan accounts opened on or after May 1, 1997, a
Contingent Deferred Sales Charge may apply if the account is closed within 365
days of the retirement plan account's initial purchase in the Franklin Templeton
Funds. Please see "How Do I Sell Shares? - Contingent Deferred Sales Charge" for
details.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not by
the Fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 1% of the amount invested.
3. Class I purchases made without a front-end sales charge by certain retirement
plans described under "Sales Charge Reductions and Waivers - Retirement Plans"
above - up to 1% of the amount invested. For retirement plan accounts opened on
or after May 1, 1997, a Contingent Deferred Sales Charge will not apply to the
account if the Securities Dealer chooses to receive a payment of 0.25% or less
or if no payment is made.
4. Class I purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the amount
invested.
5. Class I purchases by Chilean retirement plans - up to 1% of the amount
invested.
A Securities Dealer may receive only one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1, 2 or 5 above or a payment of up to 1% for investments
described in paragraph 3 will be eligible to receive the Rule 12b-1 fee
associated with the purchase starting in the thirteenth calendar month after the
purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
WE OFFER A WIDE VARIETY OF FUNDS. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums. Some Franklin Templeton Funds do not offer Class II shares.
METHOD STEPS TO FOLLOW
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BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares you
want to exchange
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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
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YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
CONTINGENT DEFERRED SALES CHARGE - CLASS I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, we will first exchange any shares
in your account that are not subject to the charge. If there are not enough of
these to meet your exchange request, we will exchange shares subject to the
charge in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
CONTINGENT DEFERRED SALES CHARGE - CLASS II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
Contingent Deferred Sales Charge, such as shares from the reinvestment of
dividends and capital gains ("free shares"), $2,000 in shares that are no longer
subject to a Contingent Deferred Sales Charge because you have held them for
longer than 18 months ("matured shares"), and $3,000 in shares that are still
subject to a Contingent Deferred Sales Charge ("CDSC liable shares"). If you
exchange $3,000 into a new fund, $500 will be exchanged from free shares, $1,000
from matured shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. The tax consequences of a sale or exchange are determined by the
Code and not by the method used by the Fund to transfer shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. Please notify us in writing if you do not want this option
to be available on your account. Additional procedures may apply. Please see
"Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Advisor Class" or "Class Z" shares. Because the
Fund does not currently offer an Advisor Class, you may exchange Advisor Class
shares of any Franklin Templeton Fund for Class I shares of the Fund at Net
Asset Value. If you do so and you later decide you would like to exchange into a
fund that offers an Advisor Class, you may exchange your Class I shares for
Advisor Class shares of that fund. Certain shareholders of Class Z shares of
Franklin Mutual Series Fund Inc. may also exchange their Class Z shares for
Class I shares of the Fund at Net Asset Value.
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.
If you would like your redemption proceeds wired to a bank
account, your instructions should include:
o The name, address and telephone number of the bank where you want
the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit union, the name of
the corresponding bank and the account number
2. Include any outstanding share certificates for the shares you are
selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may have
other requirements.
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BY PHONE Call Shareholder Services.
If you would like your redemption
proceeds wired to a bank account, other than an escrow account, you
must first sign up for the wire feature. To sign up, send us written
instructions, with a signature guarantee. To avoid any delay in
processing, the instructions should include the items listed in "By
Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts may
exceed $50,000 by completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for the shares you want
to sell or you have already returned them to the Fund
o Unless you are selling shares in a Trust Company retirement plan
account
o Unless the address on your account was changed by phone within the
last 15 days
If you do not want the ability to redeem by phone to apply to your
account, please let us know.
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THROUGH
YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
For Class I purchases, 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 Class I 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. For any Class II purchase, a Contingent
Deferred Sales Charge may apply if you sell the shares within the Contingency
Period. The charge is 1% of the value of the shares sold or the Net Asset Value
at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class I shares without a front-end sales charge may also be
subject to a Contingent Deferred Sales Charge if the retirement plan account is
closed within 365 days of the account's initial purchase in the Franklin
Templeton Funds.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997, or
(ii) the Securities Dealer of record received a payment from Distributors of
0.25% or less, or (iii) Distributors did not make any payment in connection
with the purchase, as described under "How Do I Buy Shares? - Other Payments
to Securities Dealers"
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, at a rate of up to 1% a month of an account's Net Asset Value. For
example, if you maintain an annual balance of $1 million in Class I shares,
you can redeem up to $120,000 annually through a systematic withdrawal plan
free of charge. Likewise, if you maintain an annual balance of $10,000 in
Class II shares, $1,200 may be redeemed annually free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Redemptions by Trust Company employee benefit plans or employee benefit plans
serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee benefit
plans
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income semiannually in June
and December to shareholders of record on the first business day before the 15th
of the month and pays them on or about the last day of that month.
Capital gains, if any, may be distributed annually, usually in December.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of Class I and Class II.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy additional shares of the same
class of the Fund (without a sales charge or imposition of a Contingent Deferred
Sales Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. If you own Class II shares, you may also reinvest
your distributions in Class I shares of the Fund. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge). If
you own Class II shares, you may also direct your distributions to buy Class I
shares of another Franklin Templeton Fund. Many shareholders find this a
convenient way to diversify their investments.
3. Receive distributions in cash - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers - Class I
Only" under "Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days before the record date for us
to process the new option. For Trust Company retirement plans, special forms are
required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
WHEN YOU BUY SHARES, YOU PAY THE OFFERING PRICE. This is the Net Asset Value per
share of the class you wish to purchase, plus any applicable sales charges. When
you sell shares, you receive the Net Asset Value per share minus any applicable
Contingent Deferred Sales Charges.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
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 of each class 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 for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by phone, we will not be liable for any loss.
Trust Company Retirement Plan Accounts. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, ALL owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
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CORPORATION Corporate Resolution
- --------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have let us know
that you do not want telephone privileges to apply to your account.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION - CLASS I ONLY
You may have money transferred from your paycheck to the Fund to buy additional
Class I 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 - Class I Only" below.
Once your plan is established, any distributions paid by the Fund will be
automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS - CLASS I ONLY
You may choose to have dividend and capital gain distributions from Class I
shares of the Fund or payments under a systematic withdrawal plan sent directly
to a checking account. If the checking account is with a bank that is a member
of the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If you choose this option, please allow at least
fifteen days for initial processing. We will send any payments made during that
time to the address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the code number for each class to use TeleFACTS(R). The code
number is 199 for Class I and 299 for Class II.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
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.
PROSPECTUS & APPLICATION
FRANKLIN NATURAL RESOURCES FUND
INVESTMENT STRATEGY
GROWTH & INCOME
SEPTEMBER 1, 1997
FRANKLIN STRATEGIC SERIES
This prospectus describes Class I shares of the Franklin Natural Resources Fund
(the "Fund"). It contains information you should know before investing in the
Fund. Please keep it for future reference.
The Fund currently offers another class of shares with a different sales charge
and expense structure, which affects performance. This class is described in a
separate prospectus. For more information, contact your investment
representative or call 1-800/DIAL BEN.
The Fund has a Statement of Additional Information ("SAI") for its Class I
shares, dated September 1, 1997, which may be amended from time to time. It
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 its address.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
FRANKLIN NATURAL RESOURCES FUND
SEPTERMBER 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? .................................. 9
Who Manages the Fund? ................................................. 12
How does the Fund Measure Performance? ................................ 14
How Taxation Affects the Fund and its Shareholders .................... 14
How is the Trust Organized? ........................................... 15
ABOUT YOUR ACCOUNT
How Do I Buy Shares? .................................................. 16
May I Exchange Shares for Shares of Another Fund? ..................... 21
How Do I Sell Shares? ................................................. 23
What Distributions Might I Receive from the Fund? ..................... 27
Transaction Procedures and Special Requirements ....................... 28
Services to Help You Manage Your Account .............................. 32
What If I Have Questions About My Account? ............................ 35
GLOSSARY
Useful Terms and Definitions .......................................... 35
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the Fund's historical expenses for the fiscal year ended
April 30, 1997. The Fund's actual expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge Imposed on Purchases
(as a percentage of Offering Price) 4.50%++
Deferred Sales Charge None+++
Exchange Fee (per transaction) $5.00*
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.60%**
Rule 12b-1 Fees 0.29%***
Other Expenses 0.38%
-----
Total Fund Operating Expenses 1.27%**
=======
C. EXAMPLE
Assume the Fund's annual return is 5%, operating expenses are as described
above, and you sell your shares after the number of years shown. These are the
projected expenses for each $1,000 that you invest in the Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -----------------------------------------
$57**** $83 $112 $191
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
its Net Asset Value or dividends and are not directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more.
+++A Contingent Deferred Sales Charge of 1% may apply to purchases of $1 million
or more if you sell the shares within one year. A Contingent Deferred Sales
Charge may also apply to purchases by certain retirement plans that qualify to
buy shares without a front-end sales charge. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**For the period shown, Advisers had agreed in advance to limit its management
fees to reduce the Fund's expenses. With this reduction, management fees were
0.28% and total Fund operating expenses were 0.95%.
***These fees may not exceed 0.35%. The combination of front-end sales charges
and Rule 12b-1 fees could cause long-term shareholders to pay more than the
economic equivalent of the maximum front-end sales charge permitted under the
NASD's rules.
****Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering the periods shown below appears in the financial
statements in the Trust's Annual Report to Shareholders for the fiscal year
ended April 30, 1997. The Annual Report to Shareholders also includes more
information about the Fund's performance. For a free copy, please call Fund
Information.
YEAR ENDED APRIL 30 1997 1996+
- ------------------------------------------------------------------------------
Per Share Operating Performance
NET ASSET VALUE AT BEGINNING OF PERIOD $13.14 $10.00
- -----------------------------------------------------------------------------
Net Investment Income .09 .08
Net Realized & Unrealized Gain
(Loss) on Securities 1.254 3.217
TOTAL FROM INVESTMENT OPERATIONS 1.344 3.297
- -----------------------------------------------------------------------------
Distributions From Net Investment Income (.092) (.063)
Distributions From Capital Gains (.322) (.094)
Total Distributions (.414) (.157)
NET ASSET VALUE AT END OF PERIOD $14.07 $13.14
- -----------------------------------------------------------------------------
Total Return* 10.23% 33.36%
Ratios/Supplemental Data
Net Assets at End of Period (in 000's) $45,386 $9,909
Ratio of Expenses to Average Net Assets** .98% .99%++
Ratio of Net Investment Income
to Average Net Assets .72% 1.16%++
Portfolio Turnover Rate 46.31% 59.04%
Average Commission Rate*** .0331 .0517
+For the period June 5, 1995 (effective date) to April 30, 1996.
++Annualized.
*Total return measures the change in value of an investment over the period
indicated. It is not annualized. It does not include the maximum front-end sales
charge or the Contingent Deferred Sales Charge and assumes reinvestment of
dividends and capital gains at Net Asset Value.
**During the periods indicated, Advisers agreed in advance to waive a portion or
all of its management fees and made payments of other expenses incurred by the
Fund. Had such action not been taken, the ratios of operating expenses to
average net assets would have been 1.27% for 1997 and 1.77% for 1996.
***Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is to seek to provide high total return. The
Fund's total return consists of both capital appreciation and current dividend
and interest income. The objective is a fundamental policy of the Fund and may
not be changed without shareholder approval. Of course, there is no assurance
that the Fund's objective will be achieved.
The Fund seeks to achieve its objective by investing at least 65% of its total
assets in securities issued by companies which own, produce, refine, process and
market natural resources, as well as those that provide support services for
natural resources companies (i.e., those that develop technologies or provide
services or supplies directly related to the production of natural resources).
These companies are concentrated in the natural resources sector that includes,
but is not limited to, the following industries: Integrated oil; oil and gas
exploration and production; gold and precious metals; steel and iron ore
production; aluminum production; forest products; farming products; paper
products; chemicals; building materials; energy services and technology; and
environmental services.
The Fund at all times, except during temporary defensive periods, seeks to
maintain at least 65% of its total assets invested in securities issued by
companies in the natural resources sector. The Fund reserves the right to hold,
as a temporary defensive measure or as a reserve for redemptions, short-term
U.S. government securities, high quality money market securities, including
repurchase agreements, or cash in such proportions as Advisers believes
prevailing market or economic conditions warrant.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
The Fund invests in common stocks (including preferred or debt securities
convertible into common stocks), preferred stocks and debt securities. The
mixture of common stocks, debt securities and preferred stocks varies based upon
Advisers' assessment as to whether investments in each category will contribute
to meeting the Fund's investment objective.
The Fund may invest, without limit, in investment grade fixed-income securities.
Investment grade securities are securities rated in one of the four highest
rating categories of a nationally recognized rating service, such as Moody's or
S&P, and also include unrated securities that are comparable in quality to
securities that have been rated investment grade. The four highest rating
categories are Aaa, Aa, A and Baa for Moody's and AAA, AA, A and BBB for S&P.
Although securities rated in the fourth highest rating category are considered
investment grade, they are generally more vulnerable to adverse economic
conditions than securities rated in the three highest categories and are
considered to have some speculative characteristics. The Fund's commercial paper
investments at the time of purchase will be rated "A-1" or "A-2" by S&P or
"Prime-1" or "Prime-2" by Moody's or, if not rated, will be of comparable
quality as determined by Advisers.
The Fund may also invest up to 15% of its total assets at the time of purchase
in lower rated fixed-income securities (those rated BB or lower by S&P or Ba or
lower by Moody's) and unrated securities of comparable quality (commonly known
as "junk bonds.") The Fund will not acquire securities rated lower than B by
Moody's or S&P. Lower rated securities are considered by S&P and Moody's, on
balance, to be predominantly speculative with respect to the issuer's capacity
to pay principal or interest, as the case may be, in accordance with the terms
of the obligation and will generally involve more credit risk than securities in
the higher rating categories.
If the rating services lower the rating on a security in the Fund's portfolio,
the Fund will consider this change in its evaluation of the security's overall
investment merits. A change in a security's rating, however, does not
automatically require the Fund to sell the security. For a description of the
various rating categories, please see the "Appendix - Description of Ratings" in
the SAI.
The Fund may invest up to 35% of its assets in securities of issuers that are
outside the natural resources sector. These investments will include common
stocks, debt securities or preferred stocks, and real estate investment trusts
("REITS") and will be selected to meet the Fund's investment objective of
providing high total return. These securities may be issued by either U.S. or
non-U.S. companies, governments, or governmental instrumentalities. Some of
these issuers may be in industries related to the natural resources sector and,
therefore, may be subject to similar risks. Securities that are issued by
foreign companies or are denominated in foreign currencies are subject to the
risks discussed under "What are the Fund's Potential Risks?"
Securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities, including U.S. Treasury bills, notes and bonds, as well as
certain agency securities and mortgage-backed securities issued by the
Government National Mortgage Association (GNMA), may carry guarantees which are
backed by the "full faith and credit" of the U.S. government. The guarantee
extends only to the payment of interest and principal due on the securities and
does not provide any protection from fluctuations in either the securities'
yield or value or to the yield or value of the Fund's shares. Other investments
in agency securities are not necessarily backed by the "full faith and credit"
of the U.S. government. These include securities issued by the Federal National
Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation, the
Student Loan Marketing Association and the Farm Credit Bank.
The Fund may invest in debt securities issued or guaranteed by foreign
governments. These securities are typically denominated in foreign currencies
and are subject to the currency fluctuation and other risks of foreign
securities investments discussed under "What are the Fund's Potential Risks?"
The foreign government securities in which the Fund intends to invest generally
will include obligations issued by national, state or local governments or
similar political subdivisions. Foreign government securities also include debt
obligations of supranational entities, including international organizations
designed or supported by governmental entities to promote economic
reconstruction or development and international banking institutions and related
government agencies. Examples include the International Bank of Reconstruction
and Development (the World Bank), the European Investment Bank, the Asian
Development Bank and the Inter-American Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units. An example of a multinational currency unit is the European
Currency Unit. A European Currency Unit represents specified amounts of the
currencies of certain of the 12-member states of the European Economic
Community. Debt securities of quasi-governmental agencies are issued by entities
owned by either a national or local government or are obligations of a political
unit that is not backed by the national government's full faith and credit and
general taxing powers. Foreign government securities also include
mortgage-related securities issued or guaranteed by national or local
governmental instrumentalities, including quasi-governmental agencies.
WHERE THE FUND MAY INVEST
The Fund may invest in the securities of issuers both within and outside the
U.S., including emerging market countries.
The Fund may buy foreign securities that are traded in the U.S. or in foreign
markets or buy sponsored or unsponsored American Depositary Receipts ("ADRs"),
which are receipts typically issued by a U.S. bank or trust company that
evidence ownership of underlying securities issued by a foreign corporation.
These securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. Generally, ADRs, which are issued
in registered form, are designed for use in the U.S. securities markets. The
issuers of unsponsored ADRs are not obligated to disclose material information
in the U.S. and, therefore, there may be less information available to the
investing public than with sponsored ADRs. Advisers will attempt to
independently accumulate and evaluate information with respect to the issuers of
the underlying securities of sponsored and unsponsored ADRs to attempt to limit
the Fund's exposure to the market risk associated with such investments. For
purposes of the Fund's investment policies, investments in ADRs will be deemed
to be investments in the equity securities of the foreign issuers into which
they may be converted.
Under normal conditions, it is anticipated that the percentage of assets
invested in U.S. securities will be higher than that invested in securities of
any other single country. It is possible that at times the Fund may have 50% or
more of its total assets invested in foreign securities.
OTHER INVESTMENT POLICIES OF THE FUND
SHORT-TERM INVESTMENTS. The Fund may invest its cash, including cash resulting
from purchases and sales of Fund shares, temporarily in short-term debt
instruments, including high grade commercial paper, repurchase agreements and
other money market equivalents and, pursuant to an exemption from federal
securities law, the shares of affiliated money market funds, which invest
primarily in short-term debt securities. To the extent the Fund invests in
affiliated money market funds, such as the Franklin Money Fund, Advisers has
agreed to waive its management fee on any portion of the Fund's assets invested
in the affiliated fund. Temporary investments will only be made with cash held
to maintain liquidity or pending investment. In addition, for temporary
defensive purposes in the event of, or when Advisers anticipates, a general
decline in the market prices of stocks in which the Fund invests, the Fund may
invest an unlimited amount of its assets in short-term debt instruments.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions in which
the Fund buys a U.S. government security subject to resale to a bank or dealer
at an agreed-upon price and date. The transaction requires the collateralization
of the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller may cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund may
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks which are deemed creditworthy by Advisers. A
repurchase agreement is deemed to be a loan by the Fund under federal securities
laws. The U.S. government security subject to resale (the collateral) is held on
behalf of the Fund by a custodian bank approved by the Board and is held
pursuant to a written agreement.
The Fund may also enter into reverse repurchase agreements. These agreements
involve the sale of securities held by the Fund pursuant to an agreement to
repurchase the securities at an agreed upon price, date and interest payment.
When engaging in reverse repurchase transactions the Fund maintains cash or high
grade liquid debt securities of a dollar amount equal in value to its obligation
under the agreement, including accrued interest, in a segregated account with
its custodian bank. The securities subject to the reverse repurchase agreement
are marked-to-market each day. Although reverse repurchase agreements are
borrowings under federal securities laws, the Fund does not treat these
arrangements as borrowings under investment restriction number two in the SAI,
so long as the segregated account is properly maintained.
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors, if
such loans do not exceed 33% of the value of the Fund's total assets at the time
of the most recent loan. The borrower must deposit with the Fund's custodian
bank collateral with an initial market value of at least 102% of the initial
market value of the securities loaned, including any accrued interest, with the
value of the collateral and loaned securities marked-to-market daily to maintain
collateral coverage of at least 100%. This collateral shall consist of cash,
securities issued by the U.S. government, its agencies or instrumentalities, or
irrevocable letters of credit. The lending of securities is a common practice in
the securities industry. The Fund may engage in security loan arrangements with
the primary objective of increasing the Fund's income either through investing
cash collateral in short-term interest bearing obligations or by receiving a
loan premium from the borrower. Under the securities loan agreement, the Fund
continues to be entitled to all dividends or interest on any loaned securities.
As with any extension of credit, there are risks of delay in recovery and loss
of rights in the collateral should the borrower of the security fail
financially.
BORROWING. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of its assets, except that the Fund may enter into reverse
repurchase agreements or borrow money from banks in an amount up to 33% of its
total asset value (computed at the time the loan is made) for temporary or
emergency purposes. While borrowings exceed 5% of the Fund's total assets, the
Fund will not make any additional investments.
ILLIQUID INVESTMENTS. The Fund's policy is not to invest more than 15% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them. Subject to this
limitation, the Board has authorized the Fund to invest in restricted securities
as long as the investments are consistent with the Fund's investment objective.
The Board also considers these securities liquid to the extent Advisers
determines on a daily basis that there is a liquid institutional or other market
for the securities. Notwithstanding Advisers' determination, the Board is
ultimately responsible for determining a security's liquidity and will consider
appropriate action, consistent with the Fund's objective and policies, if a
security becomes illiquid after its purchase. If the Fund invests in restricted
securities that are deemed liquid, the general level of illiquidity in the Fund
may be increased if qualified institutional buyers become uninterested in buying
these securities or the market for these securities contracts.
OTHER POLICIES AND RESTRICTIONS. As discussed more fully in the SAI, the Fund
may buy debt obligations on a "when-issued" or "delayed delivery" basis and from
time to time enter into standby commitment agreements.
The Fund has a number of additional investment restrictions that limit its
activities to some extent. Some of these restrictions may only be changed with
shareholder approval. For a list of these restrictions and more information
about the Fund's investment policies, please see "How does the Fund Invest its
Assets?" and "Investment Restrictions" in the SAI.
Each of the Fund's policies and restrictions discussed in this prospectus and in
the SAI is considered at the time the Fund makes an investment. The Fund is
generally not required to sell a security because of a change in circumstances.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
The Fund is designed for long-term investors and not as a trading vehicle. The
Fund is not intended to present a complete investment program.
NON-DIVERSIFICATION RISK. Although Advisers usually invests the Fund's assets in
a substantial number of issuers, the Fund is non-diversified under federal
securities law. This generally means that the Fund may invest more than 5% of
its assets in the securities of a single issuer. Consequently, changes in the
financial condition of a single issuer may have a greater effect on the Fund's
share value than these changes would have on the performance of other mutual
funds, particularly those that invest in a broad range of issuers, sectors and
industries.
THE NATURAL RESOURCES SECTOR. There are several risk factors that need to be
assessed before investing in the natural resources sector. Some of the
commodities in these industries are subject to limited pricing flexibility as a
result of similar supply and demand factors. Others are subject to broad price
fluctuations, reflecting the volatility of certain raw materials' prices and the
instability of supplies of other resources. These factors can effect the overall
profitability of an individual company operating within the natural resources
sector. While Advisers strives to diversify among the industries within the
natural resources sector to minimize this volatility, there will be occasions
where the value of an individual company's securities will prove more volatile
than the broader market. In addition, many of these companies operate in areas
of the world where they are subject to unstable political environments, currency
fluctuations and inflationary pressures.
FOREIGN SECURITIES. Foreign securities involve certain risks that you should
consider carefully. These risks include political, social or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of the imposition of exchange
controls, expropriation, restrictions on removal of currency or other assets,
nationalization of assets, foreign withholding and income taxation, and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Foreign securities may be subject to greater fluctuations
in price than securities issued by U.S. corporations or issued or guaranteed by
the U.S. government, its instrumentalities or agencies. The markets on which
foreign securities trade may have less volume and liquidity, and may be more
volatile than securities markets in the U.S. In addition, there may be less
publicly available information about a foreign company than about a U.S.
domiciled company. Foreign companies generally are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to U.S. domestic companies. There is generally less government
regulation of securities exchanges, brokers and listed companies abroad than in
the U.S. Confiscatory taxation or diplomatic developments could also affect
investment in those countries.
In many instances, foreign debt securities may provide higher yields than
securities of domestic issuers that have similar maturities and quality. Under
certain market conditions, these investments may be less liquid than the
securities of U.S. corporations and are certainly less liquid than securities
issued or guaranteed by the U.S. government, its instrumentalities or agencies.
Finally, in the event of a default of any foreign debt obligations, it may be
more difficult for the Fund to obtain or to enforce a judgment against the
issuers of the securities.
Investments of the Fund may be denominated in foreign currencies. If a security
is denominated in foreign currency, the value of the security to the Fund will
be affected by changes in currency exchange rates and in exchange control
regulations, and costs will be incurred in connection with conversions between
currencies. A change in the value of any foreign currency against the U.S.
dollar will result in a corresponding change in the U.S. dollar value of the
Fund's securities denominated in that currency. These changes will also affect
the Fund's income and distributions to shareholders. In addition, although the
Fund will receive income on foreign securities in such currencies, the Fund will
be required to compute and distribute its income in U.S. dollars. Therefore, if
the exchange rate for any currency declines materially after the Fund's income
has been accrued and translated into U.S. dollars, the Fund could be required to
liquidate portfolio securities to make required distributions. Similarly, if an
exchange rate declines between the time the Fund incurs expenses in U.S. dollars
and the time such expenses are paid, the amount of currency required to be
converted into U.S. dollars in order to pay such expenses in U.S. dollars will
be greater.
The Fund may choose to hedge exposure to currency fluctuations by entering into
forward foreign currency exchange contracts, and buying and selling options,
futures contracts and options on futures contracts related to foreign
currencies. The Fund may use forward currency exchange contracts in the normal
course of business to lock in an exchange rate in connection with purchases and
sales of securities denominated in foreign currencies. Advisers may employ other
currency management strategies to hedge portfolio securities or to shift
investment exposure from one currency to another. Some of these strategies will
require the Fund to set aside liquid assets in a segregated custodial account to
cover its obligations. Options, futures and options on futures and forward
contracts are generally considered "derivative securities." See "Currency
Hedging Transactions and Associated Risks" in the SAI.
The operating expense ratio of the Fund can be expected to be higher than that
of an investment company investing exclusively in U.S. securities because of the
additional expenses of the Fund attributable to its foreign investment activity.
These expenses may include custodial costs, valuation costs and communication
costs. The Fund's expenses, however, are expected to be similar to expenses of
other investment companies investing in a mix of U.S. securities and securities
of one or more foreign countries.
Investing in emerging market countries subjects the Fund to heightened foreign
securities investment risks as discussed in this section.
HIGH YIELD SECURITIES. Because the Fund may invest in securities below
investment grade, an investment in the Fund is subject to a higher degree of
risk than an investment in a fund that invests primarily in higher-quality
securities. You should consider the increased risk of loss to principal that is
present with an investment in higher risk securities, such as those in which the
Fund invests. Accordingly, an investment in the Fund should not be considered a
complete investment program and should be carefully evaluated for its
appropriateness in light of your overall investment needs and goals.
The market value of high yield, lower-quality fixed-income securities, commonly
known as junk bonds, tends to reflect individual developments affecting the
issuer to a greater degree than the market value of higher-quality securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality securities also tend to be more sensitive to economic conditions
than higher-quality securities. Please see the SAI for additional information on
the risks associated with high yeild, fixed-income securities.
INTEREST RATE, CURRENCY AND MARKET RISK. To the extent the Fund invests in debt
securities, changes in interest rates in any country where the Fund is invested
will affect the value of the Fund's portfolio and its share price. Rising
interest rates, which often occur during times of inflation or a growing
economy, are likely to have a negative effect on the value of the Fund's shares.
To the extent the Fund invests in common stocks, a general market decline in any
country where the Fund is invested, may cause the value of what the Fund owns,
and thus the Fund's share price, to decline. Changes in currency valuations may
also affect the price of Fund shares. The value of stock markets, currency
valuations and interest rates throughout the world has increased and decreased
in the past. These changes are unpredictable.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
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 $207 billion in assets. Please see "Investment Management
and Other Services" and "Miscellaneous Information" in the SAI for information
on securities transactions and a summary of the Fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is: Suzanne Willoughby Killea since inception and Edward D.
Perks since October 1996.
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.
Edward D. Perks
Portfolio Manager of Advisers
Mr. Perks holds a Bachelor of Arts degree in Economics and Political Science
from Yale University. Mr. Perks joined the Franklin Templeton Group in October
1992.
MANAGEMENT FEES. During the fiscal year ended April 30, 1997, management fees,
before any advance waiver, totaled 0.60% and operating expenses, before any
advance waiver, totaled 1.27% of the average net assets of the Fund. Under an
agreement by Advisers to waive its fees, the Fund paid management fees totaling
0.28% and operating expenses totaling 0.95%. Advisers may end this arrangement
at any time upon notice to the Board.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares, 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 RULE 12B-1 PLAN
The Fund has a distribution plan or "Rule 12b-1 Plan" for its Class I shares
under which it may reimburse Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
Fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by the Fund under the plan may not exceed 0.35% per year of Class I'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. Commonly used measures
of performance include total return, current yield and current distribution
rate. Performance figures are usually calculated using the maximum sales charge,
but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield shows the
income per share earned by the Fund. The current distribution rate shows the
dividends or distributions paid to shareholders by the Fund. This rate is
usually computed by annualizing the dividends paid per share during a certain
period and dividing that amount by the current Offering Price. Unlike current
yield, the current distribution rate may include income distributions from
sources other than dividends and interest received by the Fund.
The Fund's investment results will vary. Performance figures are always based on
past performance and do not 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.
The Fund also offers another share class and, from time to time, will advertise
its performance in a manner described in the prospectus for that class.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund is treated as a separate entity for federal income tax purposes. The
Fund has elected and intends to continue to qualify as a regulated investment
company under Subchapter M of the Code. By distributing all of its income and
meeting certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will generally not be liable for federal
income or excise taxes.
Foreign securities that meet the definition in the Code of a Passive Foreign
Investment Company ("PFIC") may subject the Fund to an income tax and interest
charge with respect to such investments. To the extent possible, the Fund will
avoid such treatment by not investing in PFIC securities or by adopting other
tax strategies for any PFIC securities it does purchase.
For federal income tax purposes, any income dividends that you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
For corporate shareholders, 14.25% of the ordinary income distributions
(including short-term capital gain distributions) paid by the Fund for the
fiscal year ended April 30, 1997, qualified for the corporate dividends-received
deduction, subject to certain holding period and debt financing restrictions
imposed under the Code on the corporation claiming the deduction. These
restrictions are discussed in the SAI.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated for tax purposes as if received by
you on December 31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to such shares.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid, and will promptly after the close of each calendar year
advise you of the tax status for federal income tax purposes of such dividends
and distributions.
If you are not considered a U.S. person for federal income tax purposes, you
should consult with your financial or tax advisor regarding the applicability of
U.S. withholding or other taxes on distributions received by you from the Fund
and the application of foreign tax laws to these distributions. You should also
consult your tax advisor with respect to the applicability of any state and
local intangible property or income taxes to your shares of the Fund and
distributions and redemption proceeds received from the Fund.
HOW IS THE TRUST ORGANIZED?
The Fund is a non-diversified series of Franklin Strategic Series (the "Trust"),
an open-end management investment company, commonly called a mutual fund. It was
organized as a Delaware business trust on January 25, 1991, and is registered
with the SEC. As of January 1, 1997, the Fund began offering a new class of
shares designated Franklin Natural Resources Fund - Advisor Class. All shares
outstanding before the offering of Advisor Class shares have been designated
Franklin Natural Resources Fund - Class I. Additional series and classes of
shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters affecting only that class, or expressly required
to be voted on separately by state or federal law. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of the Trust for matters that affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares. In
certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check.
MINIMUM
INVESTMENTS
To Open Your Account $100
To Add to Your Account $ 25
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares.
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify to buy shares under one of the sales charge reduction or
waiver categories described below, please include a written statement with
each purchase order explaining which privilege applies. If you don't
include this statement, we cannot guarantee that you will receive the sales
charge reduction or waiver.
QUANTITY DISCOUNTS. The sales charge you pay depends on the dollar amount you
invest, as shown in the table below.
TOTAL SALES CHARGE AMOUNT PAID
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 existing shares in the Franklin Templeton
Funds, as well as those of your spouse, children under the age of 21 and
grandchildren under the age of 21. If you are the sole owner of a company, you
may also add any company accounts, including retirement plan accounts. Companies
with one or more retirement plans may add together the total plan assets
invested in the Franklin Templeton Funds to determine the sales charge that
applies.
LETTER OF INTENT. You may buy shares at a reduced sales charge by completing the
Letter of Intent section of the shareholder application. A Letter of Intent is a
commitment by you to invest a specified dollar amount during a 13 month period.
The amount you agree to invest determines the sales charge you pay.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Fund shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Fund
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
SALES CHARGE WAIVERS. The Fund's front-end sales charge and Contingent Deferred
Sales Charge do not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) the distributions may be from either Class I or
Class II shares of a fund.
The Fund's sales charges do not apply if you are buying shares with money from
the following sources:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a real estate investment trust (REIT) sponsored or advised by Franklin
Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds, the Templeton Variable Annuity Fund,
the Templeton Variable Products Series Fund, or the Franklin Government
Securities Trust. You should contact your tax advisor for information on
any tax consequences that may apply.
4. Redemptions from any Franklin Templeton Fund if you:
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.
The Fund's sales charges also do not apply to purchases by:
5. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
6. Group annuity separate accounts offered to retirement plans
7. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
8. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments by the
Fund on arbitrage rebate calculations.
9. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
10. Registered Securities Dealers and their affiliates, for their investment
accounts only
11. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
12. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
13. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
14. Accounts managed by the Franklin Templeton Group
15. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with at
least 100 employees, or (ii) have plan assets of $1 million or more, or (iii)
agree to invest at least $500,000 in the Franklin Templeton Funds over a 13
month period may buy shares without a front-end sales charge. Retirement plans
that are not Qualified Retirement Plans or SEPs, such as 403(b) or 457 plans,
must also meet the requirements described under "Group Purchases" above. For
retirement plan accounts opened on or after May 1, 1997, a Contingent Deferred
Sales Charge may apply if the account is closed within 365 days of the
retirement plan account's initial purchase in the Franklin Templeton Funds.
Please see "How Do I Sell Shares? - Contingent Deferred Sales Charge" for
details.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for certain purchases made without a sales charge. The payments
are subject to the sole discretion of Distributors, and are paid by Distributors
or one of its affiliates and not by the Fund or its shareholders.
1. Purchases of $1 million or more - up to 1% of the amount invested.
2. Purchases made without a front-end sales charge by certain retirement plans
described under "Sales Charge Reductions and Waivers - Retirement Plans"
above - up to 1% of the amount invested. For retirement plan accounts
opened on or after May 1, 1997, a Contingent Deferred Sales Charge will not
apply to the account if the Securities Dealer chooses to receive a payment
of 0.25% or less or if no payment is made.
3. Purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the amount
invested.
4. Purchases by Chilean retirement plans - up to 1% of the amount invested.
A Securities Dealer may receive only one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1 or 4 above or a payment of up to 1% for investments
described in paragraph 2 will be eligible to receive the Rule 12b-1 fee
associated with the purchase starting in the thirteenth calendar month after the
purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums.
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 want to exchange
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to exchange by phone to apply
to your account, please let us know.
- --------------------------------------------------------------------------------
THROUGH
YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred Sales
Charge when you exchange shares. Any shares subject to a Contingent Deferred
Sales Charge at the time of exchange, however, will remain so in the new fund.
For accounts with shares subject to a Contingent Deferred Sales Charge, we will
first exchange any shares in your account that are not subject to the charge. If
there are not enough of these to meet your exchange request, we will exchange
shares subject to the charge 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, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. Please notify us in writing if you do not want this
option to be available on your account. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the Fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the Fund more than twice in a calendar
quarter, or (iii) exchanged shares equal to at least $5 million, or more
than 1% of the Fund's net assets. Shares under common ownership or control
are combined for these limits. If you have exchanged shares as described in
this paragraph, you will be considered a Market Timer. Each exchange by a
Market Timer, if accepted, will be charged $5.00. Some of our funds do not
allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Class Z" shares. Certain shareholders of Class Z
shares of Franklin Mutual Series Fund Inc. may exchange their Class Z shares for
shares of the Fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL 1. Send us written instructions signed by all account
owners. If you would like your redemption proceeds wired to
a bank account, your instructions should include:
o The name, address and telephone number of the bank where
you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit union, the
name of the corresponding bank and the account number
2. Include any outstanding share certificates for the shares
you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may
have other requirements.
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other than an
escrow account, you must first sign up for the wire feature.
To sign up, send us written instructions, with a signature
guarantee. To avoid any delay in processing, the instructions
should include the items listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts may
exceed $50,000 by completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for the shares you
want to sell or you have already returned them to the Fund
o Unless you are selling shares in a Trust Company retirement
plan account
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY PHONE (cont.) o Unless the address on your account was changed by phone
within the last 15 days
If you do not want the ability to redeem by phone to apply to
your account, please let us know.
- --------------------------------------------------------------------------------
THROUGH
YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
591/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
If you did not pay a front-end sales charge because you invested $1 million or
more or agreed to invest $1 million or more under a Letter of Intent, a
Contingent Deferred Sales Charge may apply if you sell all or a part of your
investment within the Contingency Period. Once you have invested $1 million or
more, any additional investments you make without a sales charge may also be
subject to a Contingent Deferred Sales Charge if they are sold within the
Contingency Period. The charge is 1% of the value of the shares sold or the Net
Asset Value at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy shares without a front-end sales charge may also be subject to a
Contingent Deferred Sales Charge if the retirement plan account is closed within
365 days of the account's initial purchase in the Franklin Templeton Funds.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997, or
(ii) the Securities Dealer of record received a payment from Distributors of
0.25% or less, or (iii) Distributors did not make any payment in connection
with the purchase, as described under "How Do I Buy Shares? - Other Payments
to Securities Dealers"
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan, at a rate of up to 1% a
month of an account's Net Asset Value. For example, if you maintain an annual
balance of $1 million, you can redeem up to $120,000 annually through a
systematic withdrawal plan free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Redemptions by Trust Company employee benefit plans or employee benefit plans
serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee benefit
plans
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income semiannually in June
and December to shareholders of record on the first business day before the 15th
of the month and pays them on or about the last day of that month. Capital
gains, if any, may be distributed annually, usually in December.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the same
class of the Fund (without a sales charge or imposition of a Contingent
Deferred Sales Charge) by reinvesting capital gain distributions, or both
dividend and capital gain distributions. 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 SAME CLASS
OF THE FUND. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days before the record date for us
to process the new option. For Trust Company retirement plans, special forms are
required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value per
share, plus any applicable sales charges. When you sell shares, you receive the
Net Asset Value per share.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
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.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Class I, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by phone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, ALL owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- --------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- --------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have let us know
that you do not want telephone privileges to apply to your account.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION
You may have money transferred from your paycheck to the Fund to buy additional
Class I 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. Once your plan
is established, any distributions paid by the Fund will be automatically
reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions from Class I
shares of the Fund or payments under a systematic withdrawal plan sent directly
to a checking account. If the checking account is with a bank that is a member
of the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If you choose this option, please allow at least
fifteen days for initial processing. We will send any payments made during that
time to the address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the Fund's code number to use TeleFACTS(R). The Fund's code number
is 203.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- --------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The Fund offers two classes of shares,
designated "Class I" and "Advisor Class." The two classes have proportionate
interests in the Fund's portfolio. They differ, however, primarily in their
sales charge and expense structures. Certain funds in the Franklin Templeton
Funds also offer a share class designated "Class II."
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 TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the front-end sales charge. The maximum front-end sales
charge is 4.50%.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
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.
PROSPECTUS & APPLICATION
FRANKLIN NATURAL RESOURCES FUND
INVESTMENT STRATEGY
GROWTH & INCOME
ADVISOR CLASS
SEPTEMBER 1, 1997
FRANKLIN STRATEGIC SERIES
This prospectus describes the Advisor Class shares of the Franklin Natural
Resources Fund (the "Fund"). It contains information you should know before
investing in the Fund. Please keep it for future reference.
The Fund currently offers another class of shares with a different sales charge
and expense structure, which affects performance. This class is described in a
separate prospectus. For more information, contact your investment
representative or call 1-800/DIAL BEN.
The Fund has a Statement of Additional Information ("SAI") for its Advisor
Class, dated September 1, 1997, which may be amended from time to time. It
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 its address.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE 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 NATURAL RESOURCES FUND - ADVISOR CLASS
SEPTEMBER 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? ................................ 9
Who Manages the Fund? ............................................... 12
How does the Fund Measure Performance? .............................. 13
How Taxation Affects the Fund and its Shareholders .................. 14
How is the Trust Organized? ......................................... 15
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ................................................ 16
May I Exchange Shares for Shares of Another Fund? ................... 18
How Do I Sell Shares? ............................................... 20
What Distributions Might I Receive from the Fund? ................... 22
Transaction Procedures and Special Requirements ..................... 23
Services to Help You Manage Your Account ............................ 27
What If I Have Questions About My Account? .......................... 28
GLOSSARY
Useful Terms and Definitions ........................................ 29
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of the Advisor Class for the fiscal
year ended September 1, 1997. The expenses are annualized. The Fund's actual
expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge Imposed on Purchases None
Exchange Fee (per transaction) $5.00*
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.60%**
Rule 12b-1 Fees None
Other Expenses 0.38%
Total Fund Operating Expenses 0.98%**
C. EXAMPLE
Assume the annual return for the class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$10 $31 $54 $120
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected
in the Net Asset Value or dividends of the class and are not directly charged
to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**For the period shown, Advisers had agreed in advance to limit its management
fees. With this reduction, management fees were 0.28% and total operating
expenses were 0.66%.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering the period shown below appears in the financial statements
in the Trust's Annual Report to Shareholders for the fiscal year ended April 30,
1997. The Annual Report to Shareholders also includes more information about the
Fund's performance. For a free copy, please call Fund Information.
YEAR ENDED APRIL 30 1997+
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $14.66
Net Investment Income
Net Realized & Unrealized Loss on Securities (.59)
Total From Investment Operations (.59)
Distributions From Net Investment Income
Distributions From Capital Gains
Total Distributions
Net Asset Value at End of Period $14.07
Total Return* (4.02%)
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) $1,123
Ratio of Expenses to Average Net Assets** .64%++
Ratio of Net Investment Income to Average Net Assets 1.03%++
Portfolio Turnover Rate 46.31%
Average Commission Rate*** .0331
+For the period January 2, 1997 (effective date) to April 30, 1997.
++Annualized.
*Total return measures the change in value of an investment over the period
indicated. It is not annualized. It assumes reinvestment of dividends and
capital gains.
**During the period, Advisers agreed in advance to waive a portion of its
management fee. Had such action not been taken, the ratio of operating expenses
to average net assets would have been 0.98%.
***Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is to seek to provide high total return. The
Fund's total return consists of both capital appreciation and current dividend
and interest income. The objective is a fundamental policy of the Fund and may
not be changed without shareholder approval. Of course, there is no assurance
that the Fund's objective will be achieved.
The Fund seeks to achieve its objective by investing at least 65% of its total
assets in securities issued by companies which own, produce, refine, process and
market natural resources, as well as those that provide support services for
natural resources companies (i.e., those that develop technologies or provide
services or supplies directly related to the production of natural resources).
These companies are concentrated in the natural resources sector that includes,
but is not limited to, the following industries: Integrated oil; oil and gas
exploration and production; gold and precious metals; steel and iron ore
production; aluminum production; forest products; farming products; paper
products; chemicals; building materials; energy services and technology; and
environmental services.
The Fund at all times, except during temporary defensive periods, seeks to
maintain at least 65% of its total assets invested in securities issued by
companies in the natural resources sector. The Fund reserves the right to hold,
as a temporary defensive measure or as a reserve for redemptions, short-term
U.S. government securities, high quality money market securities, including
repurchase agreements, or cash in such proportions as Advisers believes
prevailing market or economic conditions warrant.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
The Fund invests in common stocks (including preferred or debt securities
convertible into common stocks), preferred stocks and debt securities. The
mixture of common stocks, debt securities and preferred stocks varies based upon
Advisers' assessment as to whether investments in each category will contribute
to meeting the Fund's investment objective.
The Fund may invest, without limit, in investment grade fixed-income securities.
Investment grade securities are securities rated in one of the four highest
rating categories of a nationally recognized rating service, such as Moody's or
S&P, and also include unrated securities that are comparable in quality to
securities that have been rated investment grade. The four highest rating
categories are Aaa, Aa, A and Baa for Moody's and AAA, AA, A and BBB for S&P.
Although securities rated in the fourth highest rating category are considered
investment grade, they are generally more vulnerable to adverse economic
conditions than securities rated in the three highest categories and are
considered to have some speculative characteristics. The Fund's commercial paper
investments at the time of purchase will be rated "A-1" or "A-2" by S&P or
"Prime-1" or "Prime-2" by Moody's or, if not rated, will be of comparable
quality as determined by Advisers.
The Fund may also invest up to 15% of its total assets at the time of purchase
in lower rated fixed-income securities (those rated BB or lower by S&P or Ba or
lower by Moody's) and unrated securities of comparable quality (commonly known
as "junk bonds.") The Fund will not acquire securities rated lower than B by
Moody's or S&P. Lower rated securities are considered by S&P and Moody's, on
balance, to be predominantly speculative with respect to the issuer's capacity
to pay principal or interest, as the case may be, in accordance with the terms
of the obligation and will generally involve more credit risk than securities in
the higher rating categories.
If the rating services lower the rating on a security in the Fund's portfolio,
the Fund will consider this change in its evaluation of the security's overall
investment merits. A change in a security's rating, however, does not
automatically require the Fund to sell the security. For a description of the
various rating categories, please see the "Appendix - Description of Ratings" in
the SAI.
The Fund may invest up to 35% of its assets in securities of issuers that are
outside the natural resources sector. These investments will include common
stocks, debt securities or preferred stocks, and real estate investment trusts
("REITs") and will be selected to meet the Fund's investment objective of
providing high total return. These securities may be issued by either U.S. or
non-U.S. companies, governments, or governmental instrumentalities. Some of
these issuers may be in industries related to the natural resources sector and,
therefore, may be subject to similar risks. Securities that are issued by
foreign companies or are denominated in foreign currencies are subject to the
risks discussed under "What are the Fund's Potential Risks?"
Securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities, including U.S. Treasury bills, notes and bonds, as well as
certain agency securities and mortgage-backed securities issued by the
Government National Mortgage Association (GNMA), may carry guarantees which are
backed by the "full faith and credit" of the U.S. government. The guarantee
extends only to the payment of interest and principal due on the securities and
does not provide any protection from fluctuations in either the securities'
yield or value or to the yield or value of the Fund's shares. Other investments
in agency securities are not necessarily backed by the "full faith and credit"
of the U.S. government. These include securities issued by the Federal National
Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation, the
Student Loan Marketing Association and the Farm Credit Bank.
The Fund may invest in debt securities issued or guaranteed by foreign
governments. These securities are typically denominated in foreign currencies
and are subject to the currency fluctuation and other risks of foreign
securities investments discussed under "What are the Fund's Potential Risks?"
The foreign government securities in which the Fund intends to invest generally
will include obligations issued by national, state or local governments or
similar political subdivisions. Foreign government securities also include debt
obligations of supranational entities, including international organizations
designed or supported by governmental entities to promote economic
reconstruction or development and international banking institutions and related
government agencies. Examples include the International Bank of Reconstruction
and Development (the World Bank), the European Investment Bank, the Asian
Development Bank and the Inter-American Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units. An example of a multinational currency unit is the European
Currency Unit. A European Currency Unit represents specified amounts of the
currencies of certain of the 12-member states of the European Economic
Community. Debt securities of quasi-governmental agencies are issued by entities
owned by either a national or local government or are obligations of a political
unit that is not backed by the national government's full faith and credit and
general taxing powers. Foreign government securities also include
mortgage-related securities issued or guaranteed by national or local
governmental instrumentalities, including quasi-governmental agencies.
WHERE THE FUND MAY INVEST
The Fund may invest in the securities of issuers both within and outside the
U.S., including emerging market countries.
The Fund may buy foreign securities that are traded in the U.S. or in foreign
markets or buy sponsored or unsponsored American Depositary Receipts ("ADRs"),
which are receipts typically issued by a U.S. bank or trust company that
evidence ownership of underlying securities issued by a foreign corporation.
These securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. Generally, ADRs, which are issued
in registered form, are designed for use in the U.S. securities markets. The
issuers of unsponsored ADRs are not obligated to disclose material information
in the U.S. and, therefore, there may be less information available to the
investing public than with sponsored ADRs. Advisers will attempt to
independently accumulate and evaluate information with respect to the issuers of
the underlying securities of sponsored and unsponsored ADRs to attempt to limit
the Fund's exposure to the market risk associated with such investments. For
purposes of the Fund's investment policies, investments in ADRs will be deemed
to be investments in the equity securities of the foreign issuers into which
they may be converted.
Under normal conditions, it is anticipated that the percentage of assets
invested in U.S. securities will be higher than that invested in securities of
any other single country. It is possible that at times the Fund may have 50% or
more of its total assets invested in foreign securities.
OTHER INVESTMENT POLICIES OF THE FUND
SHORT-TERM INVESTMENTS. The Fund may invest its cash, including cash resulting
from purchases and sales of Fund shares, temporarily in short-term debt
instruments, including high grade commercial paper, repurchase agreements and
other money market equivalents and, pursuant to an exemption from federal
securities law, the shares of affiliated money market funds, which invest
primarily in short-term debt securities. To the extent the Fund invests in
affiliated money market funds, such as the Franklin Money Fund, Advisers has
agreed to waive its management fee on any portion of the Fund's assets invested
in the affiliated fund. Temporary investments will only be made with cash held
to maintain liquidity or pending investment. In addition, for temporary
defensive purposes in the event of, or when Advisers anticipates, a general
decline in the market prices of stocks in which the Fund invests, the Fund may
invest an unlimited amount of its assets in short-term debt instruments.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions in which
the Fund buys a U.S. government security subject to resale to a bank or dealer
at an agreed-upon price and date. The transaction requires the collateralization
of the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller may cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund may
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks which are deemed creditworthy by Advisers. A
repurchase agreement is deemed to be a loan by the Fund under federal securities
laws. The U.S. government security subject to resale (the collateral) is held on
behalf of the Fund by a custodian bank approved by the Board and is held
pursuant to a written agreement.
The Fund may also enter into reverse repurchase agreements. These agreements
involve the sale of securities held by the Fund pursuant to an agreement to
repurchase the securities at an agreed upon price, date and interest payment.
When engaging in reverse repurchase transactions the Fund maintains cash or high
grade liquid debt securities of a dollar amount equal in value to its obligation
under the agreement, including accrued interest, in a segregated account with
its custodian bank. The securities subject to the reverse repurchase agreement
are marked-to-market each day. Although reverse repurchase agreements are
borrowings under federal securities laws, the Fund does not treat these
arrangements as borrowings under investment restriction number two in the SAI,
so long as the segregated account is properly maintained.
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors, if
such loans do not exceed 33% of the value of the Fund's total assets at the time
of the most recent loan. The borrower must deposit with the Fund's custodian
bank collateral with an initial market value of at least 102% of the initial
market value of the securities loaned, including any accrued interest, with the
value of the collateral and loaned securities marked-to-market daily to maintain
collateral coverage of at least 100%. This collateral shall consist of cash,
securities issued by the U.S. government, its agencies or instrumentalities, or
irrevocable letters of credit. The lending of securities is a common practice in
the securities industry. The Fund may engage in security loan arrangements with
the primary objective of increasing the Fund's income either through investing
cash collateral in short-term interest bearing obligations or by receiving a
loan premium from the borrower. Under the securities loan agreement, the Fund
continues to be entitled to all dividends or interest on any loaned securities.
As with any extension of credit, there are risks of delay in recovery and loss
of rights in the collateral should the borrower of the security fail
financially.
BORROWING. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of its assets, except that the Fund may enter into reverse
repurchase agreements or borrow money from banks in an amount up to 33% of its
total asset value (computed at the time the loan is made) for temporary or
emergency purposes. While borrowings exceed 5% of the Fund's total assets, the
Fund will not make any additional investments.
ILLIQUID INVESTMENTS. The Fund's policy is not to invest more than 15% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them. Subject to this
limitation, the Board has authorized the Fund to invest in restricted securities
as long as the investments are consistent with the Fund's investment objective.
The Board also considers these securities liquid to the extent Advisers
determines on a daily basis that there is a liquid institutional or other market
for the securities. Notwithstanding Advisers' determination, the Board is
ultimately responsible for determining a security's liquidity and will consider
appropriate action, consistent with the Fund's objective and policies, if a
security becomes illiquid after its purchase. If the Fund invests in restricted
securities that are deemed liquid, the general level of illiquidity in the Fund
may be increased if qualified institutional buyers become uninterested in buying
these securities or the market for these securities contracts.
OTHER POLICIES AND RESTRICTIONS. As discussed more fully in the SAI, the Fund
may buy debt obligations on a "when-issued" or "delayed delivery" basis and from
time to time enter into standby commitment agreements. The Fund has a number of
additional investment restrictions that limit its activities to some extent.
Some of these restrictions may only be changed with shareholder approval. For a
list of these restrictions and more information about the Fund's investment
policies, please see "How does the Fund Invest its Assets?" and "Investment
Restrictions" in the SAI.
Each of the Fund's policies and restrictions discussed in this prospectus and in
the SAI is considered at the time the Fund makes an investment. The Fund is
generally not required to sell a security because of a change in circumstances.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
The Fund is designed for long-term investors and not as a trading vehicle. The
Fund is not intended to present a complete investment program.
NON-DIVERSIFICATION RISK. Although Advisers usually invests the Fund's assets in
a substantial number of issuers, the Fund is non-diversified under federal
securities law. This generally means that the Fund may invest more than 5% of
its assets in the securities of a single issuer. Consequently, changes in the
financial condition of a single issuer may have a greater effect on the Fund's
share value than these changes would have on the performance of other mutual
funds, particularly those that invest in a broad range of issuers, sectors and
industries.
THE NATURAL RESOURCES SECTOR. There are several risk factors that need to be
assessed before investing in the natural resources sector. Some of the
commodities in these industries are subject to limited pricing flexibility as a
result of similar supply and demand factors. Others are subject to broad price
fluctuations, reflecting the volatility of certain raw materials' prices and the
instability of supplies of other resources. These factors can effect the overall
profitability of an individual company operating within the natural resources
sector. While Advisers strives to diversify among the industries within the
natural resources sector to minimize this volatility, there will be occasions
where the value of an individual company's securities will prove more volatile
than the broader market. In addition, many of these companies operate in areas
of the world where they are subject to unstable political environments, currency
fluctuations and inflationary pressures.
FOREIGN SECURITIES. Foreign securities involve certain risks that you should
consider carefully. These risks include political, social or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of the imposition of exchange
controls, expropriation, restrictions on removal of currency or other assets,
nationalization of assets, foreign withholding and income taxation, and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Foreign securities may be subject to greater fluctuations
in price than securities issued by U.S. corporations or issued or guaranteed by
the U.S. government, its instrumentalities or agencies. The markets on which
foreign securities trade may have less volume and liquidity, and may be more
volatile than securities markets in the U.S. In addition, there may be less
publicly available information about a foreign company than about a U.S.
domiciled company. Foreign companies generally are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to U.S. domestic companies. There is generally less government
regulation of securities exchanges, brokers and listed companies abroad than in
the U.S. Confiscatory taxation or diplomatic developments could also affect
investment in those countries.
In many instances, foreign debt securities may provide higher yields than
securities of domestic issuers that have similar maturities and quality. Under
certain market conditions, these investments may be less liquid than the
securities of U.S. corporations and are certainly less liquid than securities
issued or guaranteed by the U.S. government, its instrumentalities or agencies.
Finally, in the event of a default of any foreign debt obligations, it may be
more difficult for the Fund to obtain or to enforce a judgment against the
issuers of the securities.
Investments of the Fund may be denominated in foreign currencies. If a security
is denominated in foreign currency, the value of the security to the Fund will
be affected by changes in currency exchange rates and in exchange control
regulations, and costs will be incurred in connection with conversions between
currencies. A change in the value of any foreign currency against the U.S.
dollar will result in a corresponding change in the U.S. dollar value of the
Fund's securities denominated in that currency. These changes will also affect
the Fund's income and distributions to shareholders. In addition, although the
Fund will receive income on foreign securities in such currencies, the Fund will
be required to compute and distribute its income in U.S. dollars. Therefore, if
the exchange rate for any currency declines materially after the Fund's income
has been accrued and translated into U.S. dollars, the Fund could be required to
liquidate portfolio securities to make required distributions. Similarly, if an
exchange rate declines between the time the Fund incurs expenses in U.S. dollars
and the time such expenses are paid, the amount of currency required to be
converted into U.S. dollars in order to pay such expenses in U.S. dollars will
be greater.
The Fund may choose to hedge exposure to currency fluctuations by entering into
forward foreign currency exchange contracts, and buying and selling options,
futures contracts and options on futures contracts related to foreign
currencies. The Fund may use forward currency exchange contracts in the normal
course of business to lock in an exchange rate in connection with purchases and
sales of securities denominated in foreign currencies. Advisers may employ other
currency management strategies to hedge portfolio securities or to shift
investment exposure from one currency to another. Some of these strategies will
require the Fund to set aside liquid assets in a segregated custodial account to
cover its obligations. Options, futures and options on futures and forward
contracts are generally considered "derivative securities." See "Currency
Hedging Transactions and Associated Risks" in the SAI.
The operating expense ratio of the Fund can be expected to be higher than that
of an investment company investing exclusively in U.S. securities because of the
additional expenses of the Fund attributable to its foreign investment activity.
These expenses may include custodial costs, valuation costs and communication
costs. The Fund's expenses, however, are expected to be similar to expenses of
other investment companies investing in a mix of U.S. securities and securities
of one or more foreign countries.
Investing in emerging market countries subjects the Fund to heightened foreign
securities investment risks as discussed in this section.
HIGH YIELD SECURITIES. Because the Fund may invest in securities below
investment grade, an investment in the Fund is subject to a higher degree of
risk than an investment in a fund that invests primarily in higher-quality
securities. You should consider the increased risk of loss to principal that is
present with an investment in higher risk securities, such as those in which the
Fund invests. Accordingly, an investment in the Fund should not be considered a
complete investment program and should be carefully evaluated for its
appropriateness in light of your overall investment needs and goals.
The market value of high yield, lower-quality fixed-income securities, commonly
known as junk bonds, tends to reflect individual developments affecting the
issuer to a greater degree than the market value of higher-quality securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality securities also tend to be more sensitive to economic conditions
than higher-quality securities. Please see the SAI for additional information on
the risks associated with high yield, fixed-income securities.
Interest Rate, Currency and Market Risk. To the extent the Fund invests in debt
securities, changes in interest rates in any country where the Fund is invested
will affect the value of the Fund's portfolio and its share price. Rising
interest rates, which often occur during times of inflation or a growing
economy, are likely to have a negative effect on the value of the Fund's shares.
To the extent the Fund invests in common stocks, a general market decline in any
country where the Fund is invested, may cause the value of what the Fund owns,
and thus the Fund's share price, to decline. Changes in currency valuations may
also affect the price of Fund shares. The value of stock markets, currency
valuations and interest rates throughout the world has increased and decreased
in the past. These changes are unpredictable.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
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 $207 billion in assets. Please see "Investment Management
and Other Services" and "Miscellaneous Information" in the SAI for information
on securities transactions and a summary of the Fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is: Suzanne Willoughby Killea since inception and Edward D.
Perks since October 1996.
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.
Edward D. Perks
Portfolio Manager of Advisers
Mr. Perks holds a Bachelor of Arts degree in Economics and Political Science
from Yale University. Mr. Perks joined the Franklin Templeton Group in October
1992.
MANAGEMENT FEES. During the fiscal year ended April 30, 1997, management fees,
before any advance waiver, totaled 0.60% of the average daily net assets of the
Fund. Total operating expenses of the class were 0.98%. Under an agreement by
Advisers to limit its fees, the Fund paid management fees totaling 0.28% and
operating expenses totaling 0.66%. Advisers may end this arrangement at any time
upon notice to the Board.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares, 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.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, the Advisor Class of the Fund advertises its performance.
Commonly used measures of performance include total return, current yield and
current distribution rate.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield shows the
income per share earned by Advisor Class. The current distribution rate shows
the dividends or distributions paid to shareholders of Advisor Class. This rate
is usually computed by annualizing the dividends paid per share during a certain
period and dividing that amount by the current Net Asset Value of the class.
Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of the Advisor Class will vary. Performance figures are
always based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund is treated as a separate entity for federal income tax purposes. The
Fund has elected and intends to continue to qualify as a regulated investment
company under Subchapter M of the Code. By distributing all of its income and
meeting certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will generally not be liable for federal
income or excise taxes.
Foreign securities that meet the definition in the Code of a Passive Foreign
Investment Company ("PFIC") may subject the Fund to an income tax and interest
charge with respect to such investments. To the extent possible, the Fund will
avoid such treatment by not investing in PFIC securities or by adopting other
tax strategies for any PFIC securities it does purchase.
For federal income tax purposes, any income dividends that you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
For corporate shareholders, 14.25% of the ordinary income distributions
(including short-term capital gain distributions) paid by the Fund for the
fiscal year ended April 30, 1997, qualified for the corporate dividends-received
deduction, subject to certain holding period and debt financing restrictions
imposed under the Code on the corporation claiming the deduction. These
restrictions are discussed in the SAI.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated for tax purposes as if received by
you on December 31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to such shares.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid, and will promptly after the close of each calendar year
advise you of the tax status for federal income tax purposes of such dividends
and distributions.
If you are not considered a U.S. person for federal income tax purposes, you
should consult with your financial or tax advisor regarding the applicability of
U.S. withholding or other taxes on distributions received by you from the Fund
and the application of foreign tax laws to these distributions. You should also
consult your tax advisor with respect to the applicability of any state and
local intangible property or income taxes to your shares of the Fund and
distributions and redemption proceeds received from the Fund.
HOW IS THE TRUST ORGANIZED?
The Fund is a non-diversified series of Franklin Strategic Series (the "Trust"),
an open-end management investment company, commonly called a mutual fund. It was
organized as a Delaware business trust on January 25, 1991, and is registered
with the SEC. As of January 1, 1997, the Fund began offering a new class of
shares designated Franklin Natural Resources Fund - Advisor Class. All shares
outstanding before the offering of Advisor Class shares have been designated
Franklin Natural Resources Fund - Class I. Additional series and classes of
shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters affecting only that class, or expressly required
to be voted on separately by state or federal law. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of the Trust for matters that affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares. In
certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
As of August 5, 1997, the Franklin Templeton Moderate Target Fund and the
Franklin Templeton Growth Target Fund each owned of record and beneficially more
than 25% of the outstanding shares of the Advisor Class of the Fund.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
Shares of the Fund may be purchased without a sales charge. 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 $5,000,000
To Add to Your Account $ 25
*We waive or lower these minimums for certain investors listed below. We may
also refuse any order to buy shares.
To determine if you meet the minimum investment requirement, the amount of your
current purchase is added to the cost or current value, whichever is higher, of
your existing shares in the Franklin Templeton Funds. At least $1 million of
this amount, however, must be invested in Advisor Class or Class Z shares of any
of the Franklin Templeton Funds.
The Fund's minimum initial investment requirement will not apply to purchases
by:
1. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
2. Qualified registered investment advisors or certified financial planners
who have clients invested in the Franklin Mutual Series Fund Inc. on
October 31, 1996, or who buy through a broker-dealer or service agent who
has entered into an agreement with Distributors
3. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group and their immediate family
members, subject to a $100 minimum investment requirement
4. Accounts managed by the Franklin Templeton Group
5. The Franklin Templeton Profit Sharing 401(k) Plan
6. Each series of the Franklin Templeton Fund Allocator Series, subject to a
$1,000 minimum initial and subsequent investment requirement
7. Employer stock, bonus, pension or profit sharing plans that meet the
requirements for qualification under Section 401 of the Code, including
salary reduction plans qualified under Section 401(k) of the Code, and that
(i) are sponsored by an employer with at least 5,000 employees, or (ii)
have plan assets of $50 million or more
8. Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds 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
9. Defined benefit plans or governments, municipalities, and tax-exempt
entities that meet the requirements for qualification under Section 501 of
the Code, subject to a $1 million initial investment in Advisor Class
shares
10. Any other investor, including a private investment vehicle such as a family
trust or foundation, who is a member of a qualified group, if the group as
a whole meets the $5 million minimum investment requirement. A qualified
group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
PAYMENTS TO SECURITIES DEALERS
Securities Dealers who initiate and are responsible for purchases of Advisor
Class shares may receive up to 0.25% of the amount invested. The payment is
subject to the sole discretion of Distributors, and is paid by Distributors or
one of its affiliates and not by the Fund or its shareholders.
For information on additional compensation payable to Securities Dealers in
connection with the sale of Fund shares, please see "How Do I Buy, Sell and
Exchange Shares? - Other Payments to Securities Dealers" in the SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and some do not offer Advisor
Class shares.
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you want to exchange
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services
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.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange shares
from a Fund account requiring two or more signatures into an identically
registered money fund account requiring only one signature for all
transactions. Please notify us in writing if you do not want this option to be
available on your account. Additional procedures may apply. Please see
"Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the Fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the Fund more than twice in a calendar quarter,
or (iii) exchanged shares equal to at least $5 million, or more than 1% of
the Fund's net assets. Shares under common ownership or control are combined
for these limits. If you have exchanged shares as described in this
paragraph, you will be considered a Market Timer. Each exchange by a Market
Timer, if accepted, will be charged $5.00. Some of our funds do not allow
investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
If you want to exchange into a fund that does not currently offer an Advisor
Class, you may exchange your Advisor Class shares for Class I shares of that
fund at Net Asset Value. If you do not qualify to buy Advisor Class shares of
Templeton Developing Markets Trust, Templeton Foreign Fund or Templeton Growth
Fund, you may exchange the Advisor Class shares you own for Class I shares of
those funds or of Templeton Institutional Funds, Inc. at Net Asset Value. If you
do so and you later decide you would like to exchange into a fund that offers an
Advisor Class, you may exchange your Class I shares for Advisor Class shares of
that fund. You may also exchange your Advisor Class shares for Class Z shares of
Franklin Mutual Series Fund Inc.
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. If you would like your redemption proceeds wired to
a bank account, your instructions should include:
o The name, address and telephone number of the bank where
you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit union, the
name of the corresponding bank and the account number
2. Include any outstanding share certificates for the shares
you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may
have other requirements.
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your redemption
proceeds wired to a bank account, other than an escrow
account, you must first sign up for the wire feature. To sign
up, send us written instructions, with a signature guarantee.
To avoid any delay in processing, the instructions should
include the items listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts may
exceed $50,000 by completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for the shares you
want to sell or you have already returned them to the Fund
o Unless you are selling shares in a Trust Company retirement
plan account
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY PHONE (cont.) o Unless the address on your account was changed by phone
within the last 15 days
Ifyou do not want the ability to redeem by phone to apply
to your account, please let us know.
- --------------------------------------------------------------------------------
THROUGH
YOUR DEALER Call your investment representative
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income semiannually in June
and December to shareholders of record on the first business day before the 15th
of the month and pays them on or about the last day of that month.
Capital gains, if any, may be distributed annually, usually in December.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the same
class of the Fund 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. You may also direct your distributions to buy Class I shares of another
Franklin Templeton Fund. Many shareholders find this a convenient way to
diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days before the record date for us
to process the new option. For Trust Company retirement plans, special forms are
required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
You buy and sell Advisor Class shares at the Net Asset Value per share. The Net
Asset Value we use when you buy or sell shares is the one next calculated after
we receive your transaction request in proper form. If you buy or sell shares
through your Securities Dealer, however, we will use the Net Asset Value next
calculated after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
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 in many
newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by phone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- --------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- --------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have let us know
that you do not want telephone privileges to apply to your account.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
These minimums do not apply if you fall within categories 4, 5, 6 or 7 under
"How Do I Buy Shares? - Opening Your Account."
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 shareholder 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.
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. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
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.
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.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND ADVISOR CLASS - The Fund offers two classes of shares, designated
"Class I" and "Advisor Class." The two classes have proportionate interests in
the Fund's portfolio. They differ, however, primarily in their sales charge and
expense structures.
CODE - Internal Revenue Code of 1986, as amended
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."
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R), and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
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.
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.
PROSPECTUS & APPLICATION
FRANKLIN BLUE CHIP FUND
INVESTMENT STRATEGY
GROWTH
SEPTEMBER 1, 1997
FRANKLIN STRATEGIC SERIES
This prospectus describes the Franklin Blue Chip Fund (the "Fund"). It contains
information you should know before investing in the Fund. Please keep it for
future reference.
The Fund has a Statement of Additional Information ("SAI"), dated September 1,
1997, which may be amended from time to time. It 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 its
address.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
FRANKLIN BLUE CHIP FUND
September 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? .............................................. 10
How does the Fund Measure Performance? ............................. 11
How Taxation Affects the Fund and its Shareholders ................. 12
How is the Trust Organized? ........................................ 13
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ............................................... 13
May I Exchange Shares for Shares of Another Fund? .................. 18
How Do I Sell Shares? .............................................. 21
What Distributions Might I Receive from the Fund? .................. 24
Transaction Procedures and Special Requirements .................... 25
Services to Help You Manage Your Account ........................... 29
What If I Have Questions About My Account? ......................... 32
GLOSSARY
Useful Terms and Definitions ....................................... 32
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 annualized historical expenses for the fiscal
year ended April 30, 1997. The Fund's actual expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge Imposed on Purchases
(as a percentage of Offering Price) 4.50%++
Deferred Sales Charge None+++
Exchange Fee (per transaction) $5.00*
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.00%**
Rule 12b-1 Fees 0.17%***
Other Expenses 1.08%
-----
Total Fund Operating Expenses 1.25%**
=======
C. EXAMPLE
Assume the Fund's annual return is 5%, operating expenses are as described
above, and you sell your shares after the number of years shown. These are the
projected expenses for each $1,000 that you invest in the Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$57**** $83 $111 $189
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected
in its Net Asset Value or dividends and are not directly charged to your
account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more.
+++A Contingent Deferred Sales Charge of 1% may apply to purchases of $1 million
or more if you sell the shares within one year. A Contingent Deferred Sales
Charge may also apply to purchases by certain retirement plans that qualify to
buy shares without a front-end sales charge. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**Advisers has agreed in advance to waive its management fees and make certain
payments to reduce the Fund's expenses so the Fund's total operating expenses do
not exceed 1.25% for the current fiscal year. Without this reduction,
contractual and expected management fees (annualized) would have been 0.75% and
total Fund operating expenses would have been 2.22%. After April 30, 1998,
Advisers may end this arrangement at any time.
*** These fees may not exceed 0.35%. The combination of front-end sales charges
and Rule 12b-1 fees could cause long-term shareholders to pay more than the
economic equivalent of the maximum front-end sales charge permitted under the
NASD's rules.
****Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering the period shown below appears in the financial statements
in the Trust's Annual Report to Shareholders for the fiscal year ended April 30,
1997. The Annual Report to Shareholders also includes more information about the
Fund's performance. For a free copy, please call Fund Information.
FOR THE PERIOD
JUNE 3, 1996 TO
APRIL 30, 1997
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $10.00
--------
Net Investment Income (Loss) .09
Net Realized & Unrealized Gain (Loss) on Securities .821
Total From Investment Operations .911
Distributions from Net Investment Income (.061)
Distributions from Realized Capital Gains --------
Total Distributions (.061)
Net Asset Value at End of Period $10.85
========
Total Return* 9.14%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) $5,600
Ratio of Expenses to Average Net Assets*** 1.25%**
Ratio of Net Investment Income
(Loss) to Average Net Assets 1.07%**
Portfolio Turnover Rate 11.14%
Average Commission Rate+ .0525
*Total return measures the change in value of an investment over the period
indicated. It is not annualized. It does not include the maximum front-end sales
charge or the Contingent Deferred Sales Charge, and assumes reinvestment of
dividends and capital gains, if any, at Net Asset Value.
**Annualized.
***During the period indicated, Advisers agreed in advance to waive 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 2.22%**. +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"), Global Depositary Receipts ("GDRs"), and European
Depositary Receipts ("EDRs"). ADRs are certificates issued by U.S. banks
representing the right to receive the securities of a foreign issuer deposited
with the bank or a correspondent bank. GDRs and EDRs are typically issued by
foreign banks or trust companies and evidence ownership of underlying securities
issued by either a foreign or a U.S. corporation. The Fund may buy both
sponsored and unsponsored ADRs, GDRs and EDRs.
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 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 the capital appreciation resulting from a market price advance in
the convertible security's underlying common stock. Though the Fund intends to
invest in liquid convertible securities there can be no assurance that this will
always be achieved. For more information on convertible securities, including
liquidity issues, please see the SAI.
The fund may, subject to the investment restrictions stated in the SAI, invest
in warrants. 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. The Fund may engage in repurchase transactions, in which
the Fund buys a U.S. government security subject to resale to a bank or dealer
at an agreed-upon price and date. The transaction requires the collateralization
of the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller may cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund may
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions,
such as broker-dealers and banks that are deemed creditworthy by Advisers. A
repurchase agreement is deemed to be a loan by the Fund under federal securities
laws. The U.S. government security subject to resale (the collateral) is held on
behalf of the Fund by a custodian bank approved by the Board and is 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, if
such loans do not exceed one-third of the value of the Fund's total assets at
the time of the most recent loan. The borrower must deposit with the Fund's
custodian bank collateral with an initial market value of at least 102% of the
initial market value of the securities loaned, including any accrued interest,
with the value of the collateral and loaned securities marked-to-market daily to
maintain collateral coverage of at least 100%. This collateral shall consist of
cash, securities issued by the U.S. government, its agencies or
instrumentalities, or irrevocable letters of credit. The lending of securities
is a common practice in the securities industry. The Fund may engage in security
loan arrangements with the primary objective of increasing the Fund's income
either through investing 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 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.
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.
Each of the Fund's policies and restrictions discussed in this prospectus and in
the SAI is considered at the time the Fund makes an investment. The Fund is
generally not required to sell a security because of a change in circumstances.
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.
The risks discussed below relating to foreign securities generally can be
significantly greater for investments in emerging markets. In addition, the
relatively small size and lesser liquidity in these markets may result in
greater price volatility than markets such as those in the U.S.
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 value of what the Fund owns, and thus
the price of Fund shares. The value of stock markets and currency valuations
throughout the world has increased and decreased in the past. These changes are
unpredictable.
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 $207 billion in assets. Please see "Investment Management
and Other Services" and "Miscellaneous Information" in the SAI for information
on securities transactions and a summary of the Fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is: Suzanne Willoughby Killea and Shan C. Green since the
Fund's inception.
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. During the fiscal year ended April
30, 1997, management fees, before any advance waiver, totaled 0.75% and
operating expenses, before any advance waiver, totaled 2.22% of the average
daily net assets of the Fund. Under an agreement by Advisers to waive its fees,
the Fund paid no management fees and operating expenses totaling 1.25%. After
April 30, 1998, Advisers may end this arrangement at any time upon notice to the
Board.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares, 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 RULE 12B-1 PLAN
The Fund has a distribution plan or "Rule 12b-1 Plan" under which it may
reimburse Distributors or others for the expenses of activities that are
primarily intended to sell shares of the Fund. These expenses may include, among
others, distribution or service fees paid to Securities Dealers or others who
have executed a servicing agreement with the Fund, Distributors or its
affiliates; a prorated portion of Distributors' overhead expenses; and the
expenses of printing prospectuses and reports used for sales purposes, and
preparing and distributing sales literature and advertisements.
Payments by the Fund under the plan may not exceed 0.35% per year of the Fund's
average daily net assets. 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. A commonly used measure
of performance is total return. Performance figures are usually calculated using
the maximum sales charge, but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested.
The Fund's investment results will vary. Performance figures are always based on
past performance and do not guarantee future results. For a more detailed
description of how the Fund calculates its performance figures, please see "How
does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund is treated as a separate entity for federal income tax purposes. The
Fund has elected and intends to continue to qualify as a regulated investment
company under Subchapter M of the Code. By distributing all of its income and
meeting certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will generally not be liable for federal
income or excise taxes.
For federal income tax purposes, any income dividends that you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned shares of the Fund and whether the distributions
are received in cash or 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.
For corporate shareholders, 59.51% of the ordinary income distributions
(including short-term capital gain distributions) paid by the Fund for the
fiscal year ended April 30, 1997, qualified for the corporate dividends-received
deduction, subject to certain holding period and debt financing restrictions,
imposed under the Code on the corporation claiming the deduction. These
restrictions are discussed in the SAI.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss 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.
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. Shares of each series of the Trust have equal and exclusive rights
to dividends and distributions declared by that series and the net assets of the
series in the event of liquidation or dissolution. Shares of the Fund are
considered Class I shares for redemption, exchange and other purposes.
Additional series and classes of shares may be offered in the future.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares. In
certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
As of August 5, 1997, Resources owned of record and beneficially more than 25%
of the outstanding shares of 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 existing shares in the Franklin Templeton
Funds, as well as those of your spouse, children under the age of 21 and
grandchildren under the age of 21. If you are the sole owner of a company, you
may also add any company accounts, including retirement plan accounts. Companies
with one or more retirement plans may add together the total plan assets
invested in the Franklin Templeton Funds to determine the sales charge that
applies.
LETTER OF INTENT. You may buy shares at a reduced sales charge by completing the
Letter of Intent section of the shareholder application. A Letter of Intent is a
commitment by you to invest a specified dollar amount during a 13 month period.
The amount you agree to invest determines the sales charge you pay.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Fund shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Fund
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
SALES CHARGE WAIVERS. The Fund's front-end sales charge and Contingent Deferred
Sales Charge do not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) the distributions may be from either Class I or
Class II shares of a fund.
The Fund's sales charges do not apply if you are buying shares with money from
the following sources:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a real estate investment trust (REIT) sponsored or advised by Franklin
Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds, the Templeton Variable Annuity Fund,
the Templeton Variable Products Series Fund, or the Franklin Government
Securities Trust. You should contact your tax advisor for information on
any tax consequences that may apply.
4. Redemptions from any Franklin Templeton Fund if you:
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.
The Fund's sales charges also do not apply to purchases by:
5. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
6. Group annuity separate accounts offered to retirement plans
7. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
8. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments by the
Fund on arbitrage rebate calculations.
9. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
10. Registered Securities Dealers and their affiliates, for their investment
accounts only
11. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
12. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
13. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
14. Accounts managed by the Franklin Templeton Group
15. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with at
least 100 employees, or (ii) have plan assets of $1 million or more, or (iii)
agree to invest at least $500,000 in the Franklin Templeton Funds over a 13
month period may buy shares without a front-end sales charge. Retirement plans
that are not Qualified Retirement Plans or SEPs, such as 403(b) or 457 plans,
must also meet the requirements described under "Group Purchases" above. For
retirement plan accounts opened on or after May 1, 1997, a Contingent Deferred
Sales Charge may apply if the account is closed within 365 days of the
retirement plan account's initial purchase in the Franklin Templeton Funds.
Please see "How Do I Sell Shares? - Contingent Deferred Sales Charge" for
details.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for certain purchases made without a sales charge. The payments
are subject to the sole discretion of Distributors, and are paid by Distributors
or one of its affiliates and not by the Fund or its shareholders.
1. Purchases of $1 million or more - up to 1% of the amount invested
2. Purchases made without a front-end sales charge by certain retirement plans
described under "Sales Charge Reductions and Waivers - Retirement Plans"
above - up to 1% of the amount invested. For retirement plan accounts opened
on or after May 1, 1997, a Contingent Deferred Sales Charge will not apply
to the account if the Securities Dealer chooses to receive a payment of
0.25% or less or if no payment is made.
3. Purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the amount
invested.
4. Purchases by Chilean retirement plans - up to 1% of the amount invested.
A Securities Dealer may receive only one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1 or 4 above or a payment of up to 1% for investments
described in paragraph 2 will be eligible to receive the Rule 12b-1 fee
associated with the purchase starting in the thirteenth calendar month after the
purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums.
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 want to exchange
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to exchange by phone to apply
to your account, please let us know.
- --------------------------------------------------------------------------------
THROUGH
YOUR DEALER Call your investment representative
- -------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred Sales
Charge when you exchange shares. Any shares subject to a Contingent Deferred
Sales Charge at the time of exchange, however, will remain so in the new fund.
For accounts with shares subject to a Contingent Deferred Sales Charge, we will
first exchange any shares in your account that are not subject to the charge. If
there are not enough of these to meet your exchange request, we will exchange
shares subject to the charge 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, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. Please notify us in writing if you do not want this
option to be available on your account. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the Fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the Fund more than twice in a calendar
quarter, or (iii) exchanged shares equal to at least $5 million, or more
than 1% of the Fund's net assets. Shares under common ownership or control
are combined for these limits. If you have exchanged shares as described in
this paragraph, you will be considered a Market Timer. Each exchange by a
Market Timer, if accepted, will be charged $5.00. Some of our funds do not
allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Advisor Class" or "Class Z" shares. Because the
Fund does not currently offer an Advisor Class, you may exchange Advisor Class
shares of any Franklin Templeton Fund for shares of the Fund at Net Asset Value.
If you do so and you later decide you would like to exchange into a fund that
offers an Advisor Class, you may exchange your Fund shares for Advisor Class
shares of that fund. Certain shareholders of Class Z shares of Franklin Mutual
Series Fund Inc. may also exchange their Class Z shares for shares of the Fund
at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL 1. Send us written instructions signed by all account
owners. If you would like your redemption proceeds wired to
a bank account, your instructions should include:
o The name, address and telephone number of the bank where
you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit union, the
name of the corresponding bank and the account number
2. Include any outstanding share certificates for the shares
you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may
have other requirements.
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other than an
escrow account, you must first sign up for the wire feature.
To sign up, send us written instructions, with a signature
guarantee. To avoid any delay in processing, the instructions
should include the items listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts may
exceed $50,000 by completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for the shares you
want to sell or you have already returned them to the Fund
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY PHONE (CONT.) o Unless you are selling shares in a Trust Company
retirement plan account
o Unless the address on your account was changed by phone
within the last 15 days
If you do not want the ability to redeem by phone to apply to
your account, please let us know.
- --------------------------------------------------------------------------------
THROUGH
YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
If you did not pay a front-end sales charge because you invested $1 million or
more or agreed to invest $1 million or more under a Letter of Intent, a
Contingent Deferred Sales Charge may apply if you sell all or a part of your
investment within the Contingency Period. Once you have invested $1 million or
more, any additional investments you make without a sales charge may also be
subject to a Contingent Deferred Sales Charge if they are sold within the
Contingency Period. The charge is 1% of the value of the shares sold or the Net
Asset Value at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy shares without a front-end sales charge may also be subject to a
Contingent Deferred Sales Charge if the retirement plan account is closed within
365 days of the account's initial purchase in the Franklin Templeton Funds.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997, or
(ii) the Securities Dealer of record received a payment from Distributors of
0.25% or less, or (iii) Distributors did not make any payment in connection
with the purchase, as described under "How Do I Buy Shares? - Other Payments
to Securities Dealers"
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan, at a rate of up to 1% a
month of an account's Net Asset Value. For example, if you maintain an annual
balance of $1 million, you can redeem up to $120,000 annually through a
systematic withdrawal plan free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Redemptions by Trust Company employee benefit plans or employee benefit plans
serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee benefit
plans
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income 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 and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge) by
reinvesting capital gain distributions, or both dividend and capital gain
distributions. This is a convenient way to accumulate additional shares and
maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge).
Many shareholders find this a convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE FUND. You
may change your distribution option at any time by notifying us by mail or
phone. Please allow at least seven days before the record date for us to process
the new option. For Trust Company retirement plans, special forms are required
to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value per
share, plus any applicable sales charges. When you sell shares, you receive the
Net Asset Value per share.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
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.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by phone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust, only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- --------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- --------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have let us know
that you do not want telephone privileges to apply to your account.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below. Once your plan
is established, any distributions paid by the Fund will be automatically
reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the Fund's code number to use TeleFACTS(R). The Fund's code number
is 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.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - Certain funds in the Franklin Templeton Funds offer
multiple classes of shares. The different classes have proportionate interests
in the same portfolio of investment securities. They differ, however, primarily
in their sales charge structures and Rule 12b-1 plans. Because the Fund's sales
charge structure and Rule 12b-1 plan are similar to those of Class I shares,
shares of the Fund are considered Class I shares for redemption, exchange and
other purposes.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - The 12 month period during which a Contingent Deferred
Sales Charge may apply. Regardless of when during the month you purchased
shares, they will age one month on the last day of that month and each following
month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
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 TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the front-end sales charge. The maximum front-end sales
charge is 4.50%.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
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 CALIFORNIA GROWTH FUND
FRANKLIN STRATEGIC SERIES
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 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? .................. 6
Investment Restrictions ............................... 9
Officers and Trustees ................................. 11
Investment Management
and Other Services .................................. 14
How does the Fund Buy
Securities for its Portfolio? ....................... 15
How Do I Buy, Sell
and Exchange Shares? ................................ 16
How are Fund Shares Valued? ........................... 19
Additional Information on
Distributions and Taxes ............................. 20
The Fund's Underwriter ................................ 22
How does the Fund
Measure Performance? ................................ 24
Miscellaneous Information ............................. 26
Financial Statements .................................. 27
Useful Terms and Definitions .......................... 27
Appendix .............................................. 28
Description of Ratings ................................ 28
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 California Growth Fund (the "Fund") is a non-diversified series of
Franklin Strategic Series (the "Trust"), an open-end management investment
company. The Fund's investment objective is to seek capital appreciation. The
Fund seeks to achieve its objective by investing primarily in the securities of
companies headquartered or conducting a majority of their operations in the
state of California.
The Prospectus, dated September 1, 1997, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN or write the Fund at the address shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS. MUTUAL FUNDS, ANNUITIES,
AND OTHER INVESTMENT PRODUCTS:
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?"
REPURCHASE AGREEMENTS. As noted in the Prospectus, the Fund may engage in
repurchase transactions. The period of these transactions will usually be short,
from overnight to one week, and at no time will the Fund invest in repurchase
agreements of more than one year's duration. The securities that are subject to
the repurchase agreement, however, may have maturity dates in excess of one year
from the effective date of the repurchase agreement. The Fund will make payment
for such securities only upon physical delivery or evidence of book entry
transfer to the account of its custodian bank. The Fund may not enter into a
repurchase agreement with more than seven days duration if, as a result, more
than 10% of the market value of the Fund's total assets would be invested in
such repurchase agreements.
ILLIQUID INVESTMENTS. The Fund will not invest more than 10% of its net assets
in illiquid securities. Subject to this limitation, the Board has authorized the
Fund to invest in restricted securities where such investment is consistent with
the Fund's investment objective and has authorized such securities to be
considered liquid to the extent Advisers determines that there is a liquid
institutional or other market for such securities - for example, restricted
securities which may be freely transferred among qualified institutional buyers
under Rule 144A of the Securities Act of 1933, as amended, and for which a
liquid institutional market has developed. The Board will review any
determination by Advisers to treat a restricted security as a liquid security on
an ongoing basis, including Advisers' assessment of current trading activity and
the availability of reliable price information. In determining whether a
restricted security is properly considered a liquid security, Advisers and the
Board will take into account the following factors: (i) the frequency of trades
and quotes for the security; (ii) the number of dealers willing to 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
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers, and the mechanics of transfer). To the extent the Fund
invests in restricted securities that are deemed liquid, the general level of
illiquidity in the Fund may be increased if qualified institutional buyers
become uninterested in buying these securities or the market for these
securities contracts.
ENHANCED CONVERTIBLE SECURITIES. The Fund may invest in convertible preferred
stocks that offer enhanced yield features, such as Preferred Equity Redemption
Cumulative Stocks ("PERCS"), which provide an investor, such as the Fund, with
the opportunity to earn higher dividend income than is available on a company's
common stock. PERCS are preferred stocks that generally feature a mandatory
conversion date, as well as a capital appreciation limit which is usually
expressed in terms of a stated price. Most PERCS expire three years from the
date of issue, at which time they are convertible into common stock of the
issuer. PERCS are generally not convertible into cash at maturity. Under a
typical arrangement, after three years PERCS convert into one share of the
issuer's common stock if the issuer's common stock is trading at a price below
that set by the capital appreciation limit, and into less than one full share if
the issuer's common stock is trading at a price above that set by the capital
appreciation limit. The amount of that fractional share of common stock is
determined by dividing the price set by the capital appreciation limit by the
market price of the issuer's common stock. PERCS can be called at any time prior
to maturity, and hence do not provide call protection. If called early, however,
the issuer must pay a call premium over the market price to the investor. This
call premium declines at a preset rate daily, up to the maturity date.
The Fund may also invest in other classes of enhanced convertible securities.
These include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities), and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all have the
following features: they are issued by the company, the common stock of which
will be received in the event the convertible preferred stock is converted;
unlike PERCS, they do not have a capital appreciation limit; they seek to
provide the investor with high current income with some prospect of future
capital appreciation; they are typically issued with three or four-year
maturities; they typically have some built-in call protection for the first two
to three years; investors have the right to convert them into shares of common
stock at a preset conversion ratio or hold them until maturity, and upon
maturity they will necessarily convert into either cash or a specified number of
shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked as
senior or subordinated debt in the issuer's corporate structure according to the
terms of the debt indenture. There may be additional types of convertible
securities not specifically referred to herein which may be also similar to
those described in which a Fund may invest, consistent with its objective and
policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the Fund. The Fund may have difficulty disposing of
such securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the Fund's ability to dispose of particular securities, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the credit worthiness of an issuer.
Reduced liquidity in the secondary market for certain securities may also make
it more difficult for the Fund to obtain market quotations based on actual
trades for purposes of valuing the Fund's portfolio. The Fund, however, intends
to acquire liquid securities, though there can be no assurances that this will
be achieved.
TRANSACTIONS IN OPTIONS, FUTURES
AND OPTIONS ON FINANCIAL FUTURES
The Fund may write ("sell") covered put and call options and buy put and call
options on securities and securities indices that trade on securities exchanges
and in the over-the-counter market.
WRITING PUT AND CALL OPTIONS. Call options written by the Fund give the holder
the right to buy the underlying securities from the Fund at a stated exercise
price; put options written by the Fund give the holder the right to sell the
underlying security to the Fund at a stated exercise price. A call option
written by the Fund is "covered" if the Fund owns the underlying security which
is subject to the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian bank) upon
conversion or exchange of other securities held in its portfolio. A call option
is also covered if the Fund holds a call on the same security and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash and high grade debt securities in a segregated
account with its custodian bank. The operation of put options in other respects,
including their related risks and rewards, is substantially identical to that of
call options.
A put option written by the Fund is covered if the Fund maintains in a
segregated account cash, U.S. government securities or other liquid, high-grade
debt securities in an amount not less than the exercise price at all times while
the put option is outstanding. (The rules of the clearing corporation currently
require that such assets be deposited in escrow to secure payment of the
exercise price.) The Fund would generally write covered put options in
circumstances where Advisers wishes to buy the underlying security for the
Fund's portfolio at a price lower than the current market price of the security.
In such event, the Fund would write a put option at an exercise price which,
reduced by the premium received on the option, reflects the lower price it is
willing to pay. Since the Fund would also receive interest on debt securities or
currencies maintained to cover the exercise price of the option, this technique
could be used to enhance current return during periods of market uncertainty.
The risk in such a transaction would be that the market price of the underlying
security would decline below the exercise price less the premiums received.
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, with regard to certain options, the writer may be assigned an
exercise notice at any time prior to the termination of the obligation. Whether
or not an option expires unexercised, the writer retains the amount of the
premium. This amount, of course, may, in the case of a covered call option, be
offset by a decline in the market value of the underlying security during the
option period. If a call option is exercised, the writer experiences a profit or
loss from the sale of the underlying security.
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is that
the writer's position will be canceled by the clearing corporation. However, a
writer may not effect a closing purchase transaction after being notified of the
exercise of an option. Likewise, an investor who is the holder of an option may
liquidate its position by effecting a "closing sale transaction." This is
accomplished by selling an option of the same series as the option previously
purchased. There is no guarantee that either a closing purchase or a closing
sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price, expiration date or both. Also, effecting a closing
transaction will permit the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other Fund investments. If the
Fund desires to sell a particular security from its portfolio on which it has
written a call option, it will effect a closing transaction before 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; 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.
BUYING CALL AND PUT OPTIONS. The Fund may buy call options on securities that it
intends to buy in order to limit the risk of a substantial increase in the
market price of the security. The Fund may also buy call options on securities
held in its portfolio and on which it has written call options. A call option
gives the holder the right to buy the underlying securities from the option
writer at a stated exercise price. Prior to its expiration, a call option may be
sold in a closing sale transaction. Profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the call
option plus the related transaction costs.
THE FUND MAY ALSO BUY PUT OPTIONS. As the holder of a put option, the Fund has
the right to sell the underlying security at the exercise price at any time
during the option period. The Fund may enter into closing sale transactions with
respect to put options, exercise them or permit them to expire.
The Fund may buy a put option on an underlying security owned by the Fund as a
hedging technique in order to protect against an anticipated decline in the
value of the security ("a protective put"). This hedge protection is provided
only during the life of the put option when the Fund, as the holder of the put
option, is able to sell the underlying security at the put exercise price,
regardless of any decline in the underlying security's market price or
currency's exchange value. For example, a put option may be purchased in order
to protect unrealized appreciation of a security when Advisers deems it
desirable to continue to hold the security because of tax considerations. The
premium paid for the put option and any transaction costs would reduce any
short-term capital gain otherwise available for distribution when the security
is eventually sold.
The Fund may also buy put options at a time when the Fund does not own the
underlying security. When buying put options on a security it does not own, the
Fund seeks to benefit from a decline in the market price of the underlying
security. If the put option is not sold when it has remaining value, and if the
market price of the underlying security remains equal to or greater than the
exercise price during the life of the put option, the Fund will lose its entire
investment in the put option. In order for the purchase of a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction
costs, unless the put option is sold in a closing sale transaction.
OVER-THE-COUNTER ("OTC") OPTIONS. The Fund intends to write ("sell") covered put
and call options and buy put and call options that trade in the OTC market to
the same extent that it will engage in exchange traded options. Just as with
exchange traded options, OTC call options give the holder the right to buy an
underlying security from an option writer at a stated exercise price; OTC put
options give the holder the right to sell an underlying security to an option
writer at a stated exercise price. However, OTC options differ from exchange
traded options in certain material respects.
OTC options are arranged directly with dealers and not, as is the case with
exchange traded options, with a clearing corporation. Thus, there is a risk of
non-performance by the dealer. Because there is no exchange, pricing is
typically done by reference to information from market makers. However, OTC
options are available for a greater variety of securities, and in a wider range
of expiration dates and exercise prices, than exchange traded options; and the
writer of an OTC option is paid the premium in advance by the dealer.
There can be no assurance that a continuous liquid secondary market will exist
for any particular option at any specific time. Consequently, the Fund may be
able to realize the value of an OTC option it has purchased only by exercising
it or entering into a closing sale transaction with the dealer that issued it.
Similarly, when the Fund writes an OTC option, it generally can close out that
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it.
OPTIONS ON STOCK INDICES. The Fund may also buy call and put options on stock
indices in order to hedge against the risk of market or industry-wide stock
price fluctuations. Call and put options on stock indices are similar to options
on securities except that, rather than the right to buy or sell stock at a
specified price, options on a stock index give the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the
underlying stock index is greater than (or less than, in the case of puts) the
exercise price of the option. This amount of cash is equal to the difference
between the closing price of the index and the exercise price of the option,
expressed in dollars multiplied by a specified number. Thus, unlike stock
options, all settlements are in cash, and gain or loss depends on price
movements in the stock market generally (or in a particular industry or segment
of the market) rather than price movements in individual stocks.
When the Fund writes an option on a stock index, the Fund will establish a
segregated account containing cash or high quality fixed-income securities with
its custodian bank in an amount at least equal to the market value of the
underlying stock index and will maintain the account while the option is open or
it will otherwise cover the transaction.
FUTURES CONTRACTS. The Fund may enter into contracts for the purchase or sale of
futures contracts based upon financial indices ("financial futures"). Financial
futures contracts are commodity contracts that obligate the long or short holder
to take or make delivery of a specified quantity of a financial instrument, such
as a security, or, as in the case of the Fund, the cash value of a securities
index during a specified future period at a specified price. A "sale" of a
futures contract means the acquisition of a contractual obligation to deliver
such cash value called for by the contract on a specified date. A "purchase" of
a futures contract means the acquisition of a contractual obligation to take
delivery of the cash value called for by the contract at a specified date. The
purpose of the acquisition or sale of a futures contract is to attempt to
protect the Fund from fluctuations in price of portfolio securities without
actually buying or selling the underlying security. Futures contracts have been
designed by exchanges designated "contracts markets" by the Commodity Futures
Trading Commission ("CFTC") and must be executed through a futures commission
merchant, or brokerage firm, which is a member of the relevant contract market.
At the same time a futures contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment ("initial deposit"). Daily thereafter,
the futures contract is valued and the payment of "variation margin" may be
required since each day the Fund would provide or receive cash that reflects any
decline or increase in the contract's value.
Although financial futures contracts by their terms call for the actual delivery
or acquisition of securities, or the cash value of the index, in most cases the
contractual obligation is fulfilled before the date of the contract without
having to make or take delivery of the securities or cash. The offsetting of a
contractual obligation is accomplished by buying (or selling, as the case may
be) on a commodities exchange an identical financial futures contract calling
for delivery in the same month. This transaction, which is effected through a
member of an exchange, cancels the obligation to make or take delivery of the
securities or cash. Since all transactions in the futures market are made,
offset or fulfilled through a clearinghouse associated with the exchange on
which the contracts are traded, the Fund will incur brokerage fees when it buys
or sells financial futures contracts.
The Fund will not engage in transactions in futures contracts or related options
for speculation but only as a hedge against changes resulting from market
conditions in the values of its securities or securities which it intends to buy
and, to the extent consistent therewith, to accommodate cash flows. The Fund
will not enter into any stock index or financial futures contract or related
option if, immediately thereafter, more than one-third of the Fund's total
assets would be represented by futures contracts or related options. In
addition, the Fund may not buy or sell futures contracts or buy or sell related
options if, immediately thereafter, the sum of the amount of initial deposits on
its existing financial futures and premiums paid on options on financial futures
contracts would exceed 5% of the Fund's total assets (taken at current value).
To the extent the Fund enters into a futures contract or related call option, it
will maintain with its custodian bank, to the extent required by the rules of
the SEC, assets in a segregated account to cover its obligations with respect to
such contract which will consist of cash, cash equivalents or high quality debt
securities from its portfolio in an amount equal to the difference between the
fluctuating market value of such futures contract or related option and the
aggregate value of the initial and variation margin payments made by the Fund
with respect to such futures contracts or related option.
STOCK INDEX FUTURES. A stock index futures contract obligates the seller to
deliver (and the buyer to take) an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index is
made.
The Fund may sell stock index futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of its equity
securities that might otherwise result. When the Fund is not fully invested in
stocks and anticipates a significant market advance, it may buy stock index
futures in order to gain rapid market exposure that may in part or entirely
offset increases in the cost of common stocks that it intends to buy.
OPTIONS ON STOCK INDEX FUTURES. The Fund may buy and sell call and put options
on stock index futures to hedge against risks of marketside price movements. The
need to hedge against these risks will depend on the extent of diversification
of the Fund's common stock portfolio and the sensitivity of such investments to
factors influencing the stock market as a whole.
Call and put options on stock index futures are similar to options on securities
except that, rather than the right to buy or sell stock at a specified price,
options on stock index futures give the holder the right to receive cash. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account which represents the
amount by which the market price of the futures contract, at exercise, exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. If an option is exercised on the last
trading day before the expiration date of the option, the settlement will be
made entirely in cash equal to the difference between the exercise price of the
option and the closing price of the futures contract on the expiration date.
BOND INDEX FUTURES AND RELATED OPTIONS. The Fund may buy and sell futures
contracts based on an index of debt securities and options on such futures
contracts to the extent they currently exist and, in the future, may be
developed. The Fund reserves the right to conduct futures and options
transactions based on an index that may be developed in the future to correlate
with price movements in certain categories of debt securities. The Fund's
investment strategy in employing futures contracts based on an index of debt
securities will be similar to that used by it in other financial futures
transactions.
The Fund may also buy and write put and call options on bond index futures and
enter into closing transactions with respect to such options. Please see "What
are the Fund's Potential Risks? - Options, Futures and Options on Futures," for
a discussion of the risks regarding the Fund's transactions in financial futures
and related options.
FUTURE DEVELOPMENTS. The Fund may take advantage of opportunities in the area of
options and futures contracts and options on futures contracts and any other
derivative investments that are not presently contemplated for use by the Fund
or which are not currently available but that may be developed.
WHAT ARE THE FUND'S POTENTIAL RISKS?
OPTIONS, FUTURES AND OPTIONS ON FUTURES. The Fund's ability to hedge effectively
all or a portion of its securities through transactions in options on stock
indexes, stock index futures and related options depends on the degree to which
price movements in the underlying index or underlying securities correlate with
price movements in the relevant portion of the Fund's securities. Inasmuch as
such instruments will not duplicate the components of any index or underlying
securities, the correlation will not be perfect. Consequently, the Fund bears
the risk that the prices of the securities being hedged will not move in the
same amount as the hedging instrument. It is also possible that there may be a
negative correlation between the index or other securities underlying the
hedging instrument and the hedged securities that would result in a loss on both
the securities and the hedging instrument. Accordingly, successful use by the
Fund of options on stock indexes, stock index futures, and related options will
be subject to Advisers' ability to correctly predict movements in the direction
of the securities markets generally or of a particular segment of the market.
This requires different skills and techniques than predicting changes in the
price of individual stocks.
If a covered call option writer cannot effect a closing transaction, it cannot
sell the underlying security until the option expires or the option is
exercised. Therefore, a covered call option writer of an OTC option may not be
able to sell an underlying security even though it might otherwise be
advantageous to do so. Likewise, a secured put writer of an OTC option may be
unable to sell the securities pledged to secure the put for other investment
purposes while it is obligated as a put writer. Similarly, a buyer of such put
or call option might also find it difficult to terminate its position on a
timely basis in the absence of a secondary market.
The CFTC and the various exchanges have established limits referred to as
"speculative position limits" on the maximum net long or net short position
which any person may hold or control in a particular futures contract. Trading
limits are imposed on the maximum number of contracts which any person may trade
on a particular trading day. An exchange may order the liquidation of positions
found to be in violation of these limits and it may impose other sanctions or
restrictions. The Fund does not believe that these trading and positions limits
will have an adverse impact on the Fund's strategies for hedging its securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by Advisers may still not
result in a successful transaction.
Although the Fund believes that use of futures contracts will benefit the Fund,
if Advisers' judgment about the general direction of interest rates is
incorrect, the Fund's overall performance would be poorer than if it had not
entered into any such contract. For example, if the Fund has hedged against the
possibility of an increase in interest rates that would adversely affect the
price of bonds held in its portfolio and interest rates decrease instead, the
Fund will lose part or all of the benefit of the increased value of its bonds
which it has hedged because it will have offsetting losses in its futures
positions. In addition, in these situations, if the Fund has insufficient cash,
it may have to sell securities from its portfolio to meet daily variation margin
requirements. These sales may be, but will not necessarily be, at increased
prices that reflect the rising market. The Fund may have to sell securities at a
time when it may be disadvantageous to do so.
The Fund's sale of futures contracts and purchase of put options on futures
contracts will be solely to protect its investments against declines in value
and, to the extent consistent therewith, to accommodate cash flows. The Fund
expects that under normal conditions it will buy securities upon termination of
long futures contracts and long call options on future contracts, but under
unusual market conditions it may terminate any of these positions without a
corresponding purchase of securities.
HIGH YIELD SECURITIES. Because the Fund may invest in securities below
investment grade, an investment in the Fund is subject to a higher degree of
risk than an investment in a fund that invests primarily in higher-quality
securities. You should consider the increased risk of loss to principal that is
present with an investment in higher risk securities, such as those in which the
Fund invests. Accordingly, an investment in the Fund should not be considered a
complete investment program and should be carefully evaluated for its
appropriateness in light of your overall investment needs and goals.
The market value of high yield, lower-quality fixed-income securities, commonly
known as junk bonds, tends to reflect individual developments affecting the
issuer to a greater degree than the market value of higher-quality securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality securities also tend to be more sensitive to economic conditions
than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with buying the securities of these issuers is generally
greater than the risk associated with higher-quality securities. For example,
during an economic downturn or a sustained period of rising interest rates,
issuers of lower-quality securities may experience financial stress and may not
have sufficient cash flow to make interest payments. The issuer's ability to
make timely interest and principal payments may also be adversely affected by
specific developments affecting the issuer, including the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the Fund's portfolio defaults, the Fund may have unrealized losses on the
security, which may lower the Fund's Net Asset Value. Defaulted securities tend
to lose much of their value before they default. Thus, the Fund's Net Asset
Value may be adversely affected before an issuer defaults. In addition, the Fund
may incur additional expenses if it must try to recover principal or interest
payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the Fund. Although these
securities are typically not callable for a period of time, usually for three to
five years from the date of issue, if an issuer calls its securities during
periods of declining interest rates, Advisers may find it necessary to replace
the securities with lower-yielding securities, which could result in less net
investment income for the Fund. The premature disposition of a high yield
security due to a call or buy-back feature, the deterioration of an issuer's
creditworthiness, or a default by an issuer may make it more difficult for the
Fund to manage the timing of its income. Under the Code and U.S. Treasury
regulations, the Fund may have to accrue income on defaulted securities and
distribute the income to shareholders for tax purposes, even though the Fund is
not currently receiving interest or principal payments on the defaulted
securities. To generate cash to satisfy these distribution requirements, the
Fund may have to sell portfolio securities that it otherwise may have continued
to hold or use cash flows from other sources, such as the sale of Fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse impact
on market price of a security and on the Fund's ability to sell a security in
response to a specific economic event, such as a deterioration in the
creditworthiness of the issuer, or if necessary to meet the Fund's liquidity
needs. Reduced liquidity may also make it more difficult to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
The Fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry restrictions
on resale. While many high yielding securities have been sold with registration
rights, covenants and penalty provisions for delayed registration, if the Fund
is required to sell restricted securities before the securities have been
registered, it may be deemed an underwriter of the securities under the
Securities Act of 1933, which entails special responsibilities and liabilities.
The Fund may also incur special costs in disposing of restricted securities,
although the Fund will generally not incur any costs when the issuer is
responsible for registering the securities.
The Fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other characteristics.
The Fund has no arrangement with its underwriter or any other person concerning
the acquisition of these securities.
The high yield securities market is relatively new and much of its growth before
1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yield securities and adversely affected the value
of outstanding securities, as well as the ability of issuers of high yield
securities to make timely principal and interest payments. Although the economy
has improved and high yield securities have performed more consistently since
that time, the adverse effects previously experienced may reoccur. For example,
the highly publicized defaults on some high yield securities during 1989 and
1990 and concerns about a sluggish economy that continued into 1993, depressed
the prices of many of these securities. While market prices may be temporarily
depressed due to these factors, the ultimate price of any security generally
reflects the true operating results of the issuer. Factors adversely impacting
the market value of high yield securities may lower the Fund's Net Asset Value.
The Fund relies on Advisers' judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, Advisers takes into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
FOREIGN SECURITIES. As noted in the Prospectus, the Fund may invest in foreign
securities, generally by purchasing those traded in the U.S. or by purchasing
American Depositary Receipts ("ADRs"). The Fund may also purchase the securities
of foreign issuers directly in foreign markets.
Securities which are acquired by the Fund outside of the U.S. and which are
publicly traded in the U.S. or on a foreign securities exchange or in a foreign
securities market are not considered by the Fund to be illiquid assets if (a)
the Fund reasonably believe they can readily dispose of the securities for cash
in the U.S. or foreign market or (b) current market quotations are readily
available. The Fund will not acquire the securities of foreign issuers outside
of the U.S. under circumstances where, at the time of acquisition, the Fund has
reason to believe that it could not resell the securities in a public trading
market. Investors should recognize that foreign securities are often traded with
less frequency and volume, and therefore may have greater price volatility, than
is the case with many U.S. securities. Notwithstanding the fact that the Fund
intends to acquire the securities of foreign issuers only where there are public
trading markets, investments by the Fund in the securities of foreign issuers
may tend to increase the risks with respect to the liquidity of the Fund's
portfolio and the Fund's ability to meet a large number of shareholders'
redemption requests should there be economic or political turmoil in a country
in which the Fund has its assets invested or should relations between the U.S.
and a foreign country deteriorate markedly.
The Fund's investment in foreign securities present special risks and
considerations not typically associated with investments in securities issued by
U.S. issuers. Such risks include: reductions of income as a result of foreign
taxes; fluctuation in value of foreign portfolio investments due to changes in
currency rates and control regulations (e.g., currency blockage); transaction
charges for currency exchange; lack of information about foreign governments;
lack of uniform accounting, auditing and financial reporting standards
comparable to those applicable to the U.S. government; less volume on foreign
exchanges than on U.S. exchanges; greater volatility and less liquidity on
foreign markets than in U.S. companies; less regulations of foreign issuers,
stock exchanges and brokers than in the U.S.; greater difficulty in commencing
lawsuits; higher brokerage commission rates than in the U.S.; increased risk of
delays in settlement of portfolio transactions or loss of certificates for
portfolio securities because of the lesser speed and reliability of mail
service; possibilities of expropriation, confiscatory taxation, political,
financial or social instability or adverse diplomatic developments; and
differences (which may be favorable or unfavorable) between the U.S. economy and
foreign economies.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with applicable U.S. and foreign currency
restrictions and other laws limiting the amount and type of foreign investments.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. The Fund may not:
1. Make loans to other persons, except by the purchase of bonds, debentures or
similar obligations which are publicly distributed or of a character usually
acquired by institutional investors or through loans of the Fund's portfolio
securities, or to the extent the entry into a repurchase agreement may be deemed
a loan.
2. Borrow money, except from banks in order to meet redemption requests that
might otherwise require the untimely disposition of portfolio securities or for
other temporary or emergency (but not investment) purposes, in an amount up to
10% of the value of the Fund's total assets (including the amount borrowed)
based on the lesser of cost or market, less liabilities (not including the
amount borrowed) at the time the borrowing is made. While borrowings exceed 5%
of the Fund's total assets, the Fund will not make any additional investments.
3. Invest more than 25% of the Fund's assets (at the time of the most recent
investment) in any single industry.
4. Underwrite securities of other issuers (does not preclude the Fund from
obtaining such short-term credit as may be necessary for the clearance of
purchases and sales of its portfolio securities) or invest more than 10% of its
assets in securities with legal or contractual restrictions on resale (although
the Fund may invest in such securities to the extent permitted under the federal
securities laws) or which are not readily marketable, or which have a record of
less than three years continuous operation, including the operations of any
predecessor companies, if more than 5% of the Fund's total assets would be
invested in such companies.
5. Invest in securities for the purpose of exercising management or control of
the issuer.
6. Maintain a margin account with a securities dealer or invest in commodities
and commodity contracts (except that the Fund may engage in financial futures,
including stock index futures, and options on stock index futures) or lease or
acquire any interests, including interest issued by limited partnerships (other
than publicly traded equity securities) in oil, gas, or other mineral
exploration or development programs, or invest in excess of 5% of its total
assets in options unrelated to the Fund's transactions in futures, including
puts, calls, straddles, spreads, or any combination thereof.
7. Effect short sales, unless at the time the Fund owns securities equivalent in
kind and amount to those sold (which will normally be for deferring recognition
of gains or losses for tax purposes).
8. Invest directly in real estate, real estate limited partnerships or illiquid
securities issued by real estate investment trusts; the Fund may, however,
invest in marketable securities issued by real estate investment trusts.
9. Invest in the securities of other investment companies, except where there is
no commission other than the customary brokerage commission or sales charge, or
except that securities of another investment company may be acquired pursuant to
a plan of reorganization, merger, consolidation or acquisition, and except where
the Fund would not own, immediately after the acquisition, securities of other
investment companies which exceed in the aggregate i) more than 3% of the
issuer's outstanding voting stock, ii) more than 5% of the Fund's total assets
and iii) together with the securities of all other investment companies held by
the Fund, exceed, in the aggregate, more than 10% of the Fund's total assets. To
the extent permitted by exemptions granted under the 1940 Act, the Fund may
invest in shares of one or more money market funds managed by Advisers or its
affiliates.
10. Purchase from or sell to its officers and trustees, or any firm of which any
officer or trustee is a member, as principal, any securities, but may deal with
such persons or firms as brokers and pay a customary brokerage commission; or
purchase or retain securities of any issuer if, to the knowledge of the Trust,
one or more of the officers or trustees of the Trust, or its investment adviser,
own beneficially more than one-half of 1% of the securities of such issuer and
all such officers and trustees together own beneficially more than 5% of such
securities.
In addition to these fundamental policies, it is the present policy of the Fund
(which may be changed without the shareholder approval) not to pledge, mortgage
or hypothecate its assets as security for loans, nor to engage in joint or joint
and several trading accounts in securities, except that it may participate in
joint repurchase arrangements, invest its short-term cash in shares of the
Franklin Money Fund (pursuant to the terms of any order, and any conditions
therein, issued by the SEC permitting such investments), or combine orders to
purchase or sell with orders from other persons to obtain lower brokerage
commissions. The Fund may not invest in excess of 5% of its net assets, valued
at the lower of cost or market, in warrants, nor more than 2% of its net assets
in warrants not listed on either the NYSE or AMEX.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
Positions and Offices Principal Occupations
Name, Age and Address with the Trust During the Past Five Years
Frank H. Abbott, III (76) Trustee
1045 Sansome Street
San Francisco, CA 94111
President and Director, Abbott
Corporation (an investment company);
and director or trustee, as the case
may be, of 28 of the investment
companies in the Franklin Templeton
Group of Funds.
Harris J. Ashton (65) 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 (a meat packing company); and
director or trustee, as the case may
be, of 52 of the investment companies
in the Franklin Templeton Group of
Funds.
*Harmon E. Burns (52) 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.
and Franklin Templeton Services, Inc.;
Executive Vice President, Franklin
Advisers, Inc.; Director,
Franklin/Templeton Investor Services,
Inc.; and officer and/or director or
trustee, as the case may be, of most of
the other subsidiaries of Franklin
Resources, Inc.; and of 57 of the
investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (65) 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, General
Host Corporation (nursery and craft
centers); and director or trustee, as
the case may be, of 54 of the
investment companies in the Franklin
Templeton Group of Funds.
David W. Garbellano (82) 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 or
trustee, as the case may be, of 27 of
the investment companies in the
Franklin Templeton Group of Funds.
*Charles B. Johnson (64) Chairman of the
777 Mariners Island Blvd. Board and
San Mateo, CA 94404 Trustee
President, Chief Executive Officer and
Director, Franklin Resources, Inc.;
Chairman of the Board and Director,
Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin
Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor
Services, Inc., Franklin Templeton
Services, Inc. and General Host
Corporation (nursery and craft
centers); and officer and/or director
or trustee, as the case may be, of most
of the other subsidiaries of Franklin
Resources, Inc. and of 53 of the
investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (57) President and
777 Mariners Island Blvd. 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 or trustee, as the case
may be, of most of the other
subsidiaries of Franklin Resources,
Inc. and of 57 of the investment
companies in the Franklin Templeton
Group of Funds.
Frank W. T. LaHaye (68) 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 Corporation
(software firm); Director, Fischer
Imaging Corporation (medical imaging
systems) and Digital Transmission
Systems, Inc. (wireless
communications); and director or
trustee, as the case may be, of 26 of
the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (69) 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), Shoppers Express (home
shopping), and Spacehab, Inc.
(aerospace services); and director or
trustee, as the case may be, of 49 of
the investment companies in the
Franklin Templeton Group of Funds;
formerly Chairman, Hambrecht and Quist
Group, Director, H & Q Healthcare
Investors, and President, National
Association of Securities Dealers, Inc.
Martin L. Flanagan (37) 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 and Director, Templeton
Worldwide, Inc.; Director, Executive
Vice President and Chief Operating
Officer, Templeton Investment Counsel,
Inc.; Senior Vice President and
Treasurer, Franklin Advisers, Inc.;
Treasurer, Franklin Advisory Services,
Inc., Inc.; Treasurer and Chief
Financial Officer, Franklin Investment
Advisory Services, Inc.; President,
Franklin Templeton Services, Inc.;
Senior Vice President,
Franklin/Templeton Investor Services,
Inc.; officer, and/or director or
trustee, as the case may be, of 57 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 Services, Inc. and Franklin
Templeton Distributors, Inc.; Vice
President, Franklin Advisers, Inc. and
Franklin Advisory Services, Inc.; Vice
President, Chief Legal Officer and
Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and
officer of 57 of the investment
companies in the Franklin Templeton
Group of Funds.
Charles E. Johnson (41) 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.;
President, Chief Executive Officer,
Chief Investment Officer and Director,
Franklin Institutional Services
Corporation; Chairman and Director,
Templeton Investment Counsel, Inc.;
Vice President, Franklin Advisers,
Inc.; officer and/or director of some
of the subsidiaries of Franklin
Resources, Inc.; and officer and/or
director or trustee, as the case may
be, of 36 of the investment companies
in the Franklin Templeton Group of
Funds.
Diomedes Loo-Tam (58) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting Officer
Senior Vice President of Franklin
Templeton Services, Inc.; and officer
of 34 of the investment companies in
the Franklin Templeton Group of Funds.
Edward V. McVey (60) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President and National Sales
Manager, Franklin Templeton
Distributors, Inc.; and officer of 29
of the investment companies in the
Franklin Templeton Group
of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are currently paid
$2,400 per year (or $300 for each of the Trust's eight regularly scheduled Board
meetings) plus $300 per meeting attended. As shown above, the nonaffiliated
Board members also serve as directors or trustees of other investment companies
in the Franklin Templeton Group of Funds. They may receive fees from these funds
for their services. The following table provides the total fees paid to
nonaffiliated Board members by the Trust and by other funds in the Franklin
Templeton Group of Funds.
Number of Boards
Total Fees in the Franklin
Total Fees Received from the Templeton Group
Received from Franklin Templeton of Funds on Which
Name the Trust* Group of Funds** Each Serves***
Frank H. Abbott, III..... $5,100 $165,236 28
Harris J. Ashton......... 5,100 343,591 52
S. Joseph Fortunato...... 5,100 360,411 54
David Garbellano......... 4,800 148,916 27
Frank W.T. LaHaye........ 4,800 139,233 26
Gordon S. Macklin........ 5,100 335,541 49
*For the fiscal year ended April 30, 1997.
**For the calendar year ended December 31, 1996.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 58 registered investment companies, with approximately 169 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 or trustee.
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 August 5, 1997, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately
14,542.891 Class I shares, or less than 1% of the total outstanding Class I
shares of the Fund. Many of the Board members also own shares in other funds in
the Franklin Templeton Group of Funds. Charles B. Johnson and Rupert H. Johnson,
Jr. are brothers and the father and uncle, respectively, of Charles E. Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio transactions
are executed. Advisers' activities are subject to the review and supervision of
the Board to whom Advisers renders periodic reports of the Fund's investment
activities. Advisers and its officers, directors and employees are covered by
fidelity insurance for the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action with
respect to any of the other funds it manages, or for its own account, that may
differ from action taken by Advisers on behalf of the Fund. Similarly, with
respect to the Fund, Advisers is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that Advisers and
access persons, as defined by the 1940 Act, may buy or sell for its or their own
account or for the accounts of any other fund. Advisers is not obligated to
refrain from investing in securities held by the Fund or other funds that it
manages. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Fund's Code of Ethics. Please
see "Miscellaneous Information Summary of Code of Ethics."
MANAGEMENT FEES. Under its management agreement, the Fund pays Advisers a
management fee equal to an annual rate of 0.625 of 1% of the average daily net
assets of the Fund up to and including $100 million; 0.50 of 1% of the value of
the average daily net assets over $100 million up to and including $250 million;
0.45 of 1% of the value of average daily net assets over $250 million up to and
including $10 billion; 0.44 of 1% of the value of average daily net assets over
$10 billion up to and including $12.5 billion; 0.42 of 1% of the value of
average daily net assets over $12.5 billion up to and including $15 billion; and
0.40 of 1% of the value of average daily net assets over $15 billion. The fee is
computed at the close of business on the last business day of each month. Each
class pays its proportionate share of the management fee.
For the fiscal years ended April 30, 1995, 1996 and 1997, management fees,
before any advance waiver, totaled $47,494, $249,784 and $953,389, respectively.
Under an agreement by Advisers to waive or limit its fees, the Fund paid
management fees totaling $0, $95,745 and $953,389, respectively.
MANAGEMENT AGREEMENT. The management agreement is in effect until April 30,
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. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these services
per benefit plan participant Fund account per year may not exceed the per
account fee payable by the Fund to Investor Services in connection with
maintaining shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York, 10286, acts as custodian of the securities and other assets of
the Fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Fund's independent auditors. During the fiscal year ended April
30, 1997, their auditing services consisted of rendering an opinion on the
financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended April 30, 1997.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
Advisers selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the Board may give.
When placing a portfolio transaction, Advisers seeks to obtain prompt execution
of orders at the most favorable net price. For portfolio transactions on a
securities exchange, the amount of commission paid by the Fund is negotiated
between Advisers and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. Advisers will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of Advisers, a
better price and execution can otherwise be obtained. Purchases of portfolio
securities from underwriters will include a commission or concession paid by the
issuer to the underwriter, and purchases from dealers will include a spread
between the bid and ask price.
Advisers may pay certain brokers commissions that are higher than those another
broker may charge, if Advisers determines in good faith that the amount paid is
reasonable in relation to the value of the brokerage and research services it
receives. This may be viewed in terms of either the particular transaction or
Advisers' overall responsibilities to client accounts over which it exercises
investment discretion. The services that brokers may provide to Advisers
include, among others, supplying information about particular companies,
markets, countries, or local, regional, national or transnational economies,
statistical data, quotations and other securities pricing information, and other
information that provides lawful and appropriate assistance to Advisers in
carrying out its investment advisory responsibilities. These services may not
always directly benefit the Fund. They must, however, be of value to Advisers in
carrying out its overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services Advisers receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staffs of other securities firms. As long as it is lawful and
appropriate to do so, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. If the Fund's
officers are satisfied that the best execution is obtained, the sale of Fund
shares, as well as shares of other funds in the Franklin Templeton Group of
Funds, may also be considered a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to Advisers will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisers are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by
Advisers, taking into account the respective sizes of the funds and the amount
of securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
During the fiscal years ended April 30, 1995, 1996 and 1997, the Fund paid
brokerage commissions totaling $23,261, $81,803 and $222,569, respectively.
As of April 30, 1997, the Fund owned securities issued by BankAmerica
Corporation valued in the aggregate at $4,090,625. Except as noted, the Fund did
not own securities of its regular broker-dealers as of the end of the fiscal
year.
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? - Purchase
Price of Fund Shares" 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.
Class I 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, Class I
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 may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares 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 of Class I shares by certain retirement plans without a front-end
sales charge, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on sales
over $3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million. Distributors may make these
payments in the form of contingent advance payments, which may be recovered from
the Securities Dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy Class
I shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds acquired more than 90 days before the Letter is filed, will be counted
towards completion of the Letter, but they will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions you make during the 13
month period, except in the case of certain retirement plans, will be subtracted
from the amount of the purchases for purposes of determining whether the terms
of the Letter have been completed. If the Letter is not completed within the 13
month period, there will be an upward adjustment of the sales charge, depending
on the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute a
Letter before a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the sales
charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I 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. 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
for Class I shares and on the prior business day for Class II shares. If the
processing dates are different, the date of the Net Asset Value used to redeem
the shares will also be different for Class I and Class II shares.
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.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions that
maintain omnibus accounts with the Fund on behalf of numerous beneficial owners
for recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, the Fund may reimburse Investor
Services an amount not to exceed the per account fee that the Fund normally pays
Investor Services. These financial institutions may also charge a fee for their
services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the scheduled close of the
NYSE, generally 1:00 p.m. Pacific time, each day that the NYSE is open for
trading. As of the date of this SAI, the Fund is informed that the NYSE observes
the following holidays: New Year's Day, Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by Advisers. Portfolio securities underlying actively traded call
options are valued at their market price as determined above. The current market
value of any option held by the Fund is its last sale price on the relevant
exchange before the time when assets are valued. Lacking any sales that day or
if the last sale price is outside the bid and ask prices, options are valued
within the range of the current closing bid and ask prices if the valuation is
believed to fairly reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the scheduled close of trading
on the NYSE, if that is earlier. The value is then converted into its U.S.
dollar equivalent at the foreign exchange rate in effect at noon, New York time,
on the day the value of the foreign security is determined. If no sale is
reported at that time, the foreign security is valued within the range of the
most recent quoted bid and ask prices. Occasionally events that affect the
values of foreign securities and foreign exchange rates may occur between the
times at which they are determined and the close of the exchange and will,
therefore, not be reflected in the computation of the 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 each class 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 Net Asset Value. If events materially
affecting the values of these securities occur during this period, the
securities will be valued at their fair value as determined in good faith by the
Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the form of
dividends, interest and other income derived from its investments. This income,
less the expenses incurred in the Fund's operations, is its net investment
income from which income dividends may be distributed. Thus, the amount of
dividends paid per share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any capital loss carryforward or post-October
loss deferral) may generally be made once each year in December to reflect any
net short-term and net long-term capital gains realized by the Fund as of
October 31 of the current fiscal year and any undistributed capital gains from
the prior fiscal year. The Fund may adjust the timing of these distributions for
operational or other reasons.
TAXES
As stated in the Prospectus, the Fund has elected and qualified 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 which 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 declared by
the Fund annually in the Fund's fiscal year end annual report.
Corporate shareholders should note that dividends paid by the Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividends-received deduction. For example, any interest income and net
short-term capital gain (in excess of any net long-term capital loss or capital
loss carryover) included in investment company taxable income and distributed by
a Fund as a dividend will not qualify for the dividends-received deduction.
Corporate shareholders should also note that availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless 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 alternative minimum tax is computed and
may also result in a reduction in the shareholder's tax basis in its Fund
shares, under certain circumstances, if the shares have been held for less than
two years. Corporate shareholders whose investment in the Fund is "debt
financed" for these tax purposes should consult with their tax advisors
concerning the availability of the dividends-received deduction.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the 12 month period ending October 31 of each year (in
addition to amounts from the prior year that were neither distributed nor taxed
to the Fund) to you by December 31 of each year in order to avoid the imposition
of a federal excise tax. Under these rules, certain distributions which are
declared in October, November or December but which, for operational reasons,
may not be paid to you until the following January, will be treated for tax
purposes as if paid by the Fund and received by you on December 31 of the
calendar year in which they are declared. The Fund intends as a matter of policy
to declare 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 the shareholder's basis
in the shares and the amount realized from the transaction, subject to the rules
described below. If such shares are a capital asset in the hands of the
shareholder, 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 repurchased. Any loss realized upon the redemption of shares
within six months from the date of their purchase will be treated as a long-term
capital loss to the extent of amounts treated as distributions of net long-term
capital gain during such six-month period. All or a portion of the sales charge
incurred in buying shares of the Fund will not be included in the federal tax
basis of any 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 Group of Funds(R) 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 and futures contracts, including stock options,
stock index options, stock index futures and options on stock index futures 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 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 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 you 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. Certain tax elections
exist for mixed straddles (i.e., straddles comprised of at least one Section
1256 position and at least one non-Section 1256 position) which may reduce or
eliminate the operation of these straddle rules.
As a regulated investment company, the Fund is 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, straddles, hedging transactions and futures contracts 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.
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 3 months. Foreign exchange gains
derived by the Fund with respect to the Fund's business of investing in stock or
securities, or options or futures with respect to such stock or securities is
qualifying income for purposes of this 90% limitation.
The Fund will monitor its transactions in such options and futures contracts and
may make certain other tax elections in order to mitigate the effect of the
above rules and to prevent disqualification of the Fund as a regulated
investment company under Subchapter M of the Code.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the Fund's shares. 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.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal years ended April 30, 1995, 1996 and 1997, were
$89,678, $1,154,089 and $4,836,624, respectively. After allowances to dealers,
Distributors retained $10,078, $129,723 and $518,921 in net underwriting
discounts and commissions and received $0, $0, and $1,701 in connection with
redemptions or repurchases of shares, for the respective years. Distributors may
be entitled to reimbursement under the Rule 12b-1 plan for each class, as
discussed below. Except as noted, Distributors received no other compensation
from the Fund for acting as underwriter.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 plans" that
were adopted pursuant to Rule 12b-1 of the 1940 Act.
THE CLASS I PLAN. Under the Class I plan, the Fund may pay up to a maximum of
0.25% per year of Class I's average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of Class I shares.
The Class I plan does not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.
THE CLASS II PLAN. Under the Class II plan, the Fund pays Distributors up to
0.75% per year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the Fund.
Under the Class II plan, the Fund also pays an additional 0.25% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
THE CLASS I AND CLASS II PLANS. In addition to the payments that Distributors or
others are entitled to under each plan, each 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
each class 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. The terms and
provisions of each plan relating to required reports, term, and approval are
consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
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 plans 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 plans 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.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are 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 plans, 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 plans 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 outstanding
shares of the class. The Class I plan may also be terminated by any act that
constitutes an assignment of the underwriting agreement with Distributors.
Distributors or any dealer or other firm may also terminate their respective
distribution or service agreement at any time upon written notice.
The plans 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 outstanding shares of the class, and all material amendments to the plans
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 plans 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 plans should be continued.
For the fiscal year ended April 30, 1997, Distributors had eligible expenditures
of $826,533 and $280,133 for advertising, printing, and payments to underwriters
and broker-dealers pursuant to the Class I and Class II plans, respectively, of
which the Fund paid Distributors $353,255 and $62,137 under the Class I and
Class II plans.
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-year and from
inception periods 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-year
and from inception period and the deduction of all applicable charges and fees.
If a change is made to the sales charge structure, historical performance
information will be restated to reflect the maximum front-end sales charge
currently in effect.
The average annual total return for Class I for the one and five-year periods
ended April 30, 1997, was 3.99% and 21.08% and for the period from the Fund's
inception (October 30, 1991) to April 30, 1997, was 18.92%.
These figures were 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-year, or from inception periods at the end of the
one-, five-year, or from inception periods
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 actual return for each class for a specified period rather than on the
average return over one-, five-year and from inception periods. The cumulative
total return for Class I for the one and five-year periods ended April 30, 1997,
was 3.98% and 160.18%, and for the period from the Fund's inception (October 30,
1991) to April 30, 1997, was 159.40%. For Class II the cumulative total return
for the period since inception (September 3, 1996) to April 30, 1997 was 7.07%.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) 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(R) 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 of 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) Valueline Index - an unmanaged index which follows the stock of approximately
1,700 companies.
i) Bateman Eichler Hill Richards Western Stock Index - A managed index
representing 215 stocks of companies within the Western United States.
Seventy-five percent of the stocks are Californian companies, the remaining 25%
represent companies in:
Arizona, Hawaii, Nevada, Oregon and Washington.
j) 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.
k) Historical data supplied by the research departments of CSFirst Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
l) Financial publications: THE WALL STREET JOURNAL, AND BUSINESS WEEK, CHANGING
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, AND MONEY MAGAZINES - provide
performance statistics over specified time periods.
m) Russell 3000 Index - composed of 3,000 large U.S. companies by market
capitalization, representing approximately 98% of the U.S. equity market.
n) Russell 2000 Small Stock Index - consists of the smallest 2,000 companies in
the Russell 3000 Index, representing approximately 11% of the Russell 3000 total
market capitalization.
o) 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.
p) Franklin California 250 Growth Index - consists of the 250 largest California
based companies on an equal weighted basis in order to approximately diversify
and correlate with the business segment weightings of the actual economy (as
provided by the Gross State Product). By doing so, the Index will have an
orientation towards small cap growth companies, mainly high tech and services
related firms. The Index is equally weighted as opposed to market weighted,
meaning each company represents 0.4% of the total index.
q) 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 2.7 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Mutual Series Fund Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $207 billion in
assets under management for more than 5.4 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 120
U.S. based open-end investment companies to the public. The Fund may identify
itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past nine years.
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of the Fund, no other person holds beneficially or of record more
than 5% of the outstanding shares of any class.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations must be sent to a compliance
officer and, within 10 days after the end of each calendar quarter, a report of
all securities transactions must be provided to the compliance officer; and
(iii) access persons involved in preparing and making investment decisions must,
in addition to (i) and (ii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended April 30, 1997, including the auditors'
report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
AMEX - American Stock Exchange
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
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 of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
PROSPECTUS - The prospectus for the Fund dated September 1, 1997, as may be
amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly-owned
subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
PREFERRED STOCKS RATINGS
S&P
AAA - This is the highest rating that may be assigned by S&P to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations.
AA - A preferred stock issue rated AA also qualifies as a high quality
fixed-income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated AAA.
A - An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB - An issue rated BBB is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the A category.
BB, B AND CCC - Preferred stock rated BB, B, and CCC are regarded, on balance,
as predominately speculative with respect to the issuer's capacity to pay
preferred stock obligations. BB indicates the lowest degree of speculation and
CCC the highest degree of speculation. While these issues will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CC - The rating CC is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C - A preferred stock rated C is a non-paying issue.
D - A preferred stock rated D is a non-paying issue with the issuer in default
on debt instruments.
NR - Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
PLUS (+) OR MINUS (-) - To provide more detailed indications of preferred stock
quality, the ratings from "AA" to "CCC" may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
CORPORATE BOND RATINGS
MOODY'S
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FRANKLIN STRATEGIC INCOME FUND
FRANKLIN STRATEGIC SERIES
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 1, 1997
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS PAGE
How does the Fund Invest its Assets? ......................... 2
What are the Fund's Potential Risks? ......................... 9
Investment Restrictions ...................................... 11
Officers and Trustees ........................................ 12
Investment Management and Other Services ..................... 15
How does the Fund Buy
Securities for its Portfolio? .............................. 17
How Do I Buy, Sell and Exchange Shares? ...................... 18
How are Fund Shares Valued? .................................. 21
Additional Information on
Distributions and Taxes .................................... 22
The Fund's Underwriter ....................................... 25
How does the Fund Measure Performance? ....................... 26
Miscellaneous Information .................................... 29
Financial Statements ......................................... 29
Useful Terms and Definitions ................................. 29
Appendix ..................................................... 30
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and
Definitions."
The Franklin Strategic Income Fund (the "Fund") is a non-diversified series
of Franklin Strategic Series (the "Trust"), an open-end management investment
company. The Fund's primary investment objective is to obtain a high level of
current income, with capital appreciation over the long term as a secondary
objective. The Fund seeks to achieve its objectives by using an active asset
allocation process and a flexible policy of investing in securities of U.S.
and foreign governments, their agencies and instrumentalities; U.S. and
foreign corporate high yield fixed-income securities; various types of fixed
or adjustable rate mortgage securities; asset-backed securities; common
stocks that pay dividends; preferred stock; and income producing securities
that are convertible into common stocks.
The Prospectus, dated September 1, 1997, as may be amended from time to time,
contains the basic information you should know before investing in the Fund.
For a free copy, call 1-800/DIAL BEN or write the Fund at the address shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN
MORE DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE
YOU WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF
THE FUND, AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
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?"
LOANS OF PORTFOLIO SECURITIES. The Fund may lend its securities, up to 33
1/3% of its assets, consistent with procedures approved by the Board. The
Fund will not lend its portfolio securities if the loans are not permitted by
the laws or regulations of any state where its shares are qualified for sale.
Loans will be subject to termination by the Fund in the normal settlement
time, currently three business days after notice, or by the borrower on one
day's notice. Borrowed securities must be returned when the loan is
terminated. Any gain or loss in the market price of the borrowed securities
that occurs during the term of the loan inures to the Fund and its
shareholders. The Fund may pay reasonable finders', borrowers',
administrative and custodial fees in connection with a loan of its securities.
The Fund will not lend securities if doing so will cause the Fund to lose the
tax treatment available to regulated investment companies. It is the current
intention of the Fund to limit loans to no more than 10% of its total assets.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES ("GNMAS"). GNMAs are
mortgage backed securities representing part ownership of a pool of mortgage
loans. GNMAs differ from bonds in that principal is scheduled to be paid back
by the borrower over the length of the loan rather than returned in a lump
sum at maturity. The Fund may buy GNMAs for which principal and interest are
guaranteed. The Fund may also buy "variable rate" GNMAs and may buy other
types that may be issued with the guarantee of the Government National
Mortgage Association ("GNMA").
The GNMA guarantee of principal and interest on GNMAs is backed by the full
faith and credit of the U.S. government. However, these securities do involve
certain risks. For example, when mortgages in the pool underlying GNMAs are
prepaid, the principal payments are passed through to the Certificate holders
(such as the Fund). Scheduled and unscheduled prepayments of principal may
greatly change realized yields. In a period of declining interest rates it is
more likely that mortgages contained in GNMA pools will be prepaid thus
reducing the effective yield. Moreover, any premium paid on the purchase of
GNMAs will be lost if the obligation is prepaid. In periods of falling
interest rates, this potential for pre-payment may reduce the general upward
price increase of GNMAs, which might otherwise occur. As with other debt
instruments, the price of GNMAs is likely to decrease in times of rising
interest rates. Price changes of GNMAs held by the Fund have a direct impact
on the Net Asset Value per share of the Fund.
Collateralized Mortgage Obligations ("CMOs"), Real Estate Mortgage Investment
Conduits ("REMICs") and Multi-Class Pass-Throughs. The Fund may invest in
certain debt obligations that are collateralized by mortgage loans or
mortgage pass-through securities. These obligations may be issued or
guaranteed by U.S. government agencies or issued by certain financial
institutions and other mortgage lenders. CMOs and REMICs are debt instruments
issued by special purpose entities and are secured by pools of mortgages
backed by residential and various types of commercial properties. Multi-class
pass-through securities are equity interests in a trust composed of mortgage
loans or other mortgage-backed securities. Payments of principal and interest
on the underlying collateral provides the funds to pay debt service on the
CMO or REMIC or make scheduled distributions on the multi-class pass-through
securities.
As noted in the Prospectus, in a CMO, a series of bonds or certificates is
issued in multiple classes or "tranches" at a specified coupon rate or
adjustable rate tranche with a stated maturity or final distribution date.
REMICs, which are authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured
by an interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities. As with CMOs, the mortgages that
collateralize the REMICs in which the Fund may invest include mortgages
backed by GNMAs or other mortgage pass-throughs issued or guaranteed by the
U.S. government, its agencies or instrumentalities or issued by private
entities, which are not guaranteed by any government agency.
Yields on privately-issued CMOs have been historically higher than the yields
on CMOs issued or guaranteed by U.S. government agencies. However, the risk
of loss due to default on such instruments is higher since they are not
guaranteed by the U.S. government. The Board believes that accepting the risk
of loss relating to privately issued CMOs that the Fund acquires is justified
by the higher yield the Fund will earn in light of the historic loss
experience on such instruments.
As new types of mortgage securities are developed and offered to investors,
the Fund may invest in them if they are consistent with the Fund's objective,
policies and quality standards.
Convertible Securities. As with a straight fixed income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Like a common stock,
the value of a convertible security also tends to increase as the market
value of the underlying stock rises, and it tends to decrease as the market
value of the underlying stock declines. Because its value can be influenced
by both interest rate and market movements, a convertible security is not as
sensitive to interest rates as a similar fixed-income security, nor is it as
sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by
an investment bank. When issued by an operating company, a convertible
security tends to be senior to common stock, but subordinate to other types
of fixed-income securities issued by that company. When a convertible
security issued by an operating company is "converted," the operating company
often issues new stock to the holder of the convertible security but, if the
parity price of the convertible security is less than the call price, the
operating company may pay out cash instead of common stock. If the
convertible security is issued by an investment bank, the security is an
obligation of and is convertible through the issuing investment bank. The
issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security
will have recourse only to the issuer.
While the Fund uses the same criteria to rate a convertible debt security
that it uses to rate a more conventional debt security, a convertible
preferred stock is treated like a preferred stock for the Fund's financial
reporting, credit rating, and investment limitation purposes. A preferred
stock is subordinated to all debt obligations in the event of insolvency, and
an issuer's failure to make a dividend payment is generally not an event of
default entitling the preferred shareholder to take action. A preferred stock
generally has no maturity date, so that its market value is dependent on the
issuer's business prospects for an indefinite period of time. In addition,
distributions from preferred stock are dividends, rather than interest
payments, and are usually treated as such for corporate tax purposes.
AMERICAN DEPOSITORY RECEIPTS ("ADRS"). ADRs represent the right to receive
securities of foreign issuers deposited in a domestic bank or a foreign
correspondent bank. Prices of ADRs are quoted in U.S. dollars. They are
traded in the U.S. on exchanges or over-the-counter and are sponsored and
issued by domestic banks. ADRs do not eliminate all of the risk inherent in
investing in the securities of foreign issuers. To the extent that the Fund
acquires ADRs through banks that do not have a contractual relationship with
the foreign issuer of the security underlying the ADR to issue and service
the ADRs, there may be an increased possibility that the Fund would not
become aware of and be able to respond to corporate actions such as stock
splits or rights offerings involving the foreign issuer in a timely manner.
In addition, the lack of information may result in inefficiencies in the
valuation of such instruments. To the extent the Fund invests in ADRs rather
than directly in the stock of foreign issuers, it will avoid currency risks
during the settlement period for either purchases or sales. In general, there
is a large, liquid market in the U.S. for ADRs quoted on a national
securities exchange or the NASDAQ National Market System. The information
available for ADRs is subject to the accounting, auditing and financial
reporting standards of the domestic market or exchange on which they are
traded. These standards are more uniform and more exacting than those to
which many foreign issuers may be subject.
ILLIQUID SECURITIES. As noted in the Prospectus, it is the policy of the Fund
that illiquid securities (including illiquid equity securities, defaulted
debt securities, loan participations, securities with legal or contractual
restrictions on resale, repurchase agreements of more than seven days
duration and other securities which are not readily marketable) may not
constitute more than 10% of the value of the Fund's total net assets.
Generally, an "illiquid security" is any security that cannot be disposed of
promptly and in the ordinary course of business at approximately the amount
at which the Fund has valued the instrument. Subject to this limitation, the
Board has authorized the Fund to invest in restricted securities where such
investment is consistent with the Fund's investment objectives and has
authorized such securities to be considered liquid to the extent Advisers
determines that there is a liquid institutional or other market for such
securities - such as, restricted securities which may be freely transferred
among qualified institutional buyers pursuant to Rule 144A under the
Securities Act of 1933, as amended, and for which a liquid institutional
market has developed. The Board will review on a monthly basis any
determination by Advisers to treat a restricted security as liquid, including
Advisers' assessment of current trading activity and the availability of
reliable price information. In determining whether a restricted security is
properly considered a liquid security, Advisers and the Board will take into
account the following factors: (i) the frequency of trades and quotes for the
security; (ii) the number of dealers willing to 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 nature of
the marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer). To the extent
the Fund invests in restricted securities that are deemed liquid, the general
level of illiquidity may be increased if qualified institutional buyers
become uninterested in buying these securities or the market for these
securities contracts.
A restricted security is a security that has been purchased through a private
offering and cannot be sold without prior registration under the Securities
Act of 1933 unless the sale is pursuant to an exemption therefrom.
Notwithstanding the restriction on the sale of such securities, a secondary
market exists for many of these securities. As with other securities in the
Fund's portfolio, if there are readily available market quotations for a
restricted security, it will be valued, for purposes of determining the
Fund's Net Asset Value, between the range of the bid and ask prices. To the
extent that no quotations are available, the securities will be valued at
fair value in accordance with procedures adopted by the Board. The Fund's
purchases of restricted securities can result in the receipt of commitment
fees. For example, the transaction may involve an individually negotiated
purchase of short-term increasing rate notes. Maturities for this type of
security typically range from one to five years. These notes are usually
issued as temporary or "bridge" financing to be replaced ultimately with
permanent financing for the project or transaction which the issuer seeks to
finance. Typically, at the time of commitment, the Fund receives the security
and sometimes a cash commitment fee. Because the transaction could possibly
involve a delay between the time the Fund commits to buy the security and the
Fund's payment for and receipt of that security, the Fund will maintain, in a
segregated account with its custodian bank, cash or high-grade marketable
securities having an aggregate value equal to the amount of the purchase
commitments until payment is made. The Fund will not buy restricted
securities in order to generate commitment fees, although the receipt of such
fees will assist the Fund in achieving its principal objective of earning a
high level of current income.
Notwithstanding the determinations in regard to the liquidity of restricted
securities, the Board remains responsible for such determinations and will
consider appropriate action to maximize the Fund's liquidity and its ability
to meet redemption demands if a security should become illiquid after its
purchase. To the extent the Fund invests in restricted securities that are
deemed liquid, the general level of illiquidity in the Fund may be increased
if qualified institutional buyers become uninterested in buying these
securities or the market for these securities contracts.
INTEREST RATE AND CURRENCY SWAPS. An interest rate swap is the transfer
between two counterparties of interest rate obligations, one of which has an
interest rate fixed to maturity while the other has an interest rate that
changes in accordance with changes in a designated benchmark (e.g., LIBOR,
prime, commercial paper, or other benchmarks). The obligations to make
repayment of principal on the underlying securities are not exchanged. These
transactions generally require the participation of an intermediary,
frequently a bank. The entity holding the fixed-rate obligation will transfer
the obligation to the intermediary, and that entity will then be obligated to
pay to the intermediary a floating rate of interest, generally including a
fractional percentage as a commission for the intermediary. The intermediary
also makes arrangements with a second entity that has a floating-rate
obligation which substantially mirrors the obligation desired by the first
party. In return for assuming a fixed obligation, the second entity will pay
the intermediary all sums that the intermediary pays on behalf of the first
entity, plus an arrangement fee and other agreed upon fees. Interest rate
swaps are generally entered into to permit the party seeking a floating rate
obligation the opportunity to acquire such obligation at a lower rate than is
directly available in the credit market, while permitting the party desiring
a fixed-rate obligation the opportunity to acquire such a fixed-rate
obligation, also frequently at a price lower than is available in the credit
markets. The success of such a transaction depends in large part on the
availability of fixed-rate obligations at a low enough coupon rate to cover
the cost involved.
The Fund will only enter into interest rate swaps on a net basis, which means
that the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments. Interest
rate swaps do not involve the delivery of securities, other underlying assets
or principal. Accordingly, the risk of loss with respect to interest rate
swaps is limited to the net amount of interest payments that the Fund is
contractually obligated to make. If the other party to an interest rate swap
defaults, the Fund's risk of loss consists of the net amount of interest
payments that the Fund is contractually entitled to receive. In contrast,
currency swaps usually involve the delivery of the entire principal value of
one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the
risk that the other party to the swap will default on its contractual
delivery obligations.
OPTIONS, FUTURES AND OPTIONS ON FINANCIAL FUTURES
Call and Put Options on Securities. As noted in the Prospectus, the Fund
intends to write (sell) covered put and call options and buy put and call
options that trade on securities exchanges and in the over-the-counter market.
WRITING CALL OPTIONS. Call options written by the Fund give the holder the
right to buy the underlying securities from the Fund at a stated exercise
price; put options written by the Fund give the holder the right to sell the
underlying security to the Fund at a stated exercise price. A call option
written by the Fund is "covered" if the Fund owns the underlying security
which is subject to the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its portfolio. A call
option is also covered if the Fund holds a call on the same security and in
the same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price of the call written
or (b) is greater than the exercise price of the call written if the
difference is maintained by the Fund in cash and high grade debt securities
in a segregated account with its custodian bank. The premium paid by the
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.
In the case of a call option, the writer of an option may have no control
over when the underlying securities must be sold, in the case of a call
option, since, with regard to certain options, the writer may be assigned an
exercise notice at any time prior to the termination of the obligation.
Whether or not an option expires unexercised, the writer retains the amount
of the premium. This amount may, in the case of a covered call option, be
offset by a decline in the market value of the underlying security during the
option period. If a call option is exercised, the writer experiences a profit
or loss from the sale of the underlying security.
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of
the same series as the option previously written. The effect of the purchase
is that the writer's position will be cancelled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the
holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price, expiration date or both. In addition,
effecting a closing transaction will permit the cash or proceeds from the
sale of any securities subject to the option to be used for other Fund
investments. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or 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; 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.
BUYING CALL OPTIONS. The Fund may buy call options on securities that it
intends to buy in order to limit the risk of a substantial increase in the
market price of the security. The Fund may also buy call options on
securities held in its portfolio and on which it has written call options. A
call option gives the holder the right to buy the underlying securities from
the option writer at a stated exercise price. Prior to its expiration, a call
option may be sold in a closing sale transaction. Profit or loss from such a
sale will depend on whether the amount received is more or less than the
premium paid for the call option plus the related transaction costs.
WRITING PUT OPTIONS. Although the Fund has no current intention of writing
covered put options, the Fund reserves the right to do so.
A put option gives the buyer of the option the right to sell, and the writer
(seller) the obligation to buy, the underlying security or currency at the
exercise price during the option period. The option may be exercised at any
time prior to its expiration date. The operation of put options in other
respects, including their related risks and rewards, is substantially
identical to that of call options.
The Fund would write put options only on a covered basis, which means that
the Fund would maintain in a segregated account cash, U.S. government
securities or other liquid, high-grade debt securities in an amount not less
than the exercise price at all times while the put option is outstanding. The
rules of the clearing corporation currently require that the assets be
deposited in escrow to secure payment of the exercise price. The Fund would
generally write covered put options in circumstances where Advisers wishes to
buy the underlying security or currency for the Fund's portfolio at a price
lower than the current market price of the security or currency. In such
event, the Fund would write a put option at an exercise price which, reduced
by the premium received on the option, reflects the lower price it is willing
to pay. Since the Fund would also receive interest on debt securities or
currencies maintained to cover the exercise price of the option, this
technique could be used to enhance current return during periods of market
uncertainty. The risk in this type of transaction would be that the market
price of the underlying security or currency would decline below the exercise
price less the premiums received.
BUYING PUT OPTIONS. The Fund may buy put options. As the holder of a put
option, the Fund has the right to sell the underlying security or currency at
the exercise price at any time during the option period. The Fund may enter
into closing sale transactions with respect to put options, exercise them or
permit them to expire.
The Fund may buy a put option on an underlying security or currency owned by
the Fund (a "protective put") as a hedging technique in order to protect
against an anticipated decline in the value of the security or currency. This
hedge protection is provided only during the life of the put option when the
Fund, as the holder of the put option, is able to sell the underlying
security or currency at the put exercise price, regardless of any decline in
the underlying security's market price or currency's exchange value. For
example, a put option may be purchased in order to protect unrealized
appreciation of a security or currency when the Advisers deems it desirable
to continue to hold the security or currency because of tax considerations.
The premium paid for the put option and any transaction costs would reduce
any capital gain otherwise available for distribution when the security or
currency is eventually sold.
The Fund may also buy put options at a time when the Fund does not own the
underlying security or currency. By buying put options on a security or
currency it does not own, the Fund seeks to benefit from a decline in the
market price of the underlying security or currency. If the put option is not
sold when it has remaining value, and if the market price of the underlying
security or currency remains equal to or greater than the exercise price
during the life of the put option, the Fund will lose its entire investment
in the put option. In order for the purchase of a put option to be
profitable, the market price of the underlying security or currency must
decline sufficiently below the exercise price to cover the premium and
transaction costs, unless the put option is sold in a closing sale
transaction.
The Fund will commit no more than 5% of its assets to premiums when buying
put options. The premium paid by the Fund when buying a put option will be
recorded as an asset in the Fund's statement of assets and liabilities. This
asset will be adjusted daily to the options' current market value, which will
be the latest sale price at the time at which the Net Asset Value per share
of the Fund is computed, the close of the Exchange, or, in the absence of a
sale, the latest bid price. The asset will be extinguished upon expiration of
the option, the writing of an identical option in a closing transaction, or
the delivery of the underlying security or currency upon the exercise of the
option.
OVER-THE-COUNTER OPTIONS ("OTC" OPTIONS). The Fund intends to write covered
put and call options and buy put and call options that trade in the
over-the-counter market to the same extent that it will engage in exchange
traded options. Just as with exchange traded options, OTC call options give
the option holder the right to buy an underlying security from an option
writer at a stated exercise price; OTC put options give the holder the right
to sell an underlying security to an option writer at a stated exercise
price. However, OTC options differ from exchange traded options in certain
material respects.
OTC options are arranged directly with dealers and not, as is the case with
exchange traded options, with a clearing corporation. Thus, there is a risk
of non-performance by the dealer. Because there is no exchange, pricing is
typically done by reference to information from market makers. However, OTC
options are available for a greater variety of securities, and in a wider
range of expiration dates and exercise prices, than exchange traded options;
and the writer of an OTC option is paid the premium in advance by the dealer.
There can be no assurance that a continuous liquid secondary market will
exist for any particular option at any specific time. Consequently, the Fund
may be able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer
that issued it. Similarly, when the Fund writes an OTC option, it generally
can close out that option prior to its expiration only by entering into a
closing purchase transaction with the dealer to which the Fund originally
wrote it.
OPTIONS ON STOCK INDICES. The Fund may also buy call and put options on stock
indices in order to hedge against the risk of market or industry-wide stock
price fluctuations. Call and put options on stock indices are similar to
options on securities except that, rather than the right to buy or sell stock
at a specified price, options on a stock index give the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level
of the underlying stock index is greater than (or less than, in the case of
puts) the exercise price of the option. This amount of cash is equal to the
difference between the closing price of the index and the exercise price of
the option, expressed in dollars multiplied by a specified number. Thus,
unlike stock options, all settlements are in cash, and gain or loss depends
on price movements in the stock market generally (or in a particular industry
or segment of the market) rather than price movements in individual stocks.
When the Fund writes an option on a stock index, the Fund will establish a
segregated account containing cash or high quality fixed-income securities
with its custodian bank in an amount at least equal to the market value of
the underlying stock index and will maintain the account while the option is
open or it will otherwise cover the transaction.
OPTIONS ON FOREIGN CURRENCIES. Like other kinds of options, the writing of an
option on foreign currency will be only a partial hedge, up to the amount of
the premium received, and the Fund could be required to buy or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may be an effective hedge against
fluctuations in exchange rates although, in the event of rate movements
adverse to the Fund's position, the Fund may forfeit the entire amount of the
premium plus related transaction costs.
FUTURES CONTRACTS. The Fund may enter into contracts for the purchase or sale
for future delivery of securities and in such contracts based upon financial
indices ("financial futures"). Financial futures contracts are commodity
contracts that obligate the long or short holder to take or make delivery of
a specified quantity of a financial instrument, such as a security, or the
cash value of a securities index during a specified future period at a
specified price. A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by the contract
at a specified price on a specified date. A "purchase" of a futures contract
means the acquisition of a contractual obligation to acquire the securities
called for by the contract at a specified price on a specified date. Futures
contracts have been designed by exchanges that have been designated
"contracts markets" by the Commodity Futures Trading Commission ("CFTC") and
must be executed through a futures commission merchant, or brokerage firm,
which is a member of the relevant contract market.
At the same time a futures contract is purchased or sold, the Fund must
allocate cash or securities as a deposit payment ("initial deposit" or
"initial margin") as a partial guarantee of its performance under the
contract. Daily thereafter, the futures contract is valued and the payment of
"variation margin" may be required since each day the Fund would provide or
receive cash that reflects any decline or increase in the contract's value.
In addition, when the Fund enters into a futures contract, it will segregate
assets or "cover" its position in accordance with the 1940 Act.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same
month. Such a transaction, which is effected through a member of an exchange,
cancels the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded,
the Fund will incur brokerage fees when it buys or sells futures contracts.
The Fund will not engage in transactions in futures contracts or related
options for speculation but only as a hedge against changes resulting from
market conditions in the values of its securities or securities it intends to
buy. The Fund will not enter into any stock index or financial futures
contract or related option if, immediately thereafter, more than one-third of
the Fund's net assets would be represented by futures contracts or related
options. In addition, the Fund may not buy or sell futures contracts or
related options if, immediately thereafter, the sum of the amount of margin
deposits on its existing futures and related options positions and premiums
paid for related options would exceed 5% of the market value of the Fund's
total assets. In instances involving the purchase of futures contracts or
related call options, money market instruments equal to the market value of
the futures contract or related option will be deposited in a segregated
account with the custodian to collateralize such long positions.
The purpose of the acquisition or sale of a futures contract is to attempt to
protect the Fund from fluctuations in the price of portfolio securities
without actually buying or selling the underlying security. To the extent the
Fund enters into a futures contract, it will maintain with its custodian
bank, to the extent required by SEC rules, assets in a segregated account to
cover its obligations with respect to the contract which will consist of
cash, cash equivalents or high quality debt securities from its portfolio in
an amount equal to the difference between the fluctuating market value of
such futures contract and the aggregate value of the initial and variation
margin payments made by the Fund with respect to such futures contracts.
STOCK INDEX FUTURES. A stock index futures contract obligates the seller to
deliver (and the buyer to take) an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at
the close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index
is made.
The Fund may sell stock index futures contracts in anticipation of or during
a market decline to attempt to offset the decrease in market value of its
equity securities that might otherwise result. When the Fund is not fully
invested in stocks and anticipates a significant market advance, it may buy
stock index futures in order to gain rapid market exposure that may in part
or entirely offset increases in the cost of common stocks that it intends to
buy.
OPTIONS ON STOCK INDEX FUTURES. The Fund may buy and sell call and put
options on stock index futures to hedge against risks of market-side price
movements. The need to hedge against such risks will depend on the extent of
diversification of the Fund's common stock portfolio and the sensitivity of
such investments to factors influencing the stock market as a whole.
Call and put options on stock index futures are similar to options on
securities except that, rather than the right to buy or sell stock at a
specified price, options on stock index futures give the holder the right to
receive cash. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account, which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the
closing price of the futures contract on the expiration date.
BOND INDEX FUTURES AND RELATED OPTIONS. The Fund may buy and sell futures
contracts based on an index of debt securities and options on such futures
contracts to the extent they currently exist and, in the future, may be
developed. The Fund reserves the right to conduct futures and options
transactions based on an index that may be developed in the future to
correlate with price movements in certain categories of debt securities. The
Fund's investment strategy in employing futures contracts based on an index
of debt securities will be similar to that used by it in other financial
futures transactions. The Fund may also buy and write put and call options on
such index futures and enter into closing transactions with respect to such
options.
FUTURE DEVELOPMENTS. The Fund may take advantage of opportunities in the area
of options and futures contracts and options on futures contracts and any
other derivative investments which are not presently contemplated for use by
the Fund or which are not currently available but which may be developed, to
the extent such opportunities are both consistent with the Fund's investment
objectives and legally permissible for the Fund. FORWARD CURRENCY EXCHANGE
CONTRACTS. The Fund may enter into forward currency exchange contracts
("Forward Contract(s)") to attempt to minimize the risk to the Fund from
adverse changes in the relationship between currencies or to enhance income.
A Forward Contract is an obligation to buy or sell a specific currency for an
agreed price at a future date which is individually negotiated and privately
traded by currency traders and their customers.
The Fund may construct an investment position by combining a debt security
denominated in one currency with a Forward Contract calling for the exchange
of that currency for another currency. The investment position is not itself
a security but is a combined position (i.e., a debt security coupled with a
Forward Contract) that is intended to be similar in overall performance to a
debt security denominated in the same currency.
For example, an Italian lira-denominated position could be constructed by
buying a German mark-denominated debt security and simultaneously entering
into a Forward Contract to exchange an equal amount of marks for lira at a
future date and at a specified exchange rate. With such a transaction, the
Fund may be able to receive a return that is substantially similar from a
yield and currency perspective to a direct investment in lira debt securities
while achieving other benefits from holding the underlying security. The Fund
may experience slightly different results from its use of such combined
investment positions as compared to its purchase of a debt security
denominated in the particular currency subject to the Forward Contract. This
difference may be enhanced or offset by premiums that may be available in
connection with the Forward Contract.
The Fund may also enter into a Forward Contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a
foreign currency in order to "lock in" the U.S. dollar price of that
security. Additionally, for example, when the Fund believes that a foreign
currency may suffer a substantial decline against the U.S. dollar, it may
enter into a Forward Contract to sell an amount of that foreign currency
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency; or when the Fund believes that the U.S.
dollar may suffer a substantial decline against a foreign currency, it may
enter into a Forward Contract to buy that foreign currency for a fixed dollar
amount.
The Fund usually effects forward currency exchange contracts on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. Some
price spread on currency exchange (to cover service charges) will be incurred
when the Fund converts assets from one currency to another.
To limit potential risks in connection with the purchase of currency under
Forward Contracts, cash, cash equivalents or readily marketable debt
securities equal to the amount of the purchase will be held in segregated
accounts with the Fund's custodian bank to be used to pay for the commitment,
or the Fund will cover any commitments under these contracts to sell currency
by owning the underlying currency (or an absolute right to acquire such
currency). The segregated account will be marked-to-market daily. The ability
of the Fund to enter into Forward Contracts is limited only to the extent
such Forward Contracts would, in the opinion of Advisers, impede portfolio
management or the ability of the Fund to honor redemption requests.
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?
Stock index options, stock index futures, financial futures and related
options. The Fund's ability to hedge effectively all or a portion of its
securities through transactions in options on stock indexes, stock index
futures, financial futures and related options depends on the degree to which
price movements in the underlying index or underlying securities correlate
with price movements in the relevant portion of the Fund's portfolio.
Inasmuch as these securities will not duplicate the components of any index
or underlying securities, the correlation will not be perfect. Consequently,
the Fund bears the risk that the prices of the securities being hedged will
not move in the same amount as the hedging instrument. It is also possible
that there may be a negative correlation between the index or other
securities underlying the hedging instrument and the hedged securities which
would result in a loss on both the securities and the hedging instrument.
Accordingly, successful use by the Fund of options on stock indexes, stock
index futures, financial futures and related options will be subject to
Advisers' ability to predict correctly movements in the direction of the
securities markets generally or of a particular segment. This requires
different skills and techniques than predicting changes in the price of
individual stocks.
Positions in stock index options, stock index futures and financial futures
and related options 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 stock index option or futures contract or
related option 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 could have an adverse impact on the Fund's ability to effectively
hedge its securities. The Fund will enter into an option or futures position
only if there appears to be a liquid secondary market for such options or
futures.
There can be no assurance that a continuous liquid secondary market will
exist for any particular OTC option at any specific time. Consequently, the
Fund may be able to realize the value of an OTC option it has purchased only
by exercising it or entering into a closing sale transaction with the dealer
that issued it. Similarly, when the Fund writes an OTC option, it generally
can close out that option prior to its expiration only by entering into a
closing purchase transaction with the dealer to which the Fund originally
wrote it. If a covered call option writer cannot effect a closing
transaction, it cannot sell the underlying security until the option expires
or the option is exercised. Therefore, a covered call option writer of an OTC
option may not be able to sell an underlying security even though it might
otherwise be advantageous to do so. Likewise, a secured put writer of an OTC
option may be unable to sell the securities pledged to secure the put for
other investment purposes while it is obligated as a put writer. Similarly, a
buyer of such put or call option might also find it difficult to terminate
its position on a timely basis in the absence of a secondary market.
The CFTC and the various exchanges have established limits referred to as
"speculative position limits" on the maximum net long or net short position
that any person may hold or control in a particular futures contract. Trading
limits are imposed on the maximum number of contracts that any person may
trade on a particular trading day. An exchange may order the liquidation of
positions found to be in violation of these limits and it may impose other
sanctions or restrictions. The Fund does not believe that these trading and
positions limits will have an adverse impact on the Fund's strategies for
hedging its securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced, thus producing distortion.
Third, from the point of view of speculators, the margin deposit requirements
in the futures market are less onerous than margin requirements in the
securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility
of distortion, a correct forecast of general interest rate trends by Advisers
may still not result in a successful transaction.
In addition, futures contracts entail risks. Although the Fund believes that
use of such contracts will benefit the Fund, if Advisers' investment judgment
about the general direction of interest rates is incorrect, the Fund's
overall performance would be poorer than if it had not entered into any such
contract. For example, if the Fund has hedged against the possibility of an
increase in interest rates which would adversely affect the price of bonds
held in its portfolio and interest rates decrease instead, the Fund will lose
part or all of the benefit of the increased value of its bonds which it has
hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Fund has insufficient cash, it may have
to sell securities from its portfolio to meet daily variation margin
requirements. These sales may be, but will not necessarily be, at increased
prices which reflect the rising market. The Fund may have to sell securities
at a time when it may be disadvantageous to do so.
The Fund's sale of futures contracts and purchase of put options on futures
contracts will be solely to protect its investments against declines in
value. The Fund expects that in the normal course it will buy securities upon
termination of long futures contracts and long call options on future
contracts, but under unusual market conditions it may terminate any of such
positions without a corresponding purchase of securities.
FORWARD CURRENCY CONTRACTS. As noted above, the Fund may enter into forward
currency contracts, in part, in order to limit the risk from adverse changes
in the relationship between currencies. However, Forward Contracts may limit
potential gain 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 also may result in poorer overall
performance for the Fund than if it had not entered into such contracts.
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) Invest more than 25% of the value of the Fund's total assets in one
particular industry; except that, to the extent this restriction is
applicable, 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) Underwrite securities of other issuers, except insofar as the Fund may be
technically deemed an underwriter in connection with the disposition of
securities in its portfolio; except that all or substantially all of the
assets of the Fund may be invested in another registered investment company
having the same investment objectives and policies as the Fund;
(3) Make loans to other persons except on a temporary basis in connection
with the delivery or receipt of portfolio securities which have been bought
or sold, or by the purchase of bonds, debentures or similar obligations which
have been publicly distributed or of a character usually acquired by
institutional investors or through loans of the Fund's portfolio securities,
or to the extent the entry into a repurchase agreement may be deemed a loan;
(4) Borrow money in excess of 5% of the value of the Fund's total assets, and
then only as a temporary measure for extraordinary or emergency purposes;
(5) Sell securities short or buy on margin nor pledge or hypothecate any of
the Fund's assets; except that the Fund may enter into financial futures and
options on financial futures as discussed;
(6) Buy or sell real estate (other than interests in real estate investment
trusts), commodities or commodity contracts; except that the Fund may invest
in financial futures and related options on futures with respect to
securities, securities indices and currencies;
(7) Invest in the securities of other investment companies, except where
there is no commission other than the customary brokerage commission or sales
charge, or except that securities of another investment company may be
acquired pursuant to a plan of reorganization, merger, consolidation or
acquisition; provided 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. To the extent permitted by
exemptions granted under the 1940 Act, the Fund may invest in shares of one
or more money market funds managed by Advisers or its affiliates;
(8) Invest in securities for the purpose of exercising management or control
of the issuer, except that, to the extent this restriction is applicable, 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; and
(9) Purchase from or sell to its officers and trustees, or any firm of which
any officer or trustee is a member, as principal, any securities, but may
deal with such persons or firms as brokers and pay a customary brokerage
commission; or purchase or retain securities of any issuer if, to the
knowledge of the Fund, one or more of the officers or trustees of the Fund,
or its investment adviser, own beneficially more than one-half of 1% of the
securities of such issuer and all such officers and trustees together own
beneficially more than 5% of such securities, except that, to the extent this
restriction is applicable, 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, or except as permitted under
investment restriction Number 7 regarding the purchase of shares of money
market funds managed by Advisers or its affiliates.
In addition to the Fund's fundamental policies, it is the present policy of
the Fund not to invest in real estate limited partnerships or in interests
(other than publicly traded equity securities) in oil, gas, or other mineral
leases, exploration or development. If a bankruptcy or other extraordinary
event occurs concerning a particular security owned by the Fund, the Fund may
receive stock, real estate, or other investments that the Fund would not, or
could not, buy. In this case, the Fund intends to dispose of the investment
as soon as practicable while maximizing the return to shareholders.
If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities or the amount of assets will not be
considered a violation of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of the Fund under the 1940 Act are indicated by an asterisk (*).
Positions and Offices
Name, Age and Address with the Trust Principal Occupations During
the Past Five Years
Frank H. Abbott, III (76) Trustee
1045 Sansome Street
San Francisco, CA 94111
President and Director, Abbott
Corporation (an investment company);
and director or trustee, as the case
may be, of 28 of the investment
companies in the Franklin Templeton
Group of Funds.
Harris J. Ashton (65) 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 (a meat packing
company); and director or trustee,
as the case may be, of 52 of the
investment companies in the Franklin
Templeton Group of Funds.
*Harmon E. Burns (52) 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. and Franklin
Templeton Services, Inc.; Executive
Vice President, Franklin Advisers,
Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer
and/or director or trustee, as the
case may be, of most of the other
subsidiaries of Franklin Resources,
Inc. and of 57 of the investment
companies in the Franklin Templeton
Group of Funds.
S. Joseph Fortunato (65) 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,
General Host Corporation (nursery
and craft centers); and director or
trustee, as the case may be, of 54
of the investment companies in the
Franklin Templeton Group of Funds.
David W. Garbellano (82) 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 or trustee, as the case may
be, of 27 of the investment
companies in the Franklin Templeton
Group of Funds.
*Charles B. Johnson (64) Chairman
777 Mariners Island Blvd. of the Board
San Mateo, CA 94404 and Trustee
President, Chief Executive Officer
and Director, Franklin Resources,
Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc.,
Franklin Advisory Services, Inc.,
Franklin Investment Advisory
Services, Inc. and Franklin
Templeton Distributors, Inc.;
Director, Franklin/Templeton
Investor Services, Inc., Franklin
Templeton Services, Inc. and General
Host Corporation (nursery and craft
centers); and officer and/or
director or trustee, as the case may
be, of most of the other
subsidiaries of Franklin Resources,
Inc. and of 53 of the investment
companies in the Franklin Templeton
Group of Funds.
*Rupert H. Johnson, Jr. (57) 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 Servies, Inc.; and officer
and/or director or trustee, as the
case may be, of most other
subsidiaries of Franklin Resources,
Inc. and of 57 of the investment
companies in the Franklin Templeton
Group of Funds.
Frank W. T. LaHaye (68) 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 Corporation (software
firm); Director, Fischer Imaging
Corporation (medical imaging
systems) and Digital Transmission
Systems, Inc. (wireless
communications); and director or
trustee, as the case may be, of 26
of the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (69) 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), Shoppers
Express (home shopping), and
Spacehab, Inc. (aerospace services);
and director or trustee, as the case
may be, of 49 of the investment
companies in the Franklin Templeton
Group of Funds; formerly Chairman,
Hambrecht and Quist Group, Director,
H & Q Healthcare Investors, and
President, National Association of
Securities Dealers, Inc.
Martin L. Flanagan (37) 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 and Director,
Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating
Officer and Director, Templeton
Investment Counsel, Inc.; Senior
Vice President and Treasurer,
Franklin Advisers, Inc.; Treasurer,
Franklin Advisory Services, Inc.;
Treasurer and Chief Financial
Officer, Franklin Investment
Advisory Services, Inc.; President,
Franklin Templeton Services, Inc.;
Senior Vice President,
Franklin/Templeton Investor
Services, Inc.; and officer and/or
director or trustee, as the case may
be, of 57 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 Services, Inc. and
Franklin Templeton Distributors,
Inc.; Vice President, Franklin
Advisers, Inc. and Franklin Advisory
Services, Inc.; Vice President,
Chief Legal Officer and Chief
Operating Officer, Franklin
Investment Advisory Services, Inc.;
and officer of 57 of the investment
companies in the Franklin Templeton
Group of Funds.
Charles E. Johnson (41) 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.;
President, Chief Executive Officer,
Chief Investment Officer and
Director, Franklin Institutional
Services Corporation; Chairman and
Director, Templeton Investment
Counsel, Inc.; Vice President,
Franklin Advisers, Inc.; officer
and/or director of some of the
subsidiaries of Franklin Resources,
Inc.; and officer and/or director or
trustee, as the case may be, of 36
of the investment companies in the
Franklin Templeton Group of Funds.
Diomedes Loo-Tam (58) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting Officer
Employee of Franklin Advisers, Inc.;
Senior Vice President, Franklin
Templeton Services, Inc.; and
officer of 34 of the investment
companies in the Franklin Templeton
Group of Funds.
Edward V. McVey (60) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President and National
Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of
29 of the investment companies in
the Franklin Templeton Group of
Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are currently
paid $2,400 per year (or $300 for each of the Trust's eight regularly
scheduled Board meetings) plus $300 per meeting attended. As shown above, the
nonaffiliated Board members also serve as directors or trustees of other
investment companies in the Franklin Templeton Group of Funds. They may
receive fees from these funds for their services. The following table
provides the total fees paid to nonaffiliated Board members by the Trust and
by other funds in the Franklin Templeton Group of Funds.
NUMBER OF BOARDS
TOTAL FEES IN THE FRANKLIN
TOTAL FEESRECEIVED FROM THETEMPLETON GROUP
RECEIVEDFRANKLIN TEMPLETONOF FUNDS ON WHICH
NAME FROM TRUST*GROUP OF FUNDS**EACH SERVES***
Frank H. Abbott, II....... $15,100 $165,236 28
Harris J. Ashton.......... 5,100 343,591 52
S. Joseph Fortunato....... 5,100 360,411 54
David Garbellano.......... 4,800 148,916 27
Frank W.T. LaHaye......... 4,800 139,233 26
Gordon S. Macklin......... 5,100 335,541 49
*For the fiscal year ended April 30, 1997. **For the calendar year ended
December 31, 1996.
***We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the Board members are responsible. The Franklin Templeton Group of
Funds currently includes 58 registered investment companies, with
approximately 169 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 or
trustee. 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 August 5, 1997, the officers and Board members, as a group, owned of
record and beneficially approximately 5,010.619 shares, or less than 1% of
the Fund's total outstanding shares. Many of the Board members also own
shares in other funds in the Franklin Templeton Group of Funds. Charles B.
Johnson and Rupert H. Johnson, Jr. are brothers and the father and uncle,
respectively, of Charles E. Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Manager and Services Provided. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio
transactions are executed. Advisers' activities are subject to the review and
supervision of the Board to whom Advisers renders periodic reports of the
Fund's investment activities. Advisers and its officers, directors and
employees are covered by fidelity insurance for the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action
with respect to any of the other funds it manages, or for its own account,
that may differ from action taken by Advisers on behalf of the Fund.
Similarly, with respect to the Fund, Advisers is not obligated to recommend,
buy or sell, or to refrain from recommending, buying or selling any security
that Advisers and access persons, as defined by the 1940 Act, may buy or sell
for its or their own account or for the accounts of any other fund. Advisers
is not obligated to refrain from investing in securities held by the Fund or
other funds that it manages. Of course, any transactions for the accounts of
Advisers and other access persons will be made in compliance with the Fund's
Code of Ethics. Please see "Miscellaneous Information - Summary of Code of
Ethics."
Under an agreement with Advisers, TICI is the Fund's sub-advisor. TICI
provides Advisers with investment management advice and assistance. TICI also
provides a continuous investment program for the Fund, including allocation
of the Fund's assets among the various securities markets of the world and
investment research and advice with respect to secutities and investments and
cash equivalents in the Fund.
MANAGEMENT FEES. Under its management agreement, the Fund pays Advisers a
management fee equal to an annual rate of 0.625 of 1% of the value of its
average daily net assets up to and including $100 million; 0.50 of 1% of the
value of its average daily net assets over $100 million up to and including
$250 million; and 0.45 of 1% of the value of its average daily net assets
over $250 million. The fee is computed at the close of business on the last
business day of each month. Under the sub-advisory agreement, Advisers pays
TICI a sub-advisory fee, in U.S. dollars, equal to an annual rate of 0.3125
of 1% of the Fund's average daily net assets up to and including $100
million; 0.25 of 1% of the value of the Fund's average daily net assets over
$100 million up to and including $250 million; and .225 of 1% of the value of
the Fund's average daily net assets over $250 million. This fee is not a
separate expense of the Fund but is paid by Advisers from the management fees
it receives from the Fund.
TICI will pay all expenses incurred in connection with its activities under
the subadvisory agreement with Advisers other than the cost of securities
purchased for the Fund, including brokerage commissions in connection with
such purchases.
For the period ended April 30, 1995, and for the fiscal years ended April 30,
1996 and 1997, management fees, before any advance waiver, totaled $32,160,
$58,092 and $129,938, respectively. Under an agreement by Advisers to waive
its fees, the Fund paid no management fees for the same periods. For the same
periods, Advisers paid TICI no sub-advisory fees. Management Agreements. The
management and sub-advisory agreements are in effect until February 28, 1998.
They may continue in effect for successive annual periods if their
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 either 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. The sub-advisory agreement may be terminated without penalty at
any time by the Board or by vote of the holders of a majority of the Fund's
outstanding voting securities, or by either Advisers or TICI on not less than
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. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these
services per benefit plan participant Fund account per year may not exceed
the per account fee payable by the Fund to Investor Services in connection
with maintaining shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York, 10286, acts as custodian of the securities and other assets
of the Fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco,
California 94105, are the Fund's independent auditors. During the fiscal year
ended April 30, 1997, their auditing services consisted of rendering an
opinion on the financial statements of the Trust included in the Trust's
Annual Report to Shareholders for the fiscal year ended April 30, 1997.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
Advisers selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management
agreement and any directions that the Board may give.
When placing a portfolio transaction, Advisers seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid by the
Fund is negotiated between Advisers and the broker executing the transaction.
The determination and evaluation of the reasonableness of the brokerage
commissions paid are based to a large degree on the professional opinions of
the persons responsible for placement and review of the transactions. These
opinions are based on the experience of these individuals in the securities
industry and information available to them about the level of commissions
being paid by other institutional investors of comparable size. Advisers will
ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in
the opinion of Advisers, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
Advisers may pay certain brokers commissions that are higher than those
another broker may charge, if Advisers determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or Advisers' overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to Advisers include, among others, supplying information
about particular companies, markets, countries, or local, regional, national
or transnational economies, statistical data, quotations and other securities
pricing information, and other information that provides lawful and
appropriate assistance to Advisers in carrying out its investment advisory
responsibilities. These services may not always directly benefit the Fund.
They must, however, be of value to Advisers in carrying out its overall
responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on
the research services Advisers receives from dealers effecting transactions
in portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research
and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, Advisers and its affiliates may use this
research and data in their investment advisory capacities with other clients.
If the Fund's officers are satisfied that the best execution is obtained, the
sale of Fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, may also be considered a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive
certain fees when the Fund tenders portfolio securities pursuant to a
tender-offer solicitation. As a means of recapturing brokerage for the
benefit of the Fund, any portfolio securities tendered by the Fund will be
tendered through Distributors if it is legally permissible to do so. In turn,
the next management fee payable to Advisers will be reduced by the amount of
any fees received by Distributors in cash, less any costs and expenses
incurred in connection with the tender.
If purchases or sales of securities of the Fund and one or more other
investment companies or clients supervised by Advisers are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to
all by Advisers, taking into account the respective sizes of the funds and
the amount of securities to be purchased or sold. In some cases this
procedure could have a detrimental effect on the price or volume of the
security so far as the Fund is concerned. In other cases it is possible that
the ability to participate in volume transactions and to negotiate lower
brokerage commissions will be beneficial to the Fund.
During the fiscal years ended April 30, 1995, 1996, 1997, the Fund paid
brokerage commissions totaling $757, $985 and $2,435, respectively.
As of April 30, 1997, the Fund did not own securities of its regular
broker-dealers.
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%
$30,000 but less than $100,000... 2%
$100,000 but less than $400,000.. 1%
$400,000 or more................. 0%
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of $1 million or more: 0.75% on sales of $1
million to $2 million, plus 0.60% on sales over $2 million to $3 million,
plus 0.50% on sales over $3 million to $50 million, plus 0.25% on sales over
$50 million to $100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts,
out of its own resources, to Securities Dealers who initiate and are
responsible for purchases by certain retirement plans without a front-end
sales charge, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on
sales over $3 million to $50 million, plus 0.25% on sales over $50 million to
$100 million, plus 0.15% on sales over $100 million. Distributors may make
these payments in the form of contingent advance payments, which may be
recovered from the Securities Dealer or set off against other payments due to
the dealer if shares are sold within 12 months of the calendar month of
purchase. Other conditions may apply. All terms and conditions may be imposed
by an agreement between Distributors, or one of its affiliates, and the
Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing
efforts in the Franklin Templeton Group of Funds; a Securities Dealer's
support of, and participation in, Distributors' marketing programs; a
Securities Dealer's compensation programs for its registered representatives;
and the extent of a Securities Dealer's marketing programs relating to the
Franklin Templeton Group of Funds. Financial support to Securities Dealers
may be made by payments from Distributors' resources, from Distributors'
retention of underwriting concessions and, in the case of funds that have
Rule 12b-1 plans, from payments to Distributors under such plans. In
addition, certain Securities Dealers may receive brokerage commissions
generated by fund portfolio transactions in accordance with the NASD's rules.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy
Fund shares, as described in the Prospectus. At any time within 90 days after
the first investment that you want to qualify for a reduced sales charge, you
may file with the Fund a signed shareholder application with the Letter of
Intent section completed. After the Letter is filed, each additional
investment will be entitled to the sales charge applicable to the level of
investment indicated on the Letter. Sales charge reductions based on
purchases in more than one Franklin Templeton Fund will be effective only
after notification to Distributors that the investment qualifies for a
discount. Your holdings in the Franklin Templeton Funds acquired more than 90
days before the Letter is filed will be counted towards completion of the
Letter, but they will not be entitled to a retroactive downward adjustment in
the sales charge. Any redemptions you make during the 13 month period, except
in the case of certain retirement plans, will be subtracted from the amount
of the purchases for purposes of determining whether the terms of the Letter
have been completed. If the Letter is not completed within the 13 month
period, there will be an upward adjustment of the sales charge, depending on
the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute
a Letter before a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the
sales charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in your
name until you fulfill the Letter. This policy of reserving shares does not
apply to certain retirement plans. If total purchases, less redemptions,
equal the amount specified under the Letter, the reserved shares will be
deposited to an account in your name or delivered to you or as you direct. If
total purchases, less redemptions, exceed the amount specified under the
Letter and is an amount that would qualify for a further quantity discount, a
retroactive price adjustment will be made by Distributors and the Securities
Dealer through whom purchases were made pursuant to the Letter (to reflect
such further quantity discount) on purchases made within 90 days before and
on those made after filing the Letter. The resulting difference in Offering
Price will be applied to the purchase of additional shares at the Offering
Price applicable to a single purchase or the dollar amount of the total
purchases. If the total purchases, less redemptions, are less than the amount
specified under the Letter, you will remit to Distributors an amount equal to
the difference in the dollar amount of sales charge actually paid and the
amount of sales charge that would have applied to the aggregate purchases if
the total of the purchases had been made at a single time. Upon remittance,
the reserved shares held for your account will be deposited to an account in
your name or delivered to you or as you direct. If within 20 days after
written request the difference in sales charge is not paid, the redemption of
an appropriate number of reserved shares to realize the difference will be
made. In the event of a total redemption of the account before fulfillment of
the Letter, the additional sales charge due will be deducted from the
proceeds of the redemption, and the balance will be forwarded to you.
If a Letter is executed on behalf of certain retirement plans, the level and
any reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve
5% of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will
be purchased at the Net Asset Value determined on the business day following
the dividend record date (sometimes known as the "ex-dividend date"). The
processing date for the reinvestment of dividends may vary and does not
affect the amount or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional
costs related to such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money. If this
occurs, it is the Fund's general policy to initially invest this money in
short-term, interest-bearing money market instruments, unless it is believed
that attractive investment opportunities consistent with the Fund's
investment objectives 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. 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.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the Fund nor
its affiliates will be liable for any loss caused by your failure to cash
such checks.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find
you from your account. These costs may include a percentage of the account
when a search company charges a percentage fee in exchange for its location
services.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the Fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions
that maintain omnibus accounts with the Fund on behalf of numerous beneficial
owners for recordkeeping operations performed with respect to such owners.
For each beneficial owner in the omnibus account, the Fund may reimburse
Investor Services an amount not to exceed the per account fee that the Fund
normally pays Investor Services. These financial institutions may also charge
a fee for their services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the scheduled close of the
NYSE, generally 1:00 p.m. Pacific time, each day that the NYSE is open for
trading. As of the date of this SAI, the Fund is informed that the NYSE
observes the following holidays: New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System for which market quotations are readily available are valued at the
last quoted sale price of the day or, if there is no such reported sale,
within the range of the most recent quoted bid and ask prices.
Over-the-counter portfolio securities are valued within the range of the most
recent quoted bid and ask prices. Portfolio securities that are traded both
in the over-the-counter market and on a stock exchange are valued according
to the broadest and most representative market as determined by Advisers.
Portfolio securities underlying actively traded call options are valued at
their market price as determined above. The current market value of any
option held by the Fund is its last sale price on the relevant exchange
before the time when assets are valued. Lacking any sales that day or if the
last sale price is outside the bid and ask prices, options are valued within
the range of the current closing bid and ask prices if the valuation is
believed to fairly reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on
the foreign exchange on which it is traded or as of the scheduled close of
trading on the NYSE, if that is earlier. The value is then converted into its
U.S. dollar equivalent at the foreign exchange rate in effect at noon, New
York time, on the day the value of the foreign security is determined. If no
sale is reported at that time, the foreign security is valued within the
range of the most recent quoted bid and ask prices. Occasionally events that
affect the values of foreign securities and foreign exchange rates may occur
between the times at which they are determined and the close of the exchange
and will, therefore, not be reflected in the computation of the Fund's Net
Asset Value. If events materially affecting the values of these foreign
securities occur during this period, the securities will be valued in
accordance with procedures established by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the scheduled close of the NYSE. The value of these securities used in
computing the Net Asset Value of the Fund's shares is determined as of such
times. Occasionally, events affecting the values of these securities may
occur between the times at which they are determined and the scheduled close
of the NYSE that will not be reflected in the computation of the Fund's Net
Asset Value. If events materially affecting the values of these securities
occur during this period, the securities will be valued at their fair value
as determined in good faith by the Board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the Board. With the approval of
the Board, the Fund may utilize a pricing service, bank or Securities Dealer
to perform any of the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the form of
dividends, interest and other income derived from its investments. This
income, less the expenses incurred in the Fund's operations, is its net
investment income from which income dividends may be distributed. Thus, the
amount of dividends paid per share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term
capital gains (after taking into account any capital loss carryforward or
post-October loss deferral) may generally be made once each year in December
to reflect any net short-term and net long-term capital gains realized by the
Fund as of October 31 of the current fiscal year and any undistributed
capital gains from the prior fiscal year. The Fund may adjust the timing of
these distributions for operational or other reasons.
TAXES
As stated in the Prospectus, the Fund has elected and qualified 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 which 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 declared by
the Fund annually in the Fund's fiscal year end annual report.
Corporate shareholders should note that dividends paid by the Fund from
sources other than the qualifying dividends it receives will not qualify for
the dividends-received deduction. For example, any interest income and
short-term capital gain (in excess of any net long-term capital loss or
capital loss carryover) included in investment company taxable income and
distributed by the Fund as a dividend will not qualify for the
dividends-received deduction.
Corporate shareholders should also note that availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless 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
alternative minimum tax is computed and may also result in a reduction in the
shareholder's tax basis in 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 12 month period ending October 31
of each year (in addition to amounts from the prior year that were neither
distributed nor taxed to the Fund) to you by December 31 of each year in
order to avoid the imposition of a federal excise tax. Under these rules,
certain distributions which are declared in October, November or December but
which, for operational reasons, may not be paid to you until the following
January, will be treated for tax purposes as if paid by the Fund and received
by you on December 31 of the calendar year in which they are declared. The
Fund intends as a matter of policy to declare 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 the Fund's shares are taxable transactions for
federal and state income tax purposes. Gain or loss will be recognized in an
amount equal to the difference between your basis in the shares and the
amount you 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 your 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 you buy other shares of the Fund (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax
basis of the shares repurchased.
Any loss realized upon the redemption of shares within six months from the
date of their purchase will be treated as a long-term capital loss to the
extent of amounts treated as distributions of net long-term capital gain
during such six-month period.
Gain realized by the Fund from any transactions entered into after April 30,
1993, that are deemed to be "conversion transactions" under the Code and that
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.
All or a portion of the sales charge incurred in buying shares of the Fund
will not be included in the federal tax basis of such shares sold or
exchanged within ninety (90) days of their purchase (for purposes of
determining gain or loss with respect to such shares) if you reinvest the
sales proceeds in the Fund or in another fund in the Franklin Templeton Group
of 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, foreign exchange gains
or losses, and structured products 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
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 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 both the amount, character and timing of
income distributed to you by the Fund.
When the Fund holds an option, future or forward contract that substantially
diminishes the Fund's risk of loss with respect to another position of the
Fund (as might occur in some hedging transactions), this combination of
positions could be treated as a "straddle" for tax purposes, resulting in
possible deferral of losses, adjustments in the holding periods of Fund
securities and conversion of short-term capital losses into long-term capital
losses. Certain tax elections exist for mixed straddles (i.e., straddles
comprised of at least one Section 1256 position and at least one non-Section
1256 position) which may reduce or eliminate the operation of these straddle
rules.
As a regulated investment company, the Fund is subject to the requirement
that less than 30% of its annual gross income be derived from the sale or
other disposition of securities and certain other investments held less than
three months ("short-short income"). This requirement may limit the Fund's
ability to engage in options 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 options and futures contracts and
may make certain other tax elections in order to mitigate the effect of the
above rules and to prevent disqualification of the Fund as a regulated
investment company under Subchapter M of the Code.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currencies, foreign currency payables
or receivables, foreign currency-denominated debt securities, foreign
currency forward contracts, and options or futures contracts on foreign
currencies are generally subject to section 988 of the Code which may cause
such gains and losses to be treated as ordinary income and losses rather than
capital gains and losses and may affect the amount and timing of the Fund's
income or loss from such transactions and in turn its distributions to
shareholders.
In order for the Fund to qualify as a regulated investment company under
Subchapter M of the Code, at least 90% of the Fund's annual gross income must
consist of dividends, interest and certain other types of qualifying income,
and no more than 30% of its annual gross income may be derived from the sale
or other disposition of securities or certain other instruments held for less
than three months. Foreign exchange gains derived by the Fund with respect to
the Fund's business of investing in stock or securities or options or futures
with respect to such stock or securities is qualifying income for purposes of
this 90% limitation.
Currency speculation or the use of currency forward contracts or other
currency instruments for non-hedging purposes may generate gains deemed to be
not directly related to the Fund's principal business of investing in stock
or securities and related options or futures. Under current law,
nondirectly-related gains arising from foreign currency positions or
instruments held for less than three months are treated as derived from the
disposition of securities held less than three months in determining the
Fund's compliance with the 30% limitation. The Fund will limit its activities
involving foreign exchange gains to the extent necessary to comply with these
requirements.
The federal income tax treatment of interest rate and currency swaps is
unclear in certain respects and may in some circumstances result in the
realization of income not qualifying under the 90% test described above or be
deemed to be derived from the disposition of securities held less than three
months in determining the Fund's compliance with the 30% limitation. The Fund
will limit its interest rate and currency swaps to the extent necessary to
comply with these requirements.
If the Fund owns shares in a foreign corporation that is 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 tax on a portion of any "excess distribution" it receives from the
PFIC or any gain it derives from the disposition of such shares, even if such
income is distributed as a taxable dividend by the Fund to its U.S.
shareholders. The Fund may also be subject to additional interest charges in
respect of deferred taxes arising from such distributions or gains. Any
federal income tax paid by the Fund as a result of its ownership of shares of
a PFIC will not give rise to a deduction or credit to the Fund or to you. 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 you 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.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the period ended April 30, 1995, and for the fiscal years
ended April 30, 1996 and 1997 were $35,219, $86,370, and $330,506,
respectively. After allowances to dealers, Distributors retained $987,
$5,531, and $23,568 in net underwriting discounts and commissions, and
received $0, $399, and $0 in connection with redemptions or repurchases of
shares, for the respective years. Distributors may be entitled to
reimbursement under the Rule 12b-1 plan, as discussed below. Except as noted,
Distributors received no other compensation from the Fund for acting as
underwriter.
THE RULE 12B-1 PLAN
The Fund has adopted a distribution plan or "Rule 12b-1 plan" pursuant to
Rule 12b-1 of the 1940 Act. Under the plan, the Fund may pay up to a maximum
of 0.25% per year of its average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of its shares.
In addition to the payments that Distributors or others are entitled to under
the plan, the plan also provides that to the extent the Fund, Advisers or
Distributors or other parties on behalf of the Fund, Advisers or
Distributors, make payments that are deemed to be for the financing of any
activity primarily intended to result in the sale of shares of the Fund
within the context of Rule 12b-1 under the 1940 Act, then such payments shall
be deemed to have been made pursuant to the plan.
In no event shall the aggregate asset-based sales charges, which include
payments made under the plan, plus any other payments deemed to be made
pursuant to the plan, exceed the amount permitted to be paid under the rules
of the NASD.
The terms and provisions of the plan relating to required reports, term, and
approval are consistent with Rule 12b-1. The plan does not permit
unreimbursed expenses incurred in a particular year to be carried over to or
reimbursed in later years.
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.
For the fiscal year ended April 30, 1997, Distributors had eligible
expenditures of $65,613 for advertising, printing, and payments to
underwriters and broker-dealers pursuant to the plan, of which the Fund paid
Distributors $33,351.
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 and current yield 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 year and from inception
periods 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-year
period and from inception period and the deduction of all applicable charges
and fees. If a change is made to the sales charge structure, historical
performance information will be restated to reflect the maximum front-end
sales charge currently in effect.
The Fund's average annual total return for the one-year and from inception
(May 24,1994) periods ended April 30, 1997, was 7.84% and 11.10%,
respectively.
These figures were 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-year and from inception periods at the end of the
one-year and from inception periods
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-year and from inception periods. The Fund's
cumulative total return for the one-year and from inception periods ended
April 30, 1997, was 7.84% and 35.87%, respectively.
YIELD
CURRENT YIELD. Current yield shows the income per share earned by the Fund.
It is calculated by dividing the net investment income per share earned
during a 30-day base period by the maximum Offering Price per share on the
last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders during the base period.
The Fund's yield for the 30-day period ended April 30, 1997, was 7.19%.
This figure was obtained using the following SEC formula:
6
Yield = 2 [( a-b + 1 ) - 1]
-----
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum Offering Price per share on the last day of the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the
SEC, is not indicative of the amounts which were or will be paid to
shareholders of the Fund. Amounts paid to shareholders are reflected in the
quoted current distribution rate. The current distribution rate is usually
computed by annualizing the dividends paid per share during a certain period
and dividing that amount by the current maximum Offering Price. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing and short-term capital
gains and is calculated over a different period of time. The Fund's current
distribution rate for the 30-day period ended April 30, 1997, was 7.94%.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities
in which the fund invests. A beta of more than 1.00 indicates volatility
greater than the market and a beta of less than 1.00 indicates volatility
less than the market. Another measure of volatility or risk is standard
deviation. Standard deviation is used to measure variability of Net Asset
Value or total return around an average over a specified period of time. The
idea is that greater volatility means greater risk undertaken in achieving
performance.
OTHER PERFORMANCE QUOTATIONS
The Fund may also quote the performance of shares without a sales charge.
Sales literature and advertising may quote a current distribution rate,
yield, cumulative total return, average annual total return and other
measures of performance as described elsewhere in this SAI with the
substitution of Net Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment
for Individual Retirement Accounts (IRAs), Business Retirement Plans, and
other tax-advantaged retirement plans may quote a total return based upon
compounding of dividends on which it is presumed no federal income tax
applies.
The Fund may include in its advertising or sales material information
relating to investment objectives and performance results of funds belonging
to the Franklin Templeton Group of Funds. Resources is the parent company of
the advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) 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(R) 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed
on the NYSE.
d) Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions, exclusive
of any applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
h) Financial publications: The Wall Street Journal, and Business Week,
Changing Times, Financial World, Forbes, Fortune, and Money magazines -
provide performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
l) Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
m) Standard & Poor's(R) 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, as well as the value of its shares that are based
upon the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can
be expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the Fund to calculate its figures. In
addition, there can be no assurance that the Fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to
have a projected amount available in the future to fund a child's college
education. (Projected college cost estimates are based upon current costs
published by the College Board.) The Franklin Retirement Planning Guide leads
you through the steps to start a retirement savings program. Of course, an
investment in the Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 49 years
and now services more than 2.7 million shareholder accounts. In 1992,
Franklin, a leader in managing fixed-income mutual funds and an innovator in
creating domestic equity funds, joined forces with Templeton Worldwide, Inc.,
a pioneer in international investing. Mutual Series Fund Inc., known for its
value-driven approach to domestic equity investing, became part of the
organization four years later. Together, the Franklin Templeton Group has
over $207 billion in assets under management for more than 5.4 million U.S.
based mutual fund shareholder and other accounts. The Franklin Templeton
Group of Funds offers 120 U.S. based open-end investment companies to the
public. The Fund may identify itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one
in service quality for five of the past nine years.
As of August 5, 1997, the principal shareholder of the Fund, beneficial or of
record, was as follows:
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
Franklin Resources, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, CA 666,597.235 13.9%
From time to time, the number of Fund shares held in the "street name"
accounts of various Securities Dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the Fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the Fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal
securities transactions subject to the following general restrictions and
procedures: (i) the trade must receive advance clearance from a compliance
officer and must be completed by the close of the business day following the
day clearance is granted; (ii) copies of all brokerage confirmations must be
sent to a compliance officer and, within 10 days after the end of each
calendar quarter, a report of all securities transactions must be provided to
the compliance officer; and (iii) access persons involved in preparing and
making investment decisions must, in addition to (i) and (ii) above, file
annual reports of their securities holdings each January and inform the
compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they
are recommending a security in which they have an ownership interest for
purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to
Shareholders of the Trust, for the fiscal year ended April 30, 1997,
including the auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Trustees of the Trust
CD - Certificate of deposit
Class I - Certain funds in the Franklin Templeton Funds offer multiple
classes of shares. The different classes have proportionate interests in the
same portfolio of investment securities. They differ, however, primarily in
their sales charge structures and Rule 12b-1 plans. Because the Fund's sales
charge structure and Rule 12b-1 plan are similar to those of Class I shares,
shares of the Fund are considered Class I shares for redemption, exchange and
other purposes.
Code - Internal Revenue Code of 1986, as amended
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter.
Franklin Templeton Funds - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator
Fund, Inc., Templeton Variable Anuuity Fund, and Templeton Variable Products
Series Fund.
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Franklin Templeton Group of Funds - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT Services - Franklin Templeton Services, Inc., the Fund's administrator
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
Moody's - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NYSE - New York Stock Exchange
Offering Price - The public offering price is based on the Net Asset Value
per share and includes the front-end sales charge. The maximum front-end
sales charge is 4.25%
Prospectus - The prospectus for the Fund dated September 1, 1997, as may be
amended from time to time
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TICI - Templeton Investment Counsel, Inc., the Fund's sub-advisor
U.S. - United States
We/Our/Us - Unless a different meaning is indicated by the context, these
terms refer to the Fund and/or Investor Services, Distributors, or other
wholly-owned subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
Moody's
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
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.
194 SAI 09/97
FRANKLIN MIDCAP GROWTH FUND
FRANKLIN STRATEGIC SERIES
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 1, 1997
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS PAGE
How does the Fund Invest its Assets?........................... 2
What are the Fund's Potential Risks?........................... 5
Investment Restrictions........................................ 7
Officers and Trustees.......................................... 9
Investment Management
and Other Services............................................ 12
How does the Fund Buy
Securities for its Portfolio?................................. 13
How Do I Buy, Sell and
Exchange Shares?.............................................. 14
How are Fund Shares Valued?.................................... 17
Additional Information on
Distributions and Taxes....................................... 18
The Fund's Underwriter......................................... 20
How does the Fund Measure Performance?........................ 24
Miscellaneous Information...................................... 25
Financial Statements........................................... 25
Useful Terms and Definitions................................... 25
Appendix
Description of Ratings........................................ 26
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 MidCap Growth Fund (the "Fund") is a diversified series of Franklin
Strategic Series (the "Trust"), an open-end management investment company. The
Fund's investment objective is long-term capital growth. The Fund seeks to
achieve its objective by investing primarily in equity securities of medium
capitalization companies that have a market capitalization range between $200
million and $5 billion.
The Prospectus, dated September 1, 1997, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN or write the Fund at the address shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
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?"
OPTIONS. The Fund may buy or write put and call options on securities listed on
a national securities exchange and in the over-the-counter ("OTC") market. The
Fund may also buy call options on stock indices. Options written by the Fund
will be for portfolio hedging purposes.
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 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.
Call and put options on stock indices are similar to options on securities
except, rather than the right to buy or sell stock at a specified price, options
on a stock index give the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the underlying stock index is
greater than (or less than, in the case of a put) the exercise price of the
option, expressed in dollars multiplied by a specified number. Thus, unlike
stock options, all settlements are in cash, and gain or loss depends on price
movements in the stock market generally (or in a particular industry or segment
of the market) rather than price movements in individual stocks.
When the Fund writes an option on a stock index, the Fund will establish a
segregated account with its custodian bank containing cash or high quality
fixed-income securities in an amount at least equal to the market value of the
underlying stock index and will maintain the account while the option is open or
will otherwise cover the transaction.
FUTURES CONTRACTS. The Fund may enter into contracts for the purchase or sale of
futures contracts based upon financial indices ("financial futures"). The
financial futures contract obligates the long or short holder to take or make
delivery of the cash value of a securities index during a specified future
period at a specified price. A "sale" of a futures contract means the
acquisition of a contractual obligation to deliver the cash value called for by
the contract on a specified date. A "purchase" of a futures contract means the
acquisition of a contractual obligation to take delivery of the cash value
called for by the contract at a specified date. Futures contracts have been
designed by exchanges designated "contracts markets" by the Commodity Futures
Trading Commission ("CFTC") and must be executed through a futures commission
merchant or brokerage firm that is a member of the relevant contract market.
Although futures contracts call for the actual delivery or acquisition of the
cash value of the index, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
cash. The offsetting of a contractual obligation is accomplished 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 cash. Since all transactions in the futures market are made,
offset or fulfilled through a clearinghouse associated with the exchange on
which the contracts are traded, the Fund will incur brokerage fees when it buys
or sells futures contracts.
The Fund will not engage in transactions in futures contracts or related options
for speculation but only as a hedge against changes resulting from market
conditions in the values of its securities or securities that it intends to buy
and, to the extent consistent therewith, to accommodate cash flows. The Fund
will not enter into any stock index or financial futures contract or related
option if, immediately thereafter, more than one-third of the Fund's net assets
would be represented by futures contracts or related options. In addition, the
Fund may not buy or sell futures contracts or buy or sell related options if,
immediately thereafter, the margin deposits on its existing futures and related
options positions, and premiums paid for related options, would exceed 5% of the
market value of the Fund's total assets. In instances involving the purchase of
futures contracts or related call options, money market instruments equal to the
market value of the futures contract or related option will be deposited in a
segregated account with the Fund's custodian bank to collateralize long
positions.
The purpose of the acquisition or sale of a futures contract is to attempt to
protect the Fund from fluctuations in price of portfolio securities without
actually buying or selling the underlying security.
STOCK INDEX FUTURES. The Fund may buy and sell stock index futures contracts.
These contracts obligate the seller to deliver (and the buyer to take) an amount
of cash equal to a specific dollar amount times the difference between the value
of a specific stock index at the close of the last trading day of the contract
and the price at which the agreement is made. No physical delivery of the
underlying stocks in the index is made.
The Fund may sell stock index futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of its equity
securities that might otherwise result. When the Fund is not fully invested in
stocks and anticipates a significant market advance, it may buy stock index
futures in order to gain rapid market exposure that may in part or entirely
offset increases in the cost of common stocks that it intends to buy.
OPTIONS ON STOCK INDEX FUTURES. The Fund may buy and sell call and put options
on stock index futures to hedge against risks of marketside price movements. The
need to hedge against such risks will depend on the extent of diversification of
the Fund's common stock portfolio and the sensitivity of such investments to
factors influencing the stock market as a whole.
Call and put options on stock index futures are similar to options on securities
except, rather than the right to buy or sell stock at a specified price, options
on stock index futures give the holder the right to receive cash. Upon exercise
of the option, the delivery of the futures position by the writer of the option
to the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account that represents the amount by
which the market price of the futures contract at exercise exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract. If an option is exercised on the last trading
day prior to the expiration date of the option, the settlement will be made
entirely in cash equal to the difference between the exercise price of the
option and the closing price of the futures contract on the expiration date.
FUTURE DEVELOPMENTS. The Fund may take advantage of opportunities in the area of
options and futures contracts and options on futures contracts and any other
derivative investments that are not presently contemplated for use by the Fund
or that are not currently available but which may be developed, to the extent
such opportunities are both consistent with the Fund's investment objective and
legally permissible for the Fund.
Securities Industry Related Investments. To the extent it is consistent with its
investment objective and certain limitations under the 1940 Act, the Fund may
invest its assets in securities issued by companies engaged in securities
related businesses, including companies that are securities brokers, dealers,
underwriters or investment advisors. These companies are considered to be part
of the financial services industry. Generally, under the 1940 Act, the Fund may
not acquire a security or any interest in a securities related business to the
extent such acquisition would result in the Fund acquiring in excess of 5% of a
class of an issuer's outstanding equity securities or 10% of the outstanding
principal amount of an issuer's debt securities, or investing more than 5% of
the value of the Fund's total assets in securities of the issuer. In addition,
any equity security of a securities related business must be a marginable
security under Federal Reserve Board regulations and any debt security of a
securities related business must be investment grade as determined by the Board.
The Fund does not believe that these limitations will impede the attainment of
its investment objective.
OTHER INVESTMENT POLICIES OF THE FUND
LOANS OF PORTFOLIO SECURITIES. As noted in the Prospectus, subject to certain
conditions, the Fund may loan up to 20% of its total assets to qualified
Securities Dealers or other institutional investors. Any voting rights the
securities may have may pass to the borrower during the term of the loan. Loans
are typically subject to termination by the Fund in the normal settlement time,
currently three business days after notice, or by the borrower on one day's
notice. Borrowed securities must be returned when the loan is terminated. Where
matters are submitted to the vote of the security holders of a portfolio company
and such matters would materially affect the Fund, the Fund will either
terminate the loan or it will have provided other means to permit it to vote
such securities.
ILLIQUID INVESTMENTS. The Fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Generally an illiquid security is any
security that cannot be disposed of within seven days in the ordinary course of
business at approximately the amount at which the Fund has valued the
instrument. Notwithstanding this limitation, the Board has authorized the Fund
to invest in certain restricted securities that are considered to be liquid to
the extent Advisers determines that there is a liquid institutional or other
market for the securities. An example of these securities are restricted
securities that may be freely transferred among qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933, as amended, and for
which a liquid institutional market has developed. The Board will review any
determination by Advisers to treat a restricted security as a liquid security on
an ongoing basis, including Advisers' assessment of current trading activity and
the availability of reliable price information. In determining whether a
restricted security is properly considered a liquid security, Advisers and the
Board will take into account the following factors: (i) the frequency of trades
and quotes for the security; (ii) the number of dealers willing to 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
nature of the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of transfer). To
the extent the Fund invests in restricted securities that are deemed liquid, the
general level of illiquidity in the Fund may be increased if qualified
institutional buyers become uninterested in buying these securities or the
market for these securities contracts.
DIVERSIFICATION. As a diversified investment company under the 1940 Act, the
Fund may not, with respect to 75% of its total assets, buy the securities of any
one issuer (except U.S. government securities) if more than 5% of its total
assets will be invested in the securities of any single issuer.
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?
OPTIONS, FUTURES AND OPTIONS ON FUTURES. The Fund's ability to hedge effectively
all or a portion of its securities through transactions in options on stocks and
stock indices, stock index futures, financial futures and related options
depends on the degree to which price movements in the underlying index or
securities correlate with price movements in the relevant portion of the Fund's
securities. Inasmuch as the Fund's securities will not duplicate the components
of any index or underlying securities, the correlation will not be perfect.
Consequently, the Fund bears the risk that the prices of the securities being
hedged will not move in the same amount as the hedging instrument. It is also
possible that there may be a negative correlation between the index or other
securities underlying the hedging instrument and the hedged securities that
would result in a loss on both hedged securities and the hedging instrument.
Accordingly, successful use by the Fund of options on stocks and stock indexes,
stock index futures, financial futures and related options will be subject to
Advisers' ability to correctly predict movements in the direction of the
securities markets generally or of a particular segment. This requires different
skills and techniques than predicting changes in the price of individual stocks.
Positions in stocks and stock indices, stock index futures, financial futures
and related options 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 or related option 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 also could have an
adverse impact on the Fund's ability to effectively hedge its securities. The
Fund will enter into an option or futures position only if there appears to be a
liquid secondary market for the option or future.
There can be no assurance that a continuous liquid secondary market will exist
for any particular OTC option at any specific time. Consequently, the Fund may
be able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer that
issued it. Similarly, when the Fund writes an OTC option, it generally can close
out that option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it. If a covered
call option writer cannot effect a closing transaction, it cannot sell the
underlying security until the option expires or the option is exercised.
Therefore, a covered call option writer of an OTC option may not be able to sell
an underlying security even though it might otherwise be advantageous to do so.
Likewise, a covered put writer of an OTC option may be unable to sell the
securities pledged to secure the put for other investment purposes while it is
obligated as a put writer. Similarly, a buyer of such put or call option might
also find it difficult to terminate its position on a timely basis in the
absence of a secondary market.
The CFTC and the various exchanges have established limits referred to as
"speculative position limits" on the maximum net long or net short position that
any person may hold or control in a particular futures contract. Trading limits
are imposed on the maximum number of contracts that any person may trade on a
particular trading day. An exchange may order the liquidation of positions found
to be in violation of these limits and it may impose other sanctions or
restrictions. The Fund does not believe that these trading and positions limits
will have an adverse impact on the Fund's strategies for hedging its securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions that could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions.
The Fund's sale of futures contracts and purchase of put options on futures
contracts will be solely to protect its investments against declines in value
and, to the extent consistent therewith, to accommodate cash flows. The Fund
expects that in the normal course it will buy securities upon termination of
long futures contracts and long call options on future contracts, but under
unusual market conditions it may terminate any of these positions without a
corresponding purchase of securities.
HIGH YIELD SECURITIES. Because the Fund may invest in securities below
investment grade, an investment in the Fund is subject to a higher degree of
risk than an investment in a fund that invests primarily in higher-quality
securities. You should consider the increased risk of loss to principal that is
present with an investment in higher risk securities, such as those in which the
Fund invests. Accordingly, an investment in the Fund should not be considered a
complete investment program and should be carefully evaluated for its
appropriateness in light of your overall investment needs and goals.
The market value of high yield, lower-quality fixed-income securities, commonly
known as junk bonds, tends to reflect individual developments affecting the
issuer to a greater degree than the market value of higher-quality securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality securities also tend to be more sensitive to economic conditions
than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with buying the securities of these issuers is generally
greater than the risk associated with higher-quality securities. For example,
during an economic downturn or a sustained period of rising interest rates,
issuers of lower-quality securities may experience financial stress and may not
have sufficient cash flow to make interest payments. The issuer's ability to
make timely interest and principal payments may also be adversely affected by
specific developments affecting the issuer, including the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the Fund's portfolio defaults, the Fund may have unrealized losses on the
security, which may lower the Fund's Net Asset Value. Defaulted securities tend
to lose much of their value before they default. Thus, the Fund's Net Asset
Value may be adversely affected before an issuer defaults. In addition, the Fund
may incur additional expenses if it must try to recover principal or interest
payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the Fund. Although these
securities are typically not callable for a period of time, usually for three to
five years from the date of issue, if an issuer calls its securities during
periods of declining interest rates, Advisers may find it necessary to replace
the securities with lower-yielding securities, which could result in less net
investment income for the Fund. The premature disposition of a high yield
security due to a call or buy-back feature, the deterioration of an issuer's
creditworthiness, or a default by an issuer may make it more difficult for the
Fund to manage the timing of its income. Under the Code and U.S. Treasury
regulations, the Fund may have to accrue income on defaulted securities and
distribute the income to shareholders for tax purposes, even though the Fund is
not currently receiving interest or principal payments on the defaulted
securities. To generate cash to satisfy these distribution requirements, the
Fund may have to sell portfolio securities that it otherwise may have continued
to hold or use cash flows from other sources, such as the sale of Fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse impact
on market price of a security and on the Fund's ability to sell a security in
response to a specific economic event, such as a deterioration in the
creditworthiness of the issuer, or if necessary to meet the Fund's liquidity
needs. Reduced liquidity may also make it more difficult to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
The Fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry restrictions
on resale. While many high yielding securities have been sold with registration
rights, covenants and penalty provisions for delayed registration, if the Fund
is required to sell restricted securities before the securities have been
registered, it may be deemed an underwriter of the securities under the
Securities Act of 1933, which entails special responsibilities and liabilities.
The Fund may also incur special costs in disposing of restricted securities,
although the Fund will generally not incur any costs when the issuer is
responsible for registering the securities.
The Fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other characteristics.
The Fund has no arrangement with its underwriter or any other person concerning
the acquisition of these securities.
The high yield securities market is relatively new and much of its growth before
1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yield securities and adversely affected the value
of outstanding securities, as well as the ability of issuers of high yield
securities to make timely principal and interest payments. Although the economy
has improved and high yield securities have performed more consistently since
that time, the adverse effects previously experienced may reoccur. For example,
the highly publicized defaults on some high yield securities during 1989 and
1990 and concerns about a sluggish economy that continued into 1993, depressed
the prices of many of these securities. While market prices may be temporarily
depressed due to these factors, the ultimate price of any security generally
reflects the true operating results of the issuer. Factors adversely impacting
the market value of high yield securities may lower the Fund's Net Asset Value.
The Fund relies on Advisers' judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, Advisers takes into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
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 10% 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. 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.
3. Invest in any company for purposes 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.
4. Buy any securities on margin or sell any securities short, except that it
may use such short-term credits as are necessary for the clearance of
transactions.
5. Purchase securities of other investment companies, except in connection with
a merger, consolidation, acquisition, or reorganization; provided 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. Invest more than 25% of the Fund's assets (at the time of the most recent
investment) in any single industry except that, to the extent this restriction
is applicable, 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. 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.
8. Buy or sell securities to the Fund's officers and trustees, or any firm of
which any officer or trustee is a member, as principal, or retain securities of
any issuer if, to the knowledge of the Fund, one or more of the Fund's officers,
trustees, or investment adviser own beneficially more than 1/2 of 1% of the
securities of such issuer and all such officers and trustees together own
beneficially more than 5% of such securities.
9. Acquire, lease or hold real estate, provided that this limitation shall not
prohibit the purchase of securities secured by real estate or interests therein.
10. Buy or sell commodities or commodity contracts, except that the Fund may
enter into financial futures contracts, including stock index futures, and
options on stock index futures, or interests in oil, gas, or other mineral
exploration or development programs, or invest in excess of 5% of its total
assets in options unrelated to the Fund's transactions in futures, including
puts, calls, straddles, spreads, or any combination thereof.
In addition to these fundamental policies, it is the present policy of the Fund
(which may be changed without shareholder approval) not to invest in real estate
limited partnerships (investments in marketable securities issued by real estate
investment trusts are not subject to this restriction). The Fund's restriction
against investment in interests in oil, gas, or other mineral leases,
exploration or development does not include publicly traded equity securities.
To comply with a certain state's staff guidelines, the Fund does not intend to
invest more than 5% of its total assets in options, puts, calls, straddles,
spreads, or any combination thereof that is not for hedging purposes.
It is the present policy of the Fund, which may be changed without shareholder
approval, not to engage in joint or joint and several trading accounts in
securities, except that it may participate in joint repurchase arrangements, or
combine orders to buy or sell with orders from other persons to obtain lower
brokerage commissions. To the extent permitted by exemptions granted under the
1940 Act, the Fund may invest in shares of one or more money market funds
managed by Advisers or its affiliates. The Fund may not invest in excess of 5%
of its total assets, valued at the lower of cost or market, in warrants, nor
more than 2% of its total assets in warrants not listed on either the New York
or American Stock Exchange.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
Positions and Offices Principal Occupation
Name, Age and Address with the Trust During Past Five Years
Frank H. Abbott, III (76) Trustee
1045 Sansome Street
San Francisco, CA 94111
President and Director, Abbott
Corporation (an investment company);
and director or trustee, as the case
may be, of 28 of the investment
companies in the Franklin Templeton
Group of Funds.
Harris J. Ashton (65) 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 (a meat packing company); and
director or trustee, as the case may
be, of 52 of the investment companies
in the Franklin Templeton Group of
Funds.
*Harmon E. Burns (52) 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.
and Franklin Templeton Services, Inc.;
Executive Vice President, Franklin
Advisers, Inc.; Director,
Franklin/Templeton Investor Services,
Inc.; and officer and/or director or
trustee, as the case may be, of most of
the other subsidiaries of Franklin
Resources, Inc. and of 57 of the
investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (65) 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, General
Host Corporation (nursery and craft
centers); and director or trustee, as
the case may be, of 54 of the
investment companies in the Franklin
Templeton Group of Funds.
David W. Garbellano (82) 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 or
trustee, as the case may be, of 27 of
the investment companies in the
Franklin Templeton Group of Funds.
*Charles B. Johnson (64) Chairman
777 Mariners Island Blvd. of the Board
San Mateo, CA 94404 and Trustee
President, Chief Executive Officer and
Director, Franklin Resources, Inc.;
Chairman of the Board and Director,
Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin
Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor
Services, Inc., Franklin Templeton
Services, Inc. and General Host
Corporation (nursery and craft
centers); and officer and/or director
or trustee, as the case may be, of most
of the other subsidiaries of Franklin
Resources, Inc. and of 53 of the
investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (57) 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 or trustee, as the case
may be, of most of the other
subsidiaries of Franklin Resources,
Inc. and of 57 of the investment
companies in the Franklin Templeton
Group of Funds.
Frank W. T. LaHaye (68) 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 Corporation
(software firm); Director, Fischer
Imaging Corporation (medical imaging
systems) and Digital Transmission
Systems, Inc. (wireless
communications); and director or
trustee, as the case may be, of 26 of
the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (69) 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), Shoppers Express (home
shopping), and Spacehab, Inc.
(aerospace services); and director or
trustee, as the case may be, of 49 of
the investment companies in the
Franklin Templeton Group of Funds;
formerly Chairman, Hambrecht and Quist
Group, Director, H & Q Healthcare
Investors, and President, National
Association of Securities Dealers, Inc.
Martin L. Flanagan (37) 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 and Director, Templeton
Worldwide, Inc.; Executive Vice
President, Chief Operating Officer and
Director, Templeton Investment Counsel,
Inc.; Senior Vice President and
Treasurer, Franklin Advisers, Inc.;
Treasurer, Franklin Advisory Services,
Inc.; Treasurer and Chief Financial
Officer, Franklin Investment Advisory
Services, Inc.; President, Franklin
Templeton Services, Inc.; Senior Vice
President, Franklin/Templeton Investor
Services, Inc.; and officer and/or
director or trustee, as the case may
be, of 57 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 Services, Inc. and Franklin
Templeton Distributors, Inc.; Vice
President, Franklin Advisers, Inc. and
Franklin Advisory Services, Inc.; Vice
President, Chief Legal Officer and
Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and
officer of 57 of the investment
companies in the Franklin Templeton
Group of Funds.
Charles E. Johnson (41) 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.;
President, Chief Executive Officer and
Chief Investment Officer and Director,
Franklin Institutional Services
Corporation; Chairman and Director,
Templeton Investment Counsel, Inc.;
Vice President, Franklin Advisers,
Inc.; officer and/or director of some
of the subsidiaries of Franklin
Resources, Inc.; and officer and/or
director or trustee, as the case may
be, of 36 of the investment companies
in the Franklin Templeton Group of
Funds.
Diomedes Loo-Tam (58) Treasurer
777 Mariners Island Blvd. and Principal
San Mateo, CA 94404 Accounting
Officer
Senior Vice President, Franklin
Templeton Services, Inc.; and officer
of 34 of the investment companies in
the Franklin Templeton Group of Funds.
Edward V. McVey (60) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President and National
Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 29
of the investment companies in the
Franklin Templeton Group
of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are currently paid
$2,400 per year (or $300 for each of the Trust's eight regularly scheduled Board
meetings) plus $300 per meeting attended. As shown above, the nonaffiliated
Board members also serve as directors or trustees of other investment companies
in the Franklin Templeton Group of Funds. They may receive fees from these funds
for their services. The following table provides the total fees paid to
nonaffiliated Board members by the Trust and by other funds in the Franklin
Templeton Group of Funds.
Total Fees Number of
Received from Boards in the
Total Fees the Franklin Franklin Templeton
Received from Templeton Group of Funds on
Name the Trust* Group of Funds** Which Each Serves***
Frank H. Abbott, III ...... $5,100 $165,236 28
Harris J. Ashton .......... 5,100 343,591 52
S. Joseph Fortunato....... 5,100 360,411 54
David W. Garbellano....... 4,800 148,916 27
Frank W. T. LaHaye........ 4,800 139,233 26
Gordon S. Macklin......... 5,100 335,541 49
*For the fiscal year ended April 30, 1997.
**For the calendar year ended December 31, 1996.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 58 registered investment companies, with approximately 169 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 or trustee.
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 August 5, 1997, the officers and Board members did not own of record or
beneficially any shares of the Fund. Many of the Board members own shares in
other funds in the Franklin Templeton Group of Funds. Charles B. Johnson and
Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively, of
Charles E. Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio transactions
are executed. Advisers' activities are subject to the review and supervision of
the Board to whom Advisers renders periodic reports of the Fund's investment
activities. Advisers and its officers, directors and employees are covered by
fidelity insurance for the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action with
respect to any of the other funds it manages, or for its own account, that may
differ from action taken by Advisers on behalf of the Fund. Similarly, with
respect to the Fund, Advisers is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that Advisers and
access persons, as defined by the 1940 Act, may buy or sell for its or their own
account or for the accounts of any other fund. Advisers is not obligated to
refrain from investing in securities held by the Fund or other funds that it
manages. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Fund's Code of Ethics. Please
see "Miscellaneous Information Summary of Code of Ethics."
MANAGEMENT FEES. Under its management agreement, the Fund pays Advisers a
management fee equal to an annual rate of 0.65% of the Fund's average daily net
assets. The fee is computed at the close of business on the last business day of
each month.
For the fiscal years ended April 30, 1995, 1996 and 1997, management fees,
before any advance waiver, totaled $33,417, $42,906 and $68,022, respectively.
Under an agreement by the investment manager to waive its fees, the Fund paid no
management fees for the fiscal years ended April 30, 1995 and 1996 and
management fees totaling $68,022 for the fiscal year ended April 30, 1997.
MANAGEMENT AGREEMENT. The management agreement is in effect until April 30,
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. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these services
per benefit plan participant Fund account per year may not exceed the per
account fee payable by the Fund to Investor Services in connection with
maintaining shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York 10286, acts as custodian of the securities and other assets of
the Fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Fund's independent auditors. During the fiscal year ended April
30, 1997, their auditing services consisted of rendering an opinion on the
financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended April 30, 1997.
PRIOR SERVICES. Before January 2, 1996, Franklin Institutional Services
Corporation ("FISCO"), a wholly owned subsidiary of Resources, served as the
Fund's investment manager under a management agreement with the Fund that
provided for the payment of management fees by the Fund equal to 0.65% annually
of its average daily net assets. FISCO employed its affiliate, Templeton
Quantitative Advisors, Inc. ("TQA"), to implement some of the investment
activities of the Fund. TQA's fees were paid fully by FISCO.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
Advisers selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the Board may give.
When placing a portfolio transaction, Advisers seeks to obtain prompt execution
of orders at the most favorable net price. For portfolio transactions on a
securities exchange, the amount of commission paid by the Fund is negotiated
between Advisers and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. Advisers will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of Advisers, a
better price and execution can otherwise be obtained. Purchases of portfolio
securities from underwriters will include a commission or concession paid by the
issuer to the underwriter, and purchases from dealers will include a spread
between the bid and ask price.
Advisers may pay certain brokers commissions that are higher than those another
broker may charge, if Advisers determines in good faith that the amount paid is
reasonable in relation to the value of the brokerage and research services it
receives. This may be viewed in terms of either the particular transaction or
Advisers' overall responsibilities to client accounts over which it exercises
investment discretion. The services that brokers may provide to Advisers
include, among others, supplying information about particular companies,
markets, countries, or local, regional, national or transnational economies,
statistical data, quotations and other securities pricing information, and other
information that provides lawful and appropriate assistance to Advisers in
carrying out its investment advisory responsibilities. These services may not
always directly benefit the Fund. They must, however, be of value to Advisers in
carrying out its overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services Advisers receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staffs of other securities firms. As long as it is lawful and
appropriate to do so, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. If the Fund's
officers are satisfied that the best execution is obtained, the sale of Fund
shares, as well as shares of other funds in the Franklin Templeton Group of
Funds, may also be considered a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to Advisers will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisers are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by
Advisers, taking into account the respective sizes of the funds and the amount
of securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
During the fiscal years ended April 30, 1995, 1996 and 1997, the Fund paid
brokerage commissions totaling $13,736, $0 and $23,231, respectively.
As of April 30, 1997, the Fund did not own securities of its regular
broker-dealers.
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%
$30,000 but less than $50,000............... 2.5%
$50,000 but less than $100,000.............. 2.0%
$100,000 but less than $200,000............. 1.5%
$200,000 but less than $400,000............. 1.0%
$400,000 or more............................ 0%
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of $1 million or more: 1% on sales of $1 million
to $2 million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on
sales over $3 million to $50 million, plus 0.25% on sales over $50 million to
$100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases by certain retirement plans without a front-end sales charge, as
discussed in the Prospectus: 1% on sales of $500,000 to $2 million, plus 0.80%
on sales over $2 million to $3 million, plus 0.50% on sales over $3 million to
$50 million, plus 0.25% on sales over $50 million to $100 million, plus 0.15% on
sales over $100 million. Distributors may make these payments in the form of
contingent advance payments, which may be recovered from the Securities Dealer
or set off against other payments due to the dealer if shares are sold within 12
months of the calendar month of purchase. Other conditions may apply. All terms
and conditions may be imposed by an agreement between Distributors, or one of
its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy Fund
shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds acquired more than 90 days before the Letter is filed, will be counted
towards completion of the Letter, but they will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions you make during the 13
month period, except in the case of certain retirement plans, will be subtracted
from the amount of the purchases for purposes of determining whether the terms
of the Letter have been completed. If the Letter is not completed within the 13
month period, there will be an upward adjustment of the sales charge, depending
on the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute a
Letter before a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the sales
charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in your name
until you fulfill the Letter. This policy of reserving shares does not apply to
certain retirement plans. If total purchases, less redemptions, equal the amount
specified under the Letter, the reserved shares will be deposited to an account
in your name or delivered to you or as you direct. If total purchases, less
redemptions, exceed the amount specified under the Letter and is an amount that
would qualify for a further quantity discount, a retroactive price adjustment
will be made by Distributors and the Securities Dealer through whom purchases
were made pursuant to the Letter (to reflect such further quantity discount) on
purchases made within 90 days before and on those made after filing the Letter.
The resulting difference in Offering Price will be applied to the purchase of
additional shares at the Offering Price applicable to a single purchase or the
dollar amount of the total purchases. If the total purchases, less redemptions,
are less than the amount specified under the Letter, you will remit to
Distributors an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge that would have applied to
the aggregate purchases if the total of the purchases had been made at a single
time. Upon remittance, the reserved shares held for your account will be
deposited to an account in your name or delivered to you or as you direct. If
within 20 days after written request the difference in sales charge is not paid,
the redemption of an appropriate number of reserved shares to realize the
difference will be made. In the event of a total redemption of the account
before fulfillment of the Letter, the additional sales charge due will be
deducted from the proceeds of the redemption, and the balance will be forwarded
to you.
If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will be
purchased at the Net Asset Value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments unless it is believed that attractive
investment opportunities consistent with the Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. 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.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions that
maintain omnibus accounts with the Fund on behalf of numerous beneficial owners
for recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, the Fund may reimburse Investor
Services an amount not to exceed the per account fee that the Fund normally pays
Investor Services. These financial institutions may also charge a fee for their
services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the scheduled close of the
NYSE, generally 1:00 p.m. Pacific time, each day that the NYSE is open for
trading. As of the date of this SAI, the Fund is informed that the NYSE observes
the following holidays: New Year's Day, Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by Advisers.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the scheduled close of trading
on the NYSE, if that is earlier. The value is then converted into its U.S.
dollar equivalent at the foreign exchange rate in effect at noon, New York time,
on the day the value of the foreign security is determined. If no sale is
reported at that time, the foreign security is valued within the range of the
most recent quoted bid and ask prices. Occasionally events that affect the
values of foreign securities and foreign exchange rates may occur between the
times at which they are determined and the close of the exchange and will,
therefore, not be reflected in the computation of the Fund's Net Asset Value. If
events materially affecting the values of these foreign securities occur during
this period, the securities will be valued in accordance with procedures
established by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the Net Asset Value of the Fund's shares is determined as of such times.
Occasionally, events affecting the values of these securities may occur between
the times at which they are determined and the scheduled close of the NYSE that
will not be reflected in the computation of the Fund's Net Asset Value. If
events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION
ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the form of
dividends, interest and other income derived from its investments. This income,
less the expenses incurred in the Fund's operations, is its net investment
income from which income dividends may be distributed. Thus, the amount of
dividends paid per share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any capital loss carryforward or post-October
loss deferral) may generally be made once each year in December to reflect any
net short-term and net long-term capital gains realized by the Fund as of
October 31 of the current fiscal year and any undistributed capital gains from
the prior fiscal year. The Fund may adjust the timing of these distributions for
operational or other reasons.
TAXES
As stated in the Prospectus, the Fund has elected and qualified 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, if you are a corporate shareholder,
all or a portion of the income distributions paid by the Fund may be treated 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 you which 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 declared by the Fund annually in
the Fund's Annual Report to Shareholders.
Corporate shareholders should note that dividends paid by the Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividends-received deduction. For example, any interest income and net
short-term capital gain (in excess of any net long-term capital loss or capital
loss carryover) included in investment company taxable income and distributed by
the Fund to you as a dividend will not qualify for the dividends-received
deduction.
If you are a corporate shareholder, you should also note that availability of
the corporate dividends-received deduction is subject to certain restrictions.
For example, the deduction is eliminated unless Fund shares have been held by
you (or deemed held by you) 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 you is directly attributable to your 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 alternative minimum tax is
computed and may also result in a reduction in your tax basis in Fund shares,
under certain circumstances, if the shares have been held for less than two
years. If your investment in the Fund is "debt financed" for these tax purposes
you should consult with your 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 12 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 you buy other shares of the Fund (through reinvestment
of dividends or otherwise) within 30 days before or after the redemption. Any
loss disallowed under these rules will be added to your tax basis.
Any loss you realize on the redemption of shares within six months from the date
you purchased them will be treated as a long-term capital loss to the extent of
amounts treated as distributions of net long-term capital gain during the
six-month period.
The Fund's investment in options, futures, and forward contracts, including
transactions involving actual or deemed short sales are subject to many complex
and special tax rules. For example, OTC options on debt securities and equity
options, including options on stock and 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 and futures 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 contacts and certain foreign currency contacts and options
thereon.
Absent a tax election to the contrary, each Section 1256 position held by the
Fund will be marked-to-market (i.e., treated as if it were sold for fair market
value) on the last business day of the Fund's fiscal year, and all gain or loss
associated with fiscal year transactions and mark-to-market positions at fiscal
year end (except certain foreign currency gain or loss covered by Section 988 of
the Code, if any) 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
its shares. In these ways, any or all of these rules may affect the amount,
character and timing of income distributed to you by the Fund.
When the Fund holds an option, future, or forward contract that substantially
diminishes its 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 the Fund's portfolio securities
and conversion of short-term capital losses into long-term capital losses.
Certain tax elections exist for mixed straddles (i.e., straddles comprised of at
least one Section 1256 position and at least one non-Section 1256 position)
which may reduce or eliminate the operation of these straddle rules.
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 gross
income may 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
futures transactions. The Fund will monitor transactions in such contracts and
may make certain other tax elections in order to mitigate the effect of the
above rules and to prevent disqualification of the Fund as a regulated
investment company under Subchapter M of the Code.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the Fund's shares. 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.
In connection with the offering of the Fund's shares, there were no aggregate
underwriting commissions for the fiscal years ended April 30, 1995 and 1996. In
connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal year ended April 30, 1997, were $140,519. After
allowances to dealers, Distributors retained $16,023 in net underwriting
discounts and commissions for the fiscal year ended April 30, 1997. Distributors
may be entitled to reimbursement under the Rule 12b-1 plan, as discussed below.
Except as noted, Distributors received no other compensation from the Fund for
acting as underwriter.
THE RULE 12B-1 PLAN
The Fund has adopted a distribution plan or "Rule 12b-1 plan" pursuant to Rule
12b-1 of the 1940 Act. Under the plan, the Fund may pay up to a maximum of 0.25%
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.
For the fiscal year ended April 30, 1997, Distributors had eligible expenditures
of $30,661 for advertising, printing, and payments to underwriters and
broker-dealers pursuant to the plan, of which the Fund paid Distributors
$13,418.
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-year and from inception
periods 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-year and from
inception 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.
When considering the average annual total return quotations, you should keep in
mind that the maximum front-end sales charge reflected in each quotation is a
one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the Fund. The
Fund's average annual total return for the one-year period ended April 30, 1997,
and for the period from inception (August 17, 1993) to April 30, 1997, was 1.69%
and 12.37%, respectively.
These figures were 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-year and from inception periods at the end of the
one-year and from inception periods
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-year and from inception periods. The Fund's cumulative total
return for the one-year period ended April 30, 1997, and for the period from
inception (August 17, 1993) to April 30, 1997, was 1.69% and 54.01%,
respectively.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) (Industrial
Average), 15 utilities company stocks (Dow Jones(R) Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's(R) 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) The Wilshire 4500 Equity Index - a market value-weighted index of all U.S.
common equity securities with readily available price data (excluding the S&P
500 securities which together with the 4500 comprise the Wilshire 5000). It is a
total return index with dividends reinvested.
f) The Wilshire Mid Cap 750 - overlaps both the top 750 and next 1750 of the
Wilshire 2500 universe (the top 2500 companies and 99% of the market
capitalization of the Wilshire 5000). Wilshire includes companies that have
market capitalizations ranging from $300 million to $1.3 billion. The portfolio
contains from 125 to 500 securities.
g) The Russell Midcap Index - is composed of medium and medium/small companies
with capitalization of $350 million to $3.25 billion. The 800 companies are
taken from the Russell 3000 Index. Russell has generated monthly returns back to
1979. Russell reconstitutes the index every June 30, based on May 31 market
capitalization. Weights are based on market capitalization, adjusted for
corporate cross-ownership and large private holdings. The index is reconstituted
annually since 1989.
h) The Russell 2000 Index - consists of the 2,000 smallest securities in the
Russell 3000 Index. Representing approximately 11% of the Russell 3000 total
market capitalization, this is Russell's Small Cap Index.
i) The Russell 2500 Index - consists of the bottom 500 securities in the Russell
Index, as ranked by total market capitalization, and all 2,000 securities in the
Russell 2000 Index. This Index is a good measure of small to medium-small stock
performance.
j) The Russell 3000 Index - consists of 3,000 large U.S. companies, as
determined by market capitalization. This portfolio of securities represents
approximately 98% of the investable U.S. equity market.
k) 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.
l) 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.
m) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
n) Valueline Index - an unmanaged index which follows the stock of approximately
1700 companies.
o) 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.
p) Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
q) Financial publications: THE WALL STREET JOURNAL, AND BUSINESS WEEK, CHANGING
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, AND MONEY MAGAZINES - provide
performance statistics over specified time periods.
r) 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.
Total Return Performance - The example below may be used to illustrate the
Fund's performance, when compared to the total return of the Wilshire 5000
Index, Standard and Poor's 500 Index and the Standard and Poor's Midcap Index:
Annual Performance from 1988 through 1996
S&P S&P WILSHIRE
500 MIDCAP 5000
- ------------------------------------------------------
1988............. 16.61 20.89 17.94
1989............. 31.69 35.52 29.17
1990............. -3.10 -5.13 -6.18
1991............. 30.47 50.10 34.28
1992............. 7.62 11.91 8.97
1993............. 10.08 13.95 11.28
1994............. 1.32 -3.58 -0.06
1995............. 37.58 30.94 36.44
1996............. 22.96 19.20 21.21
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 2.7 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Mutual Series Fund Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $207 billion in
assets under management for more than 5.4 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 120
U.S. based open-end investment companies to the public. The Fund may identify
itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past nine years.
As of August 5, 1997, the principal shareholder of the Fund, beneficial or of
record, was as follows:
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
Franklin Resources, Inc. 603,491 56%
Attn. Corporate Accounting
1147 Chess Drive
Foster City, CA
94404-1102
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
The organization expenses attributable to the Fund may be amortized on a
straight line basis over a period of five years from the effective date of the
registration statement covering its shares. New investors buying shares of the
Fund after the effective date of its registration statement under the Securities
Act of 1933 will therefore bear such expenses during the amortization period
only as such charges are accrued daily against investment income.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations must be sent to a compliance
officer and, within 10 days after the end of each calendar quarter, a report of
all securities transactions must be provided to the compliance officer; and
(iii) access persons involved in preparing and making investment decisions must,
in addition to (i) and (ii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended April 30, 1997, including the auditors'
report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I - Certain funds in the Franklin Templeton Funds offer multiple classes
of shares. The different classes have proportionate interests in the same
portfolio of investment securities. They differ, however, primarily in their
sales charge structures and Rule 12b-1 plans. Because the Fund's sales charge
structure and Rule 12b-1 plan are similar to those of Class I shares, shares of
the Fund are considered Class I shares for redemption, exchange and other
purposes.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the front-end sales charge. The maximum front-end sales
charge is 4.50%.
PROSPECTUS - The prospectus for the Fund dated September 1, 1997, as may be
amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations
196 SAI 09/97
FRANKLIN GLOBAL UTILITIES FUND
FRANKLIN STRATEGIC SERIES
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 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? ....................... 8
Investment Restrictions..................................... 16
Officers and Trustees....................................... 17
Investment Management
and Other Services ........................................ 21
How does the Fund Buy
Securities for its Portfolio? ............................. 22
How Do I Buy, Sell and Exchange Shares?..................... 23
How are Fund Shares Valued?................................. 26
Additional Information on
Distributions and Taxes.................................... 27
The Fund's Underwriter...................................... 30
How does the Fund Measure Performance?...................... 31
Miscellaneous Information .................................. 34
Financial Statements ....................................... 35
Useful Terms and Definitions ............................... 35
Appendix
Description of Ratings..................................... 35
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 Global Utilities Fund (the "Fund") is a non-diversified series of
Franklin Strategic Series (the "Trust"), an open-end management investment
company. The Fund's investment objective is to seek to provide total return
without incurring undue risk. The Fund seeks to achieve its objective by
investing at least 65% of its total assets in securities issued by companies
that are, in the opinion of Advisers, primarily engaged in the ownership or
operation of facilities used to generate, transmit or distribute electricity,
telephone communications, cable and other pay television services, wireless
telecommunications, gas or water.
The Prospectus, dated September 1, 1997, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN or write the Fund at the address shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
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?"
CONVERTIBLE SECURITIES. As with a straight fixed-income security, a convertible
security tends to increase in market value when interest rates decline and
decrease in value when interest rates rise. Like a common stock, the value of a
convertible security also tends to increase as the market value of the
underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because its value can be influenced by both interest
rate and market movements, a convertible security is not as sensitive to
interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank. The issuer of a convertible
security may be important in determining the security's true value. This is
because the holder of a convertible security will have recourse only to the
issuer.
While the Fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the Fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
LOANS OF PORTFOLIO SECURITIES. As noted in the Prospectus, the Fund may lend its
portfolio securities to qualified securities dealers or other qualified
institutional investors in amounts not to exceed one-third of the value of the
Fund's total assets. Any voting rights the loaned securities have may pass to
the borrower during the term of the loan. Loans are typically subject to
termination by the Fund in the normal settlement time, currently three business
days after notice, or by the borrower on one day's notice. Borrowed securities
must be returned when the loan is terminated. Where matters are submitted to the
vote of the security holders of a portfolio company and such matters would
materially affect the Fund, the Fund will either terminate the loan or it will
provide for other means to allow it to vote the securities.
ILLIQUID SECURITIES. The Fund will not invest more than 15% of its net assets in
illiquid securities. Generally, an "illiquid security" is any security that
cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued it. Subject to this
limitation, the Board has authorized the Fund to invest in restricted securities
where the investment is consistent with the Fund's investment objective and has
authorized the securities to be considered to be liquid to the extent Advisers
determines that there is a liquid institutional or other market for the
securities. For example, these may include restricted securities that may be
freely transferred among qualified institutional buyers pursuant to Rule 144A
under the Securities Act of 1933, as amended, and for which a liquid
institutional market has developed. The Board will review any determination by
Advisers to treat a restricted security as a liquid security on an ongoing
basis, including Advisers' assessment of current trading activity and the
availability of reliable price information. When determining if a restricted
security is properly considered a liquid security, Advisers and the Board will
take into account the following factors: (i) the frequency of trades and quotes
for the security; (ii) the number of dealers willing to 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 (e.g., the time needed to sell the security, the method of soliciting
offers, and the mechanics of transfer). To the extent the Fund invests in
restricted securities that are deemed liquid, the general level of illiquidity
in the Fund may be increased if qualified institutional buyers become
uninterested in buying these securities or the market for these securities
contracts.
The Fund intends to limit its investments in illiquid securities, including
illiquid securities with legal or contractual restrictions on resale and
securities that are not readily marketable, to 10% of the Fund's net assets.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may buy securities on a
"when-issued" or "delayed delivery" basis. These transactions are arrangements
under which the Fund may purchase securities with payment and delivery scheduled
for a future time. These transactions are subject to market fluctuation and the
risk that the value or yields at delivery may be more or less than the purchase
price or the yields available when the transaction was entered into. Although
the Fund will generally buy these securities on a when-issued basis with the
intention of acquiring such securities, it may sell the securities before the
settlement date if it is deemed advisable. In when-issued and delayed delivery
transactions, the Fund relies on the seller to complete the transaction. The
seller's failure to do so may cause the Fund to miss a price or yield considered
advantageous. Securities purchased on a when-issued or delayed delivery basis do
not generally earn interest until their scheduled delivery date. The Fund is not
subject to any percentage limit on the amount of its assets that may be invested
in "when-issued" purchase obligations.
OPTIONS, FUTURES, FORWARD CONTRACTS AND RELATED OPTIONS
The Fund may engage in various portfolio strategies to seek to hedge its
portfolio against adverse movements in the equity, debt and currency markets.
The Fund may deal in forward foreign currency exchange transactions and foreign
currency options and futures and options on such futures. The Fund may also
write (i.e., sell) covered put and call options on its portfolio securities, buy
put and call options on securities and engage in transactions in stock index
options and financial futures, including stock and bond index futures and
related options on such futures. Although certain risks are involved in options
and futures transactions (as discussed below and in "What are the Fund's
Potential Risks? - Options, Futures and Options on Futures"), Advisers believes
that, because the Fund will write only covered options on portfolio securities,
and engage in other options and futures transactions only for hedging purposes,
the options and futures portfolio strategies of the Fund will not subject the
Fund to the risks frequently associated with the speculative use of options and
futures transactions. While the Fund's use of hedging strategies is intended to
reduce the volatility of the Net Asset Value of Fund shares, the Fund's Net
Asset Value will fluctuate. There can be no assurance that the Fund's hedging
transactions will be effective. Furthermore, the Fund will only engage in
hedging activities from time to time and may not necessarily be engaging in
hedging activities when movement in the equity, debt and currency markets
occurs.
The Fund's transactions in options, futures contracts, and forward contracts may
be limited by the requirements of the Code for qualification as a regulated
investment company. These transactions are also subject to special tax rules
that may affect the amount, timing, and character of certain distributions to
shareholders. For more information, please see "Additional Information on
Distributions and Taxes."
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund may enter into forward
foreign currency exchange contracts ("Forward Contract(s)") to attempt to
minimize the risk to the Fund from adverse changes in the relationship between
currencies or to enhance income. A Forward Contract is an obligation to buy or
sell a specific currency for an agreed price at a future date and is
individually negotiated and privately traded by currency traders and their
customers.
The Fund may enter into a Forward Contract, for example, when it enters into a
contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock-in" the U.S. dollar price of that security.
Additionally, when the Fund believes that a foreign currency may suffer a
substantial decline against the U.S. dollar, it may enter into a Forward
Contract to sell an amount of that foreign currency approximating the value of
some or all of the Fund's portfolio securities denominated in that foreign
currency. Similarly, when the Fund believes that the U.S. dollar may suffer a
substantial decline against a foreign currency, it may enter into a Forward
Contract to buy that foreign currency for a fixed dollar amount.
To limit potential risks in connection with the purchase of currency under
Forward Contracts, cash, cash equivalents or readily marketable high grade debt
securities equal to the amount of the purchase will be held aside or in a
segregated account with the Fund's custodian bank to be used to pay for the
commitment, or the Fund will cover any commitments under these contracts to sell
currency by owning the underlying currency (or an absolute right to acquire the
currency). The segregated account will be marked-to-market on a daily basis.
Forward Contracts may limit the potential gain 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 also may result in
poorer overall performance for the Fund than if it had not entered into Forward
Contracts.
FOREIGN CURRENCY FUTURES. The Fund may buy and sell foreign currency futures
contracts to hedge against changes in the level of future currency rates. These
contracts involve an agreement to buy or sell a specific currency at a future
date at a price set in the contract. The Fund will not buy such contracts if
more than 5% of the Fund's assets are then invested as initial or variation
margin deposits on such contracts or related options. Assets will be held aside
or in a segregated account with the Fund's custodian bank as required to cover
the Fund's obligations under its foreign currency futures contracts.
OPTIONS ON FOREIGN CURRENCIES. The Fund may buy and write put and call options
on foreign currencies traded on U.S. and foreign exchanges or over-the-counter,
for hedging purposes to protect against declines in the U.S. dollar value of
foreign portfolio securities or other assets to be acquired. As with other kinds
of options, the writing of an option on foreign currency will only be a partial
hedge, up to the amount of the premium received, and the Fund could be required
to buy or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may be an
effective hedge against fluctuations in exchange rates although, in the event of
rate movements adverse to the Fund's position, the Fund may forfeit the entire
amount of the premium plus related transaction costs.
A decline in the dollar value of a foreign currency in which portfolio
securities are denominated will reduce the dollar value of the securities, even
if their value in the foreign currency remains constant. In order to protect
against such diminutions in the value of portfolio securities, the Fund may buy
put options on the foreign currency. If the value of the currency does decline,
the Fund will have the right to sell the currency for a fixed amount in dollars
and will thereby offset, in whole or part, the adverse effect on its portfolio
which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may buy call options thereon. The purchase of such options
could offset, at least partially, the effects of the adverse movements in
exchange rates. As in the case of other types of options, however, the benefit
to the Fund deriving from purchases of foreign currency options will be reduced
by the amount of the premium and related transaction costs. In addition, where
currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options that would require it to forego a portion or all of the benefits of
advantageous changes in such rates.
The Fund may write options on foreign currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the dollar value
of foreign currency denominated securities due to adverse fluctuations in
exchange rates it could, instead of buying a put option, write a call option on
the relevant currency. If the expected decline occurs, the option will most
likely not be exercised, and the decline in value of portfolio securities will
be offset by the amount of the premium received.
Similarly, instead of buying a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write a
put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. As in the case of other types of options,
however, the writing of a foreign currency option will constitute only a partial
hedge up to the amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the Fund
would be required to buy or sell the underlying currency at a loss which may not
be offset by the amount of the premium. Through the writing of options on
foreign currencies, the Fund also may be required to forego all or a portion of
the benefits which might otherwise have been obtained from favorable movements
in exchange rates.
The Fund intends to write covered call options on foreign currencies. A call
option written on a foreign currency is "covered" if the Fund owns the
underlying foreign currency covered by the call or has an absolute and immediate
right to acquire that foreign currency without additional cash consideration (or
for additional cash consideration held in a segregated account by its custodian
bank) upon conversion or exchange of other foreign currency held in its
portfolio. A call option is also covered if the Fund has a call on the same
foreign currency and in the same principal amount as the call written where the
exercise price of the call held (a) is equal to or less than the exercise price
of the call written or (b) is greater than the exercise price of the call
written if the difference is maintained by the Fund in cash, U.S. government
securities or other high grade liquid debt securities in a segregated account
with its custodian bank.
The Fund also intends to write call options on foreign currencies that are not
covered for cross-hedging purposes. A call option on a foreign currency is for
cross-hedging purposes if it is not covered, but is designed to provide a hedge
against a decline in the U.S. dollar value of a security which the Fund owns or
has the right to acquire and which is denominated in the currency underlying the
option due to an adverse change in the exchange rate. In such circumstances, the
Fund collateralizes the option by maintaining in a segregated account with the
Fund's custodian bank, cash or U.S. government securities or other high grade
liquid debt securities in an amount not less than the value of the underlying
foreign currency in U.S. dollars marked-to-market daily.
OPTIONS AND FINANCIAL FUTURES. The Fund may write covered put and call options
and buy put and call options on stocks, stock indices and bonds that trade on
securities exchanges and in the over-the-counter market. The Fund may buy and
sell futures and options on futures with respect to stock and bond indices.
Additionally, the Fund may engage in "close-out" transactions with respect to
futures and options. The Fund will not enter into any futures contract or
related options (except for closing transactions) if, immediately thereafter,
the sum of the amount of its initial deposits and premiums on open contracts and
options would exceed 5% of the Fund's total assets (taken at current value). The
Fund will not engage in any securities options or securities index options if
the option premiums paid regarding its open option positions exceed 5% of the
value of the Fund's total assets.
WRITING CALL OPTIONS. Call options written by the Fund give the holder the right
to buy the underlying securities from the Fund at a stated exercise price. A
call option written by the Fund is "covered" if the Fund owns the underlying
security that is subject to the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian bank) upon
conversion or exchange of other securities held in its portfolio. A call option
is also covered if the Fund holds a call on the same security and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash and high grade debt securities in a segregated
account with its custodian bank. 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.
With regard to certain options, the writer of an option may have no control over
when the underlying securities must be sold, in the case of a call option,
since, the writer may be assigned an exercise notice at any time before 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.
The writer of an option that wishes to terminate its obligation 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. A writer may not
effect a closing purchase transaction, however, after being notified of the
exercise of an option. Likewise, an investor who is the holder of an option may
liquidate its position by effecting a "closing sale transaction." This is 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 can be effected.
Effecting a closing transaction in the case of a written call option will allow
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both. Also, effecting a closing
transaction will allow the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other Fund investments. If the
Fund desires to sell a particular security from its portfolio on which it has
written a call option, it will effect a closing transaction before 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; 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.
BUYING CALL OPTIONS. The Fund may buy call options on securities that it intends
to purchase in order to limit the risk of a substantial increase in the market
price of such security. The Fund may also buy call options on securities held in
its portfolio and on which it has written call options. A call option gives the
holder the right to buy the underlying securities from the option writer at a
stated exercise price. Before 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 related transaction costs.
WRITING PUT OPTIONS. The Fund may write covered put options. The Fund, however,
does not currently intend to do so.
A put option gives the buyer of the option the right to sell, and the writer
(seller) the obligation to buy, the underlying security at the exercise price
during the option period. The option may be exercised at any time before its
expiration date. The operation of put options in other respects, including their
related risks and rewards, is substantially identical to that of call options.
If the Fund writes put options, it will do so on a covered basis. This means
that the Fund would maintain in a segregated account cash, U.S. government
securities or other liquid, high-grade debt securities in an amount not less
than the exercise price at all times while the put option is outstanding. The
rules of the clearing corporation currently require that such assets be
deposited in escrow to secure payment of the exercise price. The Fund would
generally write covered put options when Advisers wants to buy the underlying
security or currency for the Fund's portfolio at a price lower than the current
market price of the security or currency. In this event, the Fund would write a
put option at an exercise price that, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the Fund would also
receive interest on debt securities maintained to cover the exercise price of
the option, this technique could be used to enhance current return during
periods of market uncertainty. The risk in such a transaction would be that the
market price of the underlying security or currency would decline below the
exercise price less the premiums received.
BUYING PUT OPTIONS. The Fund may buy a put option on an underlying security or
currency owned by the Fund as a hedging technique in order to protect against an
anticipated decline in the value of the security or currency (a "protective
put"). Such hedge protection is provided only during the life of the put option
when the Fund, as the holder of the put option, is able to sell the underlying
security or currency at the put exercise price, regardless of any decline in the
underlying security's market price or currency's exchange value. For example, a
put option may be purchased in order to protect unrealized appreciation of a
security or currency when Advisers deems it desirable to continue to hold the
security or currency because of tax considerations. The premium paid for the put
option and any transaction costs would reduce any capital gain otherwise
available for distribution when the security or currency is eventually sold.
The Fund may also buy put options at a time when the Fund does not own the
underlying security or currency. By buying put options on a security or currency
it does not own, the Fund seeks to benefit from a decline in the market price of
the underlying security or currency. If the put option is not sold when it has
remaining value, and if the market price of the underlying security or currency
remains equal to or greater than the exercise price during the life of the put
option, the Fund will lose its entire investment in the put option. In order for
the purchase of a put option to be profitable, the market price of the
underlying security or currency must decline sufficiently below the exercise
price to cover the premium and transaction costs, unless the put option is sold
in a closing sale transaction.
The Fund will commit no more than 5% of its assets to premiums when buying put
options. The premium paid by the Fund when buying a put option will be recorded
as an asset in the Fund's statement of assets and liabilities. This asset will
be adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the Net Asset Value per share of the Fund is
computed. The asset will be extinguished upon expiration of the option, the
writing of an identical option in a closing transaction, or the delivery of the
underlying security or currency upon the exercise of the option.
OVER-THE-COUNTER ("OTC") OPTIONS. The Fund intends to write covered put and call
options and buy put and call options that trade in the over-the-counter market
to the same extent that it will engage in exchange traded options. OTC options,
however, differ from exchange traded options in certain material respects.
OTC options are arranged directly with dealers and not, as is the case with
exchange traded options, with a clearing corporation. Thus, there is a risk of
non-performance by the dealer. Because there is no exchange, pricing is
typically done by reference to information from market makers. OTC options are
available, however, for a greater variety of securities, and in a wider range of
expiration dates and exercise prices, than exchange traded options, and the
writer of an OTC option is paid the premium in advance by the dealer.
The Fund understands the current position of the staff of the SEC to be that
purchased OTC options are illiquid securities and that the assets used to cover
the sale of an OTC option are considered illiquid. The Fund and Advisers
disagree with this position. Nevertheless, pending a change in the staff's
position, the Fund will treat OTC options and "cover" assets as subject to the
Fund's limitation on illiquid securities. (See "How does the Fund Invest its
Assets? - Illiquid Investments" in the Prospectus.)
OPTIONS ON STOCK INDICES. The Fund may buy call and put options on stock indices
in order to hedge against the risk of market or industry-wide stock price
fluctuations. Call and put options on stock indices are similar to options on
securities except that, rather than the right to buy or sell stock at a
specified price, options on a stock index give the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the
underlying stock index is greater than (or less than, in the case of puts) the
exercise price of the option. This amount of cash is equal to the difference
between the closing price of the index and the exercise price of the option,
expressed in dollars multiplied by a specified number. Thus, unlike stock
options, all settlements are in cash, and gain or loss depends on price
movements in the stock market generally (or in a particular industry or segment
of the market) rather than price movements in individual stocks.
When the Fund writes an option on a stock index, the Fund will establish a
segregated account containing cash or high quality fixed-income securities with
its custodian bank in an amount at least equal to the market value of the
underlying stock index and will maintain the account while the option is open or
it will otherwise cover the transaction.
FUTURES CONTRACTS. The Fund may enter into contracts for the purchase or sale
for future delivery of securities and in such contracts based upon financial
indices ("financial futures"). Financial futures contracts are commodity
contracts that obligate the long or short holder to take or make delivery of a
specified quantity of a financial instrument, such as a security, or the cash
value of a securities index during a specified future period at a specified
price. A "sale" of a futures contract means the acquisition of a contractual
obligation to deliver the securities called for by the contract at a specified
price on a specified date. A "purchase" of a futures contract means the
acquisition of a contractual obligation to acquire the securities called for by
the contract at a specified price on a specified date. Futures contracts have
been designed by exchanges that have been designated "contracts markets" by the
Commodity Futures Trading Commission ("CFTC") and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market.
At the same time a futures contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment ("initial deposit"). Daily thereafter,
the futures contract is valued and the payment of "variation margin" may be
required since each day the Fund would provide or receive cash that reflects any
decline or increase in the contract's value.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by buying
(or selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the securities. Since all transactions in the futures market are
made, offset or fulfilled through a clearinghouse associated with the exchange
on which the contracts are traded, the Fund will incur brokerage fees when it
buys or sells futures contracts.
The Fund will not engage in transactions in futures contracts or related options
for speculation but only as a hedge against changes resulting from market
conditions in the values of its securities or securities that it intends to buy.
The Fund will not enter into any stock index or financial futures contract or
related option if, immediately thereafter, more than one-third of the Fund's net
assets would be represented by futures contracts or related options. In
addition, the Fund may not buy or sell futures contracts or related options if,
immediately thereafter, the sum of the amount of margin deposits on its existing
futures and related options positions and premiums paid for related options
would exceed 5% of the market value of the Fund's total assets. The purpose of
the acquisition or sale of a futures contract is to attempt to protect the Fund
from fluctuations in price of portfolio securities without actually buying or
selling the underlying security. To the extent the Fund enters into a futures
contract, it will maintain with its custodian bank, to the extent required by
the rules of the SEC, assets in a segregated account to cover its obligations
with respect to such contract which will consist of cash, cash equivalents or
high quality debt securities from its portfolio in an amount equal to the
difference between the fluctuating market value of such futures contract and the
aggregate value of the initial and variation margin payments made by the Fund
with respect to such futures contracts.
STOCK INDEX FUTURES. A stock index futures contract obligates the seller to
deliver (and the buyer to take) an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index is
made.
The Fund may sell stock index futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of its equity
securities that might otherwise result. When the Fund is not fully invested in
stocks and anticipates a significant market advance, it may purchase stock index
futures in order to gain rapid market exposure that may in part or entirely
offset increases in the cost of common stocks that it intends to buy.
OPTIONS ON STOCK INDEX FUTURES. The Fund may buy and sell call and put options
on stock index futures to hedge against risks of market-side price movements.
The need to hedge against such risks will depend on the extent of
diversification of the Fund's common stock portfolio and the sensitivity of such
investments to factors influencing the stock market as a whole.
Call and put options on stock index futures are similar to options on securities
except that, rather than the right to buy or sell stock at a specified price,
options on stock index futures give the holder the right to receive cash. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account which represents the
amount by which the market price of the futures contract, at exercise, exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. If an option is exercised on the last
trading day before the expiration date of the option, the settlement will be
made entirely in cash equal to the difference between the exercise price of the
option and the closing price of the futures contract on the expiration date.
BOND INDEX FUTURES AND RELATED OPTIONS. The Fund may purchase and sell futures
contracts based on an index of debt securities and options on such futures
contracts to the extent they currently exist and, in the future, may be
developed. The Fund reserves the right to conduct futures and options
transactions based on an index which may be developed in the future to correlate
with price movements in certain categories of debt securities. The Fund's
investment strategy in employing futures contracts based on an index of debt
securities will be similar to that used by it in other financial futures
transactions.
The Fund also may buy and write put and call options on bond index futures and
enter into closing transactions with respect to such options.
FUTURE DEVELOPMENTS. The Fund may take advantage of opportunities in the area of
options and futures contracts and options on futures contracts and any other
derivative investments that are not presently contemplated for use by the Fund
or which are not currently available but which may be developed, to the extent
such opportunities are both consistent with the Fund's investment objective and
legally permissible for the Fund.
WHAT ARE THE FUND'S POTENTIAL RISKS?
UTILITY INDUSTRIES
Utility companies in the U.S. and in foreign countries are generally subject to
regulation. In the U.S., most utility companies are regulated by state and/or
federal authorities. This regulation is intended to ensure appropriate standards
of service and adequate capacity to meet public demand. Prices are also
regulated, with the intention of protecting the public while ensuring that the
rate of return earned by utility companies is sufficient to allow them to
attract capital in order to grow and continue to provide appropriate services.
There can be no assurance that such pricing policies or rates of return will
continue in the future.
The nature of regulation of utility industries is evolving both in the U.S. and
in foreign countries. Changes in regulation in the U.S. increasingly allow
utility companies to provide services and products outside their traditional
geographic areas and lines of business, creating new areas of competition within
the industries. Furthermore, Advisers believes that the emergence of competition
will result in utility companies potentially earning more than their traditional
regulated rates of return. Although certain companies may develop more
profitable opportunities, others may be forced to defend their core businesses
and may be less profitable. Advisers seeks to take advantage of favorable
investment opportunities that are expected to arise from these structural
changes. Of course, there can be no assurance that favorable developments will
occur in the future.
Foreign utility companies are also subject to regulation, although such
regulation may or may not be comparable to that in the U.S. Foreign regulatory
systems vary from country to country and may evolve in ways different from
regulation in the U.S.
The Fund's investment policies are designed to enable it to capitalize on
evolving investment opportunities throughout the world. For example, the rapid
growth of certain foreign economies will necessitate expansion of capacity in
the utility industries in those countries. Although many foreign utility
companies currently are government-owned, Advisers believes that in order to
attract significant capital for growth, foreign governments are likely to seek
global investors through the privatization of their utility industries.
Privatization, which refers to the trend toward investor ownership of assets
rather than government ownership, is expected to occur in newer, faster-growing
economies and also in more mature economies. In addition, the economic
unification of European markets is expected to improve economic growth, reduce
costs and increase competition in Europe, which will result in opportunities for
investment by the Fund in European utility industries. Of course, there is no
assurance that these favorable developments will occur or that investment
opportunities for the Fund in foreign markets will increase.
The revenues of domestic and foreign utility companies generally reflect the
economic growth and developments in the geographic areas in which they do
business. Advisers takes into account anticipated economic growth rates and
other economic developments when selecting securities of utility companies.
Further descriptions of some of the anticipated opportunities and risks of
specific segments within the global utility industries are set forth below.
ELECTRIC. The electric utility industry consists of companies that are engaged
principally in the generation, transmission and sale of electric energy,
although many also provide other energy-related services. Domestic electric
utility companies in general have recently been favorably affected by lower fuel
and financing costs and the full or near completion of major construction
programs. In addition, many of these companies recently have generated cash
flows in excess of current operating expenses and construction expenditures,
permitting some degree of diversification into unregulated businesses. Some
electric utilities have also taken advantage of the right to sell power outside
of their traditional geographic areas. Electric utility companies have
historically been subject to the risks associated with increases in fuel and
other operating costs, high interest costs on borrowing needed for capital
construction programs, costs associated with compliance with environmental,
nuclear and other safety regulations and changes in the regulatory climate. For
example, in the U.S., the construction and operation of nuclear power facilities
are subject to increased scrutiny by, and evolving regulations of, the Nuclear
Regulatory Commission. Increased scrutiny might result in higher operating costs
and higher capital expenditures, with the risk that regulators may disallow
inclusion of these costs in rate authorizations.
TELEPHONE COMMUNICATIONS. The telephone communications industry is a distinct
utility industry segment that is subject to different risks and opportunities.
Companies that provide telephone services and access to telephone networks
compose the largest portion of this segment. The telephone industry is large and
highly concentrated. Telephone companies in the U.S. are still experiencing the
effects of the break-up of American Telephone & Telegraph Company, which
occurred in 1984. Since that time the number of local and long-distance
companies and the competition among such companies has increased. In addition,
since 1984, companies engaged in telephone communication services have expanded
their nonregulated activities into other businesses, including cellular
telephone services, cable television, data processing, equipment retailing and
software services. This expansion has provided significant opportunities for
certain telephone companies to increase their earnings and dividends at faster
rates than have been allowed in traditional regulated businesses. Increasing
competition and other structural changes, however, could adversely affect the
profitability of such utilities.
CABLE AND OTHER PAY TELEVISION SERVICES. Cable and pay television companies
produce and distribute programming over private networks. Cable television
continues to be a growth industry throughout most of the world. The industry is
regulated in most countries, but regulation is typically less restrictive than
regulation of the electric and telephone utility industries. Cable companies
usually enjoy local monopolies, although emerging technologies and
pro-competition legislation are presenting substantial challenges to these
monopolies and could slow growth rates.
WIRELESS TELECOMMUNICATIONS. The wireless telecommunications segment includes
those companies that provide alternative telephone and communications services.
These technologies may include: cellular, paging, satellite, microwave and
private communication networks, and other emerging technologies. The wireless
telecommunications industry is in the early development stage and is
characterized by emerging, rapidly growing companies.
GAS. Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the U.S., interstate transmission companies
are regulated by the Federal Energy Regulatory Commission, which is reducing its
regulation of the industry. Many companies have diversified into oil and gas
exploration and development, making returns more sensitive to energy prices. In
the recent decade, gas utility companies have been adversely affected by
disruption in the oil industry and have also been affected by increased
concentration and competition.
WATER. Water supply utilities are companies that collect, purify, distribute and
sell water. In the U.S. and around the world, the industry is highly fragmented
because most of the supplies are owned by local authorities. Companies in this
industry are generally mature and are experiencing little or no per capita
volume growth.
GENERAL. There can be no assurance that the positive developments noted above,
including those relating to business growth and changing regulation, will occur
or that risk factors, other than those noted above, will not develop in the
future.
FOREIGN RISK
POLITICAL AND ECONOMIC RISKS. Investing in securities of non-U.S. companies may
entail additional risks due to the potential political and economic instability
of certain countries and the risks of expropriation, nationalization,
confiscation or the imposition of restrictions on foreign investment and on
repatriation of capital invested. In the event of such expropriation,
nationalization or other confiscation by any country, the Fund could lose its
entire investment in that country.
ILLIQUID SECURITIES. The sale of restricted or illiquid securities often
requires more time and results in higher brokerage charges or dealer discounts
and other selling expenses than does the sale of securities eligible for trading
on national securities exchanges or in the OTC markets. Restricted securities
often sell at a price lower than similar securities that are not subject to
restrictions on resale.
RELIGIOUS AND ETHNIC INSTABILITY. Certain countries in which the Fund may invest
may have vocal minorities that advocate radical religious or revolutionary
philosophies or support ethnic independence. Any disturbance on the part of
these individuals could carry the potential for widespread destruction or
confiscation of property owned by individuals and entities foreign to that
country and could cause the loss of the Fund's investment in those countries.
FOREIGN INVESTMENT RESTRICTIONS. Certain countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Fund. For example, certain
countries require governmental approval before investments by foreign persons,
limit the amount of investment by foreign persons in a particular company, or
limit the investment by foreign persons to only a specific class of securities
of a company that may have less advantageous terms than securities of the
company available for purchase by nationals. Moreover, the national policies of
certain countries may restrict investment opportunities in issuers or industries
deemed sensitive to national interests. Some countries also require governmental
approval for the repatriation of investment income, capital or the proceeds of
securities sold by foreign investors. The Fund could be adversely affected by
delays in, or a refusal to grant, any required governmental approval for
repatriation, as well as by the application to it of other restrictions on
investments.
Non-Uniform Corporate Disclosure Standards and Governmental Regulation. Foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards or to other regulatory requirements comparable to
those applicable to U.S. companies. Many of the securities held by the Fund will
not be registered with the SEC or regulators of any foreign country, nor will
the issuers thereof be subject to the SEC's reporting requirements. Thus, there
will be less available information concerning foreign issuers of securities held
by the Fund than is available concerning U.S. issuers. In instances where the
financial statements of an issuer are not deemed to reflect accurately the
financial situation of the issuer, Advisers may take appropriate steps to
evaluate the proposed investment, which may include on-site inspection of the
issuer, interviews with its management and consultations with accountants,
bankers and other specialists.
CURRENCY FLUCTUATIONS. Because the Fund under normal circumstances will invest a
substantial portion of its total assets in the securities of foreign issuers
that are denominated in foreign currencies, the strength or weakness of the U.S.
dollar against foreign currencies will account for part of the Fund's investment
performance. A decline in the value of any particular currency against the U.S.
dollar will cause a decline in the U.S. dollar value of the Fund's holdings of
securities denominated in that currency and, therefore, will cause an overall
decline in the Fund's Net Asset Value and any net investment income and capital
gains to be distributed in U.S. dollars to shareholders of the Fund.
The rate of exchange between the U.S. dollar and other currencies is determined
by several factors, including the supply and demand for particular currencies,
central bank efforts to support particular currencies, the movement of interest
rates, the pace of business activity in certain other countries and the U.S.,
and other economic and financial conditions affecting the world economy.
Although the Fund values its assets daily in terms of U.S. dollars, the Fund
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund will do so from time to time, and you should be aware
of the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
between the prices at which they are buying and selling various currencies (the
"spread"). Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
sell that currency to the dealer.
ADVERSE MARKET CHARACTERISTICS. Securities of many foreign issuers may be less
liquid and their prices more volatile than securities of comparable U.S.
issuers. In addition, foreign securities exchanges and brokers are generally
subject to less governmental supervision and regulation than in the U.S., and
foreign securities exchange transactions are usually subject to fixed
commissions, which are generally higher than negotiated commissions on U.S.
transactions. In addition, foreign securities exchange transactions may be
subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems could either result in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible gain
to the buyer. Advisers will consider such difficulties when determining the
allocation of the Fund's assets, although Advisers does not believe that these
difficulties will have a material adverse effect on the Fund's portfolio trading
activities.
DEVELOPING MARKETS. Investments in companies domiciled in developing countries
may be subject to potentially higher risks than investments in companies in
developed countries. These risks include (i) less social, political and economic
stability; (ii) the smaller size of the markets for these securities and the
currently low or nonexistent volume of trading, which result in a lack of
liquidity and in greater price volatility; (iii) the lack of publicly available
information, including reports of payments of dividends or interest on
outstanding securities; (iv) certain national policies that may restrict the
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (v) foreign taxation; (vi)
the absence of developed structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vii) the absence,
until recently in certain Eastern European countries and Russia, of a capital
market structure or market-oriented economy; (viii) the possibility that recent
favorable economic developments in Eastern Europe and Russia may be slowed or
reversed by unanticipated political or social events in such countries; (ix)
restrictions which may make it difficult or impossible for the Fund to vote
proxies, exercise shareholder rights, pursue legal remedies, and obtain
judgments in foreign courts; (x) the risk of uninsured loss due to lost, stolen,
or counterfeit stock certificates; and (xi) possible losses through the holding
of securities in domestic and foreign custodial banks and depositories.
In addition, many countries in which the Fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the United States economy in such respects
as growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. The Fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for such
repatriation.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade.
Investments in Eastern European countries may involve risks of nationalization,
expropriation and confiscatory taxation. The communist governments of a number
of Eastern European countries expropriated large amounts of private property in
the past, in many cases without adequate compensation, and there can be no
assurance that such expropriation will not occur in the future. In the event of
such expropriation, the Fund could lose a substantial portion of any investments
it has made in the affected countries. Further, no accounting standards exist in
Eastern European countries. Finally, even though certain Eastern European
currencies may be convertible into U.S. dollars, the conversion rates may be
artificial relative to the actual market values and may be unfavorable to Fund
investors.
Investing in Russian securities involves a high degree of risk and special
considerations not typically associated with investing in the United States
securities markets, and should be considered highly speculative. These risks
include: (a) delays in settling portfolio transactions and risk of loss arising
out of Russia's unique system of share registration and custody; (b) the risk
that it may be impossible or more difficult than in other countries to obtain
and/or enforce a judgment; (c) pervasiveness of corruption and crime in the
Russian economic system; (d) currency exchange rate volatility and the lack of
available currency hedging instruments; (e) higher rates of inflation (including
the risk of social unrest associated with periods of hyperinflation); (f)
controls on foreign investment and local practices disfavoring foreign investors
and limitations on repatriation of invested capital, profits and dividends, and
on the Fund's ability to exchange local currencies for U.S. dollars; (g) the
risk that the Russian government or other executive or legislative bodies may
decide not to continue to support the economic reform programs implemented since
the dissolution of the Soviet Union and could follow radically different
political and/or economic policies to the detriment of investors, including
non-market oriented policies such as the support of certain industries at the
expense of other sectors or investors, or a return to the centrally planned
economy that existed prior to the dissolution of the Soviet Union; (h) the
financial condition of Russian companies, including large amounts of
inter-company debt that may create a payments crisis on a national scale; (i)
dependency on exports and the corresponding importance of international trade;
(j) the risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation; and (k) possible
difficulty in identifying a purchaser of securities held by the Fund due to the
underdeveloped nature of the securities markets.
There is little historical data on Russian securities markets because they are
relatively new and a substantial proportion of securities transactions in Russia
are privately negotiated outside of stock exchanges. Because of the recent
formation of the securities markets, as well as the underdeveloped state of the
banking and telecommunications systems, settlement, clearing and registration of
securities transactions are subject to significant risks. Ownership of shares
(except where shares are held through depositories that meet the requirements of
the 1940 Act) is defined according to entries in the company's share register
and normally evidenced by extracts from the register or by formal share
certificates. However, there is no central registration system for shareholders
and these services are carried out by the companies themselves or by registrars
located throughout Russia. These registrars are not necessarily subject to
effective state supervision and it is possible for the Fund to lose its
registration through fraud, negligence or even mere oversight. While the Fund
will endeavor to ensure that its interest continues to be appropriately recorded
either itself or through a custodian or other agent inspecting the share
register and by obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability and it is possible
that subsequent illegal amendment or other fraudulent act may deprive the Fund
of its ownership rights or improperly dilute its interests. In addition, while
applicable Russian regulations impose liability on registrars for losses
resulting from their errors, it may be difficult for the Fund to enforce any
rights it may have against the registrar or issuer of the securities in the
event of loss of share registration. Furthermore, although a Russian public
enterprise with more than 1,000 shareholders is required by law to contract out
the maintenance of its shareholder register to an independent entity that meets
certain criteria, in practice this regulation has not always been strictly
enforced. Because of this lack of independence, management of a company may be
able to exert considerable influence over who can purchase and sell the
company's shares by illegally instructing the registrar to refuse to record
transactions in the share register. This practice may prevent the Fund from
investing in the securities of certain Russian issuers deemed suitable by
Advisers. Further, this could cause a delay in the sale of Russian securites by
the Fund if a potential purchaser is deemed unsuitable, which may expose the
Fund to potential loss on the investment.
Non-U.S. Taxes. The Fund's net investment income from foreign issuers may be
subject to non-U.S. withholding or other taxes, thereby reducing the Fund's net
investment income.
OPTIONS, FUTURES AND OPTIONS ON FUTURES
The Fund's ability to hedge effectively all or a portion of its securities
through transactions in options on securities and stock indexes, stock index
futures, financial futures and related options depends on the degree to which
price movements in the underlying index or underlying debt securities correlate
with price movements in the relevant portion of the Fund's portfolio. Inasmuch
as such securities will not duplicate the components of any index or underlying
securities, the correlation will not be perfect. Consequently, the Fund bears
the risk that the prices of the securities being hedged will not move in the
same amount as the hedging instrument. It is also possible that there may be a
negative correlation between the index or other securities underlying the
hedging instrument and the hedged securities which would result in a loss on
both the securities and the hedging instrument. Accordingly, successful use by
the Fund of options on securities and stock indexes, stock index futures,
financial futures and related options will be subject to Advisers' ability to
predict correctly movements in the direction of the securities markets generally
or of a particular segment. This requires different skills and techniques than
predicting changes in the price of individual stocks.
In addition, adverse market movements could cause the Fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a futures contract. There is also the risk of loss by
the Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a futures contract or option.
Positions in stock index and securities options, stock index futures and
financial futures and related options 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 or related
option at any specific time. Thus, it may not be possible to close an option or
futures position. If the Fund were unable to close out a futures or option
position, and if prices moved adversely, the Fund would have to continue to make
daily cash payments to maintain its required margin, and, if the Fund had
insufficient cash, it might have to sell portfolio securities at a
disadvantageous time. In addition, the Fund might be required to deliver the
stocks underlying futures or options contracts it holds. The inability to close
options or futures positions could also have an adverse impact on the Fund's
ability to effectively hedge its securities. The Fund will enter into an option
or futures position only if there appears to be a liquid secondary market for
such options or futures.
There can be no assurance that a continuous liquid secondary market will exist
for any particular OTC option at any specific time. Consequently, the Fund may
be able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer that
issued it. Similarly, when the Fund writes an OTC option, it generally can close
out that option before its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it. If a covered
call option writer cannot effect a closing transaction, it cannot sell the
underlying security until the option expires or the option is exercised.
Therefore, a covered call option writer of an OTC option may not be able to sell
an underlying security even though it might otherwise be advantageous to do so.
Likewise, a secured put writer of an OTC option may be unable to sell the
securities pledged to secure the put for other investment purposes while it is
obligated as a put writer. Similarly, a buyer of a put or call option might also
find it difficult to terminate its position on a timely basis in the absence of
a liquid secondary market.
The CFTC and the various exchanges have established limits referred to as
"speculative position limits" on the maximum net long or net short position that
any person may hold or control in a particular futures contract. Trading limits
are also imposed on the maximum number of contracts that any person may trade on
a particular trading day. An exchange may order the liquidation of positions
found to be in violation of these limits and it may impose other sanctions or
restrictions. The Fund does not believe that these trading and positions limits
will have an adverse impact on the Fund's strategies for hedging its securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions that could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by Advisers may still not
result in a successful transaction.
Although the Fund believes that the use of futures contracts will benefit the
Fund, if Advisers' investment judgment about the general direction of interest
rates is incorrect, the Fund's overall performance would be poorer than if it
had not entered into any such contract. For example, if the Fund has hedged
against the possibility of an increase in interest rates that would adversely
affect the price of bonds held in its portfolio and interest rates decrease
instead, the Fund will lose part or all of the benefit of the increased value of
its bonds which it has hedged because it will have offsetting losses in its
futures positions. In addition, in these situations, if the Fund has
insufficient cash, it may have to sell securities from its portfolio to meet
daily variation margin requirements. These sales may be, but will not
necessarily be, at increased prices which reflect the rising market. The Fund
may have to sell securities at a time when it may be disadvantageous to do so.
The Fund's sale of futures contracts and purchase of put options on futures
contracts will be solely to protect its investments against declines in value.
The Fund expects that normally it will buy securities upon termination of long
futures contracts and long call options on future contracts, but under unusual
market conditions it may terminate any of these positions without a
corresponding purchase of securities.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. While these contracts are not
presently regulated by the CFTC, the CFTC may in the future assert authority to
regulate forward contracts. In this event, the Fund's ability to use forward
contracts may be restricted. The use of foreign currency forward contracts will
not eliminate fluctuations in the underlying U.S. dollar equivalent value of, or
rates of return on, the Fund's foreign currency denominated portfolio securities
and the use of such techniques will subject the Fund to certain risks.
The matching of the increase in value of a forward contract and the decline in
the U.S. dollar equivalent value of the foreign currency denominated asset that
is the subject of the hedge generally will not be precise. In addition, the Fund
may not always be able to enter into foreign currency forward contracts at
attractive prices and this will limit the Fund's ability to use such contracts
to hedge or cross-hedge its assets. Also, with regard to the Fund's use of
cross-hedges, there can be no assurance that historical correlations between the
movement of certain foreign currencies relative to the U.S. dollar will
continue. Thus, at any time, poor correlation may exist between movements in the
exchange rates of the foreign currencies in which the Fund's assets that are the
subject of such cross-hedges are denominated.
FOREIGN CURRENCY FUTURES. By entering into these contracts, the Fund is able to
protect against a loss resulting from an adverse change in the relationship
between the U.S. dollar and a foreign currency occurring between the trade and
settlement dates of the Fund's securities transaction. These contracts also tend
to limit the potential gains that might result from a positive change in such
currency relationships.
OPTIONS ON FOREIGN CURRENCIES. Options on foreign currencies and forward
contracts are not traded on contract markets regulated by the CFTC or (with the
exception of certain foreign currency options) by the SEC. To the contrary, such
instruments are traded through financial institutions acting as market makers,
although foreign currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options
Exchange, subject to SEC regulation. Similarly, options on currencies may be
traded OTC. In an OTC trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer and a
trader of forward contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements associated
with such positions.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on these exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation ("OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the OTC market, potentially permitting the Fund to liquidate open
positions at a profit before exercise or expiration, or to limit losses in the
event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, are
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the OTC market. For example, exercise and
settlement of such options must be made exclusively through the OCC, which has
established banking relationships in applicable foreign countries for this
purpose. As a result, the OCC may, if it determines that foreign governmental
restrictions or taxes would prevent the orderly settlement of foreign currency
option exercises, or would result in undue burdens on the OCC or its clearing
member, impose special procedures on exercise and settlement, such as technical
changes in the mechanics of delivery of currency, the fixing of dollar
settlement prices or prohibitions on exercise.
In addition, forward contracts and options on foreign currencies may be traded
on foreign exchanges. Such transactions are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign currencies. The value of
these positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the U.S. of
data on which to make trading decisions, (iii) delays in the Fund's ability to
act upon economic events occurring in foreign markets during nonbusiness hours
in the U.S., (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the U.S., and (v) less trading
volume.
HIGH YIELDING, FIXED-INCOME SECURITIES
The market value of high yield, lower-quality fixed-income securities, commonly
known as junk bonds, tends to reflect individual developments affecting the
issuer to a greater degree than the market value of higher-quality securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality securities also tend to be more sensitive to economic conditions
than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with buying the securities of these issuers is generally
greater than the risk associated with higher-quality securities. For example,
during an economic downturn or a sustained period of rising interest rates,
issuers of lower-quality securities may experience financial stress and may not
have sufficient cash flow to make interest payments. The issuer's ability to
make timely interest and principal payments may also be adversely affected by
specific developments affecting the issuer, including the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the Fund's portfolio defaults, the Fund may have unrealized losses on the
security, which may lower the Fund's Net Asset Value. Defaulted securities tend
to lose much of their value before they default. Thus, the Fund's Net Asset
Value may be adversely affected before an issuer defaults. In addition, the Fund
may incur additional expenses if it must try to recover principal or interest
payments on a defaulted security.
At fiscal year end, April 30, 1997, none of the securities in the Fund's
portfolio were in default on their contractual provisions.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse impact
on market price of a security and on the Fund's ability to sell a security in
response to a specific economic event, such as a deterioration in the
creditworthiness of the issuer, or if necessary to meet the Fund's liquidity
needs. Reduced liquidity may also make it more difficult to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
The Fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry restrictions
on resale. While many high yielding securities have been sold with registration
rights, covenants and penalty provisions for delayed registration, if the Fund
is required to sell restricted securities before the securities have been
registered, it may be deemed an underwriter of the securities under the
Securities Act of 1933, which entails special responsibilities and liabilities.
The Fund may also incur special costs in disposing of restricted securities,
although the Fund will generally not incur any costs when the issuer is
responsible for registering the securities.
The Fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other characteristics.
The Fund has no arrangement with its underwriter or any other person concerning
the acquisition of these securities.
The Fund relies on Advisers' judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, Advisers takes into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. The Fund may not:
1. Make loans to other persons, except by the purchase of bonds, debentures or
similar obligations which are publicly distributed or of a character usually
acquired by institutional investors, or through loans of the Fund's portfolio
securities, or to the extent the entry into a repurchase agreement may be deemed
a loan;
2. Borrow money or mortgage or pledge any of its assets, except in the form of
reverse repurchase agreements or from banks for temporary or emergency purposes
in an amount up to 33% of the value of the Fund's total assets (including the
amount borrowed) based on the lesser of cost or market, less liabilities (not
including the amount borrowed) at the time the borrowing is made. While
borrowings exceed 5% of the Fund's total assets, the Fund will not make any
additional investments;
3. Underwrite securities of other issuers (does not preclude the Fund from
obtaining such short-term credit as may be necessary for the clearance of
purchases and sales of its portfolio securities) or invest more than 5% of its
assets in securities with legal or contractual restrictions on resale (although
the Fund may invest in such securities to the extent permitted under the federal
securities laws) or which are not readily marketable, if more than 15% of the
Fund's total assets would be invested in such companies;
4. Invest in securities for the purpose of exercising management or control of
the issuer;
5. Maintain a margin account with a securities dealer or invest in commodities
and commodity contracts (except that the Fund may engage in financial futures,
including stock index futures, and options on stock index futures) or lease or
acquire any interests, including interests issued by limited partnerships (other
than publicly traded equity securities), in oil, gas, or other mineral
exploration or development programs, or invest in excess of 5% of its total
assets in options unrelated to the Fund's transactions in futures, including
puts, calls, straddles, spreads, or any combination thereof;
6. Effect short sales, unless at the time the Fund owns securities equivalent
in kind and amount to those sold (which will normally be for deferring
recognition of gains or losses for tax purposes). The Fund does not currently
intend to employ this investment technique;
7. Invest directly in real estate, real estate limited partnerships or illiquid
securities issued by real estate investment trusts (the Fund may, however,
invest in marketable securities issued by real estate investment trusts);
8. Invest in the securities of other investment companies, except where there
is no commission other than the customary brokerage commission or sales charge,
or except that securities of another investment company may be acquired pursuant
to a plan of reorganization, merger, consolidation or acquisition, and except
where the Fund would not own, immediately after the acquisition, securities of
the investment companies which exceed in the aggregate i) more than 3% of the
issuer's outstanding voting stock, ii) more than 5% of the Fund's total assets
and iii) together with the securities of all other investment companies held by
the Fund, exceed, in the aggregate, more than 10% of the Fund's total assets.
Pursuant to available exemptions from the 1940 Act, the Fund may invest in
shares of one or more money market funds managed by Advisers or its affiliates;
9. Purchase from or sell to its officers and trustees, or any firm of which any
officer or trustee is a member, as principal, any securities, but may deal with
such persons or firms as brokers and pay a customary brokerage commission; or
purchase or retain securities of any issuer if, to the knowledge of the Trust,
one or more of the officers or trustees of the Trust, or its investment adviser,
own beneficially more than one-half of 1% of the securities of such issuer and
all such officers and trustees together own beneficially more than 5% of such
securities;
10. Concentrate in any industry, except that the Fund will invest at least 25%
of total assets in the equity and debt securities issued by domestic and foreign
companies in the utilities industries; and
11. Invest more than 10% of its assets in securities of companies which have a
record of less than three years continuous operation, including the operations
of any predecessor companies.
In addition to these fundamental policies, it is the present policy of the Fund
(which may be changed without shareholder approval) not to engage in joint or
joint and several trading accounts in securities, except that it may: 1)
participate in joint repurchase arrangements; 2) invest its short-term cash in
shares of the Franklin Money Fund (pursuant to the terms of any order, and any
conditions therein, issued by the SEC permitting such investments); or 3)
combine orders to buy or sell with orders from other persons to obtain lower
brokerage commissions. The Fund may not invest in excess of 5% of its net
assets, valued at the lower of cost or market, in warrants, nor more than 2% of
its net assets in warrants not listed on either the New York or American Stock
Exchange. It is also the policy of the Fund that it may, consistent with its
objective, invest a portion of its assets, as permitted by the 1940 Act and the
rules adopted thereunder, in securities or other obligations issued by companies
engaged in securities related businesses, including such companies that are
securities brokers, dealers, underwriters or investment advisers.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
Positions and Offices Principal Occupation
Name, Age and Address with the Trust During the Past Five Years
Frank H. Abbott, III (76) Trustee
1045 Sansome Street
San Francisco, CA 94111
President and Director, Abbott
Corporation (an investment company);
and director or trustee, as the case
may be, of 28 of the investment
companies in the Franklin Templeton
Group of Funds.
Harris J. Ashton (65) 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 (a meat packing company); and
director or trustee, as the case may
be, of 52 of the investment companies
in the Franklin Templeton Group of
Funds.
*Harmon E. Burns (52) 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.
and Franklin Templeton Services, Inc.;
Executive Vice President, Franklin
Advisers, Inc.; Director,
Franklin/Templeton Investor Services,
Inc.; and officer and/or director or
trustee, as the case may be, of most of
the other subsidiaries of Franklin
Resources, Inc. and of 57 of the
investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (65) 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, General
Host Corporation (nursery and craft
centers); and director or trustee, as
the case may be, of 55 of the
investment companies in the Franklin
Templeton Group of Funds.
David W. Garbellano (82) 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 or
trustee, as the case may be, of 27 of
the investment companies in the
Franklin Templeton Group of Funds.
*Charles B. Johnson (64) Chairman
777 Mariners Island Blvd. of the Board
San Mateo, CA 94404 and Trustee
President, Chief Executive Officer and
Director, Franklin Resources, Inc.;
Chairman of the Board and Director,
Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin
Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor
Services, Inc., Franklin Templeton
Services, Inc. and General Host
Corporation (nursery and craft
centers); and officer and/or director
or trustee, as the case may be, of most
of the other subsidiaries of Franklin
Resources, Inc. and of 53 of the
investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (57) 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.;
Director, Franklin/Templeton Investor
Services, Inc.; and officer and/or
director or trustee, as the case may
be, of most other subsidiaries of
Franklin Resources, Inc. and of 57 of
the investment companies in the
Franklin Templeton Group of Funds.
Frank W. T. LaHaye (68) 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 Corporation
(software firm); Director, Fischer
Imaging Corporation (medical imaging
systems) and Digital Transmission
Systems, Inc. (wireless
communications); and director or
trustee, as the case may be, of 26 of
the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (69) 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), Shoppers Express (home
shopping), and Spacehab, Inc.
(aerospace services); and director or
trustee, as the case may be, of 49 of
the investment companies in the
Franklin Templeton Group of Funds;
formerly Chairman, Hambrecht and Quist
Group, Director, H & Q Healthcare
Investors, and President, National
Association of Securities Dealers, Inc.
Martin L. Flanagan (37) 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 and Director, Templeton
Worldwide, Inc.; Director, Executive
Vice President and Chief Operating
Officer, Templeton Investment Counsel,
Inc.; Senior Vice President and
Treasurer, Franklin Advisers, Inc.;
Treasurer, Franklin Advisory Services,
Inc.; Treasurer and Chief Financial
Officer, Franklin Investment Advisory
Services, Inc.; President, Franklin
Templeton Services, Inc.; Senior Vice
President, Franklin/Templeton Investor
Services, Inc.; and officer and/or
director or trustee, as the case may
be, of 58 of the investment companies
in the Franklin Templeton Group of
Funds.
Deborah R. Gatzek (48) 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 Services, Inc. and Franklin
Templeton Distributors, Inc.; Vice
President, Franklin Advisers, Inc. and
Franklin Advisory Services, Inc.; Vice
President, Chief Legal Officer and
Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and
officer of 57 of the investment
companies in the Franklin Templeton
Group of Funds.
Charles E. Johnson (41) 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.;
President, Chief Executive Officer,
Chief Investment Officer and Director,
Franklin Institutional Services
Corporation; Chairman and Director,
Templeton Investment Counsel, Inc.;
Vice President, Franklin Advisers,
Inc.; officer and/or director of some
of the subsidiaries of Franklin
Resources, Inc.; and officer and/or
director or trustee, as the case may
be, of 36 of the investment companies
in the Franklin Templeton Group of
Funds.
Diomedes Loo-Tam (58) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting Officer
Senior Vice President, Franklin
Templeton Services, Inc.; and officer
of 34 of the investment companies in
the Franklin Templeton Group of Funds.
Edward V. McVey (60) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President and National
Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 29
of the investment companies in the
Franklin Templeton Group of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are currently paid
$2,400 per year (or $300 for each of the eight regularly scheduled Board
meetings) plus $300 per meeting attended. As shown above, the nonaffiliated
Board members also serve as directors or trustees of other investment companies
in the Franklin Templeton Group of Funds. They may receive fees from these funds
for their services. The following table provides the total fees paid to
nonaffiliated Board members by the Trust and by other funds in the Franklin
Templeton Group of Funds.
Number of
Total Fees Boards in the
Total Fees Received from the Franklin Templeton
Received from Franklin Templeton Group of Funds on
Name the Trust* Group of Funds** Which Each Serves***
-----------------------------------------------------------------------------
Frank H. Abbott, III $5,100 $165,236 28
Harris J. Ashton 5,100 343,591 52
S. Joseph Fortunato 5,100 360,411 55
David W. Garbellano 4,800 148,916 27
Frank W.T. LaHaye 4,800 139,233 26
Gordon S. Macklin 5,100 335,541 49
*For the fiscal year ended April 30, 1997.
**For the calendar year ended December 31, 1996.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 58 registered investment companies, with approximately 169 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 or trustee.
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 August 5, 1997, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately 1,642
Class I shares, or less than 1% of the total outstanding Class I shares of the
Fund. Many of the Board members own shares in other funds in the Franklin
Templeton Group of Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are
brothers and the father and uncle, respectively, of Charles E. Johnson.
INVESTMENT MANAGEMENT
AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio transactions
are executed. Advisers' activities are subject to the review and supervision of
the Board to whom Advisers renders periodic reports of the Fund's investment
activities. Advisers and its officers, directors and employees are covered by
fidelity insurance for the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action with
respect to any of the other funds it manages, or for its own account, that may
differ from action taken by Advisers on behalf of the Fund. Similarly, with
respect to the Fund, Advisers is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that Advisers and
access persons, as defined by the 1940 Act, may buy or sell for its or their own
account or for the accounts of any other fund. Advisers is not obligated to
refrain from investing in securities held by the Fund or other funds that it
manages. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Fund's Code of Ethics. Please
see "Miscellaneous Information Summary of Code of Ethics."
MANAGEMENT FEES. Under its management agreement, the Fund pays Advisers a
management fee equal to an annual rate of 0.625 of 1% of the value of average
daily net assets up to and including $100 million; 0.50 of 1% of the value of
average daily net assets over $100 million up to and including $250 million;
0.45 of 1% of the value of average daily net assets over $250 million up to and
including $10 billion; 0.44 of 1% of the value of average daily net assets over
$10 billion up to and including $12.5 billion; 0.42 of 1% of the value of
average daily net assets over $12.5 billion up to and including $15 billion; and
0.40 of 1% of the value of average daily net assets over $15 billion. The fee is
computed at the close of business on the last business day of each month. Each
class pays its proportionate share of the management fee.
For the fiscal years ended April 30, 1995, 1996 and 1997, management fees
totaling $737,090, $770,522 and $1,007,080, respectively, were paid to Advisers.
MANAGEMENT AGREEMENT. The management agreement is in effect until April 30,
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. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these services
per benefit plan participant Fund account per year may not exceed the per
account fee payable by the Fund to Investor Services in connection with
maintaining shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York 10286, acts as custodian of the securities and other assets of
the Fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Fund's independent auditors. During the fiscal year ended April
30, 1997, their auditing services consisted of rendering an opinion on the
financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended April 30, 1997.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
Advisers selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the Board may give.
When placing a portfolio transaction, Advisers seeks to obtain prompt execution
of orders at the most favorable net price. For portfolio transactions on a
securities exchange, the amount of commission paid by the Fund is negotiated
between Advisers and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. Advisers will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of Advisers, a
better price and execution can otherwise be obtained. Purchases of portfolio
securities from underwriters will include a commission or concession paid by the
issuer to the underwriter, and purchases from dealers will include a spread
between the bid and ask price.
Advisers may pay certain brokers commissions that are higher than those another
broker may charge, if Advisers determines in good faith that the amount paid is
reasonable in relation to the value of the brokerage and research services it
receives. This may be viewed in terms of either the particular transaction or
Advisers' overall responsibilities to client accounts over which it exercises
investment discretion. The services that brokers may provide to Advisers
include, among others, supplying information about particular companies,
markets, countries, or local, regional, national or transnational economies,
statistical data, quotations and other securities pricing information, and other
information that provides lawful and appropriate assistance to Advisers in
carrying out its investment advisory responsibilities. These services may not
always directly benefit the Fund. They must, however, be of value to Advisers in
carrying out its overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services Advisers receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staffs of other securities firms. As long as it is lawful and
appropriate to do so, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. If the Fund's
officers are satisfied that the best execution is obtained, the sale of Fund
shares, as well as shares of other funds in the Franklin Templeton Group of
Funds, may also be considered a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to Advisers will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisers are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by
Advisers, taking into account the respective sizes of the funds and the amount
of securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
During the fiscal years ended April 30, 1995, 1996 and 1997, the Fund paid
brokerage commissions totaling $74,757, $235,700 and $339,618, respectively.
As of April 30, 1997, the Fund did not own securities of its regular
broker-dealers.
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? - Purchase
Price of Fund Shares" 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.
Class I 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, Class I
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 may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares 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 of Class I shares by certain retirement plans without a front-end
sales charge, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on sales
over $3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million. Distributors may make these
payments in the form of contingent advance payments, which may be recovered from
the Securities Dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy Class
I shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds acquired more than 90 days before the Letter is filed, will be counted
towards completion of the Letter, but they will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions you make during the 13
month period, except in the case of certain retirement plans, will be subtracted
from the amount of the purchases for purposes of determining whether the terms
of the Letter have been completed. If the Letter is not completed within the 13
month period, there will be an upward adjustment of the sales charge, depending
on the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute a
Letter before a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the sales
charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I 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 securities 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. 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
for Class I shares and on the prior business day for Class II shares. If the
processing dates are different, the date of the Net Asset Value used to redeem
the shares will also be different for Class I and Class II shares.
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. 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 of each class 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, Martin Luther King Jr. 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.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
of the NYSE on each day that the NYSE is open. Trading in European or Far
Eastern securities generally, or in a particular country or countries, may not
take place on every NYSE business day. Furthermore, trading takes place in
various foreign markets on days that are not business days for the NYSE and on
which the Net Asset Value of each class is not calculated. Thus, the calculation
of the Net Asset Value of each class does not take place contemporaneously with
the determination of the prices of many of the portfolio securities used in the
calculation and, if events materially affecting the values of these foreign
securities occur, the securities will be valued at fair value as determined by
management and approved in good faith 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 each class 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 Net Asset Value of each class. If events
materially affecting the values of these securities occur during this period,
the securities will be valued at their fair value as determined in good faith by
the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the form of
dividends, interest and other income derived from its investments. This income,
less the expenses incurred in the Fund's operations, is its net investment
income from which income dividends may be distributed. Thus, the amount of
dividends paid per share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any capital loss carryforward or post-October
loss deferral) may generally be made once each year in December to reflect any
net short-term and net long-term capital gains realized by the Fund as of
October 31 of the current fiscal year and any undistributed capital gains from
the prior fiscal year. The Fund may adjust the timing of these distributions for
operational or other reasons.
TAXES
As stated in the Prospectus, the Fund has elected and qualified 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.
As stated in the Prospectus, the Fund intends to continue to qualify 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 such course of action to be beneficial to
shareholders. In such case, the Fund will be subject to federal and possibly
state corporate taxes on its taxable income and gains, and distributions to you
will be ordinary dividend income 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 which 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 declared by
the Fund annually in the Fund's fiscal year end annual report.
Corporate shareholders should note that dividends paid by the Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividends-received deduction. For example, any interest income and net
short-term capital gain (in excess of any net long-term capital loss or capital
loss carryover) included in investment company taxable income and distributed by
the Fund as a dividend will not qualify for the dividends-received deduction.
Corporate shareholders should also note that availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless Fund shares have been held (or deemed held)
for at least 46 days in a substantially unhedged manner. The dividends-received
deduction may also be reduced to the extent interest paid or accrued by a
corporate shareholder is directly attributable to its investment in Fund shares.
The entire dividend, including the portion that is treated as a deduction, is
includable in the tax base on which the alternative minimum tax is computed and
may also result in a reduction in the shareholder's tax basis in its Fund
shares, under certain circumstances, if the shares have been held for less than
two years. Corporate shareholders whose investment in the Fund is "debt
financed" for these tax purposes should consult with their tax advisors
concerning the availability of the dividends-received deduction.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to you by December 31 of each year in order to avoid the
imposition of a federal excise tax. Under these rules, certain distributions
which are declared in October, November or December but which, for operational
reasons, may not be paid to you until the following January, will be treated for
tax purposes as if paid by the Fund and received by the shareholder on December
31 of the calendar year in which they are declared. The Fund intends as a matter
of policy to declare and pay such dividends, if any, in December to avoid the
imposition of this tax, but does not guarantee that its distributions will be
sufficient to avoid any or all federal excise taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between your basis in the shares
and the amount received from the transaction, 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 the sales charge incurred in buying shares of the Fund will
not be included in the federal tax basis of such shares sold or exchanged within
90 days of their purchase (for purposes of determining gain or loss with respect
to such shares) if the sales proceeds are reinvested in the Fund or in another
fund in the Franklin Templeton Funds and a sales charge which would otherwise
apply to the reinvestment is reduced or eliminated. Any portion of the sales
charge excluded from the tax basis of the shares sold will be added to the tax
basis of the shares acquired in the reinvestment. You should consult with your
tax advisor concerning the tax rules applicable to the redemption and exchange
of Fund shares.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares repurchased.
Any loss realized upon the redemption of shares within six months from the date
of their purchase will be treated as a long-term capital loss to the extent of
amounts treated as distributions of net long-term capital gain during such
six-month period.
The Fund's investment in options, futures, and forward contracts, including
transactions involving actual or deemed short sales, or foreign exchange gains
or losses are subject to many complex and special tax rules. For example, OTC
options on debt securities and equity options, including options on stock and on
narrow-based stock indexes, will be subject to tax under Section 1234 of the
Code, generally producing a long-term or short-term capital gain or loss upon
exercise, lapse, or closing out of the option or sale of the underlying stock or
security. By contrast, the Fund's treatment of certain other options, futures
and forward contracts entered into by the Fund is generally governed by Section
1256 of the Code. These "Section 1256" positions generally include listed
options on debt securities, options on broad-based stock 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 Section 1256 position held by the
Fund will be marked-to-market (i.e., treated as if it were sold for fair market
value) on the last business day of the Fund's fiscal year, and all gain or loss
associated with fiscal year transactions and mark-to-market positions at fiscal
year end (except certain foreign currency gain or loss covered by Section 988 of
the Code) will generally be treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss. The effect of Section 1256 mark-to-market
rules may be to accelerate income or to convert what otherwise would have been
long-term capital gains into short-term capital gains (or vice versa) or
short-term capital losses into long-term capital losses (or vice versa) within
the Fund. The acceleration of income on Section 1256 positions may require the
Fund to accrue taxable income without the corresponding receipt of cash. In
order to generate cash to satisfy the distribution requirements of the Code, the
Fund may be required to dispose of portfolio securities that it otherwise would
have continued to hold or to use cash flows from other sources such as the sale
of Fund shares. In these ways, any or all of these rules may affect the amount,
character and timing of income distributed to you by the Fund.
When the Fund holds an option, future, or forward contract that substantially
diminishes the Fund's risk of loss with respect to another position of the Fund
(as might occur in some hedging transactions), this combination of positions
could be treated as a straddle for tax purposes, resulting in possible deferral
of losses, adjustments in the holding periods of Fund securities and conversion
of short-term capital losses into long-term capital losses. Certain tax
elections exist for mixed straddles, i.e., straddles comprised of at least one
Section 1256 position and at least one non-Section 1256 position, which may
reduce or eliminate the operation of these straddle rules.
As a regulated investment company, the Fund is 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, futures, or forward contracts and certain other hedging
transactions because these transactions are often consummated in less than three
months, and may require the sale of portfolio securities held less than three
months and may, as in the case of short sales of portfolio securities, reduce
the holding periods of certain securities within the Fund, resulting in
additional short-short income for the Fund.
The Fund will monitor its transactions in options, futures and forward contracts
and may make certain other tax elections in order to mitigate the effect of the
above rules and to prevent disqualification of the Fund as a regulated
investment company under Subchapter M of the Code.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currencies, foreign currency payables or
receivables, foreign currency denominated debt securities, foreign currency
forward contracts, and options or futures contracts on foreign currencies are
generally subject to Section 988 of the Code which may cause such gains and
losses to be treated as ordinary income and losses rather than capital gains and
losses and may affect the amount and timing of the Fund's income or loss from
such transactions and in turn, its distributions to you.
In order for the Fund to qualify as a regulated investment company under
Subchapter M of the Code, at least 90% of the Fund's annual gross income must
consist of dividends, interest and certain other types of qualifying income, and
no more than 30% of its annual gross income may be derived from the sale or
other disposition of securities or certain other instruments held for less than
three months. Foreign exchange gains derived by the Fund with respect to the
Fund's business of investing in stock or securities or options or futures with
respect to such stock or securities is qualifying income for purposes of this
90% limitation.
Currency speculation or the use of currency forward contracts or other currency
instruments for non-hedging purposes may generate gains deemed to be not derived
with respect to the Fund's principal business of investing in stock or
securities and related options or futures. Under current law,
non-directly-related gains arising from foreign currency positions or
instruments held for less than three months are treated as derived from the
disposition of securities held less than three months in determining the Fund's
compliance with the 30% limitation. The Fund will limit its activities involving
foreign exchange gains to the extent necessary to comply with these
requirements.
If the Fund owns shares in a foreign corporation that constitutes a passive
foreign investment company (a "PFIC") for federal income tax purposes and the
Fund does not elect to treat the foreign corporation as a "qualified electing
fund" within the meaning of the Code, the Fund may be subject to U.S. federal
income taxation on a portion of any "excess distribution" it receives from the
PFIC or any gain it derives from the disposition of such shares, even if such
income is distributed as a taxable dividend by the Fund to its U.S.
shareholders. The Fund may also be subject to additional interest charges in
respect of deferred taxes arising from such distributions or gains. Any federal
income tax paid by the Fund as a result of its ownership of shares of a PFIC
will not give rise to a deduction or credit to the Fund or to you. 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 a 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. Such
excess distribution amounts are treated as ordinary income, which the Fund will
be required to distribute to you even though the Fund has nor 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 of the Fund's shares. 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.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal years ended April 30, 1995, 1996 and 1997, were
$664,553, $372,584 and $456,380, respectively. After allowances to dealers,
Distributors retained $76,600, $38,712 and $43,795 in net underwriting discounts
and commissions for the respective years. Distributors received $4,607 in
connection with redemptions or repurchases of shares for the fiscal year ended
April 30, 1997. Distributors may be entitled to reimbursement under the Rule
12b-1 plan for each class, as discussed below. Except as noted, Distributors
received no other compensation from the Fund for acting as underwriter.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 plans" that
were adopted pursuant to Rule 12b-1 of the 1940 Act.
THE CLASS I PLAN. Under the Class I plan, the Fund may pay up to a maximum of
0.25% per year of Class I's average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of Class I shares.
The Class I plan does not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.
THE CLASS II PLAN. Under the Class II plan, the Fund pays Distributors up to
0.75% per year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the Fund.
Under the Class II plan, the Fund also pays an additional 0.25% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
THE CLASS I AND CLASS II PLANS. In addition to the payments that Distributors or
others are entitled to under each plan, each 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
each class 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. The terms and
provisions of each plan relating to required reports, term, and approval are
consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
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 plans 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 plans 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.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are 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 plans, 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 plans 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 outstanding
shares of the class. The Class I plan may also be terminated by any act that
constitutes an assignment of the underwriting agreement with Distributors.
Distributors or any dealer or other firm may also terminate their respective
distribution or service agreement at any time upon written notice.
The plans 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 outstanding shares of the class, and all material amendments to the plans
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 plans 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 plans should be continued.
For the fiscal year ended April 30, 1997, Distributors had eligible expenditures
of $522,402 and $102,886 for advertising, printing, and payments to underwriters
and broker-dealers pursuant to the Class I and Class II plans, respectively, of
which the Fund paid Distributors $385,670 and $57,099 under the Class I and
Class II plans.
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 and current yield 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-year and from inception
periods 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-year and from
inception periods and the deduction of all applicable charges and fees. If a
change is made to the sales charge structure, historical performance information
will be restated to reflect the maximum front-end sales charge currently in
effect. The average annual total return for Class I shares for the one-year and
from inception (July 2, 1992) periods ended April 30, 1997 was 7.88% and 12.94%,
respectively. The average annual total return for Class II shares for the
one-year and from inception (May 1, 1995) periods ended April 30, 1997, was
9.96% and 16.89%, respectively.
These figures were 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-year and from inception periods at the end of the one-year
and from inception periods
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 actual return for each class for a specified period rather than on the
average return over one-year and from inception periods. The cumulative total
return for Class I shares for the one-year and from inception (July 2, 1992)
periods ended April 30, 1997 was 7.88% and 79.94%, respectively. The cumulative
total return for Class II shares for the one-year and from inception (May 1,
1995) periods ended April 30, 1997, was 9.96% and 36.61%, respectively.
YIELD
CURRENT YIELD. Current yield of each class shows the income per share earned by
the Fund. It is calculated by dividing the net investment income per share of
each class earned during a 30-day base period by the applicable maximum Offering
Price per share on the last day of the period and annualizing the result.
Expenses accrued for the period include any fees charged to all shareholders of
the class during the base period. The yield for each class for the 30-day period
ended April 30, 1997, was 1.85% for Class I and 1.18% for Class II.
These figures were obtained using the following SEC formula:
6
Yield = 2 [(a-b + 1) - 1]
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends d = the maximum Offering Price per share on the
last day of the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the SEC,
is not indicative of the amounts which were or will be paid to shareholders of a
class. Amounts paid to shareholders are reflected in the quoted current
distribution rate. The current distribution rate is usually computed by
annualizing the dividends paid per share by a class during a certain period and
dividing that amount by the current maximum Offering Price. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing and short-term capital
gains, and is calculated over a different period of time. The current
distribution rate for each class for the 30-day period ended April 30, 1997, was
2.53% for Class I and 2.14% for Class II.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) 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(R) 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed on
the NYSE.
d) Wilshire 5000 Equity Index - represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
h) Financial publications: The Wall Street Journal, and Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
l) Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
m) Standard & Poor's(R) 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 2.7 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Mutual Series Fund Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $207 billion in
assets under management for more than 5.4 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 120
U.S. based open-end investment companies to the public. The Fund may identify
itself by its NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the NYSE.
While many of them have similar investment objectives, no two are exactly alike.
As noted in the Prospectus, shares of the Fund are generally sold through
Securities Dealers. Investment representatives of such Securities Dealers are
experienced professionals who can offer advice on the type of investment
suitable to your unique goals and needs, as well as the types of risks
associated with such investment.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past nine years.
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of the Fund, no other person holds beneficially or of record more
than 5% of the outstanding shares of any class.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations must be sent to a compliance
officer and, within 10 days after the end of each calendar quarter, a report of
all securities transactions must be provided to the compliance officer; and
(iii) access persons involved in preparing and making investment decisions must,
in addition to (i) and (ii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended April 30, 1997, including the auditors'
report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
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 of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
PROSPECTUS - The prospectus for the Fund dated September 1, 1997, as may be
amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
197 SAI 09/97
FRANKLIN SMALL CAP GROWTH FUND
FRANKLIN STRATEGIC SERIES
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 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? ......................... 7
Investment Restrictions ...................................... 9
Officers and Trustees ........................................ 11
Investment Management
and Other Services .......................................... 14
How does the Fund Buy
Securities for its Portfolio? ............................... 15
How Do I Buy, Sell and Exchange Shares? ...................... 16
How are Fund Shares Valued? .................................. 19
Additional Information on
Distributions and Taxes ..................................... 20
The Fund's Underwriter ....................................... 22
How does the Fund
Measure Performance? ....................................... 23
Miscellaneous Information .................................... 26
Financial Statements ......................................... 27
Useful Terms and Definitions ................................. 27
Appendix Description of Ratings ............................. 27
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 Small Cap Growth Fund (the "Fund") is a diversified series of
Franklin Strategic Series (the "Trust"), an open-end management investment
company. The Fund's investment objective is long-term capital growth. The Fund
seeks to achieve its objective by investing primarily in equity securities of
companies which have a market capitalization of less than $1 billion at the time
of investment and by attempting to keep at least one-third of its assets
invested in common stocks of companies with market capitalization of $550
million or less.
The Prospectus, dated September 1, 1997, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN or write the Fund at the address shown.
This SAI describes the Fund's Class I and Class II shares. The Fund currently
offers another class of shares with a different sales charge and expense
structure, which affects performance. This class is described in a separate SAI
and prospectus. For more information, contact your investment representative or
call 1-800/DIAL BEN.
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?"
LOANS OF PORTFOLIO SECURITIES. As discussed in the Prospectus, the Fund may lend
its portfolio securities to qualified securities dealers or other institutional
investors. Any voting rights the securities may have, pass to the borrower
during the term of the loan. Loans are typically subject to termination by the
Fund in the normal settlement time, currently three business days after notice,
or by the borrower on one day's notice. Borrowed securities must be returned
when the loan is terminated. If matters are submitted to the vote of security
holders of a loaned security and the matters would materially affect the Fund,
the Fund will either terminate the loan or provide for other means to permit it
to vote the securities.
SHORT-TERM INVESTMENTS. As stated in the Prospectus, the Fund may temporarily
invest cash in short-term debt instruments. The Fund may also invest its
short-term cash in shares of the Franklin Money Fund, the assets of that are
managed under a "master/feeder" structure by the Fund's investment adviser. Such
temporary investments will only be made with cash held to maintain liquidity or
pending investment and for defensive purposes in the event of, or in
anticipation of, a general decline in the market prices of stocks in which the
Fund invests.
ILLIQUID SECURITIES. The Fund's policy is not to invest more than 10% of its net
assets in illiquid securities. Generally, an "illiquid security" is any security
that cannot be disposed of within seven days in the ordinary course of business
at approximately the amount at which the Fund has valued the instrument.
Notwithstanding this limitation, the Board has authorized the Fund to invest in
certain restricted securities that are considered liquid to the extent Advisers
determines that there is a liquid institutional or other market for the
securities. For example, restricted securities that may be freely transferred
among qualified institutional buyers pursuant to Rule 144A under the Securities
Act of 1933, as amended, and for which a liquid institutional market has
developed, where such investment is consistent with the Fund's investment
objective may be considered liquid. The Board will review any determination by
Advisers to treat a restricted security as a liquid security on an ongoing
basis, including Advisers assessment of current trading activity and the
availability of reliable price information. In determining whether a restricted
security is properly considered a liquid security, Advisers and the Board will
take into account the following factors: (i) the frequency of trades and quotes
for the security; (ii) the number of dealers willing to 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 nature of
the marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer). To the extent the
Fund invests in restricted securities that are deemed liquid, the general level
of illiquidity in the Fund may be increased if qualified institutional buyers
become uninterested in buying these securities or the market for these
securities contracts.
SECURITIES INDUSTRY RELATED INVESTMENTS. To the extent it is consistent with its
investment objective and certain limitations under the 1940 Act, the Fund may
invest its assets in securities issued by companies engaged in securities
related businesses, including companies that are securities brokers, dealers,
underwriters or investment advisors. These companies are considered to be part
of the financial services industry. Generally, under the 1940 Act, the Fund may
not acquire a security or any interest in a securities related business, to the
extent the acquisition would result in the Fund acquiring in excess of i) 5% of
a class of an issuer's outstanding equity securities, ii) 10% of the outstanding
principal amount of an issuer's debt securities, or investing more than iii) 5%
of the value of the Fund's total assets in securities of the issuer. In
addition, any equity security of a securities related business must be a
marginable security under Federal Reserve Board regulations and any debt
security of a securities related business must be investment grade as determined
by the Board.
FOREIGN SECURITIES. As noted in the Prospectus, the Fund may invest up to 25% of
its total assets in foreign securities. When buying foreign securities, the Fund
will ordinarily buy securities that are traded in the U.S. or buy sponsored or
unsponsored American Depositary Receipts ("ADRs"), which are certificates issued
by U.S. banks representing the right to receive securities of a foreign issuer
deposited with that bank or a correspondent bank. A sponsored ADR is an ADR in
which establishment of the issuing facility is brought about by the
participation of the issuer and the depositary institution pursuant to 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, thereby ensuring that 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 additionally,
more than one depositary institution may be involved in the issuance of the
unsponsored ADR. It typically clears, however, through the Depositary Trust
Company and therefore, 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. In addition, the
depositary is not required to distribute notices of shareholder meetings or
financial information to the buyer. The Fund may also buy the securities of
foreign issuers directly in foreign markets so long as, in Advisers' judgment,
an established public trading market exists (that is, there are a sufficient
number of shares traded regularly relative to the number of shares to be
purchased by the Fund).
Any investments made by the Fund in foreign securities where delivery takes
place outside the U.S. will be made in compliance with applicable U.S. and
foreign currency restrictions and tax and other laws limiting the amount and
types of foreign investments. Changes of governmental administrations, economic
or monetary policies in the U.S. or abroad, or changed circumstances in dealings
between nations could result in investment losses for the Fund and could
adversely affect the Fund's operations. The Fund's purchase of securities in
foreign countries will involve currencies of the U.S. and of foreign countries;
consequently, changes in exchange rates, currency convertibility and
repatriation may favorably or adversely affect the Fund. Although current
regulations do not, in the opinion of Advisers, seriously limit the Fund's
investment activities, if such regulations are changed in the future, they may
restrict the ability of the Fund to make its investments or impair the liquidity
of the Fund's investments.
Securities that are acquired by the Fund outside of the U.S. and that are
publicly traded in the U.S. or on a foreign securities exchange or in a foreign
securities market are not considered by the Fund to be illiquid assets if (a)
the Fund reasonably believes it can readily dispose of the securities for cash
in the U.S. or foreign market or (b) current market quotations are readily
available. The Fund will not acquire the securities of foreign issuers outside
of the U.S. under circumstances where, at the time of acquisition, the Fund has
reason to believe that it could not resell the securities in a public trading
market. Investors should recognize that foreign securities are often traded with
less frequency and volume, and therefore may have greater price volatility than
many U.S. securities. Notwithstanding the fact that the Fund intends to acquire
the securities of foreign issuers only where there are public trading markets,
investments by the Fund in the securities of foreign issuers may tend to
increase the risks with respect to the liquidity of the Fund's portfolio and the
Fund's ability to meet a large number of shareholders' redemption requests
should there be economic or political turmoil in a country in which the Fund has
its assets invested or should relations between the U.S. and a foreign country
deteriorate markedly.
OPTIONS, FUTURES AND OPTIONS ON FINANCIAL FUTURES
WRITING CALL AND PUT OPTIONS. The Fund may write (sell) covered put and call
options and buy put and call options on securities and indices that trade on
securities exchanges and in the over-the-counter market.
Call options written by the Fund give the holder the right to buy the underlying
securities from the Fund at a stated exercise price; put options written by the
Fund give the holder the right to sell the underlying security to the Fund at a
stated exercise price. A call option written by the Fund is "covered" if the
Fund owns the underlying security which is subject to the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities held in its
portfolio. A call option is also covered if the Fund holds a call on the same
security and in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the difference is maintained by the Fund in cash and high grade debt securities
in a segregated account with its custodian bank. A put option written by the
Fund is covered if the Fund maintains cash and high grade debt securities with a
value equal to the exercise price in a segregated account with its custodian
bank, or holds a put on the same security and in the same principal amount as
the put written where the exercise price of the put held is equal to or greater
than the exercise price of the put written. 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.
In the case of a call option, the writer of an option may have no control over
when the underlying securities must be sold or purchased, in the case of a put
option, since with regard to certain options, the writer may be assigned an
exercise notice at any time prior to the termination of the obligation. Whether
or not an option expires unexercised, the writer retains the amount of the
premium. This amount, of course, may, in the case of a covered call option, be
offset by a decline in the market value of the underlying security during the
option period. If a call option is exercised, the writer experiences a profit or
loss from the sale of the underlying security. 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 then current market value of the
underlying security.
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is that
the writer's position will be canceled by the clearing corporation. A writer,
however, may not effect a closing purchase transaction after being notified of
the exercise of an option. Likewise, an investor who is the holder of an option
may liquidate its position by effecting a "closing sale transaction." This is
accomplished by selling an option of the same series as the option previously
purchased. There is no guarantee that either a closing purchase or a closing
sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit the Fund to write another put option to the extent that
the exercise price thereof is secured by deposited cash or short-term
securities. Effecting a closing transaction will also permit the cash or
proceeds from the concurrent sale of any securities subject to the option to be
used for other Fund investments. If the Fund desires to sell a particular
security from its portfolio on which it has written a call option, it will
effect a closing transaction prior to or 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; 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.
BUYING CALL AND PUT OPTIONS. The Fund may buy call options on securities which
it intends to buy in order to limit the risk of a substantial increase in the
market price of the security. The Fund may also buy call options on securities
held in its portfolio and on which it has written call options. A call option
gives the option holder the right to buy the underlying securities from the
option writer at a stated exercise price. Prior to its expiration, a call option
may be sold in a closing sale transaction. Profit or loss from such a sale will
depend on whether the amount received is more or less than the premium paid for
the call option plus the related transaction costs.
The Fund intends to buy put options on particular securities in order to protect
against a decline in the market value of the underlying security below the
exercise price less the premium paid for the option. A put option gives the
option holder the right to sell the underlying security at the option exercise
price at any time during the option period. The ability to buy put options will
allow the Fund to protect the unrealized gain in an appreciated security in its
portfolio without actually selling the security. In addition, the Fund will
continue to receive interest or dividend income on the security. The Fund may
sell a put option which it has previously purchased prior to the sale of the
securities underlying such option. Such a sale 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 that is sold. This
gain or loss may be wholly or partially offset by a change in the value of the
underlying security which the Fund owns or has the right to acquire.
OVER-THE-COUNTER ("OTC") OPTIONS. The Fund intends to write covered put and call
options and buy put and call options which trade in the over-the-counter market
to the same extent that it will engage in exchange traded options. Just as with
exchange traded options, OTC call options give the option holder the right to
buy an underlying security from an option writer at a stated exercise price; OTC
put options give the holder the right to sell an underlying security to an
option writer at a stated exercise price. OTC options, however, differ from
exchange traded options in certain material respects.
OTC options are arranged directly with dealers and not, as is the case with
exchange traded options, with a clearing corporation. Thus, there is a risk of
non-performance by the dealer. Because there is no exchange, pricing is
typically done by reference to information from market makers. OTC options,
however, are available for a greater variety of securities, and in a wider range
of expiration dates and exercise prices, than exchange traded options; and the
writer of an OTC option is paid the premium in advance by the dealer.
There can be no assurance that a continuous liquid secondary market will exist
for any particular option at any specific time. Consequently, the Fund may be
able to realize the value of an OTC option it has purchased only by exercising
it or entering into a closing sale transaction with the dealer that issued it.
Similarly, when the Fund writes an OTC option, it generally can close out that
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it.
OPTIONS ON STOCK INDICES. The Fund may also buy call options on stock indices in
order to hedge against the risk of market or industry-wide stock price
fluctuations. Call and put options on stock indices are similar to options on
securities except that, rather than the right to buy or sell stock at a
specified price, options on a stock index give the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the
underlying stock index is greater than (or less than, in the case of puts) the
exercise price of the option. This amount of cash is equal to the difference
between the closing price of the index and the exercise price of the option,
expressed in dollars, multiplied by a specified number. Thus, unlike stock
options, all settlements are in cash, and gain or loss depends on price
movements in the stock market generally (or in a particular industry or segment
of the market) rather than price movements in individual stocks.
When the Fund writes an option on a stock index, the Fund will establish a
segregated account containing cash or high quality fixed-income securities with
its custodian bank in an amount at least equal to the market value of the
underlying stock index and will maintain the account while the option is open or
will otherwise cover the transaction.
FUTURES CONTRACTS. The Fund may enter into contracts for the purchase or sale
for future delivery of securities or currencies and in such contracts based upon
financial indices ("financial futures"). Financial futures contracts are
commodity contracts that obligate the long or short holder to take or make
delivery of a specified quantity of a financial instrument, such as a security,
or the cash value of a securities index during a specified future period at a
specified price. A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by the contract at a
specified price on a specified date. A "purchase" of a futures contract means
the acquisition of a contractual obligation to acquire the securities called for
by the contract at a specified price on a specified date. Futures contracts have
been designed by exchanges which have been designated "contracts markets" by the
Commodities Futures Trading Commission and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market.
At the same time a futures contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment ("initial deposit"). Daily thereafter,
the futures contract is valued and the payment of "variation margin" may be
required since each day the Fund would provide or receive cash that reflects any
decline or increase in the contract's value.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished 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 take
delivery of the securities. Since all transactions in the futures market are
made, offset or fulfilled through a clearinghouse associated with the exchange
on which the contracts are traded, the Fund will incur brokerage fees when it
buys or sells futures contracts.
The Fund will not engage in transactions in futures contracts or related options
for speculation but only as a hedge against changes resulting from market
conditions in the values of its securities or securities which it intends to
buy. The Fund will not enter into any stock index or financial futures contract
or related option if, immediately thereafter, more than one-third of the Fund's
net assets would be represented by futures contracts or related options. In
addition, the Fund may not buy or sell futures contracts or buy or sell related
options if, immediately thereafter, the sum of the amount of its initial
deposits and premiums on its existing futures and related options positions
would exceed 5% of the Fund's total assets (taken at current value). In
instances involving the purchase of futures contracts or related call options,
money market instruments equal to the market value of the futures contract or
related option will be deposited in a segregated account with the custodian to
collateralize such long positions.
The purpose of the acquisition or sale of a futures contract is to attempt to
protect the Fund from fluctuations in the price of portfolio securities without
actually buying or selling the underlying security. To the extent the Fund
enters into a futures contract, it will maintain in a segregated account with
its custodian bank, to the extent required by the rules of the SEC, assets to
cover its obligations with respect to such contract which will consist of cash,
cash equivalents or high quality debt securities in an amount equal to the
difference between the fluctuating market value of such futures contract and the
aggregate value of the initial and variation margin payments made by the Fund
with respect to such futures contract.
STOCK INDEX FUTURES AND OPTIONS ON STOCK INDEX FUTURES. The Fund may buy and
sell stock index futures contracts and options on stock index futures contracts.
A stock index futures contract obligates the seller to deliver (and the buyer to
take) an amount of cash equal to a specific dollar amount times the difference
between the value of a specific stock index at the close of the last trading day
of the contract and the price at which the agreement is made. No physical
delivery of the underlying stocks in the index is made.
The Fund may sell stock index futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of its equity
securities that might otherwise result. When the Fund is not fully invested in
stocks and it anticipates a significant market advance, it may buy stock index
futures in order to gain rapid market exposure that may in part or entirely
offset increases in the cost of stocks that it intends to buy.
The Fund may buy and sell call and put options on stock index futures to hedge
against risks of market-side price movements. The need to hedge against such
risks will depend on the extent of diversification of the Fund's common stock
portfolio and the sensitivity of such investments to factors influencing the
stock market as a whole.
Call and put options on stock index futures are similar to options on securities
except that, rather than the right to buy stock at a specified price, options on
stock index futures give the holder the right to receive cash. Upon exercise of
the option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account which represents the amount by
which the market price of the futures contract, at exercise, exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract. If an option is exercised on the last trading
day prior to the expiration date of the option, the settlement will be made
entirely in cash equal to the difference between the exercise price of the
option and the closing price of the futures contract on the expiration date.
BOND INDEX FUTURES AND RELATED OPTIONS. The Fund may buy and sell futures
contracts based on an index of debt securities and options on such futures
contracts to the extent they currently exist and, in the future, may be
developed. The Fund reserves the right to conduct futures and options
transactions based on an index which may be developed in the future to correlate
with price movements in certain categories of debt securities. The Fund's
investment strategy in employing futures contracts based on an index of debt
securities will be similar to that used by it in other financial futures
transactions.
The Fund also may buy and write put and call options on such index futures and
enter into closing transactions with respect to such options.
FUTURE DEVELOPMENTS. The Fund may take advantage of opportunities in the area of
options and futures contracts and options on futures contracts and any other
derivative investments which are not presently contemplated for use by the Fund
or which are not currently available but which may be developed, to the extent
such opportunities are both consistent with the Fund's investment objective and
legally permissible for the Fund. Prior to investing in any such investment
vehicle, the Fund will supplement its Prospectus, if appropriate.
WHAT ARE THE FUND'S POTENTIAL RISKS?
OPTIONS, FUTURES AND OPTIONS ON FUTURES. The Fund's ability to hedge effectively
all or a portion of its securities through transactions in options on stock
indices, stock index futures, financial futures and related options depends on
the degree to which price movements in the underlying index or underlying
securities correlate with price movements in the relevant portion of the Fund's
portfolio. Inasmuch as such securities will not duplicate the components of the
index or underlying securities, the correlation will not be perfect.
Consequently, the Fund bears the risk that the prices of the securities being
hedged will not move in the same amount as the hedging instrument. It is also
possible that there may be a negative correlation between the index or other
securities underlying the hedging instrument and the hedged securities which
would result in a loss on both the securities and the hedging instrument.
Accordingly, successful use by the Fund of options on stock indices, stock index
futures, financial futures and related options will be subject to Advisers'
ability to predict correctly movements in the direction of the securities
markets generally or a particular segment. This requires different skills and
techniques than predicting changes in the price of individual stocks.
Positions in stock index options, stock index futures and financial futures and
related options may be closed out only on an exchange which provides a secondary
market. There can be no assurance that a liquid secondary market will exist for
any particular stock index option or futures contract or related option at any
specific time. Thus, it may not be possible to close an option or futures
position. The inability to close options or futures positions also could have an
adverse impact on the Fund's ability to effectively hedge its securities. The
Fund will enter into an option or futures position only if there appears to be a
liquid secondary market for the option or futures.
There can be no assurance that a continuous liquid secondary market will exist
for any particular OTC option at any specific time. Consequently, the Fund may
be able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer that
issued it. Similarly, when the Fund writes an OTC option, it generally can close
out that option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it. If a covered
call option writer cannot effect a closing transaction, it cannot sell the
underlying security until the option expires or the option is exercised.
Therefore, a covered call option writer of an OTC option may not be able to sell
an underlying security even though it might otherwise be advantageous to do so.
Likewise, a secured put writer of an OTC option may be unable to sell the
securities pledged to secure the put for other investment purposes while it is
obligated as a put writer. Similarly, a buyer of such put or call option might
also find it difficult to terminate its position on a timely basis in the
absence of a secondary market.
The Commodities Futures Trading Commission and the various exchanges have
established limits, referred to as "speculative position limits," on the maximum
net long or net short position which any person may hold or control in a
particular futures contract. Trading limits are imposed on the maximum number of
contracts which any person may trade on a particular trading day. An exchange
may order the liquidation of positions found to be in violation of these limits
and it may impose other sanctions or restrictions. The Fund does not believe
that these trading and positions limits will have an adverse impact on the
Fund's strategies for hedging its securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by Advisers may still not
result in a successful transaction.
Although the Fund believes that the use of futures contracts will benefit the
Fund, if Advisers' judgment about the general direction of interest rates is
incorrect, the Fund's overall performance would be poorer than if it had not
entered into any such contract. For example, if the Fund has hedged against the
possibility of an increase in interest rates which would adversely affect the
price of bonds held in its portfolio and interest rates decrease instead, the
Fund will lose part or all of the benefit of the increased value of its bonds
which it has hedged because it will have offsetting losses in its futures
positions. In addition, in such situations, if the Fund has insufficient cash,
it may have to sell securities from its portfolio to meet daily variation margin
requirements. Such sales may be, but will not necessarily be, at increased
prices which reflect the rising market. The Fund may have to sell securities at
a time when it may be disadvantageous to do so.
The Fund's sale of futures contracts and purchase of put options on futures
contracts will be solely to protect its investments against declines in value.
The Fund expects that in the normal course of business it will buy securities
upon termination of long futures contracts and long call options on future
contracts, but under unusual market conditions it may terminate any of these
positions without a corresponding purchase of securities.
HIGH YIELD SECURITIES. The Fund intends to invest not more than 5% of its assets
in lower rated, fixed-income securities and unrated securities of comparable
quality. Because the Fund may invest in securities below investment grade, an
investment in the Fund is subject to a higher degree of risk than an investment
in a fund that invests primarily in higher-quality securities. You should
consider the increased risk of loss to principal that is present with an
investment in higher risk securities, such as those in which the Fund invests.
Accordingly, an investment in the Fund should not be considered a complete
investment program and should be carefully evaluated for its appropriateness in
light of your overall investment needs and goals.
The market value of high yield, lower-quality fixed-income securities, commonly
known as junk bonds, tends to reflect individual developments affecting the
issuer to a greater degree than the market value of higher-quality securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality securities also tend to be more sensitive to economic conditions
than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with buying the securities of these issuers is generally
greater than the risk associated with higher-quality securities. For example,
during an economic downturn or a sustained period of rising interest rates,
issuers of lower-quality securities may experience financial stress and may not
have sufficient cash flow to make interest payments. The issuer's ability to
make timely interest and principal payments may also be adversely affected by
specific developments affecting the issuer, including the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the Fund's portfolio defaults, the Fund may have unrealized losses on the
security, which may lower the Fund's Net Asset Value. Defaulted securities tend
to lose much of their value before they default. Thus, the Fund's Net Asset
Value may be adversely affected before an issuer defaults. In addition, the Fund
may incur additional expenses if it must try to recover principal or interest
payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the Fund. Although these
securities are typically not callable for a period of time, usually for three to
five years from the date of issue, if an issuer calls its securities during
periods of declining interest rates, Advisers may find it necessary to replace
the securities with lower-yielding securities, which could result in less net
investment income for the Fund. The premature disposition of a high yield
security due to a call or buy-back feature, the deterioration of an issuer's
creditworthiness, or a default by an issuer may make it more difficult for the
Fund to manage the timing of its income. Under the Code and U.S. Treasury
regulations, the Fund may have to accrue income on defaulted securities and
distribute the income to shareholders for tax purposes, even though the Fund is
not currently receiving interest or principal payments on the defaulted
securities. To generate cash to satisfy these distribution requirements, the
Fund may have to sell portfolio securities that it otherwise may have continued
to hold or use cash flows from other sources, such as the sale of Fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse impact
on market price of a security and on the Fund's ability to sell a security in
response to a specific economic event, such as a deterioration in the
creditworthiness of the issuer, or if necessary to meet the Fund's liquidity
needs. Reduced liquidity may also make it more difficult to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
The Fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry restrictions
on resale. While many high yielding securities have been sold with registration
rights, covenants and penalty provisions for delayed registration, if the Fund
is required to sell restricted securities before the securities have been
registered, it may be deemed an underwriter of the securities under the
Securities Act of 1933, which entails special responsibilities and liabilities.
The Fund may also incur special costs in disposing of restricted securities,
although the Fund will generally not incur any costs when the issuer is
responsible for registering the securities.
The Fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other characteristics.
The Fund has no arrangement with its underwriter or any other person concerning
the acquisition of these securities.
The high yield securities market is relatively new and much of its growth before
1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yield securities and adversely affected the value
of outstanding securities, as well as the ability of issuers of high yield
securities to make timely principal and interest payments. Although the economy
has improved and high yield securities have performed more consistently since
that time, the adverse effects previously experienced may reoccur. For example,
the highly publicized defaults on some high yield securities during 1989 and
1990 and concerns about a sluggish economy that continued into 1993, depressed
the prices of many of these securities. While market prices may be temporarily
depressed due to these factors, the ultimate price of any security generally
reflects the true operating results of the issuer. Factors adversely impacting
the market value of high yield securities may lower the Fund's Net Asset Value.
The Fund relies on Advisers' judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, Advisers takes into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
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. Purchase the securities of any one issuer (other than obligations of the
U.S., its agencies or instrumentalities) if immediately thereafter, and as a
result of the purchase, the Fund would (a) have invested more than 5% of the
value of its total assets in the securities of the issuer, or (b) hold more than
10% of any voting class of the securities of any one issuer;
2. Make loans to other persons, except by the purchase of bonds, debentures or
similar obligations which are publicly distributed or of a character usually
acquired by institutional investors or through loans of the Fund's portfolio
securities, or to the extent the entry into a repurchase agreement may be deemed
a loan;
3. Borrow money (does not preclude the Fund from obtaining such short-term
credit as may be necessary for the clearance of purchases and sales of its
portfolio securities), except in the form of reverse repurchase agreements or
from banks in order to meet redemption requests that might otherwise require the
untimely disposition of portfolio securities or for other temporary or emergency
(but not investment) purposes, in an amount up to 10% of the value of the Fund's
total assets (including the amount borrowed) based on the lesser of cost or
market, less liabilities (not including the amount borrowed) at the time the
borrowing is made. While borrowings exceed 5% of the Fund's total assets, the
Fund will not make any additional investments;
4. Invest more than 25% of the Fund's assets (at the time of the most recent
investment) in any single industry;
5. Underwrite securities of other issuers or invest more than 10% of its assets
in securities with legal or contractual restrictions on resale (although the
Fund may invest in such securities to the extent permitted under the federal
securities laws for example, transactions between the Fund and Qualified
Institutional Buyers subject to Rule 144A under the Securities Act of 1933) or
which are not readily marketable, or which have a record of less than three
years continuous operation, including the operations of any predecessor
companies, if more than 10% of the Fund's total assets would be invested in such
companies;
6. Invest in securities for the purpose of exercising management or control of
the issuer;
7. Maintain a margin account with a securities dealer or invest in commodities
and commodity contracts (except that the Fund may engage in financial futures,
including stock index futures, and options on stock index futures) or lease or
acquire any interests, including interests issued by limited partnerships (other
than publicly traded equity securities) in oil, gas, or other mineral
exploration or development programs, or invest in excess of 5% of its total
assets in options unrelated to the Fund's transactions in futures, including
puts, calls, straddles, spreads, or any combination thereof;
8. Effect short sales, unless at the time the Fund owns securities equivalent
in kind and amount to those sold (which will normally be for deferring
recognition of gains or losses for tax purposes). The Fund does not currently
intend to employ this investment technique;
9. Invest directly in real estate, real estate limited partnerships or illiquid
securities issued by real estate investment trusts; (the Fund may, however,
invest in marketable securities issued by real estate investment trusts);
10. Invest in the securities of other investment companies, except where there
is no commission other than the customary brokerage commission or sales charge,
or except that securities of another investment company may be acquired pursuant
to a plan of reorganization, merger, consolidation or acquisition, and except
where the Fund would not own, immediately after the acquisition, securities of
the investment companies which exceed in the aggregate i) more than 3% of the
issuer's outstanding voting stock, ii) more than 5% of the Fund's total assets,
and iii) together with the securities of all other investment companies held by
the Fund, exceed, in the aggregate, more than 10% of the Fund's total assets.
The Fund may invest in shares of one or more money market funds managed by
Advisers or its affiliates; and
11. Purchase from or sell to its officers and trustees, or any firm of which any
officer or trustee is a member, as principal, any securities, but may deal with
such persons or firms as brokers and pay a customary brokerage commission; or
purchase or retain securities of any issuer, if to the knowledge of the Trust,
one or more of the officers or trustees of the Trust, or Advisers, own
beneficially more than one-half of 1% of the securities of such issuer and all
such officers and trustees together own beneficially more than 5% of such
securities.
In addition to these fundamental policies, it is the present policy of the Fund
(which may be changed without shareholder approval) not to pledge, mortgage or
hypothecate the Fund's assets as security for loans, and not to engage in joint
or joint and several trading accounts in securities, except that it may
participate in joint repurchase arrangements, invest its short-term cash in
shares of the Franklin Money Fund (pursuant to the terms and conditions of the
SEC order permitting such investments), or combine orders to buy or sell with
orders from other persons to obtain lower brokerage commissions. The Fund may
not invest in excess of 5% of its net assets, valued at the lower of cost or
market, in warrants, nor more than 2% of its net assets in warrants not listed
on either the NYSE or American Stock Exchange.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
Positions and Offices Principal Occupations
Name, Age and Address with the Fund During the Past Five Years
Frank H. Abbott, III (76) Trustee
1045 Sansome Street
San Francisco, CA 94111
President and Director, Abbott
Corporation (an investment company);
and director or trustee, as the case
may be, of 28 of the investment
companies in the Franklin Templeton
Group of Funds.
Harris J. Ashton (65) 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 (a meat packing company); and
director or trustee, as the case may
be, of 52 of the investment companies
in the Franklin Templeton Group of
Funds.
*Harmon E. Burns (52) 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.
and Franklin Templeton Services, Inc.;
Executive Vice President, Franklin
Advisers, Inc.; Director,
Franklin/Templeton Investor Services,
Inc.; and officer and/or director or
trustee, as the case may be, of most of
the other subsidiaries of Franklin
Resources, Inc. and of 57 of the
investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (65) 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, General
Host Corporation (nursery and craft
centers); and director or trustee, as
the case may be, of 54 of the
investment companies in the Franklin
Templeton Group of Funds.
David W. Garbellano (82) 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 or
trustee, as the case may be, of 27 of
the investment companies in the
Franklin Templeton Group of Funds.
*Charles B. Johnson (64) Chairman of the
777 Mariners Island Blvd. Board and Trustee
San Mateo, CA 94404
President, Chief Executive Officer and
Director, Franklin Resources, Inc.;
Chairman of the Board and Director,
Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin
Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor
Services, Inc., Franklin Templeton
Services, Inc. and General Host
Corporation (nursery and craft
centers); and officer and/or director
or trustee, as the case may be, of most
of the other subsidiaries of Franklin
Resources, Inc. and of 53 of the
investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (57) President and
777 Mariners Island Blvd. 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 or trustee, as the case
may be, of most of the other
subsidiaries of Franklin Resources,
Inc. and of 57 of the investment
companies in the Franklin Templeton
Group of Funds.
Frank W. T. LaHaye (68) 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 Corporation
(software firm); Director, Fischer
Imaging Corporation (medical imaging
systems) and Digital Transmission
Systems, Inc. (wireless
communications); and director or
trustee, as the case may be, of 26 of
the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (69) 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), Shoppers Express (home
shopping), and Spacehab, Inc.
(aerospace services); and director or
trustee, as the case may be, of 49 of
the investment companies in the
Franklin Templeton Group of Funds;
formerly Chairman, Hambrecht and Quist
Group, Director, H & Q Healthcare
Investors, and President, National
Association of Securities Dealers, Inc.
Martin L. Flanagan (37) 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 and Director, Templeton
Worldwide, Inc.; Executive Vice
President, Chief Operating Officer and
Director, Templeton Investment Counsel,
Inc.; Senior Vice President and
Treasurer, Franklin Advisers, Inc.;
Treasurer, Franklin Advisory Services,
Inc.; Treasurer and Chief Financial
Officer, Franklin Investment Advisory
Services, Inc.; President, Franklin
Templeton Services, Inc.; Senior Vice
President, Franklin/Templeton Investor
Services, Inc.; and officer and/or
director or trustee, as the case may
be, of 57 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 Services, Inc. and Franklin
Templeton Distributors, Inc.; Vice
President, Franklin Advisers, Inc. and
Franklin Advisory Services, Inc.; Vice
President, Chief Legal Officer and
Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and
officer of 57 of the investment
companies in the Franklin Templeton
Group of Funds.
Charles E. Johnson (41) 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.;
President, Chief Executive Officer,
Chief Investment Officer and Director,
Franklin Institutional Services
Corporation; Chairman and Director,
Templeton Investment Counsel, Inc.;
Vice President, Franklin Advisers,
Inc.; officer and/or director of some
of the subsidiaries of Franklin
Resources, Inc.; and officer and/or
director or trustee, as the case may
be, of 36 of the investment companies
in the Franklin Templeton Group of
Funds.
Diomedes Loo-Tam (58) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting
Officer
Senior Vice President, Franklin
Templeton Services, Inc.; and officer
of 34 of the investment companies in
the Franklin Templeton Group of Funds.
Edward V. McVey (60) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President and National
Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 29
of the investment companies in the
Franklin Templeton Group of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are currently paid
$2,400 per year (or $300 for each of the Trust's eight regularly scheduled Board
meetings) plus $300 per meeting attended. As shown above, the nonaffiliated
Board members also serve as directors or trustees of other investment companies
in the Franklin Templeton Group of Funds. They may receive fees from these funds
for their services. The following table provides the total fees paid to
nonaffiliated Board members by the Trust and by other funds in the Franklin
Templeton Group of Funds.
TOTAL FEES NUMBER OF BOARDS IN
TOTAL FEES RECEIVED FROM THE THE FRANKLIN TEMPLETON
RECEIVED FROM FRANKLIN TEMPLETON GROUP OF FUNDS ON
NAME THE TRUST* GROUP OF FUNDS** WHICH EACH SERVES***
- -------------------------------------------------------------------------------
Frank H. Abbott, III....... $5,100 $165,236 28
Harris J. Ashton .......... $5,100 $343,591 52
S. Joseph Fortunato........ $5,100 $360,411 54
David W. Garbellano........ $4,800 $148,916 27
Frank W.T. LaHaye.......... $4,800 $139,233 26
Gordon S. Macklin ......... $5,100 $335,541 49
*For the fiscal year ended April 30, 1997.
**For the calendar year ended December 31, 1996.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 58 registered investment companies, with approximately 169 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 or trustee.
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 August 5, 1997, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately 4536.182
Class I shares and 560.555 Advisor Class shares, or less than 1%, respectively,
of the total outstanding Class I and Advisor Class shares of the Fund. Many of
the Board members also own shares in other funds in the Franklin Templeton Group
of Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Charles E. Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio transactions
are executed. Advisers' activities are subject to the review and supervision of
the Board to whom Advisers renders periodic reports of the Fund's investment
activities. Advisers and its officers, directors and employees are covered by
fidelity insurance for the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action with
respect to any of the other funds it manages, or for its own account, that may
differ from action taken by Advisers on behalf of the Fund. Similarly, with
respect to the Fund, Advisers is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that Advisers and
access persons, as defined by the 1940 Act, may buy or sell for its or their own
account or for the accounts of any other fund. Advisers is not obligated to
refrain from investing in securities held by the Fund or other funds that it
manages. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Fund's Code of Ethics. Please
see "Miscellaneous Information Summary of Code of Ethics."
MANAGEMENT FEES. Under its management agreement, the Fund pays Advisers a
management fee equal to an annual rate of .625 of 1% of the value of average
daily net assets up to and including $100 million; and .50 of 1% of the value of
average daily net assets over $100 million up to and including $250 million; and
.45 of 1% of the value of average daily net assets over $250 million up to and
including $10 billion; and .44 of 1% of the value of average daily net assets
over $10 billion, up to and including $12.5 billion; and .42 of 1% of the value
of average daily net assets over $12.5 billion, up to and including $15 billion;
and .40 of 1% of the value of average daily net assets over $15 billion. The fee
is computed at the close of business on the last business day of each month.
Each class pays its proportionate share of the management fee.
For the fiscal years ended April 30, 1995 and 1996, management fees, before any
advance waiver, totaled $228,800, and $1,232,136, respectively. Under an
agreement by Advisers to limit its fees, the Fund paid management fees totaling
$56,120 and $1,174,738 for the same periods. For the fiscal year ended April 30,
1997, management fees totaling $3,859,067, were paid to Advisers.
MANAGEMENT AGREEMENT. The management agreement is in effect until April 30,
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. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these services
per benefit plan participant Fund account per year may not exceed the per
account fee payable by the Fund to Investor Services in connection with
maintaining shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York 10286, acts as custodian of the securities and other assets of
the Fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Fund's independent auditors. During the fiscal year ended April
30, 1997, their auditing services consisted of rendering an opinion on the
financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended April 30, 1997.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
Advisers selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the Board may give.
When placing a portfolio transaction, Advisers seeks to obtain prompt execution
of orders at the most favorable net price. For portfolio transactions on a
securities exchange, the amount of commission paid by the Fund is negotiated
between Advisers and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. Advisers will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of Advisers, a
better price and execution can otherwise be obtained. Purchases of portfolio
securities from underwriters will include a commission or concession paid by the
issuer to the underwriter, and purchases from dealers will include a spread
between the bid and ask price.
Advisers may pay certain brokers commissions that are higher than those another
broker may charge, if Advisers determines in good faith that the amount paid is
reasonable in relation to the value of the brokerage and research services it
receives. This may be viewed in terms of either the particular transaction or
Advisers' overall responsibilities to client accounts over which it exercises
investment discretion. The services that brokers may provide to Advisers
include, among others, supplying information about particular companies,
markets, countries, or local, regional, national or transnational economies,
statistical data, quotations and other securities pricing information, and other
information that provides lawful and appropriate assistance to Advisers in
carrying out its investment advisory responsibilities. These services may not
always directly benefit the Fund. They must, however, be of value to Advisers in
carrying out its overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services Advisers receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staffs of other securities firms. As long as it is lawful and
appropriate to do so, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. If the Fund's
officers are satisfied that the best execution is obtained, the sale of Fund
shares, as well as shares of other funds in the Franklin Templeton Group of
Funds, may also be considered a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to Advisers will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisers are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by
Advisers, taking into account the respective sizes of the funds and the amount
of securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
During the fiscal years ended April 30, 1995, 1996 and 1997, the Fund paid
brokerage commissions totaling $117,618, $570,572 and $1,155,691, repectively.
As of April 30, 1997, the Fund did not own securities of its regular
broker-dealers.
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? - Purchase
Price of Fund Shares" 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.
Class I 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, Class I
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 may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares 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 of Class I shares by certain retirement plans without a front-end
sales charge, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on sales
over $3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million. Distributors may make these
payments in the form of contingent advance payments, which may be recovered from
the Securities Dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy Class
I shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds acquired more than 90 days before the Letter is filed, will be counted
towards completion of the Letter, but they will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions you make during the 13
month period, except in the case of certain retirement plans, will be subtracted
from the amount of the purchases for purposes of determining whether the terms
of the Letter have been completed. If the Letter is not completed within the 13
month period, there will be an upward adjustment of the sales charge, depending
on the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute a
Letter before a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the sales
charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I 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. 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
for Class I shares and on the prior business day for Class II shares. If the
processing dates are different, the date of the Net Asset Value used to redeem
the shares will also be different for Class I and Class II shares.
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.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions that
maintain omnibus accounts with the Fund on behalf of numerous beneficial owners
for recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, the Fund may reimburse Investor
Services an amount not to exceed the per account fee that the Fund normally pays
Investor Services. These financial institutions may also charge a fee for their
services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share of each class 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, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by Advisers.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the scheduled close of trading
on the NYSE, if that is earlier. The value is then converted into its U.S.
dollar equivalent at the foreign exchange rate in effect at noon, New York time,
on the day the value of the foreign security is determined. If no sale is
reported at that time, the foreign security is valued within the range of the
most recent quoted bid and ask prices. Occasionally, events that affect the
values of foreign securities and foreign exchange rates may occur between the
times at which they are determined and the close of the exchange and will,
therefore, not be reflected in the computation of the Net Asset Value of each
class. 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 each class 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 Net Asset Value of each class. If events
materially affecting the values of these securities occur during this period,
the securities will be valued at their fair value as determined in good faith by
the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the form of
dividends, interest and other income derived from its investments. This income,
less the expenses incurred in the Fund's operations, is its net investment
income from which income dividends may be distributed. Thus, the amount of
dividends paid per share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any capital loss carryforward or post-October
loss deferral) may generally be made once each year in December to reflect any
net short-term and net long-term capital gains realized by the Fund as of
October 31 of the current fiscal year and any undistributed capital gains from
the prior fiscal year. The Fund may adjust the timing of these distributions for
operational or other reasons.
TAXES
As stated in the Prospectus, the Fund has elected and qualified 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 which 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 declared by
the Fund annually in the Fund's fiscal year end annual report.
Corporate shareholders should note that dividends paid by the Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividends-received deduction. For example, any interest income and short-term
capital gain (in excess of any net long-term capital loss or capital loss
carryover) included in investment company taxable income and distributed by the
Fund as a dividend will not qualify for the dividends-received deduction.
Corporate shareholders should also note that availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless the Fund shares have been held (or deemed
held) for at least 46 days in a substantially unhedged manner. The
dividends-received deduction may also be reduced to the extent interest paid or
accrued by a corporate shareholder is directly attributable to its investment in
Fund shares. The entire dividend, including the portion which is treated as a
deduction, is includable in the tax base on which the alternative minimum tax is
computed and may also result in a reduction in the shareholder's tax basis in
its Fund shares, under certain circumstances, if the shares have been held for
less than two years. Corporate shareholders whose investment in the Fund is
"debt financed" for these tax purposes should consult with their tax advisors
concerning the availability of the dividends-received deduction.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the 12 month period ending October 31 of each year (in
addition to amounts from the prior year that were neither distributed nor taxed
to the Fund) to you by December 31 of each year in order to avoid the imposition
of a federal excise tax. Under these rules, certain distributions which are
declared in October, November or December but which, for operational reasons,
may not be paid to you until the following January, will be treated for tax
purposes as if paid by the Fund and received by you on December 31 of the
calendar year in which they are declared. The Fund intends as a matter of policy
to declare 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 the Fund's shares are taxable transactions for
federal and state income tax purposes. Gain or loss will be recognized in an
amount equal to the difference between your basis in the shares and the amount
you 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 your 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 you buy other shares of the Fund (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.
All or a portion of the sales charge incurred in buying shares of the Fund will
not be included in the federal tax basis of such shares sold or exchanged within
90 days of their purchase (for purposes of determining gain or loss with respect
to such shares) if you reinvest the sales proceeds in the Fund or in another
fund in the Franklin Templeton Group of 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.
Any loss realized upon the redemption of shares within six months from the date
of their purchase will be treated as a long-term capital loss to the extent of
amounts treated as distributions of net long-term capital gain during such six
month period.
The Fund's investment in options and futures contracts, including transactions
involving actual or deemed short sales, 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 treatment
of certain other options and futures 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 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 you 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. Certain tax elections
exist for mixed straddles (i.e., straddles comprised of at least one Section
1256 position and at least one non-Section 1256 position) which may reduce or
eliminate the operation of these straddle rules.
As a regulated investment company, the Fund is 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, straddles and futures contracts 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 options and futures contracts and may
make certain other tax elections in order to mitigate the effect of the above
rules and to prevent disqualification of the Fund as a regulated investment
company under Subchapter M of the Code.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering for each class of the Fund's shares.
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.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal years ended April 30, 1995, 1996 and 1997, were
$464,478, $5,378,559, and $11,056,311. After allowances to dealers, Distributors
retained $52,717, $585,366, and $1,097,126 in net underwriting discounts and
commissions, for the respective years and received for the fiscal years ended
April 30, 1996 and 1997, $11,535 and $33,425 in connection with redemptions or
repurchases of shares, for the respective years. Distributors may be entitled to
reimbursement under the Rule 12b-1 plan for each class, as discussed below.
Except as noted, Distributors received no other compensation from the Fund for
acting as underwriter.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 plans" that
were adopted pursuant to Rule 12b-1 of the 1940 Act.
THE CLASS I PLAN. Under the Class I plan, the Fund may pay up to a maximum of
0.25% per year of Class I's average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of Class I shares.
THE CLASS II PLAN. Under the Class II plan, the Fund pays Distributors up to
0.75% per year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the Fund.
Under the Class II plan, the Fund also pays an additional 0.25% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
THE CLASS I AND CLASS II PLANS. In addition to the payments that Distributors or
others are entitled to under each plan, each 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
each class 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. The terms and
provisions of each plan relating to required reports, term, and approval are
consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
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 plans 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 plans 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.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are 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 plans, 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 plans 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 outstanding
shares of the class. The Class I plan may also be terminated by any act that
constitutes an assignment of the underwriting agreement with Distributors.
Distributors or any dealer or other firm may also terminate their respective
distribution or service agreement at any time upon written notice.
The plans 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 outstanding shares of the class, and all material amendments to the plans
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 plans 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 plans should be continued.
For the fiscal year ended April 30, 1997, Distributors had eligible expenditures
of $2,413,518 and $1,536,869 for advertising, printing, and payments to
underwriters and broker-dealers pursuant to the Class I and Class II plans,
respectively, of which the Fund paid Distributors $1,601,744 and $768,908 under
the Class I and Class II plans.
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-year, five-year and from
inception periods, 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-year,
five-year and from inception 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.
When considering the average annual total return quotations, you should keep in
mind that the maximum front-end sales charge reflected in each quotation is a
one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the Fund. The
average annual total return for Class I for the one-year, five-year and from
inception (2/14/92) periods ended April 30, 1997, was -4.41%, 19.48% and 17.66%,
respectively. The average annual total return for Class II for the one-year and
from inception (10/02/95) periods ended April 30, 1997, was -2.65% and 9.64%,
respectively.
These figures were 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-year, five-year or from inception periods at the end of the
one-year, five-year or from inception periods
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 actual return for each class for a specified period rather than on the
average return over one-year, five-year and from inception periods. The
cumulative total return for Class I for the one-year, five-year and from
inception periods ended April 30, 1997, was -4.41%, 143.48% and 133.25%,
respectively. The cumulative total return for Class II for the one-year and from
inception periods ended April 30, 1997, was -2.65% and 15.62%, respectively.
VOLATILITY
Occasionally, statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) 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(R) 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed on
the NYSE.
d) Wilshire 5000 Equity Index - represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
h) Financial publications: THE WALL STREET JOURNAL, AND BUSINESS WEEK, CHANGING
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, AND MONEY MAGAZINES - provide
performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
l) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
m) Standard & Poor's(R) 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 2.7 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Mutual Series Fund Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $207 billion in
assets under management for more than 5.4 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 120
U.S. based open-end investment companies to the public. The Fund may identify
itself by its NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the NYSE.
While many of them have similar investment objectives, no two are exactly alike.
As noted in the Prospectus, shares of the Fund are generally sold through
Securities Dealers. Investment representatives of such Securities Dealers are
experienced professionals who can offer advice on the type of investment
suitable to your unique goals and needs, as well as the types of risks
associated with such investment.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past nine years.
As of August 5, 1997, the principal shareholders of the Fund, beneficial or of
record, were as follows:
SHARE
NAME AND ADDRESS AMOUNT PERCENTAGE
ADVISOR CLASS
Old Second National 352,097.259 17%
Bank of Aurora
37 South River St.
Aurora, IL 60506-4173
Trust Company of Illinois 247,201.759 12%
45 S. Park Blvd. Suite. 315
Glen Ellyn, IL 60137-6282
RBSCO 168,461.509 8%
P.O. Box 1410
Ruston, LA 71273-1410
Carey & Co. 323,570.803 16%
P.O. Box 1558 HC 1024
Columbus, OH 43216
First Mar & Co. #2 165,335.840 8%
101 W. Washington St.
P.O. Box 580
Marquette, MI 49855
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations must be sent to a compliance
officer and, within 10 days after the end of each calendar quarter, a report of
all securities transactions must be provided to the compliance officer; and
(iii) access persons involved in preparing and making investment decisions must,
in addition to (i) and (ii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended April 30, 1997, including the auditors'
report, are incorporated herein by reference.
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, CLASS II AND ADVISOR CLASS - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
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 of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
PROSPECTUS - The prospectus for the Fund's Class I and Class II shares dated
September 1, 1997, as may be amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
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.
198 SAI 09/97
FRANKLIN SMALL CAP GROWTH FUND -
ADVISOR CLASS
FRANKLIN STRATEGIC SERIES
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 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?.................... 7
Investment Restrictions................................. 9
Officers and Trustees................................... 11
Investment Management
and Other Services..................................... 14
How does the Fund Buy
Securities for its Portfolio?.......................... 15
How Do I Buy, Sell and Exchange Shares?................. 16
How are Fund Shares Valued?............................. 18
Additional Information on
Distributions and Taxes................................ 19
The Fund's Underwriter.................................. 21
How does the Fund Measure Performance?.................. 21
Miscellaneous Information............................... 23
Financial Statements.................................... 24
Useful Terms and Definitions............................ 24
Appendix................................................ 25
Description of Ratings................................. 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 Small Cap Growth Fund (the "Fund") is a diversified series of
Franklin Strategic Series (the "Trust"), an open-end management investment
company. The Fund's investment objective is long-term capital growth. The Fund
seeks to achieve its objective by investing primarily in equity securities of
companies which have a market capitalization of less than $1 billion at the time
of investment and by attempting to keep at least one-third of its assets
invested in common stocks of companies with market capitalization of $550
million or less.
This SAI describes the Fund's Advisor Class shares. The Prospectus, dated
September 1, 1997, as may be amended from time to time, contains the basic
information you should know before investing in the Fund. For a free copy, call
1-800/DIAL BEN or write the Fund at the address shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
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?"
LOANS OF PORTFOLIO SECURITIES. As discussed in the Prospectus, the Fund may lend
its portfolio securities to qualified securities dealers or other institutional
investors. Any voting rights the securities may have pass to the borrower during
the term of the loan. Loans are typically subject to termination by the Fund in
the normal settlement time, currently three business days after notice, or by
the borrower on one day's notice. Borrowed securities must be returned when the
loan is terminated. If matters are submitted to the vote of security holders of
a loaned security and the matters would materially affect the Fund, the Fund
will either terminate the loan or provide for other means to permit it to vote
the securities.
SHORT-TERM INVESTMENTS. As stated in the Prospectus, the Fund may temporarily
invest cash in short-term debt instruments. The Fund may also invest its
short-term cash in shares of the Franklin Money Fund, the assets of that are
managed under a "master/feeder" structure by the Fund's investment adviser. Such
temporary investments will only be made with cash held to maintain liquidity or
pending investment and for defensive purposes in the event of, or in
anticipation of, a general decline in the market prices of stocks in which the
Fund invests.
ILLIQUID SECURITIES. The Fund's policy is not to invest more than 10% of its net
assets in illiquid securities. Generally, an "illiquid security" is any security
that cannot be disposed of within seven days in the ordinary course of business
at approximately the amount at which the Fund has valued the instrument.
Notwithstanding this limitation, the Board has authorized the Fund to invest in
certain restricted securities that are considered liquid to the extent Advisers
determines that there is a liquid institutional or other market for the
securities. For example, restricted securities that may be freely transferred
among qualified institutional buyers pursuant to Rule 144A under the Securities
Act of 1933, as amended, and for which a liquid institutional market has
developed, where such investment is consistent with the Fund's investment
objective may be considered liquid. The Board will review any determination by
Advisers to treat a restricted security as a liquid security on an ongoing
basis, including Advisers assessment of current trading activity and the
availability of reliable price information. In determining whether a restricted
security is properly considered a liquid security, Advisers and the Board will
take into account the following factors: (i) the frequency of trades and quotes
for the security; (ii) the number of dealers willing to 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 nature of
the marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer). To the extent the
Fund invests in restricted securities that are deemed liquid, the general level
of illiquidity in the Fund may be increased if qualified institutional buyers
become uninterested in buying these securities or the market for these
securities contracts.
SECURITIES INDUSTRY RELATED INVESTMENTS. To the extent it is consistent with its
investment objective and certain limitations under the 1940 Act, the Fund may
invest its assets in securities issued by companies engaged in securities
related businesses, including companies that are securities brokers, dealers,
underwriters or investment advisors. These companies are considered to be part
of the financial services industry. Generally, under the 1940 Act, the Fund may
not acquire a security or any interest in a securities related business, to the
extent the acquisition would result in the Fund acquiring in excess of i) 5% of
a class of an issuer's outstanding equity securities, ii) 10% of the outstanding
principal amount of an issuer's debt securities, or investing more than iii) 5%
of the value of the Fund's total assets in securities of the issuer. In
addition, any equity security of a securities related business must be a
marginable security under Federal Reserve Board regulations and any debt
security of a securities related business must be investment grade as determined
by the Board.
FOREIGN SECURITIES. As noted in the Prospectus, the Fund may invest up to 25% of
its total assets in foreign securities. When buying foreign securities, the Fund
will ordinarily buy securities that are traded in the U.S. or buy sponsored or
unsponsored American Depositary Receipts ("ADRs"), which are certificates issued
by U.S. banks representing the right to receive securities of a foreign issuer
deposited with that bank or a correspondent bank. A sponsored ADR is an ADR in
which establishment of the issuing facility is brought about by the
participation of the issuer and the depositary institution pursuant to 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, thereby ensuring that 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 additionally,
more than one depositary institution may be involved in the issuance of the
unsponsored ADR. It typically clears, however, through the Depositary Trust
Company and therefore, 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. In addition, the
depositary is not required to distribute notices of shareholder meetings or
financial information to the buyer. The Fund may also buy the securities of
foreign issuers directly in foreign markets so long as, in Advisers' judgment,
an established public trading market exists (that is, there are a sufficient
number of shares traded regularly relative to the number of shares to be
purchased by the Fund).
Any investments made by the Fund in foreign securities where delivery takes
place outside the U.S. will be made in compliance with applicable U.S. and
foreign currency restrictions and tax and other laws limiting the amount and
types of foreign investments. Changes of governmental administrations, economic
or monetary policies in the U.S. or abroad, or changed circumstances in dealings
between nations could result in investment losses for the Fund and could
adversely affect the Fund's operations. The Fund's purchase of securities in
foreign countries will involve currencies of the U.S. and of foreign countries;
consequently, changes in exchange rates, currency convertibility and
repatriation may favorably or adversely affect the Fund. Although current
regulations do not, in the opinion of Advisers, seriously limit the Fund's
investment activities, if such regulations are changed in the future, they may
restrict the ability of the Fund to make its investments or impair the liquidity
of the Fund's investments.
Securities that are acquired by the Fund outside of the U.S. and that are
publicly traded in the U.S. or on a foreign securities exchange or in a foreign
securities market are not considered by the Fund to be illiquid assets if (a)
the Fund reasonably believes it can readily dispose of the securities for cash
in the U.S. or foreign market or (b) current market quotations are readily
available. The Fund will not acquire the securities of foreign issuers outside
of the U.S. under circumstances where, at the time of acquisition, the Fund has
reason to believe that it could not resell the securities in a public trading
market. Investors should recognize that foreign securities are often traded with
less frequency and volume, and therefore may have greater price volatility than
many U.S. securities. Notwithstanding the fact that the Fund intends to acquire
the securities of foreign issuers only where there are public trading markets,
investments by the Fund in the securities of foreign issuers may tend to
increase the risks with respect to the liquidity of the Fund's portfolio and the
Fund's ability to meet a large number of shareholders' redemption requests
should there be economic or political turmoil in a country in which the Fund has
its assets invested or should relations between the U.S. and a foreign country
deteriorate markedly.
OPTIONS, FUTURES AND OPTIONS ON FINANCIAL FUTURES
WRITING CALL AND PUT OPTIONS. The Fund may write (sell) covered put and call
options and buy put and call options on securities and indices that trade on
securities exchanges and in the over-the-counter market.
Call options written by the Fund give the holder the right to buy the underlying
securities from the Fund at a stated exercise price; put options written by the
Fund give the holder the right to sell the underlying security to the Fund at a
stated exercise price. A call option written by the Fund is "covered" if the
Fund owns the underlying security which is subject to the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities held in its
portfolio. A call option is also covered if the Fund holds a call on the same
security and in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the difference is maintained by the Fund in cash and high grade debt securities
in a segregated account with its custodian bank. A put option written by the
Fund is covered if the Fund maintains cash and high grade debt securities with a
value equal to the exercise price in a segregated account with its custodian
bank, or holds a put on the same security and in the same principal amount as
the put written where the exercise price of the put held is equal to or greater
than the exercise price of the put written. 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.
In the case of a call option, the writer of an option may have no control over
when the underlying securities must be sold or purchased, in the case of a put
option, since with regard to certain options, the writer may be assigned an
exercise notice at any time prior to the termination of the obligation. Whether
or not an option expires unexercised, the writer retains the amount of the
premium. This amount, of course, may, in the case of a covered call option, be
offset by a decline in the market value of the underlying security during the
option period. If a call option is exercised, the writer experiences a profit or
loss from the sale of the underlying security. 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 then current market value of the
underlying security.
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is that
the writer's position will be canceled by the clearing corporation. A writer,
however, may not effect a closing purchase transaction after being notified of
the exercise of an option. Likewise, an investor who is the holder of an option
may liquidate its position by effecting a "closing sale transaction." This is
accomplished by selling an option of the same series as the option previously
purchased. There is no guarantee that either a closing purchase or a closing
sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit the Fund to write another put option to the extent that
the exercise price thereof is secured by deposited cash or short-term
securities. Effecting a closing transaction will also permit the cash or
proceeds from the concurrent sale of any securities subject to the option to be
used for other Fund investments. If the Fund desires to sell a particular
security from its portfolio on which it has written a call option, it will
effect a closing transaction prior to or 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; 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.
BUYING CALL AND PUT OPTIONS. The Fund may buy call options on securities which
it intends to buy in order to limit the risk of a substantial increase in the
market price of the security. The Fund may also buy call options on securities
held in its portfolio and on which it has written call options. A call option
gives the option holder the right to buy the underlying securities from the
option writer at a stated exercise price. Prior to its expiration, a call option
may be sold in a closing sale transaction. Profit or loss from such a sale will
depend on whether the amount received is more or less than the premium paid for
the call option plus the related transaction costs.
The Fund intends to buy put options on particular securities in order to protect
against a decline in the market value of the underlying security below the
exercise price less the premium paid for the option. A put option gives the
option holder the right to sell the underlying security at the option exercise
price at any time during the option period. The ability to buy put options will
allow the Fund to protect the unrealized gain in an appreciated security in its
portfolio without actually selling the security. In addition, the Fund will
continue to receive interest or dividend income on the security. The Fund may
sell a put option which it has previously purchased prior to the sale of the
securities underlying such option. Such a sale 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 that is sold. This
gain or loss may be wholly or partially offset by a change in the value of the
underlying security which the Fund owns or has the right to acquire.
OVER-THE-COUNTER ("OTC") OPTIONS. The Fund intends to write covered put and call
options and buy put and call options which trade in the over-the-counter market
to the same extent that it will engage in exchange traded options. Just as with
exchange traded options, OTC call options give the option holder the right to
buy an underlying security from an option writer at a stated exercise price; OTC
put options give the holder the right to sell an underlying security to an
option writer at a stated exercise price. OTC options, however, differ from
exchange traded options in certain material respects.
OTC options are arranged directly with dealers and not, as is the case with
exchange traded options, with a clearing corporation. Thus, there is a risk of
non-performance by the dealer. Because there is no exchange, pricing is
typically done by reference to information from market makers. OTC options,
however, are available for a greater variety of securities, and in a wider range
of expiration dates and exercise prices, than exchange traded options; and the
writer of an OTC option is paid the premium in advance by the dealer.
There can be no assurance that a continuous liquid secondary market will exist
for any particular option at any specific time. Consequently, the Fund may be
able to realize the value of an OTC option it has purchased only by exercising
it or entering into a closing sale transaction with the dealer that issued it.
Similarly, when the Fund writes an OTC option, it generally can close out that
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it.
OPTIONS ON STOCK INDICES. The Fund may also buy call options on stock indices in
order to hedge against the risk of market or industry-wide stock price
fluctuations. Call and put options on stock indices are similar to options on
securities except that, rather than the right to buy or sell stock at a
specified price, options on a stock index give the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the
underlying stock index is greater than (or less than, in the case of puts) the
exercise price of the option. This amount of cash is equal to the difference
between the closing price of the index and the exercise price of the option,
expressed in dollars, multiplied by a specified number. Thus, unlike stock
options, all settlements are in cash, and gain or loss depends on price
movements in the stock market generally (or in a particular industry or segment
of the market) rather than price movements in individual stocks.
When the Fund writes an option on a stock index, the Fund will establish a
segregated account containing cash or high quality fixed-income securities with
its custodian bank in an amount at least equal to the market value of the
underlying stock index and will maintain the account while the option is open or
will otherwise cover the transaction.
FUTURES CONTRACTS. The Fund may enter into contracts for the purchase or sale
for future delivery of securities or currencies and in such contracts based upon
financial indices ("financial futures"). Financial futures contracts are
commodity contracts that obligate the long or short holder to take or make
delivery of a specified quantity of a financial instrument, such as a security,
or the cash value of a securities index during a specified future period at a
specified price. A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by the contract at a
specified price on a specified date. A "purchase" of a futures contract means
the acquisition of a contractual obligation to acquire the securities called for
by the contract at a specified price on a specified date. Futures contracts have
been designed by exchanges which have been designated "contracts markets" by the
Commodities Futures Trading Commission and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market.
At the same time a futures contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment ("initial deposit"). Daily thereafter,
the futures contract is valued and the payment of "variation margin" may be
required since each day the Fund would provide or receive cash that reflects any
decline or increase in the contract's value.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished 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 take
delivery of the securities. Since all transactions in the futures market are
made, offset or fulfilled through a clearinghouse associated with the exchange
on which the contracts are traded, the Fund will incur brokerage fees when it
buys or sells futures contracts.
The Fund will not engage in transactions in futures contracts or related options
for speculation but only as a hedge against changes resulting from market
conditions in the values of its securities or securities which it intends to
buy. The Fund will not enter into any stock index or financial futures contract
or related option if, immediately thereafter, more than one-third of the Fund's
net assets would be represented by futures contracts or related options. In
addition, the Fund may not buy or sell futures contracts or buy or sell related
options if, immediately thereafter, the sum of the amount of its initial
deposits and premiums on its existing futures and related options positions
would exceed 5% of the Fund's total assets (taken at current value). In
instances involving the purchase of futures contracts or related call options,
money market instruments equal to the market value of the futures contract or
related option will be deposited in a segregated account with the custodian to
collateralize such long positions.
The purpose of the acquisition or sale of a futures contract is to attempt to
protect the Fund from fluctuations in the price of portfolio securities without
actually buying or selling the underlying security. To the extent the Fund
enters into a futures contract, it will maintain in a segregated account with
its custodian bank, to the extent required by the rules of the SEC, assets to
cover its obligations with respect to such contract which will consist of cash,
cash equivalents or high quality debt securities in an amount equal to the
difference between the fluctuating market value of such futures contract and the
aggregate value of the initial and variation margin payments made by the Fund
with respect to such futures contract.
Stock Index Futures and Options on Stock Index Futures. The Fund may buy and
sell stock index futures contracts and options on stock index futures contracts.
A stock index futures contract obligates the seller to deliver (and the buyer to
take) an amount of cash equal to a specific dollar amount times the difference
between the value of a specific stock index at the close of the last trading day
of the contract and the price at which the agreement is made. No physical
delivery of the underlying stocks in the index is made.
The Fund may sell stock index futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of its equity
securities that might otherwise result. When the Fund is not fully invested in
stocks and it anticipates a significant market advance, it may buy stock index
futures in order to gain rapid market exposure that may in part or entirely
offset increases in the cost of stocks that it intends to buy.
The Fund may buy and sell call and put options on stock index futures to hedge
against risks of market-side price movements. The need to hedge against such
risks will depend on the extent of diversification of the Fund's common stock
portfolio and the sensitivity of such investments to factors influencing the
stock market as a whole.
Call and put options on stock index futures are similar to options on securities
except that, rather than the right to buy stock at a specified price, options on
stock index futures give the holder the right to receive cash. Upon exercise of
the option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account which represents the amount by
which the market price of the futures contract, at exercise, exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract. If an option is exercised on the last trading
day prior to the expiration date of the option, the settlement will be made
entirely in cash equal to the difference between the exercise price of the
option and the closing price of the futures contract on the expiration date.
BOND INDEX FUTURES AND RELATED OPTIONS. The Fund may buy and sell futures
contracts based on an index of debt securities and options on such futures
contracts to the extent they currently exist and, in the future, may be
developed. The Fund reserves the right to conduct futures and options
transactions based on an index which may be developed in the future to correlate
with price movements in certain categories of debt securities. The Fund's
investment strategy in employing futures contracts based on an index of debt
securities will be similar to that used by it in other financial futures
transactions.
The Fund also may buy and write put and call options on such index futures and
enter into closing transactions with respect to such options.
FUTURE DEVELOPMENTS. The Fund may take advantage of opportunities in the area of
options and futures contracts and options on futures contracts and any other
derivative investments which are not presently contemplated for use by the Fund
or which are not currently available but which may be developed, to the extent
such opportunities are both consistent with the Fund's investment objective and
legally permissible for the Fund. Prior to investing in any such investment
vehicle, the Fund will supplement its Prospectus, if appropriate.
WHAT ARE THE FUND'S POTENTIAL RISKS?
OPTIONS, FUTURES AND OPTIONS ON FUTURES. The Fund's ability to hedge effectively
all or a portion of its securities through transactions in options on stock
indices, stock index futures, financial futures and related options depends on
the degree to which price movements in the underlying index or underlying
securities correlate with price movements in the relevant portion of the Fund's
portfolio. Inasmuch as such securities will not duplicate the components of the
index or underlying securities, the correlation will not be perfect.
Consequently, the Fund bears the risk that the prices of the securities being
hedged will not move in the same amount as the hedging instrument. It is also
possible that there may be a negative correlation between the index or other
securities underlying the hedging instrument and the hedged securities which
would result in a loss on both the securities and the hedging instrument.
Accordingly, successful use by the Fund of options on stock indices, stock index
futures, financial futures and related options will be subject to Advisers'
ability to predict correctly movements in the direction of the securities
markets generally or a particular segment. This requires different skills and
techniques than predicting changes in the price of individual stocks.
Positions in stock index options, stock index futures and financial futures and
related options may be closed out only on an exchange which provides a secondary
market. There can be no assurance that a liquid secondary market will exist for
any particular stock index option or futures contract or related option at any
specific time. Thus, it may not be possible to close an option or futures
position. The inability to close options or futures positions also could have an
adverse impact on the Fund's ability to effectively hedge its securities. The
Fund will enter into an option or futures position only if there appears to be a
liquid secondary market for the option or futures.
There can be no assurance that a continuous liquid secondary market will exist
for any particular OTC option at any specific time. Consequently, the Fund may
be able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer that
issued it. Similarly, when the Fund writes an OTC option, it generally can close
out that option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it. If a covered
call option writer cannot effect a closing transaction, it cannot sell the
underlying security until the option expires or the option is exercised.
Therefore, a covered call option writer of an OTC option may not be able to sell
an underlying security even though it might otherwise be advantageous to do so.
Likewise, a secured put writer of an OTC option may be unable to sell the
securities pledged to secure the put for other investment purposes while it is
obligated as a put writer. Similarly, a buyer of such put or call option might
also find it difficult to terminate its position on a timely basis in the
absence of a secondary market.
The Commodities Futures Trading Commission and the various exchanges have
established limits, referred to as "speculative position limits," on the maximum
net long or net short position which any person may hold or control in a
particular futures contract. Trading limits are imposed on the maximum number of
contracts which any person may trade on a particular trading day. An exchange
may order the liquidation of positions found to be in violation of these limits
and it may impose other sanctions or restrictions. The Fund does not believe
that these trading and positions limits will have an adverse impact on the
Fund's strategies for hedging its securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by Advisers may still not
result in a successful transaction.
Although the Fund believes that the use of futures contracts will benefit the
Fund, if Advisers' judgment about the general direction of interest rates is
incorrect, the Fund's overall performance would be poorer than if it had not
entered into any such contract. For example, if the Fund has hedged against the
possibility of an increase in interest rates which would adversely affect the
price of bonds held in its portfolio and interest rates decrease instead, the
Fund will lose part or all of the benefit of the increased value of its bonds
which it has hedged because it will have offsetting losses in its futures
positions. In addition, in such situations, if the Fund has insufficient cash,
it may have to sell securities from its portfolio to meet daily variation margin
requirements. Such sales may be, but will not necessarily be, at increased
prices which reflect the rising market. The Fund may have to sell securities at
a time when it may be disadvantageous to do so.
The Fund's sale of futures contracts and purchase of put options on futures
contracts will be solely to protect its investments against declines in value.
The Fund expects that in the normal course of business it will buy securities
upon termination of long futures contracts and long call options on future
contracts, but under unusual market conditions it may terminate any of these
positions without a corresponding purchase of securities.
HIGH YIELD SECURITIES. The Fund intends to invest not more than 5% of its assets
in lower rated, fixed-income securities and unrated securities of comparable
quality. Because the Fund may invest in securities below investment grade, an
investment in the Fund is subject to a higher degree of risk than an investment
in a fund that invests primarily in higher-quality securities. You should
consider the increased risk of loss to principal that is present with an
investment in higher risk securities, such as those in which the Fund invests.
Accordingly, an investment in the Fund should not be considered a complete
investment program and should be carefully evaluated for its appropriateness in
light of your overall investment needs and goals.
The market value of high yield, lower-quality fixed-income securities, commonly
known as junk bonds, tends to reflect individual developments affecting the
issuer to a greater degree than the market value of higher-quality securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality securities also tend to be more sensitive to economic conditions
than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with buying the securities of these issuers is generally
greater than the risk associated with higher-quality securities. For example,
during an economic downturn or a sustained period of rising interest rates,
issuers of lower-quality securities may experience financial stress and may not
have sufficient cash flow to make interest payments. The issuer's ability to
make timely interest and principal payments may also be adversely affected by
specific developments affecting the issuer, including the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the Fund's portfolio defaults, the Fund may have unrealized losses on the
security, which may lower the Fund's Net Asset Value. Defaulted securities tend
to lose much of their value before they default. Thus, the Fund's Net Asset
Value may be adversely affected before an issuer defaults. In addition, the Fund
may incur additional expenses if it must try to recover principal or interest
payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the Fund. Although these
securities are typically not callable for a period of time, usually for three to
five years from the date of issue, if an issuer calls its securities during
periods of declining interest rates, Advisers may find it necessary to replace
the securities with lower-yielding securities, which could result in less net
investment income for the Fund. The premature disposition of a high yield
security due to a call or buy-back feature, the deterioration of an issuer's
creditworthiness, or a default by an issuer may make it more difficult for the
Fund to manage the timing of its income. Under the Code and U.S. Treasury
regulations, the Fund may have to accrue income on defaulted securities and
distribute the income to shareholders for tax purposes, even though the Fund is
not currently receiving interest or principal payments on the defaulted
securities. To generate cash to satisfy these distribution requirements, the
Fund may have to sell portfolio securities that it otherwise may have continued
to hold or use cash flows from other sources, such as the sale of Fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse impact
on market price of a security and on the Fund's ability to sell a security in
response to a specific economic event, such as a deterioration in the
creditworthiness of the issuer, or if necessary to meet the Fund's liquidity
needs. Reduced liquidity may also make it more difficult to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
The Fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry restrictions
on resale. While many high yielding securities have been sold with registration
rights, covenants and penalty provisions for delayed registration, if the Fund
is required to sell restricted securities before the securities have been
registered, it may be deemed an underwriter of the securities under the
Securities Act of 1933, which entails special responsibilities and liabilities.
The Fund may also incur special costs in disposing of restricted securities,
although the Fund will generally not incur any costs when the issuer is
responsible for registering the securities.
The Fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other characteristics.
The Fund has no arrangement with its underwriter or any other person concerning
the acquisition of these securities.
The high yield securities market is relatively new and much of its growth before
1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yield securities and adversely affected the value
of outstanding securities, as well as the ability of issuers of high yield
securities to make timely principal and interest payments. Although the economy
has improved and high yield securities have performed more consistently since
that time, the adverse effects previously experienced may reoccur. For example,
the highly publicized defaults on some high yield securities during 1989 and
1990 and concerns about a sluggish economy that continued into 1993, depressed
the prices of many of these securities. While market prices may be temporarily
depressed due to these factors, the ultimate price of any security generally
reflects the true operating results of the issuer. Factors adversely impacting
the market value of high yield securities may lower the Fund's Net Asset Value.
The Fund relies on Advisers' judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, Advisers takes into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
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. Purchase the securities of any one issuer (other than obligations of the
U.S., its agencies or instrumentalities) if immediately thereafter, and as a
result of the purchase, the Fund would (a) have invested more than 5% of the
value of its total assets in the securities of the issuer, or (b) hold more than
10% of any voting class of the securities of any one issuer;
2. Make loans to other persons, except by the purchase of bonds, debentures or
similar obligations which are publicly distributed or of a character usually
acquired by institutional investors or through loans of the Fund's portfolio
securities, or to the extent the entry into a repurchase agreement may be deemed
a loan;
3. Borrow money (does not preclude the Fund from obtaining such short-term
credit as may be necessary for the clearance of purchases and sales of its
portfolio securities), except in the form of reverse repurchase agreements or
from banks in order to meet redemption requests that might otherwise require the
untimely disposition of portfolio securities or for other temporary or emergency
(but not investment) purposes, in an amount up to 10% of the value of the Fund's
total assets (including the amount borrowed) based on the lesser of cost or
market, less liabilities (not including the amount borrowed) at the time the
borrowing is made. While borrowings exceed 5% of the Fund's total assets, the
Fund will not make any additional investments;
4. Invest more than 25% of the Fund's assets (at the time of the most recent
investment) in any single industry;
5. Underwrite securities of other issuers or invest more than 10% of its assets
in securities with legal or contractual restrictions on resale (although the
Fund may invest in such securities to the extent permitted under the federal
securities laws for example, transactions between the Fund and Qualified
Institutional Buyers subject to Rule 144A under the Securities Act of 1933) or
which are not readily marketable, or which have a record of less than three
years continuous operation, including the operations of any predecessor
companies, if more than 10% of the Fund's total assets would be invested in such
companies;
6. Invest in securities for the purpose of exercising management or control of
the issuer;
7. Maintain a margin account with a securities dealer or invest in commodities
and commodity contracts (except that the Fund may engage in financial futures,
including stock index futures, and options on stock index futures) or lease or
acquire any interests, including interests issued by limited partnerships (other
than publicly traded equity securities) in oil, gas, or other mineral
exploration or development programs, or invest in excess of 5% of its total
assets in options unrelated to the Fund's transactions in futures, including
puts, calls, straddles, spreads, or any combination thereof;
8. Effect short sales, unless at the time the Fund owns securities equivalent
in kind and amount to those sold (which will normally be for deferring
recognition of gains or losses for tax purposes). The Fund does not currently
intend to employ this investment technique;
9. Invest directly in real estate, real estate limited partnerships or illiquid
securities issued by real estate investment trusts; (the Fund may, however,
invest in marketable securities issued by real estate investment trusts);
10. Invest in the securities of other investment companies, except where there
is no commission other than the customary brokerage commission or sales charge,
or except that securities of another investment company may be acquired pursuant
to a plan of reorganization, merger, consolidation or acquisition, and except
where the Fund would not own, immediately after the acquisition, securities of
the investment companies which exceed in the aggregate i) more than 3% of the
issuer's outstanding voting stock, ii) more than 5% of the Fund's total assets,
and iii) together with the securities of all other investment companies held by
the Fund, exceed, in the aggregate, more than 10% of the Fund's total assets.
The Fund may invest in shares of one or more money market funds managed by
Advisers or its affiliates; and
11. Purchase from or sell to its officers and trustees, or any firm of which any
officer or trustee is a member, as principal, any securities, but may deal with
such persons or firms as brokers and pay a customary brokerage commission; or
purchase or retain securities of any issuer, if to the knowledge of the Trust,
one or more of the officers or trustees of the Trust, or Advisers, own
beneficially more than one-half of 1% of the securities of such issuer and all
such officers and trustees together own beneficially more than 5% of such
securities.
In addition to these fundamental policies, it is the present policy of the Fund
(which may be changed without shareholder approval) not to pledge, mortgage or
hypothecate the Fund's assets as security for loans, and not to engage in joint
or joint and several trading accounts in securities, except that it may
participate in joint repurchase arrangements, invest its short-term cash in
shares of the Franklin Money Fund (pursuant to the terms and conditions of the
SEC order permitting such investments), or combine orders to buy or sell with
orders from other persons to obtain lower brokerage commissions. The Fund may
not invest in excess of 5% of its net assets, valued at the lower of cost or
market, in warrants, nor more than 2% of its net assets in warrants not listed
on either the NYSE or American Stock Exchange.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
Frank H. Abbott, III (76) Trustee
1045 Sansome Street
San Francisco, CA 94111
President and Director, Abbott
Corporation (an investment company);
and director or trustee, as the case
may be, of 28 of the investment
companies in the Franklin Templeton
Group of Funds.
Harris J. Ashton (65) 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 (a meat packing company); and
director or trustee, as the case may
be, of 52 of the investment companies
in the Franklin Templeton Group of
Funds.
*Harmon E. Burns (52) 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.
and Franklin Templeton Services, Inc.;
Executive Vice President, Franklin
Advisers, Inc.; Director,
Franklin/Templeton Investor Services,
Inc.; and officer and/or director or
trustee, as the case may be, of most of
the other subsidiaries of Franklin
Resources, Inc. and of 57 of the
investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (65) 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, General
Host Corporation (nursery and craft
centers); and director or trustee, as
the case may be, of 54 of the
investment companies in the Franklin
Templeton Group of Funds.
David W. Garbellano (82) 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 or
trustee, as the case may be, of 27 of
the investment companies in the
Franklin Templeton Group of Funds.
*Charles B. Johnson (64) Chairman of
777 Mariners Island Blvd. the Board
San Mateo, CA 94404 and Trustee
President, Chief Executive Officer and
Director, Franklin Resources, Inc.;
Chairman of the Board and Director,
Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin
Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor
Services, Inc., Franklin Templeton
Services, Inc. and General Host
Corporation (nursery and craft
centers); and officer and/or director
or trustee, as the case may be, of most
of the other subsidiaries of Franklin
Resources, Inc. and of 53 of the
investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (57) President and
777 Mariners Island Blvd. 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 or trustee, as the case
may be, of most of the other
subsidiaries of Franklin Resources,
Inc. and of 57 of the investment
companies in the Franklin Templeton
Group of Funds.
Frank W. T. LaHaye (68) 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 Corporation
(software firm); Director, Fischer
Imaging Corporation (medical imaging
systems) and Digital Transmission
Systems, Inc. (wireless
communications); and director or
trustee, as the case may be, of 26 of
the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (69) 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), Shoppers Express (home
shopping), and Spacehab, Inc.
(aerospace services); and director or
trustee, as the case may be, of 49 of
the investment companies in the
Franklin Templeton Group of Funds;
formerly Chairman, Hambrecht and Quist
Group, Director, H & Q Healthcare
Investors, and President, National
Association of Securities Dealers, Inc.
Martin L. Flanagan (37) 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 and Director, Templeton
Worldwide, Inc.; Executive Vice
President, Chief Operating Officer and
Director, Templeton Investment Counsel,
Inc.; Senior Vice President and
Treasurer, Franklin Advisers, Inc.;
Treasurer, Franklin Advisory Services,
Inc.; Treasurer and Chief Financial
Officer, Franklin Investment Advisory
Services, Inc.; President, Franklin
Templeton Services, Inc.; Senior Vice
President, Franklin/Templeton Investor
Services, Inc.; and officer and/or
director or trustee, as the case may
be, of 57 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 Services, Inc. and Franklin
Templeton Distributors, Inc.; Vice
President, Franklin Advisers, Inc. and
Franklin Advisory Services, Inc.; Vice
President, Chief Legal Officer and
Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and
officer of 57 of the investment
companies in the Franklin Templeton
Group of Funds.
Charles E. Johnson (41) 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.;
President, Chief Executive Officer,
Chief Investment Officer and Director,
Franklin Institutional Services
Corporation; Chairman and Director,
Templeton Investment Counsel, Inc.;
Vice President, Franklin Advisers,
Inc.; officer and/or director of some
of the subsidiaries of Franklin
Resources, Inc.; and officer and/or
director or trustee, as the case may
be, of 36 of the investment companies
in the Franklin Templeton Group of
Funds.
Diomedes Loo-Tam (58) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting Officer
Senior Vice President, Franklin
Templeton Services, Inc.; and officer
of 34 of the investment companies in
the Franklin Templeton Group of Funds.
Edward V. McVey (60) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President and National
Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 29
of the investment companies in the
Franklin Templeton Group
of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are currently paid
$2,400 per year (or $300 for each of the Trust's eight regularly scheduled Board
meetings) plus $300 per meeting attended. As shown above, the nonaffiliated
Board members also serve as directors or trustees of other investment companies
in the Franklin Templeton Group of Funds. They may receive fees from these funds
for their services. The following table provides the total fees paid to
nonaffiliated Board members by the Trust and by other funds in the Franklin
Templeton Group of Funds.
TOTAL FEES NUMBER OF BOARDS
RECEIVED FROM IN THE FRANKLIN
*TOTAL FEES THE FRANKLIN TEMPLETON GROUP
RECEIVED FROM TEMPLETON OF FUNDS ON
NAME THE TRUST GROUP OF FUNDS** WHICH EACH SERVES***
------------------------------------------------------------------------------
Frank H. Abbott, III.... $5,100 $165,236 28
Harris J. Ashton........ $5,100 $343,591 52
S. Joseph Fortunato..... $5,100 $360,411 54
David W. Garbellano..... $4,800 $148,916 27
Frank W. T. LaHaye...... $4,800 $139,233 26
Gordon S. Macklin....... $5,100 $335,541 49
*For the fiscal year ended April 30, 1997.
**For the calendar year ended December 31, 1996.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 58 registered investment companies, with approximately 169 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 or trustee.
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 August 5, 1997, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately
4,536.182 Class I shares and 560.555 Advisor Class shares, or less than 1%,
respectively, of the total outstanding Class I and Advisor Class shares of the
fund. Many of the Board members also own shares in other funds in the Franklin
Templeton Group of Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are
brothers and the father and uncle, respectively, of Charles E.Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio transactions
are executed. Advisers' activities are subject to the review and supervision of
the Board to whom Advisers renders periodic reports of the Fund's investment
activities. Advisers and its officers, directors and employees are covered by
fidelity insurance for the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action with
respect to any of the other funds it manages, or for its own account, that may
differ from action taken by Advisers on behalf of the Fund. Similarly, with
respect to the Fund, Advisers is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that Advisers and
access persons, as defined by the 1940 Act, may buy or sell for its or their own
account or for the accounts of any other fund. Advisers is not obligated to
refrain from investing in securities held by the Fund or other funds that it
manages. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Fund's Code of Ethics. Please
see "Miscellaneous Information Summary of Code of Ethics."
MANAGEMENT FEES. Under its management agreement, the Fund pays Advisers a
management fee equal to an annual rate of 0.625 of 1% of the value of average
daily net assets up to and including $100 million; 0.50 of 1% of the value of
average daily net assets over $100 million, up to and including $250 million;
0.45 of 1% of the value of average daily net assets over $250 million, up to and
including $10 billion; 0.44 of 1% of the value of average daily net assets over
$10 billion, up to and including $12.5 billion; 0.42 of 1% of the value of
average daily net assets over $12.5 billion, up to and including $15 billion;
and 0.40 of 1% of the value of average daily net assets over $15 billion. The
fee is computed at the close of business on the last business day of each month.
Each class of the Fund's shares pays its proportionate share of the management
fee.
For the fiscal years ended April 30, 1995 and 1996, management fees, before any
advance waiver, totaled $82,978, $228,800, and $1,232,136, respectively. Under
an agreement by Advisers to limit its fees, the Fund paid management fees
totaling $0, $56,120 and $1,174,738 for the same periods. For the fiscal year
ended April 30, 1997, management fees totaling $3,859,067, were paid to
Advisers.
MANAGEMENT AGREEMENT. The management agreement is in effect until April 30,
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. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these services
per benefit plan participant Fund account per year may not exceed the per
account fee payable by the Fund to Investor Services in connection with
maintaining shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York 10286, acts as custodian of the securities and other assets of
the Fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Fund's independent auditors. During the fiscal year ended April
30, 1997, their auditing services consisted of rendering an opinion on the
financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended April 30, 1997.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
Advisers selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the Board may give.
When placing a portfolio transaction, Advisers seeks to obtain prompt execution
of orders at the most favorable net price. For portfolio transactions on a
securities exchange, the amount of commission paid by the Fund is negotiated
between Advisers and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. Advisers will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of Advisers, a
better price and execution can otherwise be obtained. Purchases of portfolio
securities from underwriters will include a commission or concession paid by the
issuer to the underwriter, and purchases from dealers will include a spread
between the bid and ask price.
Advisers may pay certain brokers commissions that are higher than those another
broker may charge, if Advisers determines in good faith that the amount paid is
reasonable in relation to the value of the brokerage and research services it
receives. This may be viewed in terms of either the particular transaction or
Advisers' overall responsibilities to client accounts over which it exercises
investment discretion. The services that brokers may provide to Advisers
include, among others, supplying information about particular companies,
markets, countries, or local, regional, national or transnational economies,
statistical data, quotations and other securities pricing information, and other
information that provides lawful and appropriate assistance to Advisers in
carrying out its investment advisory responsibilities. These services may not
always directly benefit the Fund. They must, however, be of value to Advisers in
carrying out its overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services Advisers receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staffs of other securities firms. As long as it is lawful and
appropriate to do so, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. If the Fund's
officers are satisfied that the best execution is obtained, the sale of Fund
shares, as well as shares of other funds in the Franklin Templeton Group of
Funds, may also be considered a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to Advisers will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisers are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by
Advisers, taking into account the respective sizes of the funds and the amount
of securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
During the fiscal years ended April 30, 1995, 1996 and 1997, the Fund paid
brokerage commissions totaling $117,618, $570,572 and $1,155,691, respectively.
As of April 30, 1997, the Fund did not own securities of its regular
broker-dealers.
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 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.
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.
OTHER PAYMENTS TO SECURITIES DEALERS. 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.
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. 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 prior 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.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions that
maintain omnibus accounts with the Fund on behalf of numerous beneficial owners
for recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, the Fund may reimburse Investor
Services an amount not to exceed the per account fee that the Fund normally pays
Investor Services. These financial institutions may also charge a fee for their
services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the scheduled close of the
NYSE, generally 1:00 p.m. Pacific time, each day that the NYSE is open for
trading. As of the date of this SAI, the Fund is informed that the NYSE observes
the following holidays: New Year's Day, Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by Advisers.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the scheduled close of trading
on the NYSE, if that is earlier. The value is then converted into its U.S.
dollar equivalent at the foreign exchange rate in effect at noon, New York time,
on the day the value of the foreign security is determined. If no sale is
reported at that time, the foreign security is valued within the range of the
most recent quoted bid and ask prices. Occasionally, events that affect the
values of foreign securities and foreign exchange rates may occur between the
times at which they are determined and the close of the exchange and will,
therefore, not be reflected in the computation of the 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 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 Net Asset Value. If events materially
affecting the values of these securities occur during this period, the
securities will be valued at their fair value as determined in good faith by the
Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the form of
dividends, interest and other income derived from its investments. This income,
less the expenses incurred in the Fund's operations, is its net investment
income from which income dividends may be distributed. Thus, the amount of
dividends paid per share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any capital loss carryforward or post-October
loss deferral) may generally be made once each year in December to reflect any
net short-term and net long-term capital gains realized by the Fund as of
October 31 of the current fiscal year and any undistributed capital gains from
the prior fiscal year. The Fund may adjust the timing of these distributions for
operational or other reasons.
TAXES
As stated in the Prospectus, the Fund has elected and qualified 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 which 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 declared by
the Fund annually in the Fund's fiscal year end annual report.
Corporate shareholders should note that dividends paid by the Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividends-received deduction. For example, any interest income and short-term
capital gain (in excess of any net long-term capital loss or capital loss
carryover) included in investment company taxable income and distributed by the
Fund as a dividend will not qualify for the dividends-received deduction.
Corporate shareholders should also note that availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless the Fund shares have been held (or deemed
held) for at least 46 days in a substantially unhedged manner. The
dividends-received deduction may also be reduced to the extent interest paid or
accrued by a corporate shareholder is directly attributable to its investment in
Fund shares. The entire dividend, including the portion 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
advisors concerning the availability of the dividends-received deduction.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the 12 month period ending October 31 of each year (in
addition to amounts from the prior year that were neither distributed nor taxed
to the Fund) to you by December 31 of each year in order to avoid the imposition
of a federal excise tax. Under these rules, certain distributions which are
declared in October, November or December but which, for operational reasons,
may not be paid to you until the following January, will be treated for tax
purposes as if paid by the Fund and received by you on December 31 of the
calendar year in which they are declared. The Fund intends as a matter of policy
to declare 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 the Fund's shares are taxable transactions for
federal and state income tax purposes. Gain or loss will be recognized in an
amount equal to the difference between your basis in the shares and the amount
you 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 your 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 you buy other shares of the Fund (through reinvestment
of dividends or otherwise) within 30 days before or after the redemption. Any
loss disallowed under these rules will be added to your tax basis of the shares
purchased.
All or a portion of the sales charge incurred in buying shares of the Fund will
not be included in the federal tax basis of such shares sold or exchanged within
90 days of their purchase (for purposes of determining gain or loss with respect
to such shares) if you reinvest the sales proceeds in the Fund or in another
fund in the Franklin Templeton Group of 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.
Any loss realized upon the redemption of shares within six months from the date
of their purchase will be treated as a long-term capital loss to the extent of
amounts treated as distributions of net long-term capital gain during such six
month period.
The Fund's investment in options and futures contracts, including transactions
involving actual or deemed short sales, 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 treatment
of certain other options and futures 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 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 you 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. Certain tax elections
exist for mixed straddles (i.e., straddles comprised of at least one Section
1256 position and at least one non-Section 1256 position) which may reduce or
eliminate the operation of these straddle rules.
As a regulated investment company, the Fund is 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, straddles and futures contracts 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 options and futures contracts and may
make certain other tax elections in order to mitigate the effect of the above
rules and to prevent disqualification of the Fund as a regulated investment
company under Subchapter M of the Code.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the Fund's shares. The
underwriting agreement will continue in effect for successive annual periods if
its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of the Fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting called
for that purpose. The underwriting agreement terminates automatically in the
event of its assignment and may be terminated by either party on 90 days'
written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Distributors does not receive compensation from the Fund for acting as
underwriter of the Fund's Advisor Class shares.
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.
For periods before January 1, 1997, standardized performance quotations for
Advisor Class are calculated by substituting Class I performance for the
relevant time period, excluding the effect of Class I's maximum initial sales
charge, and including the effect of the Rule 12b-1 fees applicable to Class I
shares of the Fund. For periods after January 1, 1997, standardized performance
quotations for Advisor Class are calculated as described below.
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-year, five-year and from
inception periods, that would equate an initial hypothetical $1,000 investment
to its ending redeemable value. The calculation assumes 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-year,
five-year and from inception period and the deduction of all applicable charges
and fees. If a change is made to the sales charge structure, historical
performance information will be restated to reflect the maximum front-end sales
charge currently in effect. The average annual total return for Advisor Class
for the one-year, five-year and from inception periods ended April 30, 1997, was
- -4.31%, 20.71% and 18.73%, respectively.
These figures were 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-year, five-year and from inception periods at the end of
the one-year, five-year or from inception periods
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes income dividends and capital gain distributions are reinvested at
Net Asset Value. Cumulative total return, however, will be based on the actual
return for each class for a specified period rather than on the average return
over the one-year, five-year and from inception periods. The cumulative total
return for Advisor Class for the one-year, five-year and from inception periods
ended April 30, 1997, was -4.31%, 156.26% and 144.47%, respectively.
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
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) 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(R) 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed on
the NYSE.
d) Wilshire 5000 Equity Index - represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
h) Financial publications: THE WALL STREET JOURNAL, AND BUSINESS WEEK, CHANGING
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, AND MONEY MAGAZINES - provide
performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
l) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
m) Standard & Poor's(R) 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 2.7 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Mutual Series Fund Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $207 billion in
assets under management for more than 5.4 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 120
U.S. based open-end investment companies to the public. The Fund may identify
itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past nine years.
As of August 5, 1997, the principal shareholders of the Fund, beneficial or of
record, were as follows:
SHARE PER-
NAME AND ADDRESS AMOUNT CENTAGE
ADVISOR CLASS
Old Second National 352,097.259 17%
Bank of Aurora
37 South River St.
Aurora, IL 60506-4173
Trust Company of Illinois 247,201.759 12%
45 S. Park Blvd., Ste. 315
Glen Ellyn, IL 60137-6282
RBSCO 168,461.509 8%
P.O. Box 1410
Ruston, LA 71273-1410
Carey & Co. 323,570.803 16%
P.O. Box 1558 HC 1024
Columbus, OH 43216
First Mar & Co. #2 165,335.840 8%
101 W. Washington St.
P.O. Box 580
Marquette, MI 49855
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. In the
event of disputes involving multiple claims of ownership or authority to control
your account, the Fund has the right (but has no obligation) to: (a) freeze the
account and require the written agreement of all persons deemed by the Fund to
have a potential property interest in the account, before executing instructions
regarding the account; (b) interplead disputed funds or accounts with a court of
competent jurisdiction; or (c) surrender ownership of all or a portion of the
account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations must be sent to a compliance
officer and, within 10 days after the end of each calendar quarter, a report of
all securities transactions must be provided to the compliance officer; and
(iii) access persons involved in preparing and making investment decisions must,
in addition to (i) and (ii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended April 30, 1997, including the auditors'
report, are incorporated herein by reference.
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, CLASS II AND ADVISOR CLASS - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
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
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
PROSPECTUS - The prospectus for Advisor Class shares of the Fund dated September
1, 1997, as may be amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC - rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FRANKLIN GLOBAL HEALTH CARE FUND
FRANKLIN STRATEGIC SERIES
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 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? ................... 8
Investment Restrictions ................................ 12
Officers and Trustees .................................. 13
Investment Management
and Other Services .................................... 17
How does the Fund Buy
Securities for its Portfolio? ......................... 18
How Do I Buy, Sell and Exchange Shares? ................ 19
How are Fund Shares Valued? ............................ 22
Additional Information on
Distributions and Taxes ............................... 23
The Fund's Underwriter ................................. 26
How does the Fund Measure Performance? ................ 27
Miscellaneous Information .............................. 29
Financial Statements ................................... 30
Useful Terms and Definitions ........................... 30
Appendix Description of Ratings ....................... 31
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 Global Health Care Fund (the "Fund") is a non-diversified series of
Franklin Strategic Series (the "Trust"), an open-end management investment
company. The Fund's investment objective is capital appreciation. The Fund seeks
to achieve its objective by investing primarily in the equity securities of
health care companies located throughout the world.
The Prospectus, dated September 1, 1997, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN or write the Fund at the address shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
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?"
CONVERTIBLE SECURITIES. As with a straight fixed-income security, a convertible
security tends to increase in market value when interest rates decline and
decrease in value when interest rates rise. Like a common stock, the value of a
convertible security also tends to increase as the market value of the
underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because its value can be influenced by both interest
rate and market movements, a convertible security is not as sensitive to
interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank. The issuer of a convertible
security may be important in determining the security's true value. This is
because the holder of a convertible security will have recourse only to the
issuer.
While the Fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the Fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
ILLIQUID SECURITIES. The Fund will not invest more than 10% of its net assets in
illiquid securities. Generally, an "illiquid security" is any security that
cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued it. Notwithstanding this
limitation, the Board has authorized the Fund to invest in certain restricted
securities that are considered to be liquid to the extent Advisers determines
that there is a liquid institutional or other market for the securities. For
example, these may include restricted securities that may be freely transferred
among qualified institutional buyers pursuant to Rule 144A under the Securities
Act of 1933, as amended, and for which a liquid institutional market has
developed, where the investment is consistent with the Fund's investment
objective. The Board will review any determination by Advisers to treat a
restricted security as a liquid security on an ongoing basis, including
Advisers' assessment of current trading activity and the availability of
reliable price information. When determining if a restricted security is
properly considered a liquid security, Advisers and the Board will take into
account the following factors: (i) the frequency of trades and quotes for the
security; (ii) the number of dealers willing to 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
(e.g., the time needed to sell the security, the method of soliciting offers,
and the mechanics of transfer). To the extent the Fund invests in restricted
securities that are deemed liquid, the general level of illiquidity in the Fund
may be increased if qualified institutional buyers become uninterested in buying
these securities or the market for these securities contracts.
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, if
such loans do not exceed 20% of the value of the Fund's total assets at the time
of the most recent loan. The borrower must deposit with the Fund's custodian
bank collateral with an initial market value of at least 102% of the initial
market value of the securities loaned, including any accrued interest, with the
value of the collateral and loaned securities marked-to-market daily to maintain
collateral coverage of at least 100%. This collateral shall consist of cash,
securities issued by the U.S. government, its agencies or instrumentalities, or
irrevocable letters of credit. The lending of securities is a common practice in
the securities industry. The Fund may engage in security loan arrangements with
the primary objective of increasing the Fund's income either through investing
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. The Fund presently has no intention of engaging in security loan
arrangements in excess of 5% of the Fund's total assets at the time of the most
recent loan.
OPTIONS, FUTURES, AND OPTIONS ON FINANCIAL FUTURES. The Fund may write (sell)
covered put and call options and buy put and call options on securities that
trade on securities exchanges and in the over-the-counter market. The Fund may
buy and sell futures and options on futures with respect to securities and
currencies. Additionally, the Fund may buy and sell futures and options to
"close out" futures and options it may have sold or bought. The Fund will not
engage in transactions in futures contracts or related options for speculation
but only as a hedge against changes resulting from market conditions in the
values of its securities or securities that it intends to buy. The Fund will not
enter into any stock index or financial futures contract or related option if,
immediately thereafter, more than one-third of the Fund's net assets would be
represented by futures contracts or related options. In addition, the Fund may
not buy or sell futures contracts or buy or sell related options (except for
closing transactions) if, immediately thereafter, the sum of the amount of
margin deposits on its existing futures and related options positions and
premiums paid for related options would exceed 5% of the market value of the
Fund's total assets. The Fund will not engage in any stock options or stock
index options if the option premiums paid regarding its open option positions
exceed 5% of the value of the Fund's total assets. In instances involving the
purchase of futures contracts or related call options, money market instruments
equal to the market value of the futures contract or related option will be
deposited in a segregated account with the Fund's custodian bank to
collateralize such long positions.
The Fund's transactions in options, futures and forward contracts may be limited
by the requirements of the Code for qualification as a regulated investment
company. These transactions are also subject to special tax rules that may
affect the amount, timing and character of certain distributions to you. Please
see "Additional Information on Distributions and Taxes."
WRITING CALL OPTIONS. A call option gives its holder the right to buy the
underlying security from the option writer at a stated exercise price.
A call option written by the Fund is "covered" if the Fund owns the underlying
security that is subject to the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian bank) upon
conversion or exchange of other securities held in its portfolio. A call option
is also covered if the Fund holds a call on the same security and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash and high grade debt securities in a segregated
account with its custodian bank. 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.
In the case of a call option, the writer may have no control over when the
underlying securities must be sold since, with regard to certain options, the
writer may be assigned an exercise notice at any time prior to the termination
of the obligation. Whether or not an option expires unexercised, the writer
retains the amount of the premium. This amount, may, in the case of a covered
call option, be offset by a decline in the market value of the underlying
security during the option period. If a call option is exercised, the writer
experiences a profit or loss from the sale of the underlying security.
The writer of an option may terminate its obligation by effecting 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. A writer, however, may
not effect a closing purchase transaction after being notified of the exercise
of an option. Likewise, an investor who is the holder of an option may liquidate
its position by effecting a "closing sale transaction." This is 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 will be
available at the time desired by the Fund.
Effecting a closing transaction in the case of a written call option will allow
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both. Also, effecting a closing
transaction will allow the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other Fund investments. If the
Fund desires to sell a particular security from its portfolio on which it has
written a call option, it will effect a closing transaction before 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. 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.
BUYING CALL OPTIONS. The Fund may buy call options on securities that 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. Before 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 the
related transaction costs.
WRITING PUT OPTIONS. The Fund may write covered put options. The Fund, however,
does not currently intend to do so.
A put option gives the buyer of the option the right to sell, and the writer
(seller) the obligation to buy, the underlying security or currency at the
exercise price during the option period. The option may be exercised at any time
before its expiration date. The operation of put options in other respects,
including their related risks and rewards, is substantially identical to that of
call options.
If the Fund writes put options it will only do so on a covered basis. This means
that the Fund would maintain in a segregated account cash, U.S. government
securities or other liquid, high-grade debt securities in an amount not less
than the exercise price at all times while the put option is outstanding. The
rules of the clearing corporation currently require that such assets be
deposited in escrow to secure payment of the exercise price. The Fund would
generally write covered put options when Advisers wants to buy the underlying
security or currency for the Fund's portfolio at a price lower than the current
market price of the security or currency. In this event, the Fund would write a
put option at an exercise price that, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the Fund would also
receive interest on debt securities or currencies maintained to cover the
exercise price of the option, this technique could be used to enhance current
return during periods of market uncertainty. The risk in this transaction would
be that the market price of the underlying security or currency would decline
below the exercise price less the premiums received.
BUYING PUT OPTIONS. The Fund may buy a put option on an underlying security or
currency owned by the Fund as a hedging technique in order to protect against an
anticipated decline in the value of the security or currency (a "protective
put"). This hedge protection is provided only during the life of the put option
when the Fund, as the holder of the put option, is able to sell the underlying
security or currency at the put exercise price regardless of any decline in the
underlying security's market price or currency's exchange value. For example, a
put option may be bought in order to protect unrealized appreciation of a
security or currency when Advisers deems it desirable to continue to hold the
security or currency because of tax considerations. The premium paid for the put
option and any transaction costs would reduce any capital gain otherwise
available for distribution when the security or currency is eventually sold.
The Fund may also buy put options at a time when the Fund does not own the
underlying security or currency. By buying put options on a security or currency
it does not own, the Fund seeks to benefit from a decline in the market price of
the underlying security or currency. If the put option is not sold when it has
remaining value, and if the market price of the underlying security or currency
remains equal to or greater than the exercise price during the life of the put
option, the Fund will lose its entire investment in the put option. In order for
the purchase of a put option to be profitable, the market price of the
underlying security or currency must decline sufficiently below the exercise
price to cover the premium and transaction costs, unless the put option is sold
in a closing sale transaction.
The Fund will commit no more than 5% of its assets to premiums when buying put
options. The premium paid by the Fund when buying a put option will be recorded
as an asset in the Fund's statement of assets and liabilities. This asset will
be adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the Net Asset Value per share of the Fund is
computed. The asset will be extinguished upon expiration of the option, the
writing of an identical option in a closing transaction, or the delivery of the
underlying security or currency upon the exercise of the option.
OVER-THE-COUNTER ("OTC") OPTIONS. The Fund intends to write covered put and call
options and buy put and call options that trade in the OTC market to the same
extent that it will engage in exchange traded options. OTC options, however,
differ from exchange traded options in certain material respects.
OTC options are arranged directly with dealers and not, as is the case with
exchange traded options, with a clearing corporation. Because there is no
exchange, pricing is typically done by reference to information from market
makers. There is also the risk of non-performance by the dealer. OTC options,
however, are available for a greater variety of securities, and in a wider range
of expiration dates and exercise prices, than exchange traded options, and the
writer of an OTC option is paid the premium in advance by the dealer.
There can be no assurance that a continuous liquid secondary market will exist
for any particular option at any specific time. Consequently, the Fund may be
able to realize the value of an OTC option it has purchased only by exercising
it or entering into a closing sale transaction with the dealer that issued it.
Similarly, when the Fund writes an OTC option, it generally can close out that
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it.
OPTIONS ON STOCK INDICES. In order to hedge against the risk of market or
industry-wide stock price fluctuations, the Fund may also buy call and put
options on stock indices. Call and put options on stock indices are similar to
options on securities except that, rather than the right to buy or sell stock at
a specified price, options on a stock index give the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the underlying stock index is greater than (or less than, in the case of puts)
the exercise price of the option. This amount of cash is equal to the difference
between the closing price of the index and the exercise price of the option
expressed in dollars multiplied by a specified number. Thus, unlike stock
options, all settlements are in cash, and gain or loss depends on price
movements in the stock market generally (or in a particular industry or segment
of the market) rather than price movements in individual stocks.
If the Fund writes an option on a stock index, the Fund will establish a
segregated account containing cash or high quality fixed-income securities with
its custodian bank in an amount at least equal to the market value of the
underlying stock index and will maintain the account while the option is open or
it will otherwise cover the transaction.
FUTURES CONTRACTS. The Fund may enter into contracts for the purchase or sale
for future delivery of securities and in contracts based upon financial indices
("financial futures"). Financial futures contracts are commodity contracts that
obligate the long or short holder to take or make delivery of a specified
quantity of a financial instrument, such as a security, or the cash value of a
securities index during a specified future period at a specified price. A "sale"
of a futures contract means the acquisition of a contractual obligation to
deliver the securities called for by the contract at a specified price on a
specified date. A "purchase" of a futures contract means the acquisition of a
contractual obligation to acquire the securities called for by the contract at a
specified price on a specified date. Futures contracts have been designed by
exchanges that have been designated "contracts markets" by the Commodity Futures
Trading Commission ("CFTC") and must be executed through a futures commission
merchant, or brokerage firm, which is a member of the relevant contract market.
At the same time a futures contract is bought or sold, the Fund must allocate
cash or securities as a deposit payment ("initial deposit"). Daily thereafter,
the futures contract is valued and the payment of "variation margin" may be
required since each day the Fund would provide or receive cash that reflects any
decline or increase in the contract's value.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished 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. Since all transactions in the futures market are
made, offset or fulfilled through a clearinghouse associated with the exchange
on which the contracts are traded, the Fund will incur brokerage fees when it
buys or sells futures contracts.
The purpose of the acquisition or sale of a futures contract is to attempt to
protect the Fund from fluctuations in price of portfolio securities without
actually buying or selling the underlying security. To the extent the Fund
enters into a futures contract, it will maintain with its custodian bank, to the
extent required by the SEC, assets in a segregated account to cover its
obligations with respect to such contract which will consist of cash, cash
equivalents or high quality debt securities from its portfolio in an amount
equal to the difference between the fluctuating market value of the futures
contract and the aggregate value of the initial and variation margin payments
made by the Fund with respect to the futures contracts.
The CFTC and the various exchanges have established limits, referred to as
"speculative position limits," on the maximum net long or net short position
which any person may hold or control in a particular futures contract. Trading
limits are imposed on the maximum number of contracts which any person may trade
on a particular trading day. An exchange may order the liquidation of positions
found to be in violation of these limits and it may impose other sanctions or
restrictions. The Fund does not believe that these trading and positions limits
will have an adverse impact on the Fund's strategies for hedging its securities.
STOCK INDEX FUTURES. The Fund may buy and sell stock index futures contracts. A
stock index futures contract obligates the seller to deliver (and the buyer to
take) an amount of cash equal to a specific dollar amount times the difference
between the value of a specific stock index at the close of the last trading day
of the contract and the price at which the agreement is made. No physical
delivery of the underlying stocks in the index is made.
The Fund may sell stock index futures contracts in anticipation of or during a
market decline to attempt to offset a decline in market value of its equity
securities that might otherwise result. When the Fund is not fully invested in
stocks and it anticipates a significant market advance, it may buy stock index
futures in order to gain rapid market exposure that may in part or entirely
offset increases in the cost of common stocks that it intends to buy.
OPTIONS ON STOCK INDEX FUTURES. The Fund may buy and sell call and put options
on stock index futures to hedge against risks of market-side price movements.
The need to hedge against such risks will depend on the extent of
diversification of the Fund's common stock portfolio and the sensitivity of such
investments to factors influencing the stock market as a whole.
Call and put options on stock index futures are similar to options on securities
except that, rather than the right to buy or sell stock at a specified price,
options on stock index futures give the holder the right to receive cash. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account which represents the
amount by which the market price of the futures contract, at exercise, exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. If an option is exercised on the last
trading day before the expiration date of the option, the settlement will be
made entirely in cash equal to the difference between the exercise price of the
option and the closing price of the futures contract on the expiration date.
BOND INDEX FUTURES AND RELATED OPTIONS ON SUCH CONTRACTS. The Fund may buy and
sell futures contracts based on an index of debt securities and options on such
futures contracts to the extent they currently exist and, in the future, may be
developed. The Fund's investment strategy in employing futures contracts based
on an index of debt securities will be similar to that used by it in other
financial futures transactions. The Fund may also buy and write put and call
options on bond index futures and enter into closing transactions with respect
to such options.
OPTIONS ON FOREIGN CURRENCIES. The Fund may buy and write options on foreign
currencies for hedging purposes in a manner similar to that in which futures
contracts on foreign currencies, or forward contracts, will be used. For
example, a decline in the dollar value of a foreign currency in which portfolio
securities are denominated will reduce the dollar value of such securities, even
if their value in the foreign currency remains constant. In order to protect
against such diminutions in the value of portfolio securities, the Fund may buy
put options on the foreign currency. If the value of the currency does decline,
the Fund will have the right to sell the currency for a fixed amount in dollars
and will thereby offset, in whole or part, the adverse effect on its portfolio
which otherwise would have resulted.
Conversely, where there is a projected rise in the dollar value of a currency in
which securities to be acquired are denominated, thereby increasing the cost of
such securities, the Fund may buy call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Fund derived from buying foreign currency options will be reduced
by the amount of the premium and related transaction costs. In addition, where
currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options which would require it to forego a portion or all of the benefits of
advantageous changes in such rates.
The Fund may write options on foreign currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the dollar value
of foreign currency denominated securities due to adverse fluctuations in
exchange rates it could, instead of buying a put option, write a call option on
the relevant currency. If the expected decline occurs, the option will most
likely not be exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received.
Similarly, instead of buying a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write a
put option on the relevant currency that, if rates move in the manner projected,
will expire unexercised and allow the Fund to hedge such increased cost up to
the amount of the premium. As in the case of other types of options, however,
the writing of a foreign currency option will constitute only a partial hedge up
to the amount of the premium, and only if rates move in the expected direction.
If this does not occur, the option may be exercised and the Fund would be
required to buy or sell the underlying currency at a loss which may not be
offset by the amount of the premium. Through the writing of options on foreign
currencies, the Fund also may be required to forego all or a portion of the
benefits that might otherwise have been obtained from favorable movements in
exchange rates.
The Fund intends to write covered call options on foreign currencies. A call
option written on a foreign currency by the Fund is "covered" if the Fund owns
the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian bank) upon conversion or exchange of other foreign currency
held in its portfolio. A call option is also covered if the Fund has a call on
the same foreign currency and in the same principal amount as the call written
where the exercise price of the call held (a) is equal to or less than the
exercise price of the call written or (b) is greater than the exercise price of
the call written if the difference is maintained by the Fund in cash, U.S.
government securities or other high grade liquid debt securities in a segregated
account with its custodian bank.
The Fund also intends to write call options on foreign currencies for
cross-hedging purposes. A call option on a foreign currency is for cross-hedging
purposes if it is not covered, and is designed to provide a hedge against a
decline in the U.S. dollar value of a security that the Fund owns or has the
right to acquire and that is denominated in the currency underlying the option
due to an adverse change in the exchange rate. In these circumstances, the Fund
collateralizes the option by maintaining in a segregated account with the Fund's
custodian bank, cash or U.S. government securities or other high grade liquid
debt securities in an amount not less than the value of the underlying foreign
currency in U.S. dollars marked-to-market daily.
Options on foreign currencies and forward contracts are not traded on contract
markets regulated by the CFTC or (with the exception of certain foreign currency
options) by the SEC. To the contrary, such instruments are traded through
financial institutions acting as market makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. Similarly, options on currencies may be traded OTC. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchase of an option
cannot lose more than the amount of the premium plus related transaction costs,
this entire amount could be lost. Moreover, the option writer and a trader of
forward contracts could lose amounts substantially in excess of their initial
investments, due to the margin and collateral requirements associated with such
positions.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on these exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation ("OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the OTC market, potentially permitting the Fund to liquidate open
positions at a profit before exercise or expiration, or to limit losses in the
event of adverse market movements.
FUTURE DEVELOPMENTS. The Fund may take advantage of opportunities in the area of
options and futures contracts and options on futures contracts and any other
derivative investments that are not presently contemplated for use by the Fund
or that are not currently available but may be developed, to the extent these
opportunities are both consistent with the Fund's investment objective and
legally permissible for the Fund.
WHAT ARE THE FUND'S POTENTIAL RISKS?
BIOTECHNOLOGY COMPANIES. Health care companies in which the Fund may invest
include biotechnology companies. These companies are primarily small, start-up
ventures whose fortunes to date have risen mainly on the strength of
expectations about future products, not actual products. Although numerous
biotechnology products are in the research stage by many companies, only a
handful have reached the point of approval by the U.S. Food and Drug
Administration and subsequent commercial production and distribution. Shares of
biotechnology companies may advance on the strength of new product filings with
governmental authorities and research progress, but may also drop sharply in
response to regulatory or research setbacks.
POLITICAL AND ECONOMIC RISKS. Investing in securities of non-U.S. companies may
entail additional risks due to the potential political and economic instability
of certain countries and the risks of expropriation, nationalization,
confiscation or the imposition of restrictions on foreign investment and on
repatriation of capital invested. In the event of such expropriation,
nationalization or other confiscation by any country, the Fund could lose its
entire investment in any such country.
INTERNAL POLITICAL INSTABILITY. Certain countries in which the Fund may invest
may have factions that advocate revolutionary change related to political
philosophies, religious ideology or ethnic based territorial independence. Any
disturbance on the part of such groups could carry the potential for wide-spread
destruction or confiscation of property owned by individuals and entities
foreign to such country and could cause the loss of the Fund's investments in
those countries.
FOREIGN INVESTMENT RESTRICTIONS. Certain countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Fund. As an example,
certain countries require governmental approval before investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investment by foreign persons to only a specific class of
securities of a company that may have less advantageous terms than securities of
the company available for purchase by nationals. Moreover, the national policies
of certain countries may restrict investment opportunities in issuers or
industries deemed sensitive to national interests. Some countries also require
governmental approval for the repatriation of investment income, capital or the
proceeds of securities sales by foreign investors. The Fund could be adversely
affected by delays in, or a refusal to grant, any required governmental approval
for repatriation, as well as by the application to it of other restrictions on
investments.
Non-Uniform Corporate Disclosure Standards and Governmental Regulation. Foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards or to other regulatory requirements comparable to
those applicable to U.S. companies. Many of the securities held by the Fund will
not be registered with the SEC or regulators of any foreign country, nor will
the issuers be subject to the SEC's reporting requirements. Thus, there will be
less available information concerning foreign issuers of securities held by the
Fund than is available concerning U.S. issuers. In instances where the financial
statements of an issuer are not deemed to reflect accurately the financial
situation of the issuer, Advisers will take appropriate steps to evaluate the
proposed investment, which may include on-site inspection of the issuer,
interviews with its management and consultations with accountants, bankers and
other specialists.
CURRENCY FLUCTUATIONS. Because the Fund under normal circumstances may invest a
substantial portion of its total assets in the securities of foreign issuers
that are denominated in foreign currencies, the strength or weakness of the U.S.
dollar against foreign currencies will account for part of the Fund's investment
performance. A decline in the value of any particular currency against the U.S.
dollar will cause a decline in the U.S. dollar value of the Fund's holdings of
securities denominated in such currency and, therefore, will cause an overall
decline in the Fund's Net Asset Value and any net investment income and capital
gains to be distributed in U.S. dollars to shareholders of the Fund.
The rate of exchange between the U.S. dollar and other currencies is determined
by several factors including the supply and demand for particular currencies,
central bank efforts to support particular currencies, the movement of interest
rates, the pace of business activity in certain other countries, and the U.S.,
and other economic and financial conditions affecting the world economy.
Although the Fund values its assets daily in terms of U.S. dollars, the Fund
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund will do so from time to time, and you should be aware
of the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
between the prices at which they are buying and selling various currencies (the
"spread"). Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
sell that currency to the dealer.
ADVERSE MARKET CHARACTERISTICS. Securities of many foreign issuers may be less
liquid and their prices more volatile than securities of comparable U.S.
issuers. In addition, foreign securities exchanges and brokers are generally
subject to less governmental supervision and regulation than in the U.S., and
foreign securities exchange transactions are usually subject to fixed
commissions, which are generally higher than negotiated commissions on U.S.
transactions. In addition, foreign securities exchange transactions may be
subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive opportunities. Inability to dispose of a portfolio security
due to settlement problems either could result in losses to the Fund due to
subsequent declines in value of the portfolio security or, if the Fund has
entered into a contract to sell the security, could result in possible liability
to the buyer. Advisers will consider these difficulties when determining the
allocation of the Fund's assets, although Advisers does not believe that such
difficulties will have a material adverse effect on the Fund's portfolio trading
activities.
ILLIQUID SECURITIES. The sale of restricted or illiquid securities often
requires more time and results in higher brokerage charges or dealer discounts
and other selling expenses than the sale of securities eligible for trading on
national securities exchanges or in the OTC markets. Restricted securities often
sell at a price lower than similar securities that are not subject to
restrictions on resale.
OPTIONS, FUTURES AND OPTIONS ON FUTURES. The Fund's ability to hedge effectively
all or a portion of its securities through transactions in options on securities
and stock indices, stock index futures, financial futures and related options
depends on the degree to which price movements in the underlying index or
securities correlate with price movements in the relevant portion of the Fund's
portfolio. Inasmuch as these securities will not duplicate the components of any
index or underlying securities, the correlation will not be perfect.
Consequently, the Fund bears the risk that the prices of the securities being
hedged will not move in the same amount as the hedging instrument. It is also
possible that there may be a negative correlation between the index or other
securities underlying the hedging instrument and the hedged securities that
would result in a loss on both such securities and the hedging instrument.
Accordingly, successful use by the Fund of options on securities and stock
indices, stock index futures, financial futures and related options will be
subject to Advisers' ability to predict correctly movements in the direction of
the securities markets generally or of a particular segment. This requires
different skills and techniques than predicting changes in the price of
individual stocks.
Positions in securities and stock index options, stock index futures and
financial futures and related options 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 stock index option or futures contract or
related option 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
could also have an adverse impact on the Fund's ability to effectively hedge its
securities. The Fund will enter into an option or futures position only if there
appears to be a liquid secondary market for the options or futures.
If a covered call option writer cannot effect a closing transaction, it cannot
sell the underlying security until the option expires or the option is
exercised. Therefore, a covered call option writer of an OTC option may not be
able to sell an underlying security even though it might otherwise be
advantageous to do so. Likewise, a secured put writer of an OTC option may be
unable to sell the securities pledged to secure the put for other investment
purposes while it is obligated as a put writer. Similarly, a buyer of such put
or call option might also find it difficult to terminate its position on a
timely basis in the absence of a secondary market.
The Fund understands the current position of the staff of the SEC to be that
purchased OTC options are illiquid securities and that the assets used to cover
the sale of an OTC option are considered illiquid. The Fund and Advisers
disagree with this position. Nevertheless, pending a change in the staff's
position, the Fund will treat OTC options and "cover" assets as subject to the
Fund's limitation on illiquid securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions that could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general market trends by Advisers may still not result in a
successful transaction.
Although the Fund believes that the use of futures contracts will benefit the
Fund, if Advisers' investment judgment about the general direction of interest
rates is incorrect, the Fund's overall performance would be poorer than if it
had not entered into any such contract. For example, if the Fund has hedged
against the possibility of an increase in interest rates that would adversely
affect the price of bonds held in its portfolio and interest rates decrease
instead, the Fund will lose part or all of the benefit of the increased value of
its bonds that it has hedged because it will have offsetting losses in its
futures positions. In addition, in these situations, if the Fund has
insufficient cash, it may have to sell securities from its portfolio to meet
daily variation margin requirements. These sales may be, but will not
necessarily be, at increased prices that reflect the rising market. The Fund may
have to sell securities at a time when it may be disadvantageous to do so.
In addition, adverse market movements could cause the Fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a futures contract. There is also the risk of loss by
the Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a futures contract or option.
The Fund's sale of futures contracts and purchase of put options on futures
contracts will be solely to protect its investments against declines in value.
The Fund expects that in the normal course of business it will buy securities
upon termination of long futures contracts and long call options on future
contracts, but under unusual market conditions it may terminate any of the
positions without a corresponding purchase of securities.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund may buy or sell forward
foreign currency exchange contracts. While these contracts are not presently
regulated by the CFTC, the CFTC may in the future assert authority to regulate
forward contracts. In this event, the Fund's ability to utilize forward
contracts in the manner set forth in the Prospectus may be restricted. Forward
contracts will reduce the potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for the Fund
than if it had not entered into such contracts. The use of forward foreign
currency exchange contracts will not eliminate fluctuations in the underlying
U.S. dollar equivalent value of, or rates of return on, the Fund's foreign
currency denominated portfolio securities and the use of these techniques will
subject the Fund to certain risks.
The matching of the increase in value of a forward contract and the decline in
the U.S. dollar equivalent value of the foreign currency denominated asset that
is the subject of the hedge generally will not be precise. In addition, the Fund
may not always be able to enter into forward foreign currency contracts at
attractive prices and this will limit the Fund's ability to use these contracts
to hedge or cross-hedge its assets. Also, with regard to the Fund's use of
cross-hedges, there can be no assurance that historical correlations between the
movement of certain foreign currencies relative to the U.S. dollar will
continue. Thus, at any time poor correlation may exist between movements in the
exchange rates of the foreign currencies in which the Fund's assets that are the
subject of such cross-hedges are denominated.
The purchase and sale of exchange-traded foreign currency options, however, are
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the OTC market. For example, exercise and
settlement of these options must be made exclusively through the OCC, which has
established banking relationships in applicable foreign countries for this
purpose. As a result, the OCC may, if it determines that foreign governmental
restrictions or taxes would prevent the orderly settlement of foreign currency
option exercises, or would result in undue burdens on the OCC or its clearing
members, impose special procedures on exercise and settlement, such as technical
changes in the mechanics of delivery of currency, the fixing of dollar
settlement prices, or prohibitions on exercise.
In addition, forward contracts and options on foreign currencies may be traded
on foreign exchanges. These transactions are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign currencies. The value of
these positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the U.S. of
data on which to make trading decisions, (iii) delays in the Fund's ability to
act upon economic events occurring in foreign markets during nonbusiness hours
in the U.S., (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the U.S., and (v) less trading
volume.
HIGH YIELDING, FIXED-INCOME SECURITIES. The market value of high yield,
lower-quality fixed-income securities, commonly known as junk bonds, tends to
reflect individual developments affecting the issuer to a greater degree than
the market value of higher-quality securities, which react primarily to
fluctuations in the general level of interest rates. Lower-quality securities
also tend to be more sensitive to economic conditions than higher-quality
securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with buying the securities of these issuers is generally
greater than the risk associated with higher-quality securities. For example,
during an economic downturn or a sustained period of rising interest rates,
issuers of lower-quality securities may experience financial stress and may not
have sufficient cash flow to make interest payments. The issuer's ability to
make timely interest and principal payments may also be adversely affected by
specific developments affecting the issuer, including the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the Fund's portfolio defaults, the Fund may have unrealized losses on the
security, which may lower the Fund's Net Asset Value. Defaulted securities tend
to lose much of their value before they default. Thus, the Fund's Net Asset
Value may be adversely affected before an issuer defaults. In addition, the Fund
may incur additional expenses if it must try to recover principal or interest
payments on a defaulted security.
At fiscal year end, April 30, 1997, none of the securities in the Fund's
portfolio were in default on their contractual provisions.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse impact
on market price of a security and on the Fund's ability to sell a security in
response to a specific economic event, such as a deterioration in the
creditworthiness of the issuer, or if necessary to meet the Fund's liquidity
needs. Reduced liquidity may also make it more difficult to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
The Fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry restrictions
on resale. While many high yielding securities have been sold with registration
rights, covenants and penalty provisions for delayed registration, if the Fund
is required to sell restricted securities before the securities have been
registered, it may be deemed an underwriter of the securities under the
Securities Act of 1933, which entails special responsibilities and liabilities.
The Fund may also incur special costs in disposing of restricted securities,
although the Fund will generally not incur any costs when the issuer is
responsible for registering the securities.
The Fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other characteristics.
The Fund has no arrangement with its underwriter or any other person concerning
the acquisition of these securities.
The Fund relies on Advisers' judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, Advisers takes into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. The Fund may not:
1. Make loans to other persons, except by the purchase of bonds, debentures or
similar obligations which are publicly distributed or of a character usually
acquired by institutional investors or through loans of the Fund's portfolio
securities, or to the extent the entry into a repurchase agreement may be deemed
a loan.
2. Borrow money (does not preclude the Fund from obtaining such short-term
credit as may be necessary for the clearance of purchases and sales of its
portfolio securities), except in the form of reverse repurchase agreements or
from banks in order to meet redemption requests that might otherwise require the
untimely disposition of portfolio securities or for other temporary or emergency
(but not investment) purposes, in an amount up to 10% of the value of the Fund's
total assets (including the amount borrowed) based on the lesser of cost or
market, less liabilities (not including the amount borrowed) at the time the
borrowing is made. While borrowings exceed 5% of the Fund's total assets, the
Fund will not make any additional investments.
3. Underwrite securities of other issuers or invest more than 10% of its assets
in securities with legal or contractual restrictions on resale (although the
Fund may invest in such securities to the extent permitted under the federal
securities laws, for example, transactions between the Fund and Qualified
Institutional Buyers subject to Rule 144A under the Securities Act of 1933) or
which are not readily marketable, or which have a record of less than three
years continuous operation, including the operations of any predecessor
companies, if more than 10% of the Fund's total assets would be invested in such
companies.
4. Invest in securities for the purpose of exercising management or control of
the issuer.
5. Maintain a margin account with a securities dealer or invest in commodities
and commodity contracts (except that the Fund may engage in financial futures,
including stock index futures, and options on stock index futures) or lease or
acquire any interests, including interests issued by limited partnerships (other
than publicly traded equity securities) in oil, gas, or other mineral
exploration or development programs, or invest in excess of 5% of its total
assets in options unrelated to the Fund's transactions in futures, including
puts, calls, straddles, spreads, or any combination thereof.
6. Effect short sales, unless at the time the Fund owns securities equivalent
in kind and amount to those sold (which will normally be for deferring
recognition of gains or losses for tax purposes). The Fund does not currently
intend to employ this investment technique.
7. Invest directly in real estate, real estate limited partnerships or illiquid
securities issued by real estate investment trusts; (the Fund may, however,
invest in marketable securities issued by real estate investment trusts).
8. Invest in the securities of other investment companies, except where there
is no commission other than the customary brokerage commission or sales charge,
or except that securities of another investment company may be acquired pursuant
to a plan of reorganization, merger, consolidation or acquisition, and except
where the Fund would not own, immediately after the acquisition, securities of
the investment companies which exceed in the aggregate i) more than 3% of the
issuer's outstanding voting stock, ii) more than 5% of the Fund's total assets
and iii) together with the securities of all other investment companies held by
the Fund, exceed, in the aggregate, more than 10% of the Fund's total assets.
The Fund may invest in shares of one or more money market funds managed by
Advisers or its affiliates consistent with the terms of the exemptive order
issued by the SEC.
9. Purchase from or sell to its officers and trustees, or any firm of which any
officer or trustee is a member, as principal, any securities, but may deal with
such persons or firms as brokers and pay a customary brokerage commission; or
purchase or retain securities of any issuer, if to the knowledge of the Trust,
one or more of the officers or trustees of the Trust, or its investment adviser,
own beneficially more than one-half of 1% of the securities of such issuer and
all such officers and trustees together own beneficially more than 5% of such
securities.
10. Concentrate in any industry except that the fund will invest at least 25% of
total assets in the group of health care industries consisting of
pharmaceuticals, biotechnology, health care services, medical supplies and
medical technology.
In addition to these fundamental policies, it is the present policy of the Fund
(which may be changed without shareholder approval) not to pledge, mortgage or
hypothecate the Fund's assets as security for loans, nor to engage in joint or
joint and several trading accounts in securities, except that it may participate
in joint repurchase arrangements, invest its short term cash in shares of the
Franklin Money Fund, or combine orders to purchase or sell with orders from
other persons to obtain lower brokerage commissions. The Fund may not invest in
excess of 5% of its net assets, valued at the lower of cost or market, in
warrants, nor more than 2% of its net assets in warrants not listed on either
the NYSE or American Stock Exchange. It is also the policy of the Fund that it
may, consistent with its objective, invest a portion of its assets, as permitted
by the 1940 Act and the rules adopted thereunder, in securities or other
obligations issued by companies engaged in securities related businesses,
including companies that are securities brokers, dealers, underwriters or
investment advisers.
The Fund will not purchase the securities of any issuer if, as to 75% of the
assets of the Fund at the time of the purchase, more than 10% of the voting
securities of any issuer would be held by 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 or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
Frank H. Abbott, III (76) Trustee
1045 Sansome Street
San Francisco, CA 94111
President and Director, Abbott
Corporation (an investment company);
and director or trustee, as the case
may be, of 28 of the investment
companies in the Franklin Templeton
Group of Funds.
Harris J. Ashton (65) 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 (a meat packing company); and
director or trustee, as the case may
be, of 52 of the investment companies
in the Franklin Templeton Group of
Funds.
*Harmon E. Burns (52) 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.
and Franklin Templeton Services, Inc.;
Executive Vice President, Franklin
Advisers, Inc.; Director,
Franklin/Templeton Investor Services,
Inc.; and officer and/or director or
trustee, as the case may be, of most of
the other subsidiaries of Franklin
Resources, Inc. and of 57 of the
investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (65) 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, General
Host Corporation (nursery and craft
centers); and director or trustee, as
the case may be, of 55 of the
investment companies in the Franklin
Templeton Group of Funds.
David W. Garbellano (82) 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 or
trustee, as the case may be, of 27 of
the investment companies in the
Franklin Templeton Group of Funds.
*Charles B. Johnson (64) Chairman of the
777 Mariners Island Blvd. Board and Trustee
San Mateo, CA 94404
President, Chief Executive Officer and
Director, Franklin Resources, Inc.;
Chairman of the Board and Director,
Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin
Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor
Services, Inc., Franklin Templeton
Services, Inc. and General Host
Corporation (nursery and craft
centers); and officer and/or director
or trustee, as the case may be, of most
of the other subsidiaries of Franklin
Resources, Inc. and of 53 of the
investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (57) President and
777 Mariners Island Blvd. 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 or trustee, as the case
may be, of most other subsidiaries of
Franklin Resources, Inc. and of 57 of
the investment companies in the
Franklin Templeton Group of Funds.
Frank W. T. LaHaye (68) 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 Corporation
(software firm); Director, Fischer
Imaging Corporation (medical imaging
systems) and Digital Transmission
Systems, Inc. (wireless
communications); and director or
trustee, as the case may be, of 26 of
the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (69) 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), Shoppers Express (home
shopping), and Spacehab, Inc.
(aerospace services); and director or
trustee, as the case may be, of 49 of
the investment companies in the
Franklin Templeton Group of Funds;
formerly Chairman, Hambrecht and Quist
Group, Director, H & Q Healthcare
Investors, and President, National
Association of Securities Dealers, Inc.
Martin L. Flanagan (37) 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 and Director, Templeton
Worldwide, Inc.; Director, Executive
Vice President and Chief Operating
Officer, Templeton Investment Counsel,
Inc.; Senior Vice President and
Treasurer, Franklin Advisers, Inc.;
Treasurer, Franklin Advisory Services,
Inc.; Treasurer and Chief Financial
Officer, Franklin Investment Advisory
Services, Inc.; President, Franklin
Templeton Services, Inc.; Senior Vice
President, Franklin/Templeton Investor
Services, Inc.; and officer and/or
director or trustee, as the case may
be, of 58 of the investment companies
in the Franklin Templeton Group of
Funds.
Deborah R. Gatzek (48) 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 Services, Inc. and Franklin
Templeton Distributors, Inc.; Vice
President, Franklin Advisers, Inc. and
Franklin Advisory Services, Inc.; Vice
President, Chief Legal Officer and
Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and
officer of 57 of the investment
companies in the Franklin Templeton
Group of Funds.
Charles E. Johnson (41) 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.;
President, Chief Executive Officer,
Chief Investment Officer and Director,
Franklin Institutional Services
Corporation; Chairman and Director,
Templeton Investment Counsel, Inc.;
Vice President, Franklin Advisers,
Inc.; officer and/or director of some
of the subsidiaries of Franklin
Resources, Inc.; and officer and/or
director or trustee, as the case may
be, of 36 of the investment companies
in the Franklin Templeton Group of
Funds.
Diomedes Loo-Tam (58) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting
Officer
Senior Vice President, Franklin
Templeton Services, Inc.; and officer
of 34 of the investment companies in
the Franklin Templeton Group of Funds.
Edward V. McVey (60) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President and National Sales
Manager, Franklin Templeton
Distributors, Inc.; and officer of 29
of the investment companies in the
Franklin Templeton Group
of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are currently paid
$2,400 per year (or $300 for each of the eight regularly scheduled Board
meetings) plus $300 per meeting attended. As shown above, the nonaffiliated
Board members also serve as directors or trustees of other investment companies
in the Franklin Templeton Group of Funds. They may receive fees from these funds
for their services. The following table provides the total fees paid to
nonaffiliated Board members by the Trust and by other funds in the Franklin
Templeton Group of Funds.
NUMBER OF BOARDS
TOTAL FEES RECEIVED IN THE FRANKLIN
TOTAL FEES FROM THE FRANKLIN TEMPLETON GROUP
RECEIVED TEMPLETON GROUP OF FUNDS ON WHICH
NAME FROM THE TRUST* OF FUNDS** EACH SERVES***
------------------------------------------------------------------------------
Frank H. Abbott, III.. $5,100 $165,236 28
Harris J. Ashton...... 5,100 343,591 52
S. Joseph Fortunato .. 5,100 360,411 55
David W. Garbellano .. 4,800 148,916 27
Frank W.T. LaHaye .... 4,800 139,233 26
Gordon S. Macklin..... 5,100 335,541 49
*For the fiscal year ended April 30, 1997.
**For the calendar year ended December 31, 1996.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 58 registered investment companies, with approximately 169 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 or trustee.
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 August 5, 1997, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately 18,066
Class I shares, or less than 1% of the total outstanding Class I shares of the
Fund. Many of the Board members also own shares in other funds in the Franklin
Templeton Group of Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are
brothers and the father and uncle, respectively, of Charles E. Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio transactions
are executed. Advisers' activities are subject to the review and supervision of
the Board to whom Advisers renders periodic reports of the Fund's investment
activities. Advisers and its officers, directors and employees are covered by
fidelity insurance for the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action with
respect to any of the other funds it manages, or for its own account, that may
differ from action taken by Advisers on behalf of the Fund. Similarly, with
respect to the Fund, Advisers is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that Advisers and
access persons, as defined by the 1940 Act, may buy or sell for its or their own
account or for the accounts of any other fund. Advisers is not obligated to
refrain from investing in securities held by the Fund or other funds that it
manages. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Fund's Code of Ethics. Please
see "Miscellaneous Information Summary of Code of Ethics."
MANAGEMENT FEES. Under its management agreement, the Fund pays Advisers a
management fee equal to an annual rate of 0.625 of 1% of the value of average
daily net assets up to and including $100 million; 0.50 of 1% of the value of
average daily net assets over $100 million up to and including $250 million;
0.45 of 1% of the value of average daily net assets over $250 million up to and
including $10 billion; 0.44 of 1% of the value of average daily net assets over
$10 billion up to and including $12.5 billion; 0.42 of 1% of the value of
average daily net assets over $12.5 billion up to and including $15 billion; and
0.40 of 1% of the value of average daily net assets over $15 billion. The fee is
computed at the close of business on the last business day of each month. Each
class pays its proportionate share of the management fee.
For the fiscal years ended April 30, 1995, 1996 and 1997, management fees,
before any advance waiver, totaled $58,346, $208,494 and $873,754, respectively.
Under an agreement by Advisers to waive its fees, the Fund paid no management
fees for the fiscal year ended April 30, 1995, and paid management fees totaling
$65,491 and $873,754 for the fiscal years ended April 30, 1996 and 1997,
respectively.
MANAGEMENT AGREEMENT. The management agreement is in effect until April 30,
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. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these services
per benefit plan participant Fund account per year may not exceed the per
account fee payable by the Fund to Investor Services in connection with
maintaining shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York 10286, acts as custodian of the securities and other assets of
the Fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Fund's independent auditors. During the fiscal year ended April
30, 1997, their auditing services consisted of rendering an opinion on the
financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended April 30, 1997.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
Advisers selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the Board may give.
When placing a portfolio transaction, Advisers seeks to obtain prompt execution
of orders at the most favorable net price. For portfolio transactions on a
securities exchange, the amount of commission paid by the Fund is negotiated
between Advisers and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. Advisers will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of Advisers, a
better price and execution can otherwise be obtained. Purchases of portfolio
securities from underwriters will include a commission or concession paid by the
issuer to the underwriter, and purchases from dealers will include a spread
between the bid and ask price.
Advisers may pay certain brokers commissions that are higher than those another
broker may charge, if Advisers determines in good faith that the amount paid is
reasonable in relation to the value of the brokerage and research services it
receives. This may be viewed in terms of either the particular transaction or
Advisers' overall responsibilities to client accounts over which it exercises
investment discretion. The services that brokers may provide to Advisers
include, among others, supplying information about particular companies,
markets, countries, or local, regional, national or transnational economies,
statistical data, quotations and other securities pricing information, and other
information that provides lawful and appropriate assistance to Advisers in
carrying out its investment advisory responsibilities. These services may not
always directly benefit the Fund. They must, however, be of value to Advisers in
carrying out its overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services Advisers receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staffs of other securities firms. As long as it is lawful and
appropriate to do so, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. If the Fund's
officers are satisfied that the best execution is obtained, the sale of Fund
shares, as well as shares of other funds in the Franklin Templeton Group of
Funds, may also be considered a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage fees 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.
During the fiscal years ended April 30, 1995, 1996 and 1997, the Fund paid
brokerage commissions totaling $26,180, $76,519 and $200,754, respectively.
As of April 30, 1997, the Fund did not own securities of its regular
broker-dealers.
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? - Purchase
Price of Fund Shares" 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.
Class I 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, Class I
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 may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares 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 of Class I shares by certain retirement plans without a front-end
sales charge, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on sales
over $3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million. Distributors may make these
payments in the form of contingent advance payments, which may be recovered from
the Securities Dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy Class
I shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds acquired more than 90 days before the Letter is filed, will be counted
towards completion of the Letter, but they will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions you make during the 13
month period, except in the case of certain retirement plans, will be subtracted
from the amount of the purchases for purposes of determining whether the terms
of the Letter have been completed. If the Letter is not completed within the 13
month period, there will be an upward adjustment of the sales charge, depending
on the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute a
Letter before a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the sales
charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I 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. 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
for Class I shares and on the prior business day for Class II shares. If the
processing dates are different, the date of the Net Asset Value used to redeem
the shares will also be different for Class I and Class II shares.
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. 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 of each class 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, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by Advisers.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the scheduled close of trading
on the NYSE, if that is earlier. The value is then converted into its U.S.
dollar equivalent at the foreign exchange rate in effect at noon, New York time,
on the day the value of the foreign security is determined. If no sale is
reported at that time, the foreign security is valued within the range of the
most recent quoted bid and ask prices. Occasionally events that affect the
values of foreign securities and foreign exchange rates may occur between the
times at which they are determined and the close of the exchange and will,
therefore, not be reflected in the computation of the Net Asset Value of each
class. 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 each class 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 Net Asset Value of each class. If events
materially affecting the values of these securities occur during this period,
the securities will be valued at their fair value as determined in good faith by
the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the form of
dividends, interest and other income derived from its investments. This income,
less the expenses incurred in the Fund's operations, is its net investment
income from which income dividends may be distributed. Thus, the amount of
dividends paid per share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any capital loss carryforward or post-October
loss deferral) may generally be made once each year in December to reflect any
net short-term and net long-term capital gains realized by the Fund as of
October 31 of the current fiscal year and any undistributed capital gains from
the prior fiscal year. The Fund may adjust the timing of these distributions for
operational or other reasons.
TAXES
As stated in the Prospectus, the Fund has elected and qualified 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
(including its tax-exempt interest dividends) to shareholders will be taxable to
the extent of the Fund's available earnings and profits.
Subject to the limitations discussed below, all or a portion of the income
distributions paid by the Fund may be treated by corporate shareholders as
qualifying dividends for purposes of the dividends-received deduction under
federal income tax law. If the aggregate qualifying dividends received by the
Fund (generally, dividends from U.S. domestic corporations, the stock in which
is not debt-financed by the Fund and is held for at least a minimum holding
period) is less than 100% of its distributable income, then the amount of the
Fund's dividends paid to corporate shareholders that may be designated as
eligible for this deduction will not exceed the aggregate qualifying dividends
received by the Fund for the taxable year. The amount or percentage of income
qualifying for the corporate dividends-received deduction will be declared by
the Fund annually in the Fund's fiscal year end annual report.
Corporate shareholders should note that dividends paid by the Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividends-received deduction. For example, any interest income and net
short-term capital gain (in excess of any net long-term capital loss or capital
loss carryover) included in investment company taxable income and distributed by
the Fund as a dividend will not qualify for the dividends-received deduction.
Corporate shareholders should also note that availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless the Fund shares have been held (or deemed
held) for at least 46 days in a substantially unhedged manner. The
dividends-received deduction may also be reduced to the extent interest paid or
accrued by a corporate shareholder is directly attributable to its investment in
Fund shares. The entire dividend, including the portion that is treated as a
deduction, is includable in the tax base on which the alternative minimum tax is
computed and may also result in a reduction in the shareholder's tax basis in
its Fund shares, under certain circumstances, if the shares have been held for
less than two years. Corporate shareholders whose investment in the Fund is
"debt financed" for these tax purposes should consult with their tax advisors
concerning the availability of the dividends-received deduction.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve-month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to you by December 31 of each year in order to avoid the
imposition of a federal excise tax. Under these rules, certain distributions
which are declared in October, November or December but which, for operational
reasons, may not be paid to you until the following January, will be treated for
tax purposes as if paid by the Fund and received by you on December 31 of the
calendar year in which they are declared. The Fund intends as a matter of policy
to declare and pay such dividends, if any, in December to avoid the imposition
of this tax, but does not guarantee that its distributions will be sufficient to
avoid any or all federal excise taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between your basis in the shares
and the amount received, subject to the rules described below. If such shares
are a capital asset in your hands, gain or loss will be capital gain or loss and
will be long-term for federal income tax purposes if you have held the shares
for more than one year.
All or a portion of the sales charge incurred in buying shares of the Fund will
not be included in the federal tax basis of such shares sold or exchanged within
90 days of their purchase (for purposes of determining gain or loss with respect
to such shares) if the sales proceeds are reinvested in the Fund or in another
fund in the Franklin Templeton Funds and a sales charge which would otherwise
apply to the reinvestment is reduced or eliminated. Any portion of the sales
charge excluded from the tax basis of the shares sold will be added to the tax
basis of the shares acquired in the reinvestment. You should consult with your
tax advisor concerning the tax rules applicable to the redemption and exchange
of Fund shares.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares repurchased.
Any loss realized upon the redemption of shares within six months from the date
of their purchase will be treated as a long-term capital loss to the extent of
amounts treated as distributions of net long-term capital gain during the six
month period.
The Fund's investment in options, futures and forward contracts, including
transactions involving actual or deemed short sales or foreign exchange gains or
losses are subject to many complex and special tax rules. For example, OTC
options on debt securities and equity options, including options on stock and on
narrow-based stock indexes, will be subject to tax under Section 1234 of the
Code, generally producing a long-term or short-term capital gain or loss upon
exercise, lapse, or closing out of the option or sale of the underlying stock or
security. By contrast, the Fund's treatment of certain other options, futures
and forward contracts entered into by the Fund is generally governed by Section
1256 of the Code. These "Section 1256" positions generally include listed
options on debt securities, options on broad-based stock indices, options on
securities indices, options on futures contracts, regulated futures contracts
and certain foreign currency contracts and options thereon.
Absent a tax election to the contrary, each Section 1256 position held by the
Fund will be marked-to-market (i.e., treated as if it were sold for fair market
value) on the last business day of the Fund's fiscal year, and all gain or loss
associated with fiscal year transactions and mark-to-market positions at fiscal
year end (except certain foreign currency gain or loss covered by Section 988 of
the Code) will generally be treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss. The effect of Section 1256 mark-to-market
rules may be to accelerate income or to convert what otherwise would have been
long-term capital gains into short-term capital gains (or vice versa) or
short-term capital losses into long-term capital losses (or vice versa) within
the Fund. The acceleration of income on Section 1256 positions may require the
Fund to accrue taxable income without the corresponding receipt of cash. In
order to generate cash to satisfy the distribution requirements of the Code, the
Fund may be required to dispose of portfolio securities that it otherwise would
have continued to hold or to use cash flows from other sources such as the sale
of Fund shares. In these ways, any or all of these rules may affect the amount,
character and timing of income distributed to shareholders by the Fund.
When the Fund holds an option, future, or forward contract that substantially
diminishes the Fund's risk of loss with respect to another position of the Fund
(as might occur in some hedging transactions), this combination of positions
could be treated as a "straddle" for tax purposes, resulting in possible
deferral of losses, adjustments in the holding periods of Fund securities and
conversion of short-term capital losses into long-term capital losses. Certain
tax elections exist for mixed straddles (i.e., straddles comprised of at least
one Section 1256 position and at least one non-Section 1256 position) which may
reduce or eliminate the operation of these straddle rules.
As a regulated investment company, the Fund is subject to the requirement that
less than 30% of its annual gross income be derived from the sale or other
disposition of securities and certain other investments held for less than three
months ("short-short income"). This requirement may limit the Fund's ability to
engage in options, futures, and forward contracts and certain other hedging
transactions because these transactions are often consummated in less than three
months and may require the sale of portfolio securities held less than three
months and may, as in the case of short sales of portfolio securities, reduce
the holding periods of certain securities within the Fund, resulting in
additional short-short income for the Fund.
The Fund will monitor its transactions in options, futures, and forward
contracts and may make certain other tax elections in order to mitigate the
effect of the above rules and to prevent disqualification of the Fund as a
regulated investment company under Subchapter M of the Code.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currencies, foreign currency payables or
receivables, foreign currency denominated debt securities, foreign currency
forward contracts, and options or futures contracts on foreign currencies are
generally subject to Section 988 of the Code which may cause such gains and
losses to be treated as ordinary income and losses rather than capital gains and
losses and may affect the amount and timing of the Fund's income or loss from
such transactions and in turn, its distributions to shareholders.
In order for the Fund to qualify as a regulated investment company under
subchapter M of the Code, at least 90% of the Fund's annual gross income must
consist of dividends, interest and certain other types of qualifying income, and
no more than 30% of its annual gross income may be derived from the sale or
other disposition of securities or other instruments held for less than three
months. Foreign exchange gains derived by the Fund with respect to the Fund's
business of investing in stock or securities or options or futures with respect
to such stock or securities is qualifying income for purposes of this 90%
limitation.
Currency speculation or the use of currency forward contracts or other currency
instruments for non-hedging purposes may generate gains deemed to be not derived
with respect to the Fund's business of investing in stock or securities and
related options or futures. Under current law, non directly-related gains
arising from foreign currency positions or instruments held for less than three
months are treated as derived from the disposition of securities held less than
three months in determining the Fund's compliance with the 30% limitation. The
Fund will limit its activities involving foreign exchange gains to the extent
necessary to comply with these requirements.
The federal income tax treatment of interest rate and currency swaps is unclear
in certain respects and may in some circumstances result in the realization of
income not qualifying under the 90% test described above or be deemed to be
derived from the disposition of securities held less than three months in
determining the Fund's compliance with the 30% limitation. The Fund will limit
its interest rate and currency swaps to the extent necessary to comply with
these requirements.
If the Fund owns shares in a foreign corporation that constitutes a passive
foreign investment company (a "PFIC") for federal income tax purposes and the
Fund does not elect to treat the foreign corporation as a "qualified electing
fund" within the meaning of the Code, the Fund may be subject to U.S. federal
income taxation on a portion of any "excess distribution" it receives from the
PFIC or any gain it derives from the disposition of such shares, even if such
income is distributed as a taxable dividend by the Fund to its U.S.
shareholders. The Fund may also be subject to additional interest charges in
respect of deferred taxes arising from such distributions or gains. Any federal
income tax paid by the Fund as a result of its ownership of shares of a PFIC
will not give rise to a deduction or credit to the Fund or to any shareholder. A
PFIC means any foreign corporation if, for the taxable year involved, either (i)
it derives at least 75 percent of its gross income from "passive income"
(including, but not limited to, interest, dividends, royalties, rents and
annuities), or (ii) on average, at least 50 percent of the value (or adjusted
basis, if elected) of the assets held by the corporation produce "passive
income."
On April 1, 1992, proposed U.S. Treasury regulations were issued regarding a
special mark-to-market election for regulated investment companies. Under these
regulations, the annual mark-to-market gain, if any, on shares held by the Fund
in a PFIC would be treated as an excess distribution received by the Fund in the
current year, eliminating the deferral and the related interest charge. These
excess distribution amounts are treated as ordinary income, which the Fund will
be required to distribute to shareholders even though the Fund has not received
any cash to satisfy this distribution requirement. These regulations would be
effective for taxable years ending after the promulgation of the proposed
regulations as final regulations.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the Fund's shares. 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.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal years ended April 30, 1995, 1996 and 1997, were
$134,715, $1,317,176 and $3,331,378, respectively. After allowances to dealers,
Distributors retained $15,248, $148,496 and $362,830, in net underwriting
discounts and commissions for the respective years. Distributors may be entitled
to reimbursement under the Rule 12b-1 plan for each class, as discussed below.
Except as noted, Distributors received no other compensation from the Fund for
acting as underwriter.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 plans" that
were adopted pursuant to Rule 12b-1 of the 1940 Act.
THE CLASS I PLAN. Under the Class I plan, the Fund may pay up to a maximum of
0.25% per year of Class I's average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of Class I shares.
The Class I plan does not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.
THE CLASS II PLAN. Under the Class II plan, the Fund pays Distributors up to
0.75% per year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the Fund.
Under the Class II plan, the Fund also pays an additional 0.25% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
THE CLASS I AND CLASS II PLANS. In addition to the payments that Distributors or
others are entitled to under each plan, each 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
each class 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. The terms and
provisions of each plan relating to required reports, term, and approval are
consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
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 plans 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 plans 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.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are 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 plans, 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 plans 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 outstanding
shares of the class. The Class I plan may also be terminated by any act that
constitutes an assignment of the underwriting agreement with Distributors.
Distributors or any dealer or other firm may also terminate their respective
distribution or service agreement at any time upon written notice.
The plans 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 outstanding shares of the class, and all material amendments to the plans
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 plans 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 plans should be continued.
For the fiscal year ended April 30, 1997, Distributors had eligible expenditures
of $644,090 and $146,994 for advertising, printing, and payments to underwriters
and broker-dealers pursuant to the Class I and Class II plans, respectively, of
which the Fund paid Distributors $327,891 and $33,683 under the Class I and
Class II plans.
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 the one-, five-year and from
inception periods 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-year
and from inception periods 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.
When considering the average annual total return quotations, you should keep in
mind that the maximum front-end sales charge reflected in each quotation is a
one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the Fund. The
average annual total return for Class I shares for the one-, five-year and from
inception (February 14, 1992) periods ended April 30, 1997 was (18.51)%, 16.44%
and 13.04%, respectively. The aggregate total return for class II shares for the
period from inception (September 3, 1996) through April 30, 1997, was (7.14)%.
Since Class II shares have existed for less than one year, average annual total
returns are not provided.
These figures were 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-year or from inception periods at the end of the
one-, five-year or from inception periods
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 actual return for each class for a specified period rather than on the
average return over the one-, five-year and from inception periods. The
cumulative total return for Class I shares for the one-, five-year and from
inception (February 14, 1992) periods ended April 30, 1997, was (18.51)%,
114.06% and 89.32%, respectively. The cumulative total return for Class II
shares for the period from inception (September 3, 1996) to April 30, 1997, was
(7.14)%.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures 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(R) 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(R) 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed on
the NYSE.
d) Wilshire 5000 Equity Index - represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
h) Financial publications: THE WALL STREET JOURNAL, AND BUSINESS WEEK, CHANGING
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, AND MONEY MAGAZINES - provide
performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
l) Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
m) Standard & Poor's(R) 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 2.7 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Mutual Series Fund Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $207 billion in
assets under management for more than 5.4 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 120
U.S. based open-end investment companies to the public. The Fund may identify
itself by its NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the NYSE.
While many of them have similar investment objectives, no two are exactly
alike.As noted in the Prospectus, shares of the Fund are generally sold through
Securities Dealers. Investment representatives of such Securities Dealers are
experienced professionals who can offer advice in the type of investment
suitable to your unique goals and needs, as well as the types of risks
associated with such investment. The Dalbar Surveys, Inc. broker-dealer survey
has ranked Franklin number one in service quality for five of the past nine
years.
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of the Fund, no other person holds beneficially or of record more
than 5% of the outstanding shares of any class.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations must be sent to a compliance
officer and, within 10 days after the end of each calendar quarter, a report of
all securities transactions must be provided to the compliance officer; and
(iii) access persons involved in preparing and making investment decisions must,
in addition to (i) and (ii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended April 30, 1997, including the auditors'
report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
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 of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
PROSPECTUS - The prospectus for the Fund dated September 1, 1997, as may be
amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
199 SAI 09/97
FRANKLIN NATURAL RESOURCES FUND
FRANKLIN STRATEGIC SERIES
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 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? ......................... 6
Investment Restrictions ...................................... 9
Officers and Trustees ........................................ 10
Investment Management and Other Services ..................... 13
How does the Fund Buy
Securities for its Portfolio?................................ 14
How Do I Buy, Sell and Exchange Shares?....................... 15
How are Fund Shares Valued? .................................. 18
Additional Information on Distributions and Taxes ............ 19
The Fund's Underwriter ....................................... 22
How does the Fund Measure Performance?........................ 23
Miscellaneous Information .................................... 26
Financial Statements ......................................... 27
Useful Terms and Definitions ................................. 27
Appendix Description of Ratings ............................. 27
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 Natural Resources Fund (the "Fund") is a non-diversified series of
Franklin Strategic Series (the "Trust"), an open-end management investment
company. The Fund's investment objective is to provide high total return. The
Fund seeks to achieve its objective by investing primarily in securities of
companies that own, produce, refine, process and market natural resources, as
well as those that provide support services for natural resources companies
(i.e. those that develop technologies or provide services or supplies directly
related to the production of natural resources). The Fund may also invest in
securities of issuers outside the U.S.
The Prospectus, dated September 1, 1997, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN or write the Fund at the address shown.
This SAI describes the Fund's Class I shares. The Fund currently offers another
class of shares with a different sales charge and expense structure, which
affects performance. This class is described in a separate SAI and prospectus.
For more information, contact your investment representative or call 1-800/DIAL
BEN.
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?"
LOANS OF PORTFOLIO SECURITIES. As stated in the Prospectus, the Fund may lend
its portfolio securities consistent with procedures approved by the Board. The
Fund will not lend its portfolio securities if such loans are not permitted by
the laws or regulations of any state in which its shares are qualified for sale.
Loans will be subject to termination by the Fund in the normal settlement time,
currently three business days after notice, or by the borrower on one day's
notice. Borrowed securities must be returned when the loan is terminated. Any
gain or loss in the market price of the borrowed securities which occurs during
the term of the loan inures to the Fund and its shareholders. The Fund may pay
reasonable finders', borrowers', administrative and custodial fees in connection
with a loan of its securities.
ILLIQUID INVESTMENTS. The Fund's policy is not to invest more than 15% of its
net assets in illiquid securities. The Fund may invest up to 5% of its net
assets in illiquid securities, the disposition of which may be subject to legal
or contractual restrictions. To comply with applicable state restrictions, the
Fund will limit its investments in illiquid securities, including illiquid
securities with legal or contractual restrictions on resale, except for Rule
144A restricted securities, and including securities which are not readily
marketable, to 10% of the Fund's net assets. Subject to these limitations, the
Board has authorized the Fund to invest in restricted securities where such
investments are consistent with the Fund's investment objective and has
authorized such securities to be considered liquid to the extent Advisers
determines that there is a liquid institutional or other market for the
securities. An example of these securities are restricted securities that may be
freely transferred among qualified institutional buyers under Rule 144A of the
Securities Act of 1933, as amended, and for which a liquid institutional market
has developed. The Board will review any determination by Advisers to treat a
restricted security as a liquid security on an ongoing basis, including
Advisers' assessment of current trading activity and the availability of
reliable price information. In determining whether a restricted security is
properly considered a liquid security, Advisers and the Board will take into
account the following factors: (i) the frequency of trades and quotes for the
security; (ii) the number of dealers willing to 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 marketplace trades (e.g.,
the time needed to dispose of the security, the method of soliciting offers, and
the mechanics of transfer). To the extent the Fund invests in restricted
securities that are deemed liquid, the general level of illiquidity in the Fund
may be increased if qualified institutional buyers become uninterested in buying
these securities or the market for these securities contracts.
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS. The Fund may buy securities on a
when-issued or delayed delivery basis. These transactions are arrangements under
which the Fund buys securities with payment and delivery scheduled for a future
time. The securities are subject to market fluctuation prior to delivery to the
Fund and generally do not earn interest until their scheduled delivery date.
Therefore, the value or yields at delivery may be more or less than the purchase
price or the yields available when the transaction was entered into. Although
the Fund will generally buy these securities on a when-issued basis with the
intention of acquiring the securities, it may sell the securities before the
settlement date if it is deemed advisable. When the Fund is the buyer, it will
maintain, in a segregated account with its custodian bank, cash or high-grade
marketable securities having an aggregate value equal to the amount of its
purchase commitments until payment is made. In such an arrangement, the Fund
relies on the seller to complete the transaction. The seller's failure to do so
may cause the Fund to miss a price or yield considered advantageous. The Fund is
not subject to any percentage limit on the amount of its assets that may be
invested in when-issued purchase obligations. To the extent the Fund engages in
when-issued and delayed delivery transactions, it will do so only for the
purpose of acquiring portfolio securities consistent with its investment
objective and policies, and not for the purpose of investment leverage.
STANDBY COMMITMENT AGREEMENTS. The Fund may, from time to time, enter into
standby commitment agreements. These agreements commit the Fund, for a stated
period of time, to buy a stated amount of a security that may be issued and sold
to the Fund at the option of the issuer. The price and coupon of the security is
fixed at the time of the commitment. When the Fund enters into the agreement,
the Fund is paid a commitment fee, regardless of whether the security is
ultimately issued, typically equal to approximately 0.5% of the aggregate
purchase price of the security that the Fund has committed to buy. The Fund will
enter into such agreements only for the purpose of investing in the security
underlying the commitment at a yield and/or price that is considered
advantageous to the Fund.
The Fund will not enter into a standby commitment with a remaining term in
excess of 45 days and will limit its investment in standby commitments so that
the aggregate purchase price of the securities subject to the commitments with
remaining terms exceeding seven days, together with the value of other portfolio
securities deemed illiquid, will not exceed the Fund's limit on holding illiquid
investments, taken at the time of acquisition of such commitment or security.
See "What Are the Fund's Potential Risks? - Illiquid Investments." The Fund will
at all times maintain a segregated account with its custodian bank of cash, cash
equivalents, U.S. government securities or other high grade liquid debt
securities denominated in U.S. dollars or non-U.S. currencies in an aggregate
amount equal to the purchase price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued, and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, the Fund may bear the
risk of a decline in the value of the security and may not benefit from an
appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's Net Asset Value. The
cost basis of the security will be adjusted by the amount of the commitment fee.
In the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
CURRENCY HEDGING TRANSACTIONS
In order to hedge against currency exchange rate risks, the Fund may enter into
forward currency exchange contracts and currency futures contracts and options
on such futures contracts, as well as buy put or call options and write covered
put and call options on currencies traded in U.S. or foreign markets.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund may enter into forward
foreign currency exchange contracts in certain circumstances, as indicated in
the Prospectus. Additionally, when Advisers believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract to sell, for a fixed amount
of dollars, the amount of foreign currency approximating the value of some or
all of the Fund's portfolio securities denominated in that foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved is not generally possible because the future value of such securities
in foreign currencies changes as a consequence of market movements in the value
of those securities between the date on which the contract is entered into and
the date it matures. Using forward contracts 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 which each Fund can achieve at some future point
in time. The precise projection of short-term currency market movements is not
possible, and short-term hedging provides a means of fixing the dollar value of
only a portion of the Fund's foreign assets.
The Fund may engage in cross-hedging by using forward contracts in one currency
to hedge against fluctuations in the value of securities denominated in a
different currency if Advisers determines that there is a pattern of correlation
between the two currencies. The Fund may also buy and sell forward contracts (to
the extent they are not deemed "commodities") for non-hedging purposes when
Advisers anticipates that the foreign currency will appreciate or depreciate in
value, but securities denominated in that currency do not present attractive
investment opportunities and are not held in the Fund's portfolio.
The Fund's custodian bank will place cash or liquid high grade debt securities
(i.e., securities rated in one of the top three ratings categories by Moody's or
S&P or, if unrated, deemed by Advisers to be of comparable credit quality) into
a segregated account of the Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of forward foreign currency exchange
contracts requiring the Fund to buy foreign currencies. If the value of the
securities placed in the segregated account declines, additional cash or
securities is placed in the account on a daily basis so that the value of the
account equals the amount of the Fund's commitments with respect to its
contracts. The segregated account is marked-to-market on a daily basis. Although
the contracts are not presently regulated by the Commodity Futures Trading
Commission (the "CFTC"), the CFTC may in the future assert authority to regulate
these contracts. If this happens, the Fund's ability to use forward foreign
currency exchange contracts may be restricted.
The Fund generally will not enter into a forward contract with a term of greater
than one year.
Writing and Buying Currency Call and Put Options. The Fund may write (sell)
covered put and call options and buy put and call options on foreign currencies
for the purpose of protecting against declines in the dollar value of portfolio
securities and against increases in the dollar cost of securities to be
acquired. The Fund may use options on currency to cross-hedge, which involves
writing or buying options on one currency to hedge against changes in exchange
rates for a different currency with a pattern of correlation. In addition, the
Fund may buy call options on currency for non-hedging purposes when Advisers
anticipates that the currency will appreciate in value, but the securities
denominated in that currency do not present attractive investment opportunities
and are not included in the Fund's portfolio.
A call option written by the Fund obligates the Fund to sell specified currency
to the holder of the option at a specified price at any time before the
expiration date. A put option written by the Fund would obligate the Fund to buy
specified currency from the option holder at a specified time before the
expiration date. The writing of currency options involves a risk that the Fund
will, upon exercise of the option, be required to sell currency subject to a
call at a price that is less than the currency's market value or be required to
buy currency subject to a put at a price that exceeds the currency's market
value.
The Fund may terminate its obligations under a call or put option by buying an
option identical to the one it has written. These purchases are referred to as
"closing purchase transactions." The Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
options purchased by the Fund.
The Fund would normally buy call options in anticipation of an increase in the
dollar value of the currency in which securities to be acquired by the Fund are
denominated. The purchase of a call option would entitle the Fund, in return for
the premium paid, to buy specified currency at a specified price during the
option period. The Fund would ordinarily realize a gain if, during the option
period, the value of the currency exceeded the sum of the exercise price, the
premium paid and transaction costs; otherwise the Fund would realize either no
gain or a loss on the purchase of the call option.
The Fund would normally buy put options in anticipation of a decline in the
dollar value of currency in which securities in its portfolio are denominated
("protective puts"). The purchase of a put option would entitle the Fund, in
exchange for the premium paid, to sell specific currency at a specified price
during the option period. The purchase of protective puts is designed merely to
offset or hedge against a decline in the dollar value of the Fund's portfolio
securities due to currency exchange rate fluctuations. The Fund would ordinarily
realize a gain if, during the option period, the value of the underlying
currency decreased below the exercise price sufficiently to more than cover the
premium and transaction costs; otherwise the Fund would realize either no gain
or a loss on the purchase of the put option. Gains and losses on the purchase of
protective put options would tend to be offset by countervailing changes in the
value of the underlying currency.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Advisers may choose to hedge
against changes in interest rates, securities prices or currency exchange rates,
by buying and selling various kinds of futures contracts. The Fund may also
enter into closing purchase and sale transactions with respect to any such
contracts and options. The futures contracts may be based on foreign currencies.
The Fund will engage in futures and related options transactions only for bona
fide hedging or other appropriate risk management purposes as defined below. All
futures contracts entered into by the Fund are traded on U.S. exchanges or
boards of trade that are licensed and regulated by the CFTC or on foreign
exchanges.
FUTURES CONTRACTS. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments for an
agreed price during a designated month (or to deliver the final cash settlement
price, in the case of a contract relating to an index or otherwise not calling
for physical delivery at the end of trading in the contract).
The Fund can sell futures contracts on a specified currency to protect against a
decline in the value of the currency and its portfolio securities that are
denominated in that currency. The Fund can buy futures contracts on foreign
currency to fix the price in U.S. dollars of a security denominated in the
currency that the Fund has acquired or expects to acquire.
Although futures contracts by their terms generally call for the actual delivery
or acquisition of underlying securities, 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 the cash value of the index underlying the contractual
obligations. 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 instead liquidated through offsetting transactions that may result in a
profit or a loss. While the Fund's futures contracts on currency will usually be
liquidated in this manner, the Fund may instead make or take delivery of the
currency whenever it appears economically advantageous for it to do so. A
clearing corporation associated with the exchange on which futures on currency
are traded guarantees that, if still open, the sale or purchase will be
performed on the settlement date.
HEDGING STRATEGIES WITH FUTURES. Hedging by use of futures contracts seeks to
establish, with more certainty than would otherwise be possible, the effective
price or currency exchange rate on portfolio securities or securities that the
Fund owns or proposes to acquire. The Fund may sell futures contracts on
currency in which its portfolio securities are denominated or in one currency to
hedge against fluctuations in the value of securities denominated in a different
currency if there is an established historical pattern of correlation between
the two currencies.
The CFTC and U.S. commodities exchanges have established limits referred to as
"speculative position limits" on the maximum net long or net short position that
any person may hold or control in a particular futures contract. Trading limits
are also imposed on the maximum number of contracts that any person may trade on
a particular trading day. An exchange may order the liquidation of positions
found to be in violation of these limits and it may impose other sanctions or
restrictions. The Fund does not believe that these trading and positions limits
will have an adverse impact on its strategies for hedging its securities.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on futures
contracts will give the Fund the right (but not the obligation), for a specified
price, to sell or to buy, respectively, the underlying futures contract at any
time during the option period. As the buyer of an option on a futures contract,
the Fund obtains the benefit of the futures position if prices move in a
favorable direction but limits its risk of loss in the event of an unfavorable
price movement, to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium that may
be partially offset by a decline in the value of the Fund's assets. By writing a
call option, the Fund becomes obligated, in exchange for the premium, to sell a
futures contract, which may have a value higher than the exercise price.
Conversely, the writing of a put option on a futures contract generates a
premium that may partially offset an increase in the price of securities that
the Fund intends to buy. However, the Fund becomes obligated to buy a futures
contract, which may have a value lower than the exercise price. Thus, the loss
incurred by the Fund in writing options on futures is potentially unlimited and
may exceed the amount of the premium received. The Fund will incur transaction
costs in connection with the writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or buying an offsetting option on the same series. There is
no guarantee that closing transactions can be effected. The Fund's ability to
establish and close out positions on its options will be subject to the
development and maintenance of a liquid market.
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?
POLITICAL AND ECONOMIC RISKS. Investing in securities of non-U.S. companies may
entail additional risks due to the potential political and economic instability
of certain countries and the risks of expropriation, nationalization,
confiscation or the imposition of restrictions on foreign investment and on
repatriation of capital invested. In the event of expropriation, nationalization
or other confiscation by any country, the Fund could lose its entire investment
in that country.
ILLIQUID INVESTMENTS. The sale of restricted or illiquid securities often
requires more time and results in higher brokerage charges or dealer discounts
and other selling expenses than does the sale of securities eligible for trading
on national securities exchanges or in the over-the-counter markets. Restricted
securities often sell at a price lower than similar securities that are not
subject to restrictions on resale.
RELIGIOUS AND ETHNIC INSTABILITY. Certain countries in which the Fund may invest
may have vocal minorities that advocate radical religious or revolutionary
philosophies or support ethnic independence. Any disturbance on the part of
these individuals could carry the potential for wide-spread destruction or
confiscation of property owned by individuals and entities foreign to the
country and could cause the loss of the Fund's investment in those countries.
FOREIGN INVESTMENT RESTRICTIONS. Certain countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Fund. As illustrations,
certain countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investment by foreign persons to only a specific class of
securities of a company that may have less advantageous terms than securities of
the company available for purchase by nationals. Moreover, the national policies
of certain countries may restrict investment opportunities in issuers or
industries deemed sensitive to national interests. Some countries require
governmental approval for the repatriation of investment income, capital or the
proceeds of securities sold by foreign investors. The Fund could be adversely
affected by delays in, or a refusal to grant, any required governmental approval
for repatriation, as well as by the application to it of other restrictions on
investments.
Non-Uniform Corporate Disclosure Standards and Governmental Regulation. Foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards or to other regulatory requirements comparable to
those applicable to U.S. companies. There will be less available information
concerning foreign issuers of securities held by the Fund than is available
concerning U.S. issuers. In instances where the financial statements of an
issuer are not deemed to reflect accurately the financial situation of the
issuer, Advisers may take appropriate steps to evaluate the proposed investment,
which may include on-site inspection of the issuer, interviews with its
management and consultations with accountants, bankers and other specialists.
ADVERSE MARKET CHARACTERISTICS. Securities of many foreign issuers may be less
liquid and their prices more volatile than securities of comparable U.S.
issuers. In addition, foreign securities exchanges and brokers are generally
subject to less governmental supervision and regulation than in the U.S., and
foreign securities exchange transactions are usually subject to fixed
commissions, which are generally higher than negotiated commissions on U.S.
transactions. In addition, foreign securities exchange transactions may be
subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems could either result in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible gain
to the buyer. Advisers will consider these difficulties when determining the
allocation of the Fund's assets, although Advisers does not believe that these
difficulties will have a material adverse effect on the Fund's portfolio trading
activities.
NON-U.S. TAXES. The Fund's net investment income from foreign issuers may be
subject to non-U.S. withholding or other taxes, thereby reducing the Fund's net
investment income.
CURRENCY FLUCTUATIONS. Because the Fund under normal circumstances will invest a
substantial portion of its total assets in the securities of foreign issuers
that are denominated in foreign currencies, the strength or weakness of the U.S.
dollar against such foreign currencies will account for part of the Fund's
investment performance. A decline in the value of any particular currency
against the U.S. dollar will cause a decline in the U.S. dollar value of the
Fund's holdings of securities denominated in that currency and, therefore, will
cause an overall decline in the Fund's Net Asset Value and any net investment
income and capital gains to be distributed to you in U.S. dollars.
The rate of exchange between the U.S. dollar and other currencies is determined
by several factors, including the supply and demand for particular currencies,
central bank efforts to support particular currencies, the movement of interest
rates, the pace of business activity in certain other countries and the U.S.,
and other economic and financial conditions affecting the world economy.
Although the Fund values its assets daily in terms of U.S. dollars, the Fund
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund will do so from time to time, and you should be aware
of the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
sell that currency to the dealer.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. While the Fund may enter into
forward contracts to reduce currency exchange rate risks, transactions in these
contracts involve certain other risks. Thus, while the Fund may benefit from
such transactions, unanticipated changes in currency prices may result in a
poorer overall performance for the Fund than if it had not engaged in any
forward contract. Moreover, there may be imperfect correlation between the
Fund's portfolio holdings of securities denominated in a particular currency and
forward contracts entered into by the Fund. This imperfect correlation may cause
the Fund to sustain losses that will prevent the Fund from achieving a complete
hedge or expose the Fund to risk of foreign exchange loss.
OPTIONS ON CURRENCY. An exchange-traded options position may be closed out only
on an options exchange that provides a secondary market for an option of the
same series. Although the Fund will generally buy or write only those options
for which there appears to be an active secondary market, there is no assurance
that a liquid secondary market on an exchange will exist for any particular
option or at any particular time. For some options, no secondary market on an
exchange may exist. In this event, it might not be possible to effect closing
transactions in particular options, with the result that the Fund would have to
exercise its options in order to realize any profit and would incur transaction
costs upon the sale of underlying securities pursuant to the exercise of put
options. If the Fund, as a covered call option writer, is unable to effect a
closing purchase transaction in a secondary market, it will not be able to sell
the underlying currency (or security denominated in that currency) until the
option expires or it delivers the underlying currency upon exercise.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of the
Option Clearing Corporation inadequate, and thereby result in the institution by
an exchange of special procedures that may interfere with the timely execution
of customers' orders.
The Fund may buy and write over-the-counter options to the extent consistent
with its limitation on investments in restricted securities, as described in the
Prospectus. Trading in over-the-counter options is subject to the risk that the
other party will be unable or unwilling to close-out options purchased or
written by the Fund.
The amount of the premiums that the Fund may pay or receive may be adversely
affected as new or existing institutions, including other investment companies,
engage in or increase their option buying and writing activities.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. While transactions in
futures contracts and options on futures may reduce certain risks, these
transactions themselves entail certain other risks. Thus, while the Fund may
benefit from the use of futures and options on futures, unanticipated changes in
interest rates, securities prices or currency exchange rates may result in a
poorer overall performance for the Fund than if it had not entered into any
futures contracts or options transactions. In the event of an imperfect
correlation between a future position and portfolio position that is intended to
be protected, the desired protection may not be obtained and the Fund may be
exposed to risk of loss.
HIGH YIELD SECURITIES. Issuers of high yield, fixed-income securities are often
highly leveraged and may not have more traditional methods of financing
available to them. Therefore, the risk associated with buying the securities of
these issuers is generally greater than the risk associated with higher-quality
securities. For example, during an economic downturn or a sustained period of
rising interest rates, issuers of lower-quality securities may experience
financial stress and may not have sufficient cash flow to make interest
payments. The issuer's ability to make timely interest and principal payments
may also be adversely affected by specific developments affecting the issuer,
including the issuer's inability to meet specific projected business forecasts
or the unavailability of additional financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the Fund's portfolio defaults, the Fund may have unrealized losses on the
security, which may lower the Fund's Net Asset Value. Defaulted securities tend
to lose much of their value before they default. Thus, the Fund's Net Asset
Value may be adversely affected before an issuer defaults. In addition, the Fund
may incur additional expenses if it must try to recover principal or interest
payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the Fund. Although these
securities are typically not callable for a period of time, usually for three to
five years from the date of issue, if an issuer calls its securities during
periods of declining interest rates, Advisers may find it necessary to replace
the securities with lower-yielding securities, which could result in less net
investment income for the Fund. The premature disposition of a high yield
security due to a call or buy-back feature, the deterioration of an issuer's
creditworthiness, or a default by an issuer may make it more difficult for the
Fund to manage the timing of its income. Under the Code and U.S. Treasury
regulations, the Fund may have to accrue income on defaulted securities and
distribute the income to shareholders for tax purposes, even though the Fund is
not currently receiving interest or principal payments on the defaulted
securities. To generate cash to satisfy these distribution requirements, the
Fund may have to sell portfolio securities that it otherwise may have continued
to hold or use cash flows from other sources, such as the sale of Fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse impact
on market price of a security and on the Fund's ability to sell a security in
response to a specific economic event, such as a deterioration in the
creditworthiness of the issuer, or if necessary to meet the Fund's liquidity
needs. Reduced liquidity may also make it more difficult to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
The Fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry restrictions
on resale. While many high yielding securities have been sold with registration
rights, covenants and penalty provisions for delayed registration, if the Fund
is required to sell restricted securities before the securities have been
registered, it may be deemed an underwriter of the securities under the
Securities Act of 1933, which entails special responsibilities and liabilities.
The Fund may also incur special costs in disposing of restricted securities,
although the Fund will generally not incur any costs when the issuer is
responsible for registering the securities.
The Fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other characteristics.
The Fund has no arrangement with its underwriter or any other person concerning
the acquisition of these securities.
The high yield securities market is relatively new and much of its growth before
1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yield securities and adversely affected the value
of outstanding securities, as well as the ability of issuers of high yield
securities to make timely principal and interest payments. Although the economy
has improved and high yield securities have performed more consistently since
that time, the adverse effects previously experienced may reoccur. For example,
the highly publicized defaults on some high yield securities during 1989 and
1990 and concerns about a sluggish economy that continued into 1993, depressed
the prices of many of these securities. While market prices may be temporarily
depressed due to these factors, the ultimate price of any security generally
reflects the true operating results of the issuer. Factors adversely impacting
the market value of high yield securities may lower the Fund's Net Asset Value.
The Fund relies on Advisers' judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, Advisers takes into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. The Fund may not:
1. Make loans to other persons, except by the purchase of bonds, debentures or
similar obligations which are publicly distributed or of a character usually
acquired by institutional investors, or through loans of the Fund's portfolio
securities, or to the extent the entry into a repurchase agreement or similar
transaction may be deemed a loan;
2. Borrow money or mortgage or pledge any of its assets, except in the form of
reverse repurchase agreements or from banks for temporary or emergency purposes
in an amount up to 33% of the value of the Fund's total assets (including the
amount borrowed) based on the lesser of cost or market, less liabilities (not
including the amount borrowed) at the time the borrowing is made. While
borrowings exceed 5% of the Fund's total assets, the Fund will not make any
additional investments;
3. Underwrite securities of other issuers (does not preclude the Fund from
obtaining such short-term credit as may be necessary for the clearance of
purchases and sales of its portfolio securities) or invest more than 5% of its
assets in illiquid securities with legal or contractual restrictions on resale
(although the Fund may invest in Rule 144A restricted securities to the full
extent permitted under the federal securities laws); 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;
4. Invest in securities for the purpose of exercising management or control of
the 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;
5. Effect short sales, unless at the time the Fund owns securities equivalent
in kind and amount to those sold (which will normally be for deferring
recognition of gains or losses for tax purposes);
6. Invest directly in real estate, real estate limited partnerships or illiquid
securities issued by real estate investment trusts (the Fund may, however,
invest up to 10% of its assets in marketable securities issued by real estate
investment trusts);
7. Invest directly in interests in oil, gas or other mineral leases, exploration
or development programs;
8. Invest in the securities of other investment companies, except where there
is no commission other than the customary brokerage commission or sales charge,
or except that securities of another investment company may be acquired pursuant
to a plan of reorganization, merger, consolidation or acquisition, and except
where the Fund would not own, immediately after the acquisition, securities of
the investment companies which exceed in the aggregate i) more than 3% of the
issuer's outstanding voting stock, ii) more than 5% of the Fund's total assets
and iii) together with the securities of all other investment companies held by
the Fund, exceed, in the aggregate, more than 10% of the Fund's total assets;
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. Pursuant to available exemptions from the 1940 Act,
the Fund may invest in shares of one or more money market funds managed by
Advisers, or its affiliates;
9. Purchase from or sell to its officers and trustees, or any firm of which any
officer or trustee is a member, as principal, any securities, but may deal with
such persons or firms as brokers and pay a customary brokerage commission; or
purchase or retain securities of any issuer if one or more of the officers or
trustees of the Trust, or its investment adviser, own beneficially more than
one-half of 1% of the securities of such issuer and all such officers and
trustees together own beneficially more than 5% of such securities;
10. Concentrate in any industry, except that under normal circumstances the Fund
will invest at least 25% of total assets in the securities issued by domestic
and foreign companies operating within the natural resources sector; 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; and
11. Invest more than 10% of its assets in securities of companies which have a
record of 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.
In addition to these fundamental policies, it is the present policy of the Fund
(which may be changed without shareholder approval) not to engage in joint or
joint and several trading accounts in securities, except that it may participate
in joint repurchase arrangements, invest its short-term cash in shares of the
Franklin Money Fund (pursuant to the terms of any order, and any conditions
therein, issued by the SEC permitting such investments), or combine orders to
purchase or sell with orders from other persons to obtain lower brokerage
commissions. The Fund may not invest in excess of 5% of its net assets, valued
at the lower of cost or market, in warrants, nor more than 2% of its net assets
in warrants not listed on either the New York or American Stock Exchange.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
Positions and Offices Principal Occupation
Name, Age and Address with the Trust During the Past Five Years
Frank H. Abbott, III (76) Trustee
1045 Sansome Street
San Francisco, CA 94111
President and Director, Abbott
Corporation (an investment company);
and director or trustee, as the case
may be, of 28 of the investment
companies in the Franklin Templeton
Group of Funds.
Harris J. Ashton (65) 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 (a meat packing company); and
director or trustee, as the case may
be, of 52 of the investment companies
in the Franklin Templeton Group of
Funds.
*Harmon E. Burns (52) 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.
and Franklin Templeton Services, Inc.;
Executive Vice President, Franklin
Advisers, Inc.; Director,
Franklin/Templeton Investor Services,
Inc.; and officer and/or director or
trustee, as the case may be, of most of
the other subsidiaries of Franklin
Resources, Inc. and of 57 of the
investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (65) 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, General
Host Corporation (nursery and craft
centers); and director or trustee, as
the case may be, of 54 of the
investment companies in the Franklin
Templeton Group of Funds.
David W. Garbellano (82) 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 or
trustee, as the case may be, of 27 of
the investment companies in the
Franklin Templeton Group of Funds.
*Charles B. Johnson (64) Chairman of
777 Mariners Island Blvd. the Board
San Mateo, CA 94404 and Trustee
President, Chief Executive Officer and
Director, Franklin Resources, Inc.;
Chairman of the Board and Director,
Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin
Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor
Services, Inc., Franklin Templeton
Services, Inc. and General Host
Corporation (nursery and craft
centers); and officer and/or director
or trustee, as the case may be, of most
of the other subsidiaries of Franklin
Resources, Inc. and of 53 of the
investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (57) President and
777 Mariners Island Blvd. 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 or trustee, as the case
may be, of most of the other
subsidiaries of Franklin Resources,
Inc. and of 57 of the investment
companies in the Franklin Templeton
Group of Funds.
Frank W. T. LaHaye (68) 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 Corporation
(software firm); Director, Fischer
Imaging Corporation (medical imaging
systems) and Digital Transmission
Systems, Inc. (wireless
communications); and director or
trustee, as the case may be, of 26 of
the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (69) 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), Shoppers Express (home
shopping), and Spacehab, Inc.
(aerospace services); and director or
trustee, as the case may be, of 49 of
the investment companies in the
Franklin Templeton Group of Funds;
formerly Chairman, Hambrecht and Quist
Group, Director, H & Q Healthcare
Investors, and President, National
Association of Securities Dealers, Inc.
Martin L. Flanagan (37) 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 and Director, Templeton
Worldwide, Inc.; Executive Vice
President, Chief Operating Officer and
Director, Templeton Investment Counsel,
Inc.; Senior Vice President and
Treasurer, Franklin Advisers, Inc.;
Treasurer, Franklin Advisory Services,
Inc.; Treasurer and Chief Financial
Officer, Franklin Investment Advisory
Services, Inc.; President, Franklin
Templeton Services, Inc.; Senior Vice
President, Franklin/Templeton Investor
Services, Inc.; and officer and/or
director or trustee, as the case may
be, of 57 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 Services, Inc. and Franklin
Templeton Distributors, Inc.; Vice
President, Franklin Advisers, Inc. and
Franklin Advisory Services, Inc.; Vice
President, Chief Legal Officer and
Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and
officer of 57 of the investment
companies in the Franklin Templeton
Group of Funds.
Charles E. Johnson (41) 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.;
President, Chief Executive Officer,
Chief Investment Officer and Director
Franklin Institutional Services
Corporation; Chairman and Director,
Templeton Investment Counsel, Inc.;
Vice President, Franklin Advisers,
Inc.; officer and/or director of some
of the subsidiaries of Franklin
Resources, Inc.; and officer and/or
director or trustee, as the case may
be, of 36 of the investment companies
in the Franklin Templeton Group of
Funds.
Diomedes Loo-Tam (58) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting
Officer
Senior Vice President, Franklin
Templeton Services, Inc.; and officer
of 34 of the investment companies in
the Franklin Templeton Group of Funds.
Edward V. McVey (60) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President and National
Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 29
of the investment companies in the
Franklin Templeton Group
of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are currently paid
$2,400 per year (or $300 for each of the Trust's eight regularly scheduled Board
meetings) plus $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
TOTAL FEES IN THE FRANKLIN
TOTAL FEES RECEIVED FROM THE TEMPLETON GROUP
RECEIVED FRANKLIN TEMPLETON OF FUNDS ON WHICH
NAME FROM THE TRUST* GROUP OF FUNDS** EACH SERVES***
Frank H. Abbott, III........ $ 5,100 $ 165,236 28
Harris J. Ashton............ 5,100 343,591 52
S. Joseph Fortunato......... 5,100 360,411 54
David W. Garbellano......... 4,800 148,916 27
Frank W.T. LaHaye........... 4,800 139,233 26
Gordon S. Macklin........... 5,100 335,541 49
*For the fiscal year ended April 30, 1997.
**For the calendar year ended December 31, 1996.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 58 registered investment companies, with approximately 169 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 or trustee.
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 August 5, 1997, the officers and Board members did not own of record or
beneficially any shares of the Fund. Many of the Board members own shares in
other funds in the Franklin Templeton Group of Funds. Charles B. Johnson and
Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively, of
Charles E. Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio transactions
are executed. Advisers' activities are subject to the review and supervision of
the Board to whom Advisers renders periodic reports of the Fund's investment
activities. Advisers and its officers, directors and employees are covered by
fidelity insurance for the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action with
respect to any of the other funds it manages, or for its own account, that may
differ from action taken by Advisers on behalf of the Fund. Similarly, with
respect to the Fund, Advisers is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that Advisers and
access persons, as defined by the 1940 Act, may buy or sell for its or their own
account or for the accounts of any other fund. Advisers is not obligated to
refrain from investing in securities held by the Fund or other funds that it
manages. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Fund's Code of Ethics. Please
see "Miscellaneous Information Summary of Code of Ethics."
MANAGEMENT FEES. Under its management agreement, the Fund pays Advisers a
management fee equal to an annual rate of 0.625 of 1% of the value of average
daily net assets up to and including $100 million; and 0.50 of 1% of the value
of average daily net assets over $100 million up to and including $250 million;
and 0.45 of 1% of the value of average daily net assets over $250 million up to
and including $10 billion; and 0.44 of 1% of the value of average daily net
assets over $10 billion, up to and including $12.5 billion; and 0.42 of 1% of
the value of average daily net assets over $12.5 billion, up to and including
$15 billion; and 0.40 of 1% of the value of average daily net assets over $15
billion. The fee is computed daily and paid monthly. Each class of the Fund pays
its proportionate share of the management fee.
For the fiscal years ended April 30, 1996 and 1997, management fees, before any
advance waiver, totaled $21,007 and $175,237, respectively. Under an agreement
by Advisers to limit its fees, the Fund paid no management fees for the fiscal
year ended April 30, 1996, and management fees totaling $83,520 for the fiscal
year ended April 30, 1997.
MANAGEMENT AGREEMENT. The management agreement is in effect until April 30,
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 30 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. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these services
per benefit plan participant Fund account per year may not exceed the per
account fee payable by the Fund to Investor Services in connection with
maintaining shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York 10286, acts as custodian of the securities and other assets of
the Fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Fund's independent auditors. During the fiscal year ended April
30, 1997, their auditing services consisted of rendering an opinion on the
financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended April 30, 1997.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
Advisers selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the Board may give.
When placing a portfolio transaction, Advisers seeks to obtain prompt execution
of orders at the most favorable net price. For portfolio transactions on a
securities exchange, the amount of commission paid by the Fund is negotiated
between Advisers and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. Advisers will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of Advisers, a
better price and execution can otherwise be obtained. Purchases of portfolio
securities from underwriters will include a commission or concession paid by the
issuer to the underwriter, and purchases from dealers will include a spread
between the bid and ask price.
Advisers may pay certain brokers commissions that are higher than those another
broker may charge, if Advisers determines in good faith that the amount paid is
reasonable in relation to the value of the brokerage and research services it
receives. This may be viewed in terms of either the particular transaction or
Advisers' overall responsibilities to client accounts over which it exercises
investment discretion. The services that brokers may provide to Advisers
include, among others, supplying information about particular companies,
markets, countries, or local, regional, national or transnational economies,
statistical data, quotations and other securities pricing information, and other
information that provides lawful and appropriate assistance to Advisers in
carrying out its investment advisory responsibilities. These services may not
always directly benefit the Fund. They must, however, be of value to Advisers in
carrying out its overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services Advisers receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staffs of other securities firms. As long as it is lawful and
appropriate to do so, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. If the Fund's
officers are satisfied that the best execution is obtained, the sale of Fund
shares, as well as shares of other funds in the Franklin Templeton Group of
Funds, may also be considered a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to Advisers will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisers are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by
Advisers, taking into account the respective sizes of the funds and the amount
of securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
During the fiscal years ended April 30, 1996 and 1997, the Fund paid brokerage
commissions totaling $21,405 and $120,604, respectively.
As of April 30, 1997, the Fund did not own securities of its regular
broker-dealers.
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.
Class I 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, Class I
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 may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares 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 of Class I shares by certain retirement plans without a front-end
sales charge, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on sales
over $3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million. Distributors may make these
payments in the form of contingent advance payments, which may be recovered from
the Securities Dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy Fund
shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds acquired more than 90 days before the Letter is filed, will be counted
towards completion of the Letter, but they will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions you make during the 13
month period, except in the case of certain retirement plans, will be subtracted
from the amount of the purchases for purposes of determining whether the terms
of the Letter have been completed. If the Letter is not completed within the 13
month period, there will be an upward adjustment of the sales charge, depending
on the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute a
Letter before a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the sales
charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in your name
until you fulfill the Letter. This policy of reserving shares does not apply to
certain retirement plans. If total purchases, less redemptions, equal the amount
specified under the Letter, the reserved shares will be deposited to an account
in your name or delivered to you or as you direct. If total purchases, less
redemptions, exceed the amount specified under the Letter and is an amount that
would qualify for a further quantity discount, a retroactive price adjustment
will be made by Distributors and the Securities Dealer through whom purchases
were made pursuant to the Letter (to reflect such further quantity discount) on
purchases made within 90 days before and on those made after filing the Letter.
The resulting difference in Offering Price will be applied to the purchase of
additional shares at the Offering Price applicable to a single purchase or the
dollar amount of the total purchases. If the total purchases, less redemptions,
are less than the amount specified under the Letter, you will remit to
Distributors an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge that would have applied to
the aggregate purchases if the total of the purchases had been made at a single
time. Upon remittance, the reserved shares held for your account will be
deposited to an account in your name or delivered to you or as you direct. If
within 20 days after written request the difference in sales charge is not paid,
the redemption of an appropriate number of reserved shares to realize the
difference will be made. In the event of a total redemption of the account
before fulfillment of the Letter, the additional sales charge due will be
deducted from the proceeds of the redemption, and the balance will be forwarded
to you.
If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will be
purchased at the Net Asset Value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term, money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. 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.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions that
maintain omnibus accounts with the Fund on behalf of numerous beneficial owners
for recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, the Fund may reimburse Investor
Services an amount not to exceed the per account fee that the Fund normally pays
Investor Services. These financial institutions may also charge a fee for their
services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the scheduled close of the
NYSE, generally 1:00 p.m. Pacific time, each day that the NYSE is open for
trading. As of the date of this SAI, the Fund is informed that the NYSE observes
the following holidays: New Year's Day, Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by Advisers.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the scheduled close of trading
on the NYSE, if that is earlier. The value is then converted into its U.S.
dollar equivalent at the foreign exchange rate in effect at noon, New York time,
on the day the value of the foreign security is determined. If no sale is
reported at that time, the foreign security is valued within the range of the
most recent quoted bid and ask prices. Occasionally events that affect the
values of foreign securities and foreign exchange rates may occur between the
times at which they are determined and the close of the exchange and will,
therefore, not be reflected in the computation of the Fund's Net Asset Value. If
events materially affecting the values of these foreign securities occur during
this period, the securities will be valued in accordance with procedures
established by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the Net Asset Value of the Fund's shares is determined as of such times.
Occasionally, events affecting the values of these securities may occur between
the times at which they are determined and the scheduled close of the NYSE that
will not be reflected in the computation of the Fund's Net Asset Value. If
events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. INCOME DIVIDENDS. The Fund receives income generally in the form of
dividends, interest and other income derived from its investments. This income,
less the expenses incurred in the Fund's operations, is its net investment
income from which income dividends may be distributed. Thus, the amount of
dividends paid per share may vary with each distribution.
2. CAPITAL GAIN DISTRIBUTIONS. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any capital loss carryforward or post-October
loss deferral) may generally be made once each year in December to reflect any
net short-term and net long-term capital gains realized by the Fund as of
October 31 of the current fiscal year and any undistributed capital gains from
the prior fiscal year. The Fund may adjust the timing of these distributions for
operational or other reasons.
TAXES
As stated in the Prospectus, the Fund has elected and qualified 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 which 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 declared by
the Fund annually in the Fund's fiscal year-end annual report.
Corporate shareholders should note that dividends paid by the Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividends-received deduction. For example, any interest income and short-term
capital gain (in excess of any net long-term capital loss or capital loss
carryover) included in investment company taxable income and distributed by the
Fund as a dividend will not qualify for the dividends-received deduction.
Corporate shareholders should also note that availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless the Fund shares have been held (or deemed
held) for at least 46 days in a substantially unhedged manner. The
dividends-received deduction may also be reduced to the extent interest paid or
accrued by a corporate shareholder is directly attributable to its investment in
Fund shares. The entire dividend, including the portion 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
advisors concerning the availability of the dividends-received deduction.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to you by December 31 of each year in order to avoid the
imposition of a federal excise tax. Under these rules, certain distributions
which are declared in October, November or December but which, for operational
reasons, may not be paid to you until the following January, will be treated for
tax purposes as if paid by the Fund and received by you on December 31 of the
calendar year in which they are declared. The Fund intends as a matter of policy
to declare 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. 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 your shares have been held for more
than one year.
All or a portion of the sales charge incurred in buying shares of the Fund will
not be included in the federal tax basis of such shares sold or exchanged within
90 days of their purchase (for purposes of determining gain or loss with respect
to such shares) if you reinvest the sales proceeds in the Fund or in another
fund in the Franklin Templeton Funds and a sales charge which would otherwise
apply to the reinvestment is reduced or eliminated. Any portion of the sales
charge excluded from the tax basis of the shares sold will be added to the tax
basis of the shares acquired in the reinvestment.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent you buy other shares of the Fund (through reinvestment
of dividends or otherwise) within 30 days before or after the redemption. Any
loss disallowed under these rules will be added to your tax basis of the shares
repurchased.
Any loss realized upon the redemption of shares within six months from the date
of their purchase will be treated as a long-term capital loss to the extent of
amounts treated as distributions of net long-term capital gain during such six
month period.
The Fund's investment in options and forward contracts are subject to many
complex and special tax rules. For example, over-the-counter 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 contacts and certain foreign
currency contacts and options thereon.
Absent a tax election to the contrary, each Section 1256 position held by the
Fund will be marked-to-market (i.e., treated as if it were sold for fair market
value) on the last business day of the Fund's fiscal year, and all gain or loss
associated with fiscal year transactions and mark-to-market positions at fiscal
year end (except certain foreign currency gain or loss covered by Section 988 of
the Code) will generally be treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss. The effect of Section 1256 mark-to-market
rules may be to accelerate income or to convert what otherwise would have been
long-term capital gains into short-term capital gains or 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 both the amount, character and timing of
income distributed to you by the Fund.
When the Fund holds an option or contract which substantially diminishes the
Fund's risk of loss with respect to another position of the Fund (as might occur
in some hedging transactions), this combination of positions could be treated as
a "straddle" for tax purposes, resulting in possible deferral of losses,
adjustments in the holding periods of Fund securities and conversion of
short-term capital losses into long-term capital losses. Certain tax elections
exist for mixed straddles (i.e., straddles comprised of at least one Section
1256 position and at least one non-Section 1256 position) which may reduce or
eliminate the operation of these straddle rules.
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 3 months. Foreign exchange gains
derived by the Fund with respect to the Fund's business of investing in stock or
securities, or options or futures with respect to such stock or securities is
qualifying income for purposes of this 90% limitation.
Currency speculation or the use of currency forward contracts or other currency
instruments for non-hedging purposes may generate gains deemed not to be derived
with respect to the Fund's business of investing in stock or securities and
related options or forwards. Under current law, non-directly-related gains
arising from foreign currency positions or instruments held for less than 3
months are treated as derived from the disposition of securities held less than
3 months in determining the Fund's compliance with the 30% limitation. The Fund
will limit its activities involving foreign exchange gains to the extent
necessary to comply with these requirements.
The Fund is authorized to invest in foreign securities (see the discussion in
the Prospectus under "How does the Fund Invest its Assets?"). Such investments,
if made, will have the following tax consequences.
The Fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. Because the Fund will likely invest 50% or less of its
total assets in securities of foreign corporations, the Fund will not be
entitled under the Code to pass-through to you your pro rata share of the
foreign taxes paid by the Fund. These taxes will be taken as a deduction by the
Fund.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currencies, foreign currency payables or
receivables, foreign currency-denominated debt securities, foreign currency
forward contracts, and options or futures contracts on foreign currencies are
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 you. Additionally, investments in foreign
securities pose special issues to the Fund in meeting its asset diversification
and income tests as a regulated investment company. The Fund will limit its
investments in foreign securities to the extent necessary to comply with these
requirements.
If the Fund owns shares in a foreign corporation that constitutes a "passive
foreign investment company" (a "PFIC") for federal income tax purposes and the
Fund does not elect to treat the foreign corporation as a "qualified electing
fund" within the meaning of the Code, the Fund may be subject to U.S. federal
income taxation on a portion of any "excess distribution" it receives from the
PFIC or any gain it derives from the disposition of such shares, even if such
income is distributed as a taxable dividend by the Fund to its U.S.
shareholders. The Fund may also be subject to additional interest charges in
respect of deferred taxes arising from such distributions or gains. Any 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% 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% 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 marked-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 you 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 of the Fund's shares. 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.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal years ended April 30, 1996 and 1997 were $136,529 and
$742,239, respectively. After allowances to dealers, Distributors retained
$15,262 and $16,002 in net underwriting discounts and commissions for the
respective years. Distributors may be entitled to reimbursement under the Rule
12b-1 plan, as discussed below. Except as noted, Distributors received no other
compensation from the Fund for acting as underwriter.
THE RULE 12B-1 PLAN
The Fund has adopted a distribution plan or "Rule 12b-1 plan" pursuant to Rule
12b-1 of the 1940 Act for its Class I shares. 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 Class I
shares. In addition, the Fund is permitted to pay Distributors up to an
additional 0.10% per year of Class I's 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 Class I 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. The plan does not permit unreimbursed
expenses incurred in a particular year to be carried over to or reimbursed in
later years.
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 the underwriting agreement with
Distributors, or by vote of a majority of the outstanding shares of Class I.
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 outstanding shares of Class I, 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.
For the fiscal year ended April 30, 1997, Distributors had eligible expenditures
of $169,847 for advertising, printing, and payments to underwriters and
broker-dealers pursuant to the plan, of which the Fund paid Distributors
$83,291.
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 and current yield 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-year and from inception
periods 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-year and from
inception period and the deduction of all applicable charges and fees. If a
change is made to the sales charge structure, historical performance information
will be restated to reflect the maximum front-end sales charge currently in
effect. The Fund's average annual total return for the one-year and from
inception periods ended April 30, 1997, was 5.27% and 19.52%, respectively.
These figures were 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-year and from inception periods at the end of the
one-year and from inception periods
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-year and from inception periods. The Fund's cumulative total
return for the one-year and from inception periods ended April 30, 1997, was
5.27% and 40.40%, respectively.
YIELD
CURRENT YIELD. Current yield shows the income per share earned by the Fund. It
is calculated by dividing the net investment income per share earned during a
30-day base period by the maximum Offering Price per share on the last day of
the period and annualizing the result. Expenses accrued for the period include
any fees charged to all shareholders during the base period. The Fund's yield
for the 30-day period ended April 30, 1997, was 0.38%.
This figure was obtained using the following SEC formula:
6
Yield = 2 [( a-b + 1 ) - 1]
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the maximum Offering Price per share on the last day of the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the SEC,
is not indicative of the amounts which were or will be paid to shareholders of
the Fund. Amounts paid to shareholders are reflected in the quoted current
distribution rate. The current distribution rate is usually computed by
annualizing the dividends paid per share during a certain period and dividing
that amount by the current maximum Offering Price. The current distribution rate
differs from the current yield computation because it may include distributions
to shareholders from sources other than dividends and interest, such as premium
income from option writing and short-term capital gains and is calculated over a
different period of time. The Fund's current distribution rate for the 30-day
period ended April 30, 1997, was 0.62%.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) 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(R) 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) Valueline Index - an unmanaged index which follows the stocks of
approximately 1,700 companies.
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) Historical data supplied by the research departments of CSFirst Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
k) Financial publications: THE WALL STREET JOURNAL, AND BUSINESS WEEK, FINANCIAL
WORLD, FORBES, FORTUNE, AND MONEY MAGAZINES - provide performance statistics
over specified time periods.
l) Morgan Stanley Capital International World Indices, including, among others,
the Morgan Stanley Capital International Europe, Australia, Far East Index
("EAFE Index"). The EAFE index is an unmanaged index of more than 1,000
companies of Europe, Australia and the Far East.
m) Financial Times Actuaries Indices - including the FTA-World Index (and
components thereof), which are based on stocks in major world equity markets.
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 2.7 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Mutual Series Fund Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $207 billion in
assets under management for more than 5.4 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 120
U.S. based open-end investment companies to the public. The Fund may identify
itself by its NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the NYSE.
While many of them have similar investment objectives, no two are exactly alike.
As noted in the Prospectus, shares of the Fund are generally sold through
Securities Dealers. Investment representatives of such Securities Dealers are
experienced professionals who can offer advice on the type of investment
suitable to your unique goals and needs, as well as the types of risks
associated with such investment.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past nine years.
As of August 5, 1997, the principal shareholders of the Fund, beneficial or of
record, were as follows:
SHARE PER
NAME AND ADDRESS AMOUNT CENTAGE
- ---------------------------------------------------------------------
ADVISOR CLASS
Franklin Templeton
Fund Allocator
Moderate Target Fund
c/o Fund Accounting Dept.
Kimberely Monasterio
1810 Gateway 3rd Flr.
San Mateo, CA 94404-2470 17,782.807 37%
Franklin Templeton
Fund Allocator
Growth Target Fund
c/o Fund Accounting Dept.
Kimberely Monasterio
1810 Gateway 3rd Flr.
San Mateo, CA 94404-2470 16,840.681 35%
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations must be sent to a compliance
officer and, within 10 days after the end of each calendar quarter, a report of
all securities transactions must be provided to the compliance officer; and
(iii) access persons involved in preparing and making investment decisions must,
in addition to (i) and (ii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended April 30, 1997, including the auditors'
report, are incorporated herein by reference.
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 ADVISOR CLASS - The Fund offers two classes of shares, designated
"Class I" and "Advisor Class." The two classes have proportionate interests in
the Fund's portfolio. They differ, however, primarily in their sales charge and
expense structures. Certain funds in the Franklin Templeton Funds also offer a
share class designated "Class II."
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the front-end sales charge. The maximum front-end sales
charge is 4.50%
PROSPECTUS - The prospectus for the Fund's Class I shares dated September 1,
1997, as may be amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
403 SAI 09/97
203 SAI
FRANKLIN NATURAL RESOURCES FUND-
ADVISOR CLASS
FRANKLIN STRATEGIC SERIES
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 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 ................................ 8
Officers and Trustees .................................. 10
Investment Management and Other Services .............. 13
How does the Fund Buy
Securities for its Portfolio? ......................... 14
How Do I Buy, Sell and Exchange Shares?................. 15
How are Fund Shares Valued? ............................ 17
Additional Information on
Distributions and Taxes ............................... 18
The Fund's Underwriter ................................. 20
How does the Fund
Measure Performance? .................................. 21
Miscellaneous Information .............................. 23
Financial Statements ................................... 24
Useful Terms and Definitions ........................... 24
Appendix
Description of Ratings ................................ 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 Natural Resources Fund (the "Fund") is a non-diversified series
of Franklin Strategic Series (the "Trust"), an open-end management investment
company. The Fund's investment objective is to provide high total return. The
Fund seeks to achieve its objective by investing primarily in securities of
companies that own, produce, refine, process and market natural resources, as
well as those that provide support services for natural resources companies
(i.e. those that develop technologies or provide services or supplies
directly related to the production of natural resources). The Fund may also
invest in securities of issuers outside the U.S.
This SAI describes the Fund's Advisor Class shares. The Prospectus, dated
September 1, 1997, as may be amended from time to time, contains the basic
information you should know before investing in the Fund. For a free copy,
call 1-800/DIAL BEN or write the Fund at the address shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN
MORE DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE
YOU WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF
THE FUND, AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
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?"
LOANS OF PORTFOLIO SECURITIES. As stated in the Prospectus, the Fund may lend
its portfolio securities consistent with procedures approved by the Board.
The Fund will not lend its portfolio securities if such loans are not
permitted by the laws or regulations of any state in which its shares are
qualified for sale. Loans will be subject to termination by the Fund in the
normal settlement time, currently three business days after notice, or by the
borrower on one day's notice. Borrowed securities must be returned when the
loan is terminated. Any gain or loss in the market price of the borrowed
securities which occurs during the term of the loan inures to the Fund and
its shareholders. The Fund may pay reasonable finders', borrowers',
administrative and custodial fees in connection with a loan of its securities.
ILLIQUID INVESTMENTS. The Fund's policy is not to invest more than 15% of its
net assets in illiquid securities. The Fund may invest up to 5% of its net
assets in illiquid securities, the disposition of which may be subject to
legal or contractual restrictions. To comply with applicable state
restrictions, the Fund will limit its investments in illiquid securities,
including illiquid securities with legal or contractual restrictions on
resale, except for Rule 144A restricted securities, and including securities
which are not readily marketable, to 10% of the Fund's net assets. Subject to
these limitations, the Board has authorized the Fund to invest in restricted
securities where such investments are consistent with the Fund's investment
objective and has authorized such securities to be considered liquid to the
extent Advisers determines that there is a liquid institutional or other
market for the securities. An example of these securities are restricted
securities that may be freely transferred among qualified institutional
buyers under Rule 144A of the Securities Act of 1933, as amended, and for
which a liquid institutional market has developed. The Board will review any
determination by Advisers to treat a restricted security as a liquid security
on an ongoing basis, including Advisers' assessment of current trading
activity and the availability of reliable price information. In determining
whether a restricted security is properly considered a liquid security,
Advisers and the Board will take into account the following factors: (i) the
frequency of trades and quotes for the security; (ii) the number of dealers
willing to 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 marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics
of transfer). To the extent the Fund invests in restricted securities that
are deemed liquid, the general level of illiquidity in the Fund may be
increased if qualified institutional buyers become uninterested in buying
these securities or the market for these securities contracts.
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS. The Fund may buy securities on
a when-issued or delayed delivery basis. These transactions are arrangements
under which the Fund buys securities with payment and delivery scheduled for
a future time. The securities are subject to market fluctuation prior to
delivery to the Fund and generally do not earn interest until their scheduled
delivery date. Therefore, the value or yields at delivery may be more or less
than the purchase price or the yields available when the transaction was
entered into. Although the Fund will generally buy these securities on a
when-issued basis with the intention of acquiring the securities, it may sell
the securities before the settlement date if it is deemed advisable. When the
Fund is the buyer, it will maintain, in a segregated account with its
custodian bank, cash or high-grade marketable securities having an aggregate
value equal to the amount of its purchase commitments until payment is made.
In such an arrangement, the Fund relies on the seller to complete the
transaction. The seller's failure to do so may cause the Fund to miss a price
or yield considered advantageous. The Fund is not subject to any percentage
limit on the amount of its assets that may be invested in when-issued
purchase obligations. To the extent the Fund engages in when-issued and
delayed delivery transactions, it will do so only for the purpose of
acquiring portfolio securities consistent with its investment objective and
policies, and not for the purpose of investment leverage.
STANDBY COMMITMENT AGREEMENTS. The Fund may, from time to time, enter into
standby commitment agreements. These agreements commit the Fund, for a stated
period of time, to buy a stated amount of a security that may be issued and
sold to the Fund at the option of the issuer. The price and coupon of the
security is fixed at the time of the commitment. When the Fund enters into
the agreement, the Fund is paid a commitment fee, regardless of whether the
security is ultimately issued, typically equal to approximately 0.5% of the
aggregate purchase price of the security that the Fund has committed to buy.
The Fund will enter into such agreements only for the purpose of investing in
the security underlying the commitment at a yield and/or price that is
considered advantageous to the Fund.
The Fund will not enter into a standby commitment with a remaining term in
excess of 45 days and will limit its investment in standby commitments so
that the aggregate purchase price of the securities subject to the
commitments with remaining terms exceeding seven days, together with the
value of other portfolio securities deemed illiquid, will not exceed the
Fund's limit on holding illiquid investments, taken at the time of
acquisition of such commitment or security. See "What Are the Fund's
Potential Risks? - Illiquid Investments." The Fund will at all times maintain
a segregated account with its custodian bank of cash, cash equivalents, U.S.
government securities or other high grade liquid debt securities denominated
in U.S. dollars or non-U.S. currencies in an aggregate amount equal to the
purchase price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued, and the value of the security, if issued, on the delivery
date may be more or less than its purchase price. Since the issuance of the
security underlying the commitment is at the option of the issuer, the Fund
may bear the risk of a decline in the value of the security and may not
benefit from an appreciation in the value of the security during the
commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's Net Asset Value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
CURRENCY HEDGING TRANSACTIONS
In order to hedge against currency exchange rate risks, the Fund may enter
into forward currency exchange contracts and currency futures contracts and
options on such futures contracts, as well as buy put or call options and
write covered put and call options on currencies traded in U.S. or foreign
markets.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund may enter into forward
foreign currency exchange contracts in certain circumstances, as indicated in
the Prospectus. Additionally, when Advisers believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract to sell, for a fixed
amount of dollars, the amount of foreign currency approximating the value of
some or all of the Fund's portfolio securities denominated in that foreign
currency. The precise matching of the forward contract amounts and the value
of the securities involved is not generally possible because the future value
of such securities in foreign currencies changes as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts 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 which each Fund
can achieve at some future point in time. The precise projection of
short-term currency market movements is not possible, and short-term hedging
provides a means of fixing the dollar value of only a portion of the Fund's
foreign assets.
The Fund may engage in cross-hedging by using forward contracts in one
currency to hedge against fluctuations in the value of securities denominated
in a different currency if Advisers determines that there is a pattern of
correlation between the two currencies. The Fund may also buy and sell
forward contracts (to the extent they are not deemed "commodities") for
non-hedging purposes when Advisers anticipates that the foreign currency will
appreciate or depreciate in value, but securities denominated in that
currency do not present attractive investment opportunities and are not held
in the Fund's portfolio.
The Fund's custodian bank will place cash or liquid high grade debt
securities (i.e., securities rated in one of the top three ratings categories
by Moody's or S&P or, if unrated, deemed by Advisers to be of comparable
credit quality) into a segregated account of the Fund in an amount equal to
the value of the Fund's total assets committed to the consummation of forward
foreign currency exchange contracts requiring the Fund to buy foreign
currencies. If the value of the securities placed in the segregated account
declines, additional cash or securities is placed in the account on a daily
basis so that the value of the account equals the amount of the Fund's
commitments with respect to its contracts. The segregated account is
marked-to-market on a daily basis. Although the contracts are not presently
regulated by the Commodity Futures Trading Commission (the "CFTC"), the CFTC
may in the future assert authority to regulate these contracts. If this
happens, the Fund's ability to use forward foreign currency exchange
contracts may be restricted.
The Fund generally will not enter into a forward contract with a term of
greater than one year.
WRITING AND BUYING CURRENCY CALL AND PUT OPTIONS. The Fund may write (sell)
covered put and call options and buy put and call options on foreign
currencies for the purpose of protecting against declines in the dollar value
of portfolio securities and against increases in the dollar cost of
securities to be acquired. The Fund may use options on currency to
cross-hedge, which involves writing or buying options on one currency to
hedge against changes in exchange rates for a different currency with a
pattern of correlation. In addition, the Fund may buy call options on
currency for non-hedging purposes when Advisers anticipates that the currency
will appreciate in value, but the securities denominated in that currency do
not present attractive investment opportunities and are not included in the
Fund's portfolio.
A call option written by the Fund obligates the Fund to sell specified
currency to the holder of the option at a specified price at any time before
the expiration date. A put option written by the Fund would obligate the Fund
to buy specified currency from the option holder at a specified time before
the expiration date. The writing of currency options involves a risk that the
Fund will, upon exercise of the option, be required to sell currency subject
to a call at a price that is less than the currency's market value or be
required to buy currency subject to a put at a price that exceeds the
currency's market value.
The Fund may terminate its obligations under a call or put option by buying
an option identical to the one it has written. These purchases are referred
to as "closing purchase transactions." The Fund would also be able to enter
into closing sale transactions in order to realize gains or minimize losses
on options purchased by the Fund.
The Fund would normally buy call options in anticipation of an increase in
the dollar value of the currency in which securities to be acquired by the
Fund are denominated. The purchase of a call option would entitle the Fund,
in return for the premium paid, to buy specified currency at a specified
price during the option period. The Fund would ordinarily realize a gain if,
during the option period, the value of the currency exceeded the sum of the
exercise price, the premium paid and transaction costs; otherwise the Fund
would realize either no gain or a loss on the purchase of the call option.
The Fund would normally buy put options in anticipation of a decline in the
dollar value of currency in which securities in its portfolio are denominated
("protective puts"). The purchase of a put option would entitle the Fund, in
exchange for the premium paid, to sell specific currency at a specified price
during the option period. The purchase of protective puts is designed merely
to offset or hedge against a decline in the dollar value of the Fund's
portfolio securities due to currency exchange rate fluctuations. The Fund
would ordinarily realize a gain if, during the option period, the value of
the underlying currency decreased below the exercise price sufficiently to
more than cover the premium and transaction costs; otherwise the Fund would
realize either no gain or a loss on the purchase of the put option. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of the underlying currency.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Advisers may choose to
hedge against changes in interest rates, securities prices or currency
exchange rates, by buying and selling various kinds of futures contracts. The
Fund may also enter into closing purchase and sale transactions with respect
to any such contracts and options. The futures contracts may be based on
foreign currencies. The Fund will engage in futures and related options
transactions only for bona fide hedging or other appropriate risk management
purposes as defined below. All futures contracts entered into by the Fund are
traded on U.S. exchanges or boards of trade that are licensed and regulated
by the CFTC or on foreign exchanges.
FUTURES CONTRACTS. A futures contract may generally be described as an
agreement between two parties to buy and sell particular financial
instruments for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index
or otherwise not calling for physical delivery at the end of trading in the
contract).
The Fund can sell futures contracts on a specified currency to protect
against a decline in the value of the currency and its portfolio securities
that are denominated in that currency. The Fund can buy futures contracts on
foreign currency to fix the price in U.S. dollars of a security denominated
in the currency that the Fund has acquired or expects to acquire.
Although futures contracts by their terms generally call for the actual
delivery or acquisition of underlying securities, 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 the cash value of
the index underlying the contractual obligations. 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 instead liquidated through offsetting transactions that may result in a
profit or a loss. While the Fund's futures contracts on currency will usually
be liquidated in this manner, the Fund may instead make or take delivery of
the currency whenever it appears economically advantageous for it to do so. A
clearing corporation associated with the exchange on which futures on
currency are traded guarantees that, if still open, the sale or purchase will
be performed on the settlement date.
HEDGING STRATEGIES WITH FUTURES. Hedging by use of futures contracts seeks to
establish, with more certainty than would otherwise be possible, the
effective price or currency exchange rate on portfolio securities or
securities that the Fund owns or proposes to acquire. The Fund may sell
futures contracts on currency in which its portfolio securities are
denominated or in one currency to hedge against fluctuations in the value of
securities denominated in a different currency if there is an established
historical pattern of correlation between the two currencies.
The CFTC and U.S. commodities exchanges have established limits referred to
as "speculative position limits" on the maximum net long or net short
position that any person may hold or control in a particular futures
contract. Trading limits are also imposed on the maximum number of contracts
that any person may trade on a particular trading day. An exchange may order
the liquidation of positions found to be in violation of these limits and it
may impose other sanctions or restrictions. The Fund does not believe that
these trading and positions limits will have an adverse impact on its
strategies for hedging its securities.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
futures contracts will give the Fund the right (but not the obligation), for
a specified price, to sell or to buy, respectively, the underlying futures
contract at any time during the option period. As the buyer of an option on a
futures contract, the Fund obtains the benefit of the futures position if
prices move in a favorable direction but limits its risk of loss in the event
of an unfavorable price movement, to the loss of the premium and transaction
costs.
The writing of a call option on a futures contract generates a premium that
may be partially offset by a decline in the value of the Fund's assets. By
writing a call option, the Fund becomes obligated, in exchange for the
premium, to sell a futures contract, which may have a value higher than the
exercise price. Conversely, the writing of a put option on a futures contract
generates a premium that may partially offset an increase in the price of
securities that the Fund intends to buy. However, the Fund becomes obligated
to buy a futures contract, which may have a value lower than the exercise
price. Thus, the loss incurred by the Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received. The
Fund will incur transaction costs in connection with the writing of options
on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or buying an offsetting option on the same series. There
is no guarantee that closing transactions can be effected. The Fund's ability
to establish and close out positions on its options will be subject to the
development and maintenance of a liquid market.
WHAT ARE THE FUND'S POTENTIAL RISKS?
POLITICAL AND ECONOMIC RISKS. Investing in securities of non-U.S. companies
may entail additional risks due to the potential political and economic
instability of certain countries and the risks of expropriation,
nationalization, confiscation or the imposition of restrictions on foreign
investment and on repatriation of capital invested. In the event of
expropriation, nationalization or other confiscation by any country, the Fund
could lose its entire investment in that country.
ILLIQUID INVESTMENTS. The sale of restricted or illiquid securities often
requires more time and results in higher brokerage charges or dealer
discounts and other selling expenses than does the sale of securities
eligible for trading on national securities exchanges or in the
over-the-counter markets. Restricted securities often sell at a price lower
than similar securities that are not subject to restrictions on resale.
RELIGIOUS AND ETHNIC INSTABILITY. Certain countries in which the Fund may
invest may have vocal minorities that advocate radical religious or
revolutionary philosophies or support ethnic independence. Any disturbance on
the part of these individuals could carry the potential for wide-spread
destruction or confiscation of property owned by individuals and entities
foreign to the country and could cause the loss of the Fund's investment in
those countries.
FOREIGN INVESTMENT RESTRICTIONS. Certain countries prohibit or impose
substantial restrictions on investments in their capital markets,
particularly their equity markets, by foreign entities such as the Fund. As
illustrations, certain countries require governmental approval prior to
investments by foreign persons, or limit the amount of investment by foreign
persons in a particular company, or limit the investment by foreign persons
to only a specific class of securities of a company that may have less
advantageous terms than securities of the company available for purchase by
nationals. Moreover, the national policies of certain countries may restrict
investment opportunities in issuers or industries deemed sensitive to
national interests. Some countries require governmental approval for the
repatriation of investment income, capital or the proceeds of securities sold
by foreign investors. The Fund could be adversely affected by delays in, or a
refusal to grant, any required governmental approval for repatriation, as
well as by the application to it of other restrictions on investments.
Non-Uniform Corporate Disclosure Standards and Governmental Regulation.
Foreign companies are not generally subject to uniform accounting, auditing
and financial reporting standards or to other regulatory requirements
comparable to those applicable to U.S. companies. There will be less
available information concerning foreign issuers of securities held by the
Fund than is available concerning U.S. issuers. In instances where the
financial statements of an issuer are not deemed to reflect accurately the
financial situation of the issuer, Advisers may take appropriate steps to
evaluate the proposed investment, which may include on-site inspection of the
issuer, interviews with its management and consultations with accountants,
bankers and other specialists.
ADVERSE MARKET CHARACTERISTICS. Securities of many foreign issuers may be
less liquid and their prices more volatile than securities of comparable U.S.
issuers. In addition, foreign securities exchanges and brokers are generally
subject to less governmental supervision and regulation than in the U.S., and
foreign securities exchange transactions are usually subject to fixed
commissions, which are generally higher than negotiated commissions on U.S.
transactions. In addition, foreign securities exchange transactions may be
subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of the
Fund are uninvested and no return is earned thereon. The inability of the
Fund to make intended security purchases due to settlement problems could
cause the Fund to miss attractive investment opportunities. Inability to
dispose of a portfolio security due to settlement problems could either
result in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible gain to the buyer. Advisers will consider
these difficulties when determining the allocation of the Fund's assets,
although Advisers does not believe that these difficulties will have a
material adverse effect on the Fund's portfolio trading activities.
NON-U.S. TAXES. The Fund's net investment income from foreign issuers may be
subject to non-U.S. withholding or other taxes, thereby reducing the Fund's
net investment income.
CURRENCY FLUCTUATIONS. Because the Fund under normal circumstances will
invest a substantial portion of its total assets in the securities of foreign
issuers that are denominated in foreign currencies, the strength or weakness
of the U.S. dollar against such foreign currencies will account for part of
the Fund's investment performance. A decline in the value of any particular
currency against the U.S. dollar will cause a decline in the U.S. dollar
value of the Fund's holdings of securities denominated in that currency and,
therefore, will cause an overall decline in the Fund's Net Asset Value and
any net investment income and capital gains to be distributed to you in U.S.
dollars.
The rate of exchange between the U.S. dollar and other currencies is
determined by several factors, including the supply and demand for particular
currencies, central bank efforts to support particular currencies, the
movement of interest rates, the pace of business activity in certain other
countries and the U.S., and other economic and financial conditions affecting
the world economy.
Although the Fund values its assets daily in terms of U.S. dollars, the Fund
does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. The Fund will do so from time to time, and you
should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Fund at one rate, while offering a lesser rate of
exchange should the Fund desire to sell that currency to the dealer.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. While the Fund may enter into
forward contracts to reduce currency exchange rate risks, transactions in
these contracts involve certain other risks. Thus, while the Fund may benefit
from such transactions, unanticipated changes in currency prices may result
in a poorer overall performance for the Fund than if it had not engaged in
any forward contract. Moreover, there may be imperfect correlation between
the Fund's portfolio holdings of securities denominated in a particular
currency and forward contracts entered into by the Fund. This imperfect
correlation may cause the Fund to sustain losses that will prevent the Fund
from achieving a complete hedge or expose the Fund to risk of foreign
exchange loss.
OPTIONS ON CURRENCY. An exchange-traded options position may be closed out
only on an options exchange that provides a secondary market for an option of
the same series. Although the Fund will generally buy or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. For some options, no secondary
market on an exchange may exist. In this event, it might not be possible to
effect closing transactions in particular options, with the result that the
Fund would have to exercise its options in order to realize any profit and
would incur transaction costs upon the sale of underlying securities pursuant
to the exercise of put options. If the Fund, as a covered call option writer,
is unable to effect a closing purchase transaction in a secondary market, it
will not be able to sell the underlying currency (or security denominated in
that currency) until the option expires or it delivers the underlying
currency upon exercise.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of
the Option Clearing Corporation inadequate, and thereby result in the
institution by an exchange of special procedures that may interfere with the
timely execution of customers' orders.
The Fund may buy and write over-the-counter options to the extent consistent
with its limitation on investments in restricted securities, as described in
the Prospectus. Trading in over-the-counter options is subject to the risk
that the other party will be unable or unwilling to close-out options
purchased or written by the Fund.
The amount of the premiums that the Fund may pay or receive may be adversely
affected as new or existing institutions, including other investment
companies, engage in or increase their option buying and writing activities.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. While transactions in
futures contracts and options on futures may reduce certain risks, these
transactions themselves entail certain other risks. Thus, while the Fund may
benefit from the use of futures and options on futures, unanticipated changes
in interest rates, securities prices or currency exchange rates may result in
a poorer overall performance for the Fund than if it had not entered into any
futures contracts or options transactions. In the event of an imperfect
correlation between a future position and portfolio position that is intended
to be protected, the desired protection may not be obtained and the Fund may
be exposed to risk of loss.
HIGH YIELD SECURITIES. Issuers of high yield, fixed-income securities are
often highly leveraged and may not have more traditional methods of financing
available to them. Therefore, the risk associated with buying the securities
of these issuers is generally greater than the risk associated with
higher-quality securities. For example, during an economic downturn or a
sustained period of rising interest rates, issuers of lower-quality
securities may experience financial stress and may not have sufficient cash
flow to make interest payments. The issuer's ability to make timely interest
and principal payments may also be adversely affected by specific
developments affecting the issuer, including the issuer's inability to meet
specific projected business forecasts or the unavailability of additional
financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the Fund's portfolio defaults, the Fund may have unrealized losses on the
security, which may lower the Fund's Net Asset Value. Defaulted securities
tend to lose much of their value before they default. Thus, the Fund's Net
Asset Value may be adversely affected before an issuer defaults. In addition,
the Fund may incur additional expenses if it must try to recover principal or
interest payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the Fund. Although these
securities are typically not callable for a period of time, usually for three
to five years from the date of issue, if an issuer calls its securities
during periods of declining interest rates, Advisers may find it necessary to
replace the securities with lower-yielding securities, which could result in
less net investment income for the Fund. The premature disposition of a high
yield security due to a call or buy-back feature, the deterioration of an
issuer's creditworthiness, or a default by an issuer may make it more
difficult for the Fund to manage the timing of its income. Under the Code and
U.S. Treasury regulations, the Fund may have to accrue income on defaulted
securities and distribute the income to shareholders for tax purposes, even
though the Fund is not currently receiving interest or principal payments on
the defaulted securities. To generate cash to satisfy these distribution
requirements, the Fund may have to sell portfolio securities that it
otherwise may have continued to hold or use cash flows from other sources,
such as the sale of Fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse
impact on market price of a security and on the Fund's ability to sell a
security in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer, or if necessary to meet the Fund's
liquidity needs. Reduced liquidity may also make it more difficult to obtain
market quotations based on actual trades for purposes of valuing the Fund's
portfolio.
The Fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry
restrictions on resale. While many high yielding securities have been sold
with registration rights, covenants and penalty provisions for delayed
registration, if the Fund is required to sell restricted securities before
the securities have been registered, it may be deemed an underwriter of the
securities under the Securities Act of 1933, which entails special
responsibilities and liabilities. The Fund may also incur special costs in
disposing of restricted securities, although the Fund will generally not
incur any costs when the issuer is responsible for registering the securities.
The Fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other
characteristics. The Fund has no arrangement with its underwriter or any
other person concerning the acquisition of these securities.
The high yield securities market is relatively new and much of its growth
before 1990 paralleled a long economic expansion. The recession that began in
1990 disrupted the market for high yield securities and adversely affected
the value of outstanding securities, as well as the ability of issuers of
high yield securities to make timely principal and interest payments.
Although the economy has improved and high yield securities have performed
more consistently since that time, the adverse effects previously experienced
may reoccur. For example, the highly publicized defaults on some high yield
securities during 1989 and 1990 and concerns about a sluggish economy that
continued into 1993, depressed the prices of many of these securities. While
market prices may be temporarily depressed due to these factors, the ultimate
price of any security generally reflects the true operating results of the
issuer. Factors adversely impacting the market value of high yield securities
may lower the Fund's Net Asset Value.
The Fund relies on Advisers' judgment, analysis and experience in evaluating
the creditworthiness of an issuer. In this evaluation, Advisers takes into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies.
These restrictions may not be changed without the approval of a majority of
the outstanding voting securities of the Fund. Under the 1940 Act, this means
the approval of (i) more than 50% of the outstanding shares of the Fund or
(ii) 67% or more of the shares of the Fund present at a shareholder meeting
if more than 50% of the outstanding shares of the Fund are represented at the
meeting in person or by proxy, whichever is less. The Fund MAY NOT:
1. Make loans to other persons, except by the purchase of bonds, debentures
or similar obligations which are publicly distributed or of a character
usually acquired by institutional investors, or through loans of the Fund's
portfolio securities, or to the extent the entry into a repurchase agreement
or similar transaction may be deemed a loan;
2. Borrow money or mortgage or pledge any of its assets, except in the form
of reverse repurchase agreements or from banks for temporary or emergency
purposes in an amount up to 33% of the value of the Fund's total assets
(including the amount borrowed) based on the lesser of cost or market, less
liabilities (not including the amount borrowed) at the time the borrowing is
made. While borrowings exceed 5% of the Fund's total assets, the Fund will
not make any additional investments;
3. Underwrite securities of other issuers (does not preclude the Fund from
obtaining such short-term credit as may be necessary for the clearance of
purchases and sales of its portfolio securities) or invest more than 5% of
its assets in illiquid securities with legal or contractual restrictions on
resale (although the Fund may invest in Rule 144A restricted securities to
the full extent permitted under the federal securities laws); 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;
4. Invest in securities for the purpose of exercising management or control
of the 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;
5. Effect short sales, unless at the time the Fund owns securities
equivalent in kind and amount to those sold (which will normally be for
deferring recognition of gains or losses for tax purposes);
6. Invest directly in real estate, real estate limited partnerships or
illiquid securities issued by real estate investment trusts (the Fund may,
however, invest up to 10% of its assets in marketable securities issued by
real estate investment trusts);
7. Invest directly in interests in oil, gas or other mineral leases,
exploration or development programs;
8. Invest in the securities of other investment companies, except where
there is no commission other than the customary brokerage commission or sales
charge, or except that securities of another investment company may be
acquired pursuant to a plan of reorganization, merger, consolidation or
acquisition, and except where the Fund would not own, immediately after the
acquisition, securities of the investment companies which exceed in the
aggregate i) more than 3% of the issuer's outstanding voting stock, ii) more
than 5% of the Fund's total assets and iii) together with the securities of
all other investment companies held by the Fund, exceed, in the aggregate,
more than 10% of the Fund's total assets; 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. Pursuant to available exemptions from the 1940 Act, the Fund may invest
in shares of one or more money market funds managed by Advisers, or its
affiliates;
9. Purchase from or sell to its officers and trustees, or any firm of which
any officer or trustee is a member, as principal, any securities, but may
deal with such persons or firms as brokers and pay a customary brokerage
commission; or purchase or retain securities of any issuer if one or more of
the officers or trustees of the Trust, or its investment adviser, own
beneficially more than one-half of 1% of the securities of such issuer and
all such officers and trustees together own beneficially more than 5% of such
securities;
10. Concentrate in any industry, except that under normal circumstances the
Fund will invest at least 25% of total assets in the securities issued by
domestic and foreign companies operating within the natural resources sector;
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; and
11. Invest more than 10% of its assets in securities of companies which have
a record of 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.
In addition to these fundamental policies, it is the present policy of the
Fund (which may be changed without shareholder approval) not to engage in
joint or joint and several trading accounts in securities, except that it may
participate in joint repurchase arrangements, invest its short-term cash in
shares of the Franklin Money Fund (pursuant to the terms of any order, and
any conditions therein, issued by the SEC permitting such investments), or
combine orders to purchase or sell with orders from other persons to obtain
lower brokerage commissions. The Fund may not invest in excess of 5% of its
net assets, valued at the lower of cost or market, in warrants, nor more than
2% of its net assets in warrants not listed on either the New York or
American Stock Exchange.
If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities or the amount of assets will not be
considered a violation of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of the Fund under the 1940 Act are indicated by an asterisk (*).
Positions and Offices Principal Occupation During
Name, Age and Address with the Trust the Past Five Years
Frank H. Abbott, III (76) Trustee
1045 Sansome Street
San Francisco, CA 94111
President and Director, Abbott
Corporation (an investment company);
and director or trustee, as the case
may be, of 28 of the investment
companies in the Franklin Templeton
Group of Funds.
Harris J. Ashton (65) 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 (a meat packing
company); and director or trustee,
as the case may be, of 52 of the
investment companies in the Franklin
Templeton Group of Funds.
*Harmon E. Burns (52) 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. and Franklin
Templeton Services, Inc.; Executive
Vice President, Franklin Advisers,
Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer
and/or director or trustee, as the
case may be, of most of the other
subsidiaries of Franklin Resources,
Inc. and of 57 of the investment
companies in the Franklin Templeton
Group of Funds.
S. Joseph Fortunato (65) 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,
General Host Corporation (nursery
and craft centers); and director or
trustee, as the case may be, of 54
of the investment companies in the
Franklin Templeton Group of Funds.
David W. Garbellano (82) 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 or trustee, as the case may
be, of 27 of the investment
companies in the Franklin Templeton
Group of Funds.
*Charles B. Johnson (64) Chairman of the
777 Mariners Island Blvd. Board and Trustee
San Mateo, CA 94404
President, Chief Executive Officer
and Director, Franklin Resources,
Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc.,
Franklin Advisory Services, Inc.,
Franklin Investment Advisory
Services, Inc. and Franklin
Templeton Distributors, Inc.;
Director, Franklin/Templeton
Investor Services, Inc., Franklin
Templeton Services, Inc. and General
Host Corporation (nursery and craft
centers); and officer and/or
director or trustee, as the case may
be, of most of the other
subsidiaries of Franklin Resources,
Inc. and of 53 of the investment
companies in the Franklin Templeton
Group of Funds.
*Rupert H. Johnson, Jr. (57) President and
777 Mariners Island Blvd. 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 or trustee, as the
case may be, of most of the other
subsidiaries of Franklin Resources,
Inc. and of 57 of the investment
companies in the Franklin Templeton
Group of Funds.
Frank W. T. LaHaye (68) 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 Corporation (software
firm); Director, Fischer Imaging
Corporation (medical imaging
systems) and Digital Transmission
Systems, Inc. (wireless
communications); and director or
trustee, as the case may be, of 26
of the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (69) 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), Shoppers
Express (home shopping), and
Spacehab, Inc. (aerospace services);
and director or trustee, as the case
may be, of 49 of the investment
companies in the Franklin Templeton
Group of Funds; formerly Chairman,
Hambrecht and Quist Group, Director,
H & Q Healthcare Investors, and
President, National Association of
Securities Dealers, Inc.
Martin L. Flanagan (37) 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 and Director,
Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating
Officer and Director, Templeton
Investment Counsel, Inc.; Senior
Vice President and Treasurer,
Franklin Advisers, Inc.; Treasurer,
Franklin Advisory Services, Inc.;
Treasurer and Chief Financial
Officer, Franklin Investment
Advisory Services, Inc.; President,
Franklin Templeton Services, Inc.;
Senior Vice President,
Franklin/Templeton Investor
Services, Inc.; and officer and/or
director or trustee, as the case may
be, of 57 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 Services, Inc. and
Franklin Templeton Distributors,
Inc.; Vice President, Franklin
Advisers, Inc. and Franklin Advisory
Services, Inc.; Vice President,
Chief Legal Officer and Chief
Operating Officer, Franklin
Investment Advisory Services, Inc.;
and officer of 57 of the investment
companies in the Franklin Templeton
Group of Funds.
Charles E. Johnson (41) 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.;
President, Chief Executive Officer,
Chief Investment Officer and
Director Franklin Institutional
Services Corporation; Chairman and
Director, Templeton Investment
Counsel, Inc.; Vice President,
Franklin Advisers, Inc.; officer
and/or director of some of the
subsidiaries of Franklin Resources,
Inc.; and officer and/or director or
trustee, as the case may be, of 36
of the investment companies in the
Franklin Templeton Group of Funds.
Diomedes Loo-Tam (58) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting
Officer
Senior Vice President, Franklin
Templeton Services, Inc.; and
officer of 34 of the investment
companies in the Franklin Templeton
Group of Funds.
Edward V. McVey (60) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President and National
Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of
29 of the investment companies in
the Franklin Templeton Group of
Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are currently
paid $2,400 per year (or $300 for each of the Trust's eight regularly
scheduled Board meetings) plus $300 per meeting attended. As shown above, the
nonaffiliated Board members also serve as directors or trustees of other
investment companies in the Franklin Templeton Group of Funds. They may
receive fees from these funds for their services. The following table
provides the total fees paid to nonaffiliated Board members by the Trust and
by other funds in the Franklin Templeton Group of Funds.
NUMBER OF BOARDS
TOTAL FEES RECEIVED IN THE FRANKLIN
TOTAL FEES FROM THE FRANKLIN TEMPLETON GROUP
RECEIVED TEMPLETON GROUP OF FUNDS ON WHICH
NAME FROM THE TRUST* OF FUNDS** EACH SERVES***
Frank H. Abbott, III$ 5,100 $ 165,236 28
Harris J. Ashton . 5,100 343,591 52
S. Joseph Fortunato 5,100 360,411 54
David Garbellano . 4,800 148,916 27
Frank W.T. LaHaye 4,800 139,233 26
Gordon S. Macklin 5,100 335,541 49
*For the fiscal year ended April 30, 1997.
**For the calendar year ended December 31, 1996.
***We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the Board members are responsible. The Franklin Templeton Group of
Funds currently includes 58 registered investment companies, with
approximately 169 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 or
trustee. 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 August 5, 1997, the officers and Board members did not own of record or
beneficially any shares of the Fund.
Many of the Board members own shares in other funds in the Franklin Templeton
Group of Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers
and the father and uncle, respectively, of Charles E. Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio
transactions are executed. Advisers' activities are subject to the review and
supervision of the Board to whom Advisers renders periodic reports of the
Fund's investment activities. Advisers and its officers, directors and
employees are covered by fidelity insurance for the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action
with respect to any of the other funds it manages, or for its own account,
that may differ from action taken by Advisers on behalf of the Fund.
Similarly, with respect to the Fund, Advisers is not obligated to recommend,
buy or sell, or to refrain from recommending, buying or selling any security
that Advisers and access persons, as defined by the 1940 Act, may buy or sell
for its or their own account or for the accounts of any other fund. Advisers
is not obligated to refrain from investing in securities held by the Fund or
other funds that it manages. Of course, any transactions for the accounts of
Advisers and other access persons will be made in compliance with the Fund's
Code of Ethics. Please see "Miscellaneous Information - Summary of Code of
Ethics."
MANAGEMENT FEES. Under its management agreement, the Fund pays Advisers a
management fee equal to an annual rate of 0.625 of 1% for the first $100
million of average daily net assets of the Fund; 0.50 of 1% in excess of $100
million up to $250 million of average daily net assets; 0.45 of 1% in excess
of $250 million up to $10 billion of average daily net assets; 0.44 of 1% in
excess of $10 billion up to $12.5 billion of average daily net assets; 0.42
of 1% in excess of $12.5 billion up to $15 billion of average daily net
assets; and 0.40 of 1% in excess of $15 billion of average daily net assets.
The fee is computed daily and paid monthly. Each class of the Fund's shares
pays its proportionate share of the management fee.
For the fiscal years ended April 30, 1996 and 1997, management fees, before
any advance waiver, totaled $21,007 and $175,237, respectively. Under an
agreement by Advisers to limit its fees, the Fund paid no management fees for
the fiscal year ended April 30, 1996, and management fees totaling $83,520
for the fiscal year ended April 30, 1997.
MANAGEMENT AGREEMENT. The management agreement is in effect until April 30,
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 30 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. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these
services per benefit plan participant Fund account per year may not exceed
the per account fee payable by the Fund to Investor Services in connection
with maintaining shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York 10286, acts as custodian of the securities and other assets of
the Fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco,
California 94105, are the Fund's independent auditors. During the fiscal year
ended April 30, 1997, their auditing services consisted of rendering an
opinion on the financial statements of the Trust included in the Trust's
Annual Report to Shareholders for the fiscal year ended April 30, 1997.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
Advisers selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management
agreement and any directions that the Board may give.
When placing a portfolio transaction, Advisers seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid by the
Fund is negotiated between Advisers and the broker executing the transaction.
The determination and evaluation of the reasonableness of the brokerage
commissions paid are based to a large degree on the professional opinions of
the persons responsible for 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.
Advisers may pay certain brokers commissions that are higher than those
another broker may charge, if Advisers determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or Advisers' overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to Advisers include, among others, supplying information
about particular companies, markets, countries, or local, regional, national
or transnational economies, statistical data, quotations and other securities
pricing information, and other information that provides lawful and
appropriate assistance to Advisers in carrying out its investment advisory
responsibilities. These services may not always directly benefit the Fund.
They must, however, be of value to Advisers in carrying out its overall
responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on
the research services Advisers receives from dealers effecting transactions
in portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research
and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, Advisers and its affiliates may use this
research and data in their investment advisory capacities with other clients.
If the Fund's officers are satisfied that the best execution is obtained, the
sale of Fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, may also be considered a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive
certain fees when the Fund tenders portfolio securities pursuant to a
tender-offer solicitation. As a means of recapturing brokerage for the
benefit of the Fund, any portfolio securities tendered by the Fund will be
tendered through Distributors if it is legally permissible to do so. In turn,
the next management fee payable to Advisers will be reduced by the amount of
any fees received by Distributors in cash, less any costs and expenses
incurred in connection with the tender.
If purchases or sales of securities of the Fund and one or more other
investment companies or clients supervised by Advisers are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to
all by Advisers, taking into account the respective sizes of the funds and
the amount of securities to be purchased or sold. In some cases this
procedure could have a detrimental effect on the price or volume of the
security so far as the Fund is concerned. In other cases it is possible that
the ability to participate in volume transactions and to negotiate lower
brokerage commissions will be beneficial to the Fund.
During the fiscal years ended April 30, 1996 and 1997, the Fund paid
brokerage commissions totaling $21,405 and $120,604, respectively.
As of April 30, 1997, the Fund did not own securities of its regular
broker-dealers.
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 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.
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.
OTHER PAYMENTS TO SECURITIES DEALERS. 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.
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. 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
prior 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.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the Fund nor
its affiliates will be liable for any loss caused by your failure to cash
such checks.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find
you from your account. These costs may include a percentage of the account
when a search company charges a percentage fee in exchange for its location
services.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the Fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions
that maintain omnibus accounts with the Fund on behalf of numerous beneficial
owners for recordkeeping operations performed with respect to such owners.
For each beneficial owner in the omnibus account, the Fund may reimburse
Investor Services an amount not to exceed the per account fee that the Fund
normally pays Investor Services. These financial institutions may also charge
a fee for their services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share of each class of the Fund's shares
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,
Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System for which market quotations are readily available are valued at the
last quoted sale price of the day or, if there is no such reported sale,
within the range of the most recent quoted bid and ask prices.
Over-the-counter portfolio securities are valued within the range of the most
recent quoted bid and ask prices. Portfolio securities that are traded both
in the over-the-counter market and on a stock exchange are valued according
to the broadest and most representative market as determined by Advisers.
Portfolio securities underlying actively traded call options are valued at
their market price as determined above. The current market value of any
option held by the Fund is its last sale price on the relevant exchange
before the time when assets are valued. Lacking any sales that day or if the
last sale price is outside the bid and ask prices, options are valued within
the range of the current closing bid and ask prices if the valuation is
believed to fairly reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on
the foreign exchange on which it is traded or as of the scheduled close of
trading on the NYSE, if that is earlier. The value is then converted into its
U.S. dollar equivalent at the foreign exchange rate in effect at noon, New
York time, on the day the value of the foreign security is determined. If no
sale is reported at that time, the foreign security is valued within the
range of the most recent quoted bid and ask prices. Occasionally events that
affect the values of foreign securities and foreign exchange rates may occur
between the times at which they are determined and the close of the exchange
and will, therefore, not be reflected in the computation of the 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 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 Net Asset Value. If events
materially affecting the values of these securities occur during this period,
the securities will be valued at their fair value as determined in good faith
by the Board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the Board. With the approval of
the Board, the Fund may utilize a pricing service, bank or Securities Dealer
to perform any of the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. INCOME DIVIDENDS. The Fund receives income generally in the form of
dividends, interest and other income derived from its investments. This
income, less the expenses incurred in the Fund's operations, is its net
investment income from which income dividends may be distributed. Thus, the
amount of dividends paid per share may vary with each distribution.
2. CAPITAL GAIN DISTRIBUTIONS. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term
capital gains (after taking into account any capital loss carryforward or
post-October loss deferral) may generally be made once each year in December
to reflect any net short-term and net long-term capital gains realized by the
Fund as of October 31 of the current fiscal year and any undistributed
capital gains from the prior fiscal year. The Fund may adjust the timing of
these distributions for operational or other reasons.
TAXES
As stated in the Prospectus, the Fund has elected and qualified 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 which 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 declared by the Fund annually in the Fund's fiscal year end
annual report.
Corporate shareholders should note that dividends paid by the Fund from
sources other than the qualifying dividends it receives will not qualify for
the dividends-received deduction. For example, any interest income and
short-term capital gain (in excess of any net long-term capital loss or
capital loss carryover) included in investment company taxable income and
distributed by the Fund as a dividend will not qualify for the
dividends-received deduction.
Corporate shareholders should also note that availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless the Fund shares have been held (or deemed
held) for at least 46 days in a substantially unhedged manner. The
dividends-received deduction may also be reduced to the extent interest paid
or accrued by a corporate shareholder is directly attributable to its
investment in Fund shares. The entire dividend, including the portion 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 advisors concerning the availability of the
dividends-received deduction.
The Code requires all funds to distribute at least 98% of their taxable
ordinary income earned during the calendar year and at least 98% of their
capital gain net income earned during the twelve month period ending October
31 of each year (in addition to amounts from the prior year that were neither
distributed nor taxed to the Fund) to you by December 31 of each year in
order to avoid the imposition of a federal excise tax. Under these rules,
certain distributions which are declared in October, November or December but
which, for operational reasons, may not be paid to you until the following
January, will be treated for tax purposes as if paid by the Fund and received
by you on December 31 of the calendar year in which they are declared. The
Fund intends as a matter of policy to declare 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. 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 your shares have been held for
more than one year.
All or a portion of the sales charge incurred in buying shares of the Fund
will not be included in the federal tax basis of such shares sold or
exchanged within 90 days of their purchase (for purposes of determining gain
or loss with respect to such shares) if you reinvest the sales proceeds in
the Fund or in another fund in the Franklin Templeton Funds and a sales
charge which would otherwise apply to the reinvestment is reduced or
eliminated. Any portion of the sales charge excluded from the tax basis of
the shares sold will be added to the tax basis of the shares acquired in the
reinvestment.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent you buy other shares of the Fund (through
reinvestment of dividends or otherwise) within 30 days before or after the
redemption. Any loss disallowed under these rules will be added to your tax
basis of the shares repurchased.
Any loss realized upon the redemption of shares within six months from the
date of their purchase will be treated as a long-term capital loss to the
extent of amounts treated as distributions of net long-term capital gain
during such six month period.
The Fund's investment in options and forward contracts are subject to many
complex and special tax rules. For example, over-the-counter 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 contacts and certain foreign currency contacts and options thereon.
Absent a tax election to the contrary, each Section 1256 position held by the
Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Fund's fiscal year, and all
gain or loss associated with fiscal year transactions and mark-to-market
positions at fiscal year end (except certain foreign currency gain or loss
covered by Section 988 of the Code) will generally be treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. The
effect of Section 1256 mark-to-market rules may be to accelerate income or to
convert what otherwise would have been long-term capital gains into
short-term capital gains or 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 both the amount, character and timing of
income distributed to you by the Fund.
When the Fund holds an option or contract which substantially diminishes the
Fund's risk of loss with respect to another position of the Fund (as might
occur in some hedging transactions), this combination of positions could be
treated as a "straddle" for tax purposes, resulting in possible deferral of
losses, adjustments in the holding periods of Fund securities and conversion
of short-term capital losses into long-term capital losses. Certain tax
elections exist for mixed straddles (i.e., straddles comprised of at least
one Section 1256 position and at least one non-Section 1256 position) which
may reduce or eliminate the operation of these straddle rules.
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 3 months. Foreign exchange
gains derived by the Fund with respect to the Fund's business of investing in
stock or securities, or options or futures with respect to such stock or
securities is qualifying income for purposes of this 90% limitation.
Currency speculation or the use of currency forward contracts or other
currency instruments for non-hedging purposes may generate gains deemed not
to be derived with respect to the Fund's business of investing in stock or
securities and related options or forwards. Under current law,
non-directly-related gains arising from foreign currency positions or
instruments held for less than 3 months are treated as derived from the
disposition of securities held less than 3 months in determining the Fund's
compliance with the 30% limitation. The Fund will limit its activities
involving foreign exchange gains to the extent necessary to comply with these
requirements.
The Fund is authorized to invest in foreign securities (see the discussion in
the Prospectus under "How does the Fund Invest its Assets?"). Such
investments, if made, will have the following tax consequences.
The Fund may be subject to foreign withholding taxes on income from certain
of its foreign securities. Because the Fund will likely invest 50% or less of
its total assets in securities of foreign corporations, the Fund will not be
entitled under the Code to pass-through to you your pro rata share of the
foreign taxes paid by the Fund. These taxes will be taken as a deduction by
the Fund.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currencies, foreign currency payables
or receivables, foreign currency-denominated debt securities, foreign
currency forward contracts, and options or futures contracts on foreign
currencies are 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 you. Additionally,
investments in foreign securities pose special issues to the Fund in meeting
its asset diversification and income tests as a regulated investment company.
The Fund will limit its investments in foreign securities to the extent
necessary to comply with these requirements.
If the Fund owns shares in a foreign corporation that constitutes a "passive
foreign investment company" (a "PFIC") for federal income tax purposes and
the Fund does not elect to treat the foreign corporation as a "qualified
electing fund" within the meaning of the Code, the Fund may be subject to
U.S. federal income taxation on a portion of any "excess distribution" it
receives from the PFIC or any gain it derives from the disposition of such
shares, even if such income is distributed as a taxable dividend by the Fund
to its U.S. shareholders. The Fund may also be subject to additional interest
charges in respect of deferred taxes arising from such distributions or
gains. Any 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% 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% 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 you 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 of the Fund's shares. The
underwriting agreement will continue in effect for successive annual periods
if its continuance is specifically approved at least annually by a vote of
the Board or by a vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the Board
members who are not parties to the underwriting agreement or interested
persons of any such party (other than as members of the Board), cast in
person at a meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may be terminated
by either party on 90 days' written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The Fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
Distributors does not receive compensation from the Fund for acting as
underwriter of the Fund's Advisor Class shares.
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 and current yield 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.
For periods before January 1, 1997, standardized performance quotations for
Advisor Class are calculated by substituting Class I performance for the
relevant time period, excluding the effect of Class I's maximum initial sales
charge, and including the effect of the Rule 12b-1 fees applicable to Class I
shares of the Fund. For periods after January 1, 1997, standardized
performance quotations for Advisor Class are calculated as described below.
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 for the one-year and from
inception periods, that would equate an initial hypothetical $1,000
investment to its ending redeemable value. The calculation assumes 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-year and from inception period and the deduction of all applicable
charges and fees. If a change is made to the sales charge structure,
historical performance information will be restated to reflect the maximum
front-end sales charge currently in effect.
The average annual total return for Advisor Class for the one-year and from
inception periods ended April 30, 1997, was 8.25% and 22.44%, respectively.
These figures were 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-year and from inception periods
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes income dividends and capital gain distributions are reinvested
at Net Asset Value. Cumulative total return, however, will be based on the
actual return for each class for a specified period rather than on the
average return over the one-year and from inception periods. The cumulative
total return for Advisor Class for the one-year and from inception periods
ended April 30, 1997, was 8.25% and 47.00%, respectively.
YIELD
CURRENT YIELD. Current yield shows the income per share earned by the Fund.
It is calculated by dividing the net investment income per share of Advisor
Class earned during a 30-day base period by the Net Asset Value per share on
the last day of the period and annualizing the result. Expenses accrued for
the period include any fees charged to all shareholders of the class during
the base period. The yield for Advisor Class for the 30-day period ended
April 30, 1997, was 0.40%.
This figure was obtained using the following SEC formula:
Yield = 2 [(A-B + 1)6 - 1]
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the Net Asset Value per share on the last day of the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the
SEC, is not indicative of the amounts which were or will be paid to
shareholders. Amounts paid to shareholders are reflected in the quoted
current distribution rate. For Advisor Class, the current distribution rate
is usually computed by annualizing the dividends paid per share by the class
during a certain period and dividing that amount by the current Net Asset
Value. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing
and short-term capital gains, and is calculated over a different period of
time.
VOLATILITY
Occasionally statistics may be used to 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
Sales literature referring to the use of the Fund as a potential investment
for Individual Retirement Accounts (IRAs), Business Retirement Plans, and
other tax-advantaged retirement plans may quote a total return based upon
compounding of dividends on which it is presumed no federal income tax
applies.
The Fund may include in its advertising or sales material information
relating to investment objectives and performance results of funds belonging
to the Franklin Templeton Group of Funds. Resources is the parent company of
the advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) 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(R) 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) Valueline Index - an unmanaged index which follows the stocks of
approximately 1,700 companies.
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) Historical data supplied by the research departments of CSFirst Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
k) Financial publications: The Wall Street Journal, and Business Week,
Financial World, Forbes, Fortune, and Money magazines - provide performance
statistics over specified time periods.
l) Morgan Stanley Capital International World Indices, including, among
others, the Morgan Stanley Capital International Europe, Australia, Far East
Index ("EAFE Index"). The EAFE index is an unmanaged index of more than 1,000
companies of Europe, Australia and the Far East.
m) Financial Times Actuaries Indices - including the FTA-World Index (and
components thereof), which are based on stocks in major world equity markets.
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
Rinvestment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, if any, as well as the value of its shares that are
based upon the value of such portfolio investments, can be expected to
decrease. Conversely, when interest rates decrease, the value of the Fund's
shares can be expected to increase. CDs are frequently insured by an agency
of the U.S. government. An investment in the Fund is not insured by any
federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the Fund to calculate its figures. In
addition, there can be no assurance that the Fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to
have a projected amount available in the future to fund a child's college
education. (Projected college cost estimates are based upon current costs
published by the College Board.) The Franklin Retirement Planning Guide leads
you through the steps to start a retirement savings program. Of course, an
investment in the Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 49 years
and now services more than 2.7 million shareholder accounts. In 1992,
Franklin, a leader in managing fixed-income mutual funds and an innovator in
creating domestic equity funds, joined forces with Templeton Worldwide, Inc.,
a pioneer in international investing. Mutual Series Fund Inc., known for its
value-driven approach to domestic equity investing, became part of the
organization four years later. Together, the Franklin Templeton Group has
over $207 billion in assets under management for more than 5.4 million U.S.
based mutual fund shareholder and other accounts. The Franklin Templeton
Group of Funds offers 120 U.S. based open-end investment companies to the
public. The Fund may identify itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one
in service quality for five of the past nine years.
As of August 5, 1997, the principal shareholders of the Fund, beneficial or
of record, were as follows:
SHARE PER-
NAME AND ADDRESS AMOUNT CENTAGE
ADVISOR CLASS
Franklin Templeton
Fund Allocator
Moderate Target Fund
c/o Fund Accounting Dept.
Kimberely Monasterio
1810 Gateway 3rd Flr.
San Mateo, CA 94404-2470 17,782.801 37%
Franklin Templeton
Fund Allocator
Growth Target Fund
c/o Fund Accounting Dept.
Kimberely Monasterio
1810 Gateway 3rd Flr.
San Mateo, CA 94404-2470 16,840.681 35%
From time to time, the number of Fund shares held in the "street name"
accounts of various Securities Dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the Fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the Fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal
securities transactions subject to the following general restrictions and
procedures: (i) the trade must receive advance clearance from a compliance
officer and must be completed by the close of the business day following the
day clearance is granted; (ii) copies of all brokerage confirmations must be
sent to a compliance officer and, within 10 days after the end of each
calendar quarter, a report of all securities transactions must be provided to
the compliance officer; and (iii) access persons involved in preparing and
making investment decisions must, in addition to (i) and (ii) above, file
annual reports of their securities holdings each January and inform the
compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they
are recommending a security in which they have an ownership interest for
purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to
Shareholders of the Trust, for the fiscal year ended April 30, 1997,
including the auditors' report, are incorporated herein by reference.
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 ADVISOR CLASS - The Fund offers two classes of shares, designated
"Class I" and "Advisor Class." The two classes have proportionate interests
in the Fund's portfolio. They differ, however, primarily in their sales
charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
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
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
PROSPECTUS - The prospectus for Advisor Class shares of the Fund dated
September 1, 1997, as may be amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these
terms refer to the Fund and/or Investor Services, Distributors, or other
wholly owned subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong and, in the majority of
instances, differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service
payments are continuing. The C1 rating is reserved for income bonds on which
no interest is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually their promissory obligations not having an original maturity
in excess of nine months. Moody's employs the following designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
403 SAIZ 09/97
203 SAIZ
FRANKLIN BLUE CHIP FUND
FRANKLIN STRATEGIC SERIES
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 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? ............................... 6
Investment Restrictions ............................................ 7
Officers and Trustees .............................................. 8
Investment Management
and Other Services ................................................ 11
How does the Fund Buy
Securities for its Portfolio? ..................................... 12
How Do I Buy, Sell and Exchange Shares? ........................... 13
How are Fund Shares Valued? ........................................ 16
Additional Information on
Distributions and Taxes ........................................... 17
The Fund's Underwriter ............................................. 20
How does the Fund Measure Performance? ............................ 21
Miscellaneous Information .......................................... 23
Financial Statements ............................................... 24
Useful Terms and Definitions ....................................... 24
Appendix
Description of Ratings ............................................ 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 September 1, 1997, and as may be amended from time to
time, contains the basic information you should know before investing in the
Fund. For a free copy, call 1-800/DIAL BEN or write the Fund at the address
shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
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?"
DEPOSITARY RECEIPTS. Many securities of foreign issuers are represented by
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
and Global Depositary Receipts ("GDRs") (collectively "Depositary Receipts").
ADRs evidence ownership of, and represent the right to receive, securities of
foreign issuers deposited in a domestic bank or trust company or a foreign
correspondent bank. EDRs and GDRs are typically issued by foreign banks or trust
companies, although they also may be issued by U.S. banks or trust companies,
and evidence ownership of underlying securities issued by either a foreign or a
U.S. corporation. Generally, Depositary Receipts in registered form are designed
for use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the U.S.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on
exchanges or over-the-counter. While ADRs do not eliminate all the risk
associated with foreign investments, by investing in ADRs rather than directly
in the stock of foreign issuers, the Fund will avoid currency risks during the
settlement period for either purchases or sales. In general, there is a large,
liquid market in the U.S. for ADRs quoted on a national securities exchange or
on NASDAQ. The information available for ADRs is subject to the accounting,
auditing and financial reporting standards of the U.S. market or exchange on
which they are traded, which standards are more uniform and more exacting than
those to which many foreign issuers may be subject. EDRs and GDRs may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted.
Depositary Receipts may be issued under sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of Depositary Receipts. In unsponsored programs, the issuer
may not be directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs and there may not be a correlation
between such information and the market value of the Depositary Receipts.
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. As with a straight fixed-income security, a convertible
security tends to increase in market value when interest rates decline and
decrease in value when interest rates rise. Like a common stock, the value of a
convertible security also tends to increase as the market value of the
underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because its value can be influenced by both interest
rate and market movements, a convertible security is not as sensitive to
interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank. The issuer of a convertible
security may be important in determining the security's true value. This is
because the holder of a convertible security will have recourse only to the
issuer.
While the Fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the Fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
OPTIONS. 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.
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 Advisers 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. 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 NYSE or AMEX.
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 or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
Positions and Offices Principal Occupation
Name, Age and Address with the Trust During the Past Five Years
Frank H. Abbott, III (76) Trustee
1045 Sansome Street
San Francisco, CA 94111
President and Director, Abbott Corporation (an investment
company); and director or trustee, as the case may be, of 28
of the investment companies in the Franklin Templeton Group
of Funds.
Harris J. Ashton (65) 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 (a meat packing company); and director or
trustee, as the case may be, of 52 of the investment
companies in the Franklin Templeton Group of Funds.
*Harmon E. Burns (52) 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. and Franklin Templeton
Services, Inc.; Executive Vice President, Franklin Advisers,
Inc.; Director, Franklin/Templeton Investor Services, Inc.;
and officer and/or director or trustee, as the case may be,
of most of the other subsidiaries of Franklin Resources,
Inc.; and of 57 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (65) 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, General Host Corporation (nursery and craft
centers); and director or trustee, as the case may be, of 54
of the investment companies in the Franklin Templeton Group
of Funds.
David W. Garbellano (82) 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 or trustee, as the case may be, of 27
of the investment companies in the Franklin Templeton Group
of Funds.
*Charles B. Johnson (64) Chairman of
777 Mariners Island Blvd. the Board
San Mateo, CA 94404 and Trustee
President, Chief Executive Officer and Director, Franklin
Resources, Inc.; Chairman of the Board and Director,
Franklin Advisers, Inc., Franklin Advisory Services, Inc.,
Franklin Investment Advisory Services, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton
Investor Services, Inc., Franklin Templeton Services, Inc.
and General Host Corporation (nursery and craft centers);
and officer and/or director or trustee, as the case may be,
of most of the other subsidiaries of Franklin Resources,
Inc. and of 53 of the investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (57) President and
777 Mariners Island Blvd. 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 or trustee, as the case may be, of most
other subsidiaries of Franklin Resources, Inc. and of 57 of
the investment companies in the Franklin Templeton Group of
Funds.
Frank W.T. LaHaye (68) 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 Corporation (software
firm); Director, Fischer Imaging Corporation (medical
imaging systems) and Digital Transmissions Systems, Inc.
(wireless communications); and director or trustee, as the
case may be, of 26 of the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (69) 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), Shoppers Express (home shopping), and
Spacehab, Inc. (aerospace services); and director or
trustee, as the case may be, of 49 of the investment
companies in the Franklin Templeton Group of Funds; FORMERLY
Chairman, Hambrecht and Quist Group, Director, H & Q
Healthcare Investors, and President, National Association of
Securities Dealers, Inc.
Martin L. Flanagan (37) 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 and Director, Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating Officer and Director,
Templeton Investment Counsel, Inc.; Senior Vice President
and Treasurer, Franklin Advisers, Inc.; Treasurer, Franklin
Advisory Services, Inc.; Treasurer and Chief Financial
Officer, Franklin Investment Advisory Services, Inc.;
President, Franklin Templeton Services, Inc.; Senior Vice
President, Franklin/Templeton Investor Services, Inc.; and
officer, and/or director or trustee, as the case may be, of
57 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
Services, Inc. and Franklin Templeton Distributors, Inc.;
Vice President, Franklin Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer
and Chief Operating Officer, Franklin Investment Advisory
Services, Inc.; and officer of 57 of the investment
companies in the Franklin Templeton Group of Funds.
Charles E. Johnson (41) 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.; President, Chief Executive Officer & Chief
Investment Officer and Director, Franklin Institutional
Services Corporation; Chairman and Director, Templeton
Investment Counsel, Inc.; Vice President, Franklin Advisers,
Inc.; officer and/or director of some of the subsidiaries of
Franklin Resources, Inc.; and officer and/or director or
trustee, as the case may be, of 36 of the investment
companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (58) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.;
and officer of 34 of the investment companies in the
Franklin Templeton Group of Funds.
Edward V. McVey (60) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President and National Sales Manager, Franklin
Templeton Distributors, Inc.; and officer of 29 of the
investment companies in the Franklin Templeton Group of
Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are currently paid
$2,400 per year (or $300 for each of the Trust's eight regularly scheduled Board
meetings) plus $300 per meeting attended. As shown above, the nonaffiliated
Board members also serve as directors or trustees of other investment companies
in the Franklin Templeton Group of Funds. They may receive fees from these funds
for their services. The following table provides the total fees paid to
nonaffiliated Board members by the Trust and by other funds in the Franklin
Templeton Group of Funds.
Number of Boards
Total Fees in the Franklin
Total Fees Received from the Templeton Group
Received from Franklin Templeton of Funds on Which
Name the Trust* Group of Funds** Each Serves***
Frank H. Abbott, III ........ $5,100 $165,236 28
Harris J. Ashton ............ 5,100 343,591 52
S. Joseph Fortunato.......... 5,100 360,411 54
David W. Garbellano ......... 4,800 148,916 27
Frank W.T. LaHaye ........... 4,800 139,233 26
Gordon S. Macklin ........... 5,100 335,541 49
*For the fiscal year ended April 30, 1997.
**For the calendar year ended December 31, 1996.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 58 registered investment companies, with approximately 169 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 or trustee.
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 August 5, 1997, the officers and Board members did not own of record and
beneficially any shares of the Fund. Many of the Board members own shares in
other funds in the Franklin Templeton Group of Funds. Charles B. Johnson and
Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively, of
Charles E. Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio transactions
are executed. Advisers' activities are subject to the review and supervision of
the Board to whom Advisers renders periodic reports of the Fund's investment
activities. Advisers and its officers, directors and employees are covered by
fidelity insurance for the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action with
respect to any of the other funds it manages, or for its own account, that may
differ from action taken by Advisers on behalf of the Fund. Similarly, with
respect to the Fund, Advisers is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that Advisers and
access persons, as defined by the 1940 Act, may buy or sell for its or their own
account or for the accounts of any other fund. Advisers is not obligated to
refrain from investing in securities held by the Fund or other funds that it
manages. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Fund's Code of Ethics. Please
see "Miscellaneous Information Summary of Code of Ethics."
MANAGEMENT FEES. Under its management agreement, the Fund pays Advisers a
management fee equal to an annual rate of 0.75% of the Fund's average daily net
assets up to and including $500 million; 0.625% of the Fund's average daily net
assets over $500 million up to and including $1 billion; and 0.50% of the Fund's
average daily net assets over $1 billion. The fee is computed at the close of
business on the last business day of each month.
For the fiscal year ended April 30, 1997, management fees, before any advance
waiver, totaled $25,008. Under an agreement by Advisers to waive its fees, the
Fund paid no management fees.
MANAGEMENT AGREEMENT. The management agreement is in effect until April 30,
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. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these services
per benefit plan participant Fund account per year may not exceed the per
account fee payable by the Fund to Investor Services in connection with
maintaining shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York 10286, acts as custodian of the securities and other assets of
the Fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Fund's independent auditors. During the fiscal year ended April
30, 1997, their auditing services consisted of rendering an opinion on the
financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended April 30, 1997.
HOW DOES THE FUND BUY
SECURITIES FOR ITS PORTFOLIO?
Advisers selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the Board may give.
When placing a portfolio transaction, Advisers seeks to obtain prompt execution
of orders at the most favorable net price. For portfolio transactions on a
securities exchange, the amount of commission paid by the Fund is negotiated
between Advisers and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. Advisers will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of Advisers, a
better price and execution can otherwise be obtained. Purchases of portfolio
securities from underwriters will include a commission or concession paid by the
issuer to the underwriter, and purchases from dealers will include a spread
between the bid and ask price.
Advisers may pay certain brokers commissions that are higher than those another
broker may charge, if Advisers determines in good faith that the amount paid is
reasonable in relation to the value of the brokerage and research services it
receives. This may be viewed in terms of either the particular transaction or
Adviser's overall responsibilities to client accounts over which it exercises
investment discretion. The services that brokers may provide to Advisers
include, among others, supplying information about particular companies,
markets, countries, or local, regional, national or transnational economies,
statistical data, quotations and other securities pricing information, and other
information that provides lawful and appropriate assistance to Advisers in
carrying out its investment advisory responsibilities. These services may not
always directly benefit the Fund. They must, however, be of value to Advisers in
carrying out its overall responsibilities to its clients.
The Fund seeks to obtain prompt execution of orders at the most favorable net
price. Transactions may be directed to dealers in return for research and
statistical information, as well as for special services provided by the dealers
in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services Advisers receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staffs of other securities firms. As long as it is lawful and
appropriate to do so, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. If the Fund's
officers are satisfied that the best execution is obtained, the sale of Fund
shares, as well as shares of other funds in the Franklin Templeton Group of
Funds, may also be considered a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to Advisers will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisers are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by
Advisers, taking into account the respective sizes of the funds and the amount
of securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
During the fiscal year ended April 30, 1997, the Fund paid brokerage commissions
totaling $14,667.
As of April 30, 1997, the Fund owned securities issued by Merrill Lynch & Co.,
Inc. valued in the aggregate at $19,050. Except as noted, the Fund did not own
securities issued by its regular broker-dealers as of the end of the fiscal
year.
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 may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of $1 million or more: 1% on sales of $1 million
to $2 million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on
sales over $3 million to $50 million, plus 0.25% on sales over $50 million to
$100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases by certain retirement plans without a front-end sales charge, as
discussed in the Prospectus: 1% on sales of $500,000 to $2 million, plus 0.80%
on sales over $2 million to $3 million, plus 0.50% on sales over $3 million to
$50 million, plus 0.25% on sales over $50 million to $100 million, plus 0.15% on
sales over $100 million. Distributors may make these payments in the form of
contingent advance payments, which may be recovered from the Securities Dealer
or set off against other payments due to the dealer if shares are sold within 12
months of the calendar month of purchase. Other conditions may apply. All terms
and conditions may be imposed by an agreement between Distributors, or one of
its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy Fund
shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds acquired more than 90 days before the Letter is filed will be counted
towards completion of the Letter, but they will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions you make during the 13
month period, except in the case of certain retirement plans, will be subtracted
from the amount of the purchases for purposes of determining whether the terms
of the Letter have been completed. If the Letter is not completed within the 13
month period, there will be an upward adjustment of the sales charge, depending
on the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute a
Letter before a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the sales
charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in your name
until you fulfill the Letter. This policy of reserving shares does not apply to
certain retirement plans. If total purchases, less redemptions, equal the amount
specified under the Letter, the reserved shares will be deposited to an account
in your name or delivered to you or as you direct. If total purchases, less
redemptions, exceed the amount specified under the Letter and is an amount that
would qualify for a further quantity discount, a retroactive price adjustment
will be made by Distributors and the Securities Dealer through whom purchases
were made pursuant to the Letter (to reflect such further quantity discount) on
purchases made within 90 days before and on those made after filing the Letter.
The resulting difference in Offering Price will be applied to the purchase of
additional shares at the Offering Price applicable to a single purchase or the
dollar amount of the total purchases. If the total purchases, less redemptions,
are less than the amount specified under the Letter, you will remit to
Distributors an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge that would have applied to
the aggregate purchases if the total of the purchases had been made at a single
time. Upon remittance, the reserved shares held for your account will be
deposited to an account in your name or delivered to you or as you direct. If
within 20 days after written request the difference in sales charge is not paid,
the redemption of an appropriate number of reserved shares to realize the
difference will be made. In the event of a total redemption of the account
before fulfillment of the Letter, the additional sales charge due will be
deducted from the proceeds of the redemption, and the balance will be forwarded
to you.
If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will be
purchased at the Net Asset Value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term, money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. 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. 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, Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by Advisers.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the scheduled close of trading
on the NYSE, if that is earlier. The value is then converted into its U.S.
dollar equivalent at the foreign exchange rate in effect at noon, New York time,
on the day the value of the foreign security is determined. If no sale is
reported at that time, the foreign security is valued within the range of the
most recent quoted bid and ask prices. Occasionally events that affect the
values of foreign securities and foreign exchange rates may occur between the
times at which they are determined and the close of the exchange and will,
therefore, not be reflected in the computation of the Fund's Net Asset Value. If
events materially affecting the values of these foreign securities occur during
this period, the securities will be valued in accordance with procedures
established by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the Net Asset Value of the Fund's shares is determined as of such times.
Occasionally, events affecting the values of these securities may occur between
the times at which they are determined and the scheduled close of the NYSE that
will not be reflected in the computation of the Fund's Net Asset Value. If
events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION
ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. INCOME DIVIDENDS. The Fund receives income generally in the form of
dividends, interest and other income derived from its investments. This income,
less the expenses incurred in the Fund's operations, is its net investment
income from which income dividends may be distributed. Thus, the amount of
dividends paid per share may vary with each distribution.
2. CAPITAL GAIN DISTRIBUTIONS. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any capital loss carryforward or post-October
loss deferral) may generally be made once each year in December to reflect any
net short-term and net long-term capital gains realized by the Fund as of
October 31 of the current fiscal year and any undistributed capital gains from
the prior fiscal year. The Fund may adjust the timing of these distributions for
operational or other reasons.
TAXES
As stated in the Prospectus, the Fund has elected and qualified 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 the Fund's fiscal year end annual report.
Corporate shareholders should note that dividends paid by the Fund from sources
other than the qualifying dividends it receives will not qualify for the
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.
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 the Fund's shares. 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.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal year ended April 30, 1997, was $76,980. After
allowances to dealers, Distributors retained $8,755 in net underwriting
discounts and commissions. Distributors may be entitled to reimbursement under
the Rule 12b-1 plan, as discussed below. Except as noted, Distributors received
no other compensation from the Fund for acting as underwriter.
THE RULE 12B-1 PLAN
The Fund has adopted a distribution plan or "Rule 12b-1 plan" pursuant to Rule
12b-1 of the 1940 Act. Under the plan, the Fund may pay up to a maximum of 0.25%
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.
For the fiscal year ended April 30, 1997, Distributors had eligible expenditures
of $28,555 for advertising, printing, and payments to underwriters and
broker-dealers pursuant to the plan, of which the Fund paid Distributors $6,111.
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 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
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 for the period from inception. The Fund's cumulative total return for the
period from inception (June 3, 1996) to April 30, 1997 was 4.24%.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) 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(R) 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed on
the NYSE.
d) Wilshire 5000 Equity Index - represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
h) Financial publications: The Wall Street Journal, and Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
l) Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
m) Standard & Poor's(R) 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 2.7 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Mutual Series Fund, Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $207 billion in
assets under management for more than 5.4 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 120
U.S. based open-end investment companies to the public. The Fund may identify
itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past nine years.
As of August 5, 1997, 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 201,184 29%
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations must be sent to a compliance
officer and, within 10 days after the end of each calendar quarter, a report of
all securities transactions must be provided to the compliance officer; and
(iii) access persons involved in preparing and making investment decisions must,
in addition to (i) and (ii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended April 30, 1997, including the auditors'
report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
AMEX - American Stock Exchange
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I - Certain funds in the Franklin Templeton Funds offer multiple classes
of shares. The different classes have proportionate interests in the same
portfolio of investment securities. They differ, however, primarily in their
sales charge structures and Rule 12b-1 plans. Because the Fund's sales charge
structure and Rule 12b-1 plan are similar to those of Class I shares, shares of
the Fund are considered Class I shares for redemption, exchange and other
purposes.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the front-end sales charge. The maximum front-end sales
charge is 4.50%.
PROSPECTUS - The prospectus for the Fund dated September 1, 1997, as may be
amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
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
File Nos. 33-39088
811-6243
FORM N-1A
PART C
Other Information
ITEM 24 FINANCIAL STATEMENTS AND EXHIBITS
a) Financial Statements
Audited Financial Statements incorporated herein by reference to the
Registrant's Annual Report to Shareholders for fiscal year ended April 30,
1997 as filed electronically with the Securities and Exchange Commission
on Form Type N-30D on July 8, 1997.
(i) Report of Independent Auditors
(ii) Statement of Investments in Securities and Net Assets - April 30,
1997
(iii)Statements of Assets and Liabilities - April 30, 1997
(iv) Statements of Operations - for the year ended April 30, 1997
(v) Statements of Changes in Net Assets - for the years ended April
30, 1997 and 1996
(vi) Notes to Financial Statements
b) Exhibits:
The following exhibits are incorporated by reference, except exhibits 11(i),
15(ix), 27(i), 27(ii), 27(iii), 27(iv), 27(v), 27(vi), 27(vii), 27(viii),
27(ix), 27(x), 27(xi), 27(xii), 27(xiii) and 27(xiv) which are attached
herewith:
(1) copies of the charter as now in effect;
(i) Agreement and Declaration of Trust of Franklin California 250
Growth Index Fund dated January 22, 1991
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Certificate of Trust of Franklin California 250 Growth Index Fund
dated January 22, 1991
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iii) Certificate of Amendment to the Certificate of Trust of Franklin
California 250 Growth Index Fund dated November 19, 1991
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iv) Certificate of Amendment to the Certificate of Trust of Franklin
Strategic Series dated May 14, 1992
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(v) Certificate of Amendment of Agreement and Declaration of Trust of
Franklin Strategic Series dated April 18, 1995
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(2) copies of the existing By-Laws or instruments corresponding
thereto;
(i) Amended and Restated By-Laws of Franklin California 250
Growth Index Fund as of April 25, 1991
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Amendment to By-Laws dated October 27, 1994
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
iling Date: June 1, 1995
(3) Copies of any voting trust agreement with respect to more than five
percent of any class of equity securities of the Registrant;
Not Applicable
(4) specimens or copies of each security issued by the Registrant, including
copies of all constituent instruments, defining the rights of the holders
of such securities, and copies of each security being registered;
Not Applicable
(5) copies of all investment advisory contracts relating to the management
of the assets of the Registrant;
(i) Management Agreement between the Registrant, on behalf of
Franklin Global Health Care Fund, Franklin Small Cap Growth Fund,
Franklin Global Utilities Fund, and Franklin Natural Resources
Fund, and Franklin Advisers, Inc., dated February 24, 1992
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Administration Agreement between the Registrant, on behalf of
Franklin MidCap Growth Fund, and Franklin Advisers, Inc., dated
April 12, 1993
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(iii) Management Agreement between the Registrant, on behalf of Franklin
Strategic Income Fund, and Franklin Advisers, Inc., dated May 24,
1994
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iv) Subadvisory Agreement between Franklin Advisers, Inc., on behalf
of the Franklin Strategic Income Fund, and Templeton Investment
Counsel, Inc., dated May 24, 1994
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(v) Amended and Restated Management Agreement between the
Registrant, on behalf of Franklin California Growth Fund, and
Franklin Advisers, Inc., dated July 12, 1993
Filing: Post-Effective Amendment No. 14 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(vi) Management Agreement between the Registrant, on behalf of
Franklin Blue Chip Fund, and Franklin Advisers, Inc., dated
February 13, 1996
Filing: Post-Effective Amendment No. 18 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: March 14, 1996
(vii) Management Agreement between the Registrant, on behalf of Franklin
Institutional MidCap Growth Fund (now known as Franklin MidCap
Growth Fund), and Franklin Advisers, Inc., dated January 1, 1996
Filing: Post-Effective Amendment No. 19 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: March 27, 1996
(viii) Amendment dated August 1, 1995 to the Management Agreement between
the Registrant, on behalf of Franklin California Growth Fund, and
Franklin Advisers, Inc., dated July 12, 1993
Filing: Post-Effective Amendment No. 21 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(ix) Amendment dated August 1, 1995 to the Management Agreement between
the Registrant, on behalf of Franklin Global Health Care Fund,
Franklin Small Cap Growth Fund, Franklin Global Utilities Fund, and
Franklin Natural Resources Fund, and Franklin Advisers,
Inc., dated February 24, 1992
Filing: Post-Effective Amendment No. 21 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(x) Amendment dated August 1, 1995 to the Management Agreement
between the Registrant, on behalf of Franklin Strategic Income
Fund, and Franklin Advisers, Inc., dated May 24, 1994
Filing: Post-Effective Amendment No. 21 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(xi) Management Agreement between the Registrant, on behalf of
Franklin Biotechnology Discovery Fund, and Franklin Advisers,
Inc., dated July 15, 1997
Filing: Post-Effective Amendment No. 25 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: August 22, 1997
(xii) Administration Agreement between the Registrant, on behalf of
Franklin Biotechnology Discovery Fund, and Franklin Templeton
Services, Inc., dated July 15, 1997
Filing: Post-Effective Amendment No. 25 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: August 22, 1997
(6) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies of all
agreements between principal underwriters and dealers;
(i) Amended and Restated Distribution Agreement between the
Registrant, on behalf of all Series except Franklin Strategic
Income Fund, and Franklin/Templeton Distributors, Inc., dated
April 23, 1995
Filing: Post-Effective Amendment No. 14 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Amended and Restated Distribution Agreement between the
Registrant, on behalf of Franklin Strategic Income Fund, and
Franklin/Templeton Distributors, Inc., dated March 29, 1995
Filing: Post-Effective Amendment No. 14 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iii) Forms of Dealer Agreements between Franklin/Templeton
Distributors, Inc., and Securities Dealers is Incorporated herein
by reference to:
Registrant: Franklin Tax-Free Trust
Filing: Post-Effective Amendment No. 22 to Registration Statement
on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(7) copies of all bonus, profit sharing, pension or other similar contracts or
arrangements wholly or partly for the benefit of Trustees or officers of
the Registrant in their capacity as such; any such plan that is not set
forth in a formal document, furnish a reasonably detailed description
thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts under Section
17(f) of the Investment Company Act of 1940 (the "1940 Act"), with respect
to securities and similar investments of the Registrant, including the
schedule of remuneration;
(i) Master Custody Agreement between the Registrant and Bank of New
York dated February 16, 1996
Filing: Post-Effective Amendment No. 19 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: March 14, 1996
(ii) Terminal Link Agreement between the Registrant and Bank of New
York dated February 16, 1996
Filing: Post-Effective Amendment No. 19 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: March 14, 1996
(9) copies of all other material contracts not made in the ordinary course of
business which are to be performed in whole or in part at or after the
date of filing the Registration Statement;
Not Applicable
(10) an opinion and consent of counsel as to the legality of the securities
being registered, indicating whether they will when sold be legally
issued, fully paid and nonassessable;
Not Applicable
(11) Copies of any other opinions, appraisals or rulings and consents to the
use thereof relied on in the preparation of this registration statement
and required by Section 7 of the 1933 Act;
(i) Consent of Independent Auditors
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in consideration for
providing the initial capital between or among the Registrant, the
underwriter, adviser, promoter or initial stockholders and written
assurances from promoters or initial stockholders that their purchases
were made for investment purposes without any present intention of
redeeming or reselling;
(i) Letter of Understanding dated August 20, 1991
Filing: Post-Effective Amendment No. 14 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Letter of Understanding dated April 12, 1995 Filing:
Post-Effective Amendment No. 14 to Registration Statement on Form
N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iii) Letter of Understanding dated June 5, 1995
Filing: Post-Effective Amendment No. 17 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: December 5, 1995
(iv) Form of Letter of Understanding for Franklin California Growth
Fund dated August 30, 1996
Filing: Post-Effective Amendment No. 21 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: August 7, 1996
(v) Form of Letter of Understanding for Franklin Global Health Care
Fund dated August 30, 1996
Filing: Post-Effective Amendment No. 21 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: August 7, 1996
(14) copies of the model plan used in the establishment of any retirement plan
in conjunction with which Registrant offers its securities, any
instructions thereto and any other documents making up the model plan.
Such form(s) should disclose the costs and fees charged in connection
therewith;
(i) Copy of Model Retirement Plan
Registrant: Franklin High Income Trust
Filing: Post-effective amendment No. 26 to Registration Statement
on Form N-1A
File No. 2-30203
Filing Date: August 1, 1989
(15) copies of any plan entered into by Registrant pursuant to Rule 12b-l under
the 1940 Act, which describes all material aspects of the financing of
distribution of Registrant's shares, and any agreements with any person
relating to implementation of such plan.
(i) Amended and Restated Distribution Plan between the
Registrant, on behalf of Franklin California Growth Fund,
Franklin Small Cap Growth Fund, Franklin Global Health Care Fund
and Franklin Global Utilities Fund, and Franklin/Templeton
Distributors, Inc., dated July 1, 1993
Filing: Post-Effective Amendment No. 14 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Distribution Plan between the Registrant, on behalf of Franklin
Global Utilities Fund - Class II, and Franklin/Templeton
Distributors, Inc., dated March 30, 1995
Filing: Post-Effective Amendment No. 14 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iii) Distribution Plan pursuant to Rule 12b-1 between the Registrant,
on behalf of the Franklin Strategic Income Fund, and
Franklin/Templeton Distributors, Inc., dated May 24, 1994
Filing: Post-Effective Amendment No. 14 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iv) Distribution Plan pursuant to Rule 12b-1 between the Registrant,
on behalf of the Franklin Natural Resources Fund, and
Franklin/Templeton Distributors, Inc., dated June 1, 1995
Filing: Post-Effective Amendment No. 14 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(v) Distribution Plan pursuant to Rule 12b-1 between the Registrant,
on behalf of the Franklin MidCap Growth Fund, and
Franklin/Templeton Distributors, Inc., dated June 1, 1996
Filing: Post-Effective Amendment No. 21 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: August 7, 1996
(vi) Distribution Plan pursuant to Rule 12b-1 between the Registrant,
on behalf of the Franklin Blue Chip Fund, and Franklin/Templeton
Distributors, Inc., dated May 28, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 7, 1996
(vii) Distribution Plan pursuant to Rule 12b-1 between the Registrant,
on behalf of Franklin Small Cap Growth Fund - Class II, and
Franklin/Templeton Distributors, Inc., dated September 29, 1995
Filing: Post-Effective Amendment No. 21 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: August 7, 1996
(viii) Form of Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Biotechnology Discovery Fund,
and Franklin/Templeton Distributors, Inc.
Filing: Post-Effective Amendment No. 24 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: June 12, 1997
(ix) Distribution Plan pursuant to Rule 12b-1 between the Registrant, on
behalf of Franklin California Growth Fund - Class II, and Franklin
Global Health Care Fund - Class II, and Franklin/Templeton
Distributors, Inc., dated September 3, 1996
(16) schedule for computation of each performance quotation provided in the
registration statement in response to Item 22 (which need not be audited).
(i) Schedule for Computation of Performance and Quotations is
Incorporated herein by reference to: Registrant:
Franklin Tax-Advantaged U.S. Government Securities Fund
Filing: Post-Effective Amendment No. 8 to Registration Statement
on Form N-1A
File No. 33-11963
Filing Date: March 1, 1995
(17) Powers of Attorney
(i) Power of Attorney for Franklin Strategic Series dated December
14, 1995
Filing: Post-Effective Amendment No. 21 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(ii) Certificate of Secretary for Franklin Strategic Series dated
December 14, 1995
Filing: Post-Effective Amendment No. 21 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(18) Copies of any plan entered into by Registrant pursuant to Rule 18f-3
under the 1940 Act
(i) Multiple Class Plan dated October 19, 1995
Filing: Post-Effective Amendment No. 21 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: August 7, 1996
(ii) Multiple Class Plan for Franklin California Growth Fund dated
June 18, 1996
Filing: Post-Effective Amendment No. 21 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: August 7, 1996
(iii) Multiple Class Plan for Franklin Global Health Care Fund dated
June 18, 1996
Filing: Post-Effective Amendment No. 21 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: August 7, 1996
(iv) Multiple Class Plan for Franklin Small Cap Growth Fund dated June
18, 1996
Filing: Post-Effective Amendment No. 24 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: December 11, 1996
(v) Multiple Class Plan for Franklin Natural Resources Fund dated
June 18, 1996
Filing: Post-Effective Amendment No. 24 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: December 11, 1996
(27) Financial Data Schedule
(i) Financial Data Schedule for Franklin California Growth Fund -
Class I
(ii) Financial Data Schedule for Franklin California Growth Fund -
Class II
(iii) Financial Data Schedule for Franklin Strategic Income Fund
(iv) Financial Data Schedule for Franklin MidCap Growth Fund
(v) Financial Data Schedule for Franklin Global Utilities Fund -
Class I
(vi) Financial Data Schedule for Franklin Global Utilities Fund -
Class II
(vii) Financial Data Schedule for Franklin Small Cap Growth Fund -
Class I
(viii)Financial Data Schedule for Franklin Small Cap Growth Fund -
Class II
(ix) Financial Data Schedule for Franklin Small Cap Growth Fund -
Advisor Class
(x) Financial Data Schedule for Franklin Global Health Care Fund -
Class I
(xi) Financial Data Schedule for Franklin Global Health Care Fund -
Class II
(xii) Financial Data Schedule for Franklin Natural Resources Fund -
Class I
(xiii)Financial Data Schedule for Franklin Natural Resources Fund -
Advisor Class
(xiv) Financial Data Schedule for Franklin Blue Chip Fund
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON COTROL WITH REGISTRANT
None
ITEM 26 NUMBER OF HOLDERS OF SECURITIES
As of May 31, 1997 the number of record holders of the only classes of
securities of the Registrant was as follows:
Number of Record Holders
Shares of Beneficial Interest Class I Class II Advisor
Class
Franklin California Growth Fund 36,184 4,324 N/A
Franklin Strategic Income Fund 1,898 N/A N/A
Franklin MidCap Growth Fund 1,041 N/A N/A
Franklin Global Utilities Fund 16,502 924 N/A
Franklin Small Cap Growth Fund 100,734 22,966 311
Franklin Global Health Care Fund 24,675 1,906 N/A
Franklin Natural Resources Fund 6,123 N/A 80
Franklin Blue Chip Fund 1,017 N/A N/A
Franklin Biotechnology Discovery Fund 0 N/A N/A
ITEM 27 INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a Trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court or appropriate
jurisdiction the question whether such indemnification is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 28 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
a) Franklin Advisers, Inc.
The officers and directors of the Registrant's manager also serve as
officers and/or directors for (1) the manager's corporate parent, Franklin
Resources, Inc., and/or (2) other investment companies in the Franklin Templeton
Group of Funds. In addition, Mr. Charles B. Johnson is a director of General
Host Corporation. For additional information please see Part B and Schedules A
and D of Form ADV of the Funds' Investment Manager (SEC File 801-26292)
incorporated herein by reference, which sets forth the officers and directors of
the Investment Manager and information as to any business, profession, vocation
or employment of a substantial nature engaged in by those officers and directors
during the past two years.
b) Templeton Investment Counsel, Inc.
Templeton Investment Counsel, Inc. ("TICI"), an indirect, wholly owned
subsidiary of Franklin Resources, Inc., serves as the Franklin Strategic Income
Fund's Sub-adviser, furnishing to Franklin Advisers, Inc. in that capacity,
portfolio management services and investment research. For additional
information please see Part B and Schedules A and D of Form ADV of the Franklin
Strategic Income Fund's Sub-adviser (SEC File 801-15125), incorporated herein by
reference, which sets forth the officers and directors of the Sub-adviser and
information as to any business, profession, vocation or employment of a
substantial nature engaged in by those officers and directors during the past
two years.
ITEM 29 PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
Franklin Templeton Japan Fund
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Annuity Fund
Templeton Variable Products Series Fund
b) The information required by this Item 29 with respect to each director and
officer of Distributors is incorporated by reference to Part B of this N-1A and
Schedule A of Form BD filed by Distributors with the Securities and Exchange
Commission pursuant to the Securities Act of 1934 (SEC File No.
8-5889)
c) Not Applicable. Registrant's principal underwriter is an affiliated
person of an affiliated person of the Registrant.
ITEM 30 LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 are kept by the Registrant or its
shareholder services agent, Franklin/Templeton Investor Services, Inc., both of
whose address is 777 Mariners Island Blvd., San Mateo, CA 94404.
ITEM 31 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 32 UNDERTAKINGS
a) The Registrant hereby undertakes to promptly call a meeting of shareholders
for the purpose of voting upon the question of removal of any trustee or
trustees when requested in writing to do so by the record holders of not less
than 10 percent of the Registrant's outstanding shares and to assist its
shareholders in the communicating with other shareholders in accordance with the
requirements of Section 16(c) of the Investment Company Act of 1940.
b) The Registrant hereby undertakes to comply with the information requirement
in Item 5A of the Form N-1A by including the required information in the Trust's
annual report and to furnish each person to whom a prospectus is delivered a
copy of the annual report upon request and without charge.
c) The Registrant hereby undertakes to file a Post-Effective Amendment on behalf
of Franklin Strategic Biotechnology Discovery Fund using Financial Statements
which need not be certified, within four to six months from effective date of
Registrant's Registration Statement under the Securities
Act of 1933.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Amendment to its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of San
Mateo and the State of California, on the 28th day of August, 1997.
FRANKLIN STRATEGIC SERIES
(Registrant)
By: RUPERT H. JOHNSON, JR., PRESIDENT
Rupert H. Johnson, Jr., President
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
its Registration Amendment has been signed below by the following persons in the
capacities and on the dates indicated:
RUPERT H. JOHNSON, JR.* Principal Executive Officer and
Rupert H. Johnson, Jr. Trustee
Dated: August 28, 1997
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: August 28, 1997
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: August 28, 1997
FRANK H. ABBOTT, III* Trustee
Frank H. Abbott, III Dated: August 28, 1997
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: August 28, 1997
HARMON E. BURNS* Trustee
Harmon E. Burns Dated: August 28, 1997
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: August 28, 1997
DAVID W. GARBELLANO* Trustee
David W. Garbellano Dated: August 28, 1997
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: August 28, 1997
FRANK W.T. LAHAYE* Trustee
Frank W.T. LaHaye Dated: August 28, 1997
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: August 28, 1997
*By /s/Larry L. Greene
Attorney-in-Fact
(Pursuant to Power of Attorney previously filed)
FRANKLIN STRATEGIC SERIES
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.B1(i) Agreement and Declaration of Trust of Franklin *
California 250 Growth Index Fund dated January
22, 1991
EX-99.B1(ii) Certificate of Trust of Franklin California *
250 Growth Index Fund dated January 22, 1991
EX-99.B1(iii) Certificate of Amendment to the Certificate of *
Trust of Franklin California 250 Growth Index
Fund dated November 19, 1991
EX-99.B1(iv) Certificate of Amendment to the Certificate of *
Trust of Franklin Strategic Series dated May
14, 1992
EX-99.B1(v) Certificate of Amendment of Agreement and *
Declaration of Trust of Franklin Strategic
Series dated April 18, 1995
EX-99.B2(i) Amended and Restated By-Laws of Franklin *
California 250 Growth Index Fund as of April
25, 1991
EX-99.B2(ii) Amendment to By-Laws dated October 27, 1994 *
EX-99.B5(i) Management Agreement between the Registrant, *
on behalf of Franklin Global Health Care Fund,
Franklin Small Cap Growth Fund, Franklin
Global Utilities Fund, and Franklin Natural
Resources Fund, and Franklin Advisers, Inc.,
dated February 24, 1992
EX-99.B5(ii) Administration Agreement between the *
Registrant, on behalf of Franklin MidCap
Growth Fund, and Franklin Advisers, Inc.,
dated April 12, 1993
EX-99.B5(iii) Management Agreement between the Registrant, *
on behalf of Franklin Strategic Income Fund,
and Franklin Advisers, Inc., dated May 24, 1994
EX-99.B5(iv) Subadvisory Agreement between Franklin *
Advisers, Inc., on behalf of the Franklin
Strategic Income Fund, and Templeton
Investment Counsel, Inc., dated May 24, 1994
EX-99.B5(v) Amended and Restated Management Agreement *
between the Registrant, on behalf of Franklin
California Growth Fund, and Franklin Advisers,
Inc., dated July 12, 1993
EX-99.B5(vi) Management Agreement between the Registrant, *
on behalf of Franklin Blue Chip Fund, and
Franklin Advisers, Inc., dated February 13,
1996
EX-99.B5(vii) Management Agreement between the Registrant, *
on behalf of Franklin Institutional MidCap
Growth Fund (now known as Franklin MidCap
Growth Fund), and Franklin Advisers, Inc.,
dated January 1, 1996
EX-99.B5(viii) Amendment dated August 1, 1995 to the *
Management Agreement between the Registrant,
on behalf of Franklin California Growth Fund,
and Franklin Advisers, Inc., dated July 12, 1993
EX-99.B5(ix) Amendment dated August 1, 1995 to the *
Management Agreement between the Registrant,
on behalf of Franklin Global Health Care Fund,
and Franklin Small Cap Growth Fund, Franklin
Global Utilities Fund, and Franklin Natural
Resources Fund, and Franklin Advisers, Inc.,
dated February 24, 1992
EX-99.B5(x) Amendment dated August 1, 1995 to the *
Management Agreement between the Registrant
on behalf of Franklin Strategic Income Fund,
and Franklin Advisers, Inc., dated May 24, 1994
EX-99.B5(xi) Management Agreement between the Registrant, *
on behalf of Franklin Biotechnology Discovery
Fund, and Franklin Advisers, Inc., dated July
15, 1997
EX-99.B5(xii) Administration Agreement between the *
Registrant, on behalf of Franklin
Biotechnology Discovery Fund, and Franklin
Templeton Services, Inc., dated July 15, 1997
EX-99.B6(i) Amended and Restated Distribution Agreement *
between the Registrant, on behalf of all
Series except Franklin Strategic Income Fund,
and Franklin/Templeton Distributors, Inc.,
dated April 23, 1995
EX-99.B6(ii) Amended and Restated Distribution Agreement *
between the Registrant, on behalf of Franklin
Strategic Income Fund, and Franklin/Templeton
Distributors, Inc., dated March 29, 1995
EX-99.B6(iii) Forms of Dealer Agreements between *
Franklin/Templeton Distributors, Inc., and
Securities Dealers
EX-99.B8(i) Master Custody Agreement between the *
Registrant and Bank of New York dated February
16, 1996
EX-99.B8(ii) Terminal Link Agreement between the Registrant *
and Bank of New York dated February 16, 1996
EX-99.B11(i) Consent of Independent Auditors Attached
EX-99.B13(i) Letter of Understanding dated August 20, 1991 *
EX-99.B13(ii) Letter of Understanding dated April 12, 1995 *
EX-99.B13(iii) Letter of Understanding dated June 5, 1995 *
EX-99.B13(iv) Form of Letter of Understanding for Franklin *
California Growth Fund dated August 30, 1996
EX-99.B13(v) Form of Letter of Understanding for Franklin *
Global Health Care Fund dated August 30, 1996
EX-99.B15(i) Amended and Restated Distribution Plan between *
the Registrant, on behalf of Franklin California
Growth Fund, Franklin Small Cap Growth Fund,
Franklin Global Health Care Fund and Franklin
Global Utilities Fund, and Franklin/Templeton
Distributors, Inc., dated July 1, 1993
EX-99.B15(ii) Distribution Plan between the Registrant, on *
behalf of Franklin Global Utilities Fund Class
II, and Franklin/Templeton Distributors, Inc.,
dated March 30, 1995
EX-99.B15(iii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of Franklin
Strategic Income Fund, and Franklin/Templeton
Distributors, Inc., dated May 24, 1994
EX-99.B15(iv) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of the
Franklin Natural Resources Fund, and
Franklin/Templeton Distributors, Inc., dated
June 1, 1995
EX-99.B15(v) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of the
Franklin MidCap Growth Fund, and
Franklin/Templeton Distributors, Inc., dated
June 1, 1996
EX-99.B15(vi) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of the
Franklin Blue Chip Fund, and Franklin/Templeton
Distributors, Inc., dated May 28, 1996
EX-99.B15(vii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of Franklin
Small Cap Growth Fund - Class II, and
Franklin/Templeton Distributors, Inc., dated
September 29, 1995
EX-99.B15(viii) Form of Distribution Plan pursuant to Rule *
12b-1 between the Registrant, on behalf of
Franklin Biotechnology Discovery Fund, and
Franklin/Templeton Distributors, Inc.
EX-99.B15(ix) Distribution Plan pursuant to Rule 12b-1 Attached
between the Registrant, on behalf of Franklin
California Growth Fund - Class II, and Franklin
Global Health Care Fund - Class II, and
Franklin/Templeton Distributors, Inc., dated
September 3, 1996
EX-99.B16(i) Schedule for Computation of Performance *
Quotation
EX-99.B17(i) Power of Attorney for Franklin Strategic *
Series dated December 14, 1995
EX-99.B17(ii) Certificate of Secretary for Franklin *
Strategic Series dated December 14, 1995
EX-99.B18(i) Multiple Class Plan dated October 19, 1995 *
EX-99.B18(ii) Multiple Class Plan for Franklin California *
Growth Fund dated June 18, 1996
EX-99.B18(iii) Multiple Class Plan for Franklin Global Health *
Care Fund dated June 18, 1996
EX-99.B18(iv) Multiple Class Plan for Franklin Small Cap *
Growth Fund dated June 18, 1996
EX-99.B18(v) Multiple Class Plan for Franklin Natural *
Resources Fund dated June 18, 1996
EX-27.B(i) Financial Data Schedule for Franklin Attached
California Growth Fund - Class I
EX-27.B(ii) Financial Data Schedule for Franklin Attached
California Growth Fund - Class II
EX-27.B(iii) Financial Data Schedule for Franklin Strategic Attached
Income Fund
EX-27.B(iv) Financial Data Schedule for Franklin MidCap Attached
Growth Fund
EX-27.B(v) Financial Data Schedule for Franklin Global Attached
Utilities Fund - Class I
EX-27.B(vi) Financial Data Schedule for Franklin Global Attached
Utilities Fund - Class II
EX-27.B(vii) Financial Data Schedule for Franklin Small Cap Attached
Growth Fund - Class I
EX-27.B(viii) Financial Data Schedule for Franklin Small Cap Attached
Growth Fund - Class II
EX-27.B(ix) Financial Data Schedule for Franklin Small Cap Attached
Growth Fund - Advisor Class
EX-27.B(x) Financial Data Schedule for Franklin Global Attached
Health Care Fund - Class I
EX-27.B(xi) Financial Data Schedule for Franklin Global Attached
Health Care Fund - Class II
EX-27.B(xii) Financial Data Schedule for Franklin Natural Attached
Resources Fund - Class I
EX-27.B(xiii) Financial Data Schedule for Franklin Natural Attached
Resources Fund - Advisor Class
EX-27.B(xiv) Financial Data Schedule for Franklin Blue Chip Attached
Fund
* Incorporated by reference
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No. 26
to the Registration Statement of Franklin Strategic Series on Form N-1A File
Nos. (33-39088 and 811-6243) of our report dated June 10, 1997 on our audit of
the financial statements and financial highlights of Franklin Strategic Series,
which report is included in the Annual Report to Shareholders for the year ended
April 30, 1997, which is incorporated by reference in the Registration
Statement.
/s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
San Francisco, California
August 27, 1997
CLASS II DISTRIBUTION PLAN
I. Investment Company: FRANKLIN STRATEGIC SERIES
II. Fund: FRANKLIN CALIFORNIA GROWTH FUND - CLASS II
FRANKLIN GLOBAL HEALTH CARE FUND - CLASS II
III. Maximum Per Annum Rule 12b-1 Fees for Class II Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS II DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class II shares
(the "Class") of each Fund named above ("Funds"), which Plan shall take effect
as of the date class II shares are first offered (the "Effective Date of the
Plan"). The Plan has been approved by a majority of the Board of Trustees of the
Investment Company (the "Board"), including a majority of the Board members who
are not interested persons of the Investment Company and who have no direct, or
indirect financial interest in the operation of the Plan (the "non-interested
Board members"), cast in person at a meeting called for the purpose of voting on
such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Management Agreement between the Investment Company
and Franklin Advisers, Inc. and the terms of the Underwriting Agreement between
the Investment Company and Franklin/Templeton Distributors, Inc.
("Distributors"). The Board concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the Underwriting Agreement,
was fair and not excessive. The approval of the Plan included a determination
that in the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
each Fund and its shareholders.
DISTRIBUTION PLAN
1. (a) The Funds shall pay to Distributors a quarterly fee not to exceed
the above-stated maximum distribution fee per annum of the Class' average daily
net assets represented by shares of the Class, as may be determined by the Board
from time to time.
(b) In addition to the amounts described in (a) above, each Fund shall
pay (i) to Distributors for payment to dealers or others, or (ii) directly to
others, an amount not to exceed the above-stated maximum service fee per annum
of the Class' average daily net assets represented by shares of the Class, as
may be determined by the Funds' Board from time to time, as a service fee
pursuant to servicing agreements which have been approved from time to time by
the Board, including the non-interested Board members.
2. (a) Distributors shall use the monies paid to it pursuant to Paragraph
1(a) above to assist in the distribution and promotion of shares of the Class.
Payments made to Distributors under the Plan may be used for, among other
things, the printing of prospectuses and reports used for sales purposes,
expenses of preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a pro-rated
portion of Distributors' overhead expenses attributable to the distribution of
Class shares, as well as for additional distribution fees paid to securities
dealers or their firms or others who have executed agreements with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Trustees, including the non-interested
trustees. In addition, such fees may be used to pay for advancing the commission
costs to dealers or others with respect to the sale of Class shares.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be
used to pay dealers or others for, among other things, furnishing personal
services and maintaining shareholder accounts, which services include, among
other things, assisting in establishing and maintaining customer accounts and
records; assisting with purchase and redemption requests; arranging for bank
wires; monitoring dividend payments from each Fund on behalf of customers;
forwarding certain shareholder communications from the Funds to customers;
receiving and answering correspondence; and aiding in maintaining the investment
of their respective customers in the Class. Any amounts paid under this
paragraph 2(b) shall be paid pursuant to a servicing or other agreement, which
form of agreement has been approved from time to time by the Board.
3. In addition to the payments which each Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Funds, Advisers,
Distributors or other parties on behalf of the Funds, Advisers or Distributors
make payments that are deemed to be payments by the Funds for the financing of
any activity primarily intended to result in the sale of Class shares issued by
each Fund within the context of Rule 12b-1 under the Act, then such payments
shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies reimbursed to it and to others under the
Plan, and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Board, including the non-interested Board members, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of each Fund or by vote of a majority of the
non-interested Board members, on not more than sixty (60) days' written notice,
or by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between the Funds and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may
not be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 1 hereof without approval by a majority of the Funds'
outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Funds' non-interested Board members shall be committed to the discretion of such
non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: 9/13/96
FRANKLIN STRATEGIC SERIES
By:/S/DEBORAH R GATZEK
Deborah R Gatzek
Vice President & Secretary
Franklin/Templeton Distributors, Inc.
By:/S/HARMON E. BURNS
Harmon E. Burns
Executive Vice President
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
STRAREGIC SERIES FUND APRIL 30, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 011
<NAME> FRANKLIN CALIFORNIA GROWTH FUND CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 251,549,991
<INVESTMENTS-AT-VALUE> 261,134,980
<RECEIVABLES> 52,526,645
<ASSETS-OTHER> 1,636,352
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 315,297,977
<PAYABLE-FOR-SECURITIES> 7,195,906
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 647,565
<TOTAL-LIABILITIES> 7,843,471
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 294,690,591
<SHARES-COMMON-STOCK> 14,617,798
<SHARES-COMMON-PRIOR> 4,445,434
<ACCUMULATED-NII-CURRENT> 667,621
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,511,305
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,584,989
<NET-ASSETS> 307,454,506
<DIVIDEND-INCOME> 1,741,798
<INTEREST-INCOME> 1,447,110
<OTHER-INCOME> 0
<EXPENSES-NET> (1,841,785)
<NET-INVESTMENT-INCOME> 1,347,123
<REALIZED-GAINS-CURRENT> 5,419,170
<APPREC-INCREASE-CURRENT> (1,845,799)
<NET-CHANGE-FROM-OPS> 4,920,494
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (856,516)
<DISTRIBUTIONS-OF-GAINS> (3,662,883)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 13,366,627
<NUMBER-OF-SHARES-REDEEMED> (3,404,453)
<SHARES-REINVESTED> 210,190
<NET-CHANGE-IN-ASSETS> 226,279,740
<ACCUMULATED-NII-PRIOR> 192,438
<ACCUMULATED-GAINS-PRIOR> 885,590
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 953,389
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,841,785
<AVERAGE-NET-ASSETS> 166,492,484
<PER-SHARE-NAV-BEGIN> 18.260
<PER-SHARE-NII> .130
<PER-SHARE-GAIN-APPREC> 1.510
<PER-SHARE-DIVIDEND> (.122)
<PER-SHARE-DISTRIBUTIONS> (.428)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.350
<EXPENSE-RATIO> 1.080
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN STRATEGIC SERIES APRIL 30, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 012
<NAME> FRANKLIN CALIFORNIA GROWTH FUND CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 251,549,991
<INVESTMENTS-AT-VALUE> 261,134,980
<RECEIVABLES> 52,526,645
<ASSETS-OTHER> 1,636,352
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 315,297,977
<PAYABLE-FOR-SECURITIES> 7,195,906
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 647,565
<TOTAL-LIABILITIES> 7,843,471
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 294,690,591
<SHARES-COMMON-STOCK> 1,274,090
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 667,621
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,511,305
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,584,989
<NET-ASSETS> 307,454,506
<DIVIDEND-INCOME> 1,741,798
<INTEREST-INCOME> 1,447,110
<OTHER-INCOME> 0
<EXPENSES-NET> (1,841,785)
<NET-INVESTMENT-INCOME> 1,347,123
<REALIZED-GAINS-CURRENT> 5,419,170
<APPREC-INCREASE-CURRENT> (1,845,799)
<NET-CHANGE-FROM-OPS> 4,920,494
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (15,424)
<DISTRIBUTIONS-OF-GAINS> (130,572)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,316,359
<NUMBER-OF-SHARES-REDEEMED> (49,082)
<SHARES-REINVESTED> 6,813
<NET-CHANGE-IN-ASSETS> 226,279,740
<ACCUMULATED-NII-PRIOR> 192,438
<ACCUMULATED-GAINS-PRIOR> 885,590
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 953,389
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,841,785
<AVERAGE-NET-ASSETS> 166,492,484
<PER-SHARE-NAV-BEGIN> 18.050
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 1.646
<PER-SHARE-DIVIDEND> (.048)
<PER-SHARE-DISTRIBUTIONS> (.428)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.270
<EXPENSE-RATIO> 1.860
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
STRATEGIC SERIES APRIL 30, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 071
<NAME> FRANKLIN STRATEGIC INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 27,533,894
<INVESTMENTS-AT-VALUE> 27,598,731
<RECEIVABLES> 7,585,750
<ASSETS-OTHER> 1,402,751
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 36,587,232
<PAYABLE-FOR-SECURITIES> 1,613,211
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 110,122
<TOTAL-LIABILITIES> 1,723,333
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 34,428,285
<SHARES-COMMON-STOCK> 3,210,392
<SHARES-COMMON-PRIOR> 1,208,880
<ACCUMULATED-NII-CURRENT> 141,184
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 164,134
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 130,296
<NET-ASSETS> 34,863,899
<DIVIDEND-INCOME> 124,616
<INTEREST-INCOME> 1,706,081
<OTHER-INCOME> 0
<EXPENSES-NET> (48,105)
<NET-INVESTMENT-INCOME> 1,782,592
<REALIZED-GAINS-CURRENT> 632,481
<APPREC-INCREASE-CURRENT> (329,459)
<NET-CHANGE-FROM-OPS> 2,085,614
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,770,285)
<DISTRIBUTIONS-OF-GAINS> (519,339)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,512,297
<NUMBER-OF-SHARES-REDEEMED> (668,531)
<SHARES-REINVESTED> 157,746
<NET-CHANGE-IN-ASSETS> 21,842,363
<ACCUMULATED-NII-PRIOR> 59,325
<ACCUMULATED-GAINS-PRIOR> 119,947
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 129,938
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 217,494
<AVERAGE-NET-ASSETS> 20,732,301
<PER-SHARE-NAV-BEGIN> 10.770
<PER-SHARE-NII> .930
<PER-SHARE-GAIN-APPREC> .385
<PER-SHARE-DIVIDEND> (.956)
<PER-SHARE-DISTRIBUTIONS> (.269)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.860
<EXPENSE-RATIO> .230
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
STRATEGIC SERIES APRIL 30, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 051
<NAME> FRANKLIN MIDCAP GROWTH FUND CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 9,571,641
<INVESTMENTS-AT-VALUE> 10,766,062
<RECEIVABLES> 2,437,362
<ASSETS-OTHER> 7,499
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 13,210,923
<PAYABLE-FOR-SECURITIES> 329,589
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 28,715
<TOTAL-LIABILITIES> 358,304
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,472,196
<SHARES-COMMON-STOCK> 963,185
<SHARES-COMMON-PRIOR> 531,781
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 186,002
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,194,421
<NET-ASSETS> 12,852,619
<DIVIDEND-INCOME> 33,488
<INTEREST-INCOME> 55,445
<OTHER-INCOME> 0
<EXPENSES-NET> (111,521)
<NET-INVESTMENT-INCOME> (22,588)
<REALIZED-GAINS-CURRENT> 545,132
<APPREC-INCREASE-CURRENT> (3,730)
<NET-CHANGE-FROM-OPS> 518,814
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (26,689)
<DISTRIBUTIONS-OF-GAINS> (1,366,521)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 436,500
<NUMBER-OF-SHARES-REDEEMED> (104,275)
<SHARES-REINVESTED> 99,179
<NET-CHANGE-IN-ASSETS> 5,278,007
<ACCUMULATED-NII-PRIOR> 26,979
<ACCUMULATED-GAINS-PRIOR> 1,006,649
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 68,022
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 111,521
<AVERAGE-NET-ASSETS> 10,464,410
<PER-SHARE-NAV-BEGIN> 14.240
<PER-SHARE-NII> (0.020)
<PER-SHARE-GAIN-APPREC> 0.933
<PER-SHARE-DIVIDEND> (0.050)
<PER-SHARE-DISTRIBUTIONS> (1.763)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.340
<EXPENSE-RATIO> 1.070
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
STRATEGIC SERIES APRIL 30,1997 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BE
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 041
<NAME> FRANKLIN GLOBAL UTILITIES FUND CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 155,203,756
<INVESTMENTS-AT-VALUE> 170,282,083
<RECEIVABLES> 11,501,594
<ASSETS-OTHER> 1,135,312
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 182,918,989
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 428,804
<TOTAL-LIABILITIES> 428,804
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 154,539,760
<SHARES-COMMON-STOCK> 12,036,730
<SHARES-COMMON-PRIOR> 11,709,122
<ACCUMULATED-NII-CURRENT> 1,924,489
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10,947,934
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 15,078,002
<NET-ASSETS> 182,490,185
<DIVIDEND-INCOME> 6,273,880
<INTEREST-INCOME> 452,855
<OTHER-INCOME> 0
<EXPENSES-NET> (1,807,035)
<NET-INVESTMENT-INCOME> 4,919,700
<REALIZED-GAINS-CURRENT> 20,104,534
<APPREC-INCREASE-CURRENT> (3,808,807)
<NET-CHANGE-FROM-OPS> 21,215,427
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,357,887)
<DISTRIBUTIONS-OF-GAINS> (13,464,544)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,133,940
<NUMBER-OF-SHARES-REDEEMED> (2,859,257)
<SHARES-REINVESTED> 1,052,925
<NET-CHANGE-IN-ASSETS> 12,538,678
<ACCUMULATED-NII-PRIOR> 1,473,140
<ACCUMULATED-GAINS-PRIOR> 4,840,336
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,007,080
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,807,035
<AVERAGE-NET-ASSETS> 176,320,876
<PER-SHARE-NAV-BEGIN> 14.280
<PER-SHARE-NII> .420
<PER-SHARE-GAIN-APPREC> 1.351
<PER-SHARE-DIVIDEND> (.383)
<PER-SHARE-DISTRIBUTIONS> (1.208)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.460
<EXPENSE-RATIO> 1.000
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
STRATEGIC SERIES APRIL 30, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 021
<NAME> FRANKLIN SMALL CAP GROWTH FUND CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 1,116,787,829
<INVESTMENTS-AT-VALUE> 1,101,912,894
<RECEIVABLES> 161,771,575
<ASSETS-OTHER> 1,828,738
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,265,513,207
<PAYABLE-FOR-SECURITIES> 25,960,249
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,259,212
<TOTAL-LIABILITIES> 29,219,461
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,228,152,526
<SHARES-COMMON-STOCK> 56,510,250
<SHARES-COMMON-PRIOR> 22,525,659
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 23,016,155
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (14,874,935)
<NET-ASSETS> 1,236,293,746
<DIVIDEND-INCOME> 3,507,667
<INTEREST-INCOME> 4,606,507
<OTHER-INCOME> 0
<EXPENSES-NET> (7,937,518)
<NET-INVESTMENT-INCOME> 176,656
<REALIZED-GAINS-CURRENT> 40,556,983
<APPREC-INCREASE-CURRENT> (72,391,160)
<NET-CHANGE-FROM-OPS> (31,657,521)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,394,320)
<DISTRIBUTIONS-OF-GAINS> (28,319,877)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 53,625,870
<NUMBER-OF-SHARES-REDEEMED> (21,003,120)
<SHARES-REINVESTED> 1,361,841
<NET-CHANGE-IN-ASSETS> 767,279,787
<ACCUMULATED-NII-PRIOR> 124,074
<ACCUMULATED-GAINS-PRIOR> 16,100,061
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,859,067
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,937,518
<AVERAGE-NET-ASSETS> 799,844,264
<PER-SHARE-NAV-BEGIN> 19.750
<PER-SHARE-NII> .030
<PER-SHARE-GAIN-APPREC> .044
<PER-SHARE-DIVIDEND> (.067)
<PER-SHARE-DISTRIBUTIONS> (.797)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.960
<EXPENSE-RATIO> .920
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
STRATEGIC SERIES APRIL 30, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 022
<NAME> FRANKLIN SMALL CAP GROWTH FUND CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 1,116,787,829
<INVESTMENTS-AT-VALUE> 1,101,912,894
<RECEIVABLES> 161,771,575
<ASSETS-OTHER> 1,828,738
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,265,513,207
<PAYABLE-FOR-SECURITIES> 25,960,249
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,259,212
<TOTAL-LIABILITIES> 29,219,461
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,228,152,526
<SHARES-COMMON-STOCK> 7,784,393
<SHARES-COMMON-PRIOR> 1,225,769
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 23,016,155
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (14,874,935)
<NET-ASSETS> 1,236,293,746
<DIVIDEND-INCOME> 3,507,667
<INTEREST-INCOME> 4,606,507
<OTHER-INCOME> 0
<EXPENSES-NET> (7,937,518)
<NET-INVESTMENT-INCOME> 176,656
<REALIZED-GAINS-CURRENT> 40,556,983
<APPREC-INCREASE-CURRENT> (72,391,160)
<NET-CHANGE-FROM-OPS> (31,657,521)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (3,174,405)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,092,087
<NUMBER-OF-SHARES-REDEEMED> (674,976)
<SHARES-REINVESTED> 141,513
<NET-CHANGE-IN-ASSETS> 767,279,787
<ACCUMULATED-NII-PRIOR> 124,074
<ACCUMULATED-GAINS-PRIOR> 16,100,061
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,859,067
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,937,518
<AVERAGE-NET-ASSETS> 799,844,264
<PER-SHARE-NAV-BEGIN> 19.660
<PER-SHARE-NII> (.050)
<PER-SHARE-GAIN-APPREC> (.033)
<PER-SHARE-DIVIDEND> .000
<PER-SHARE-DISTRIBUTIONS> (.797)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.780
<EXPENSE-RATIO> 1.690
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN STRATEGIC SERIES APRIL 30, 1997 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 023
<NAME> FRANKLIN SMALL CAP GROWTH FUND ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 1,116,787,829
<INVESTMENTS-AT-VALUE> 1,101,912,894
<RECEIVABLES> 161,771,575
<ASSETS-OTHER> 1,828,738
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,265,513,207
<PAYABLE-FOR-SECURITIES> 25,960,249
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,259,212
<TOTAL-LIABILITIES> 29,219,461
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,228,152,526
<SHARES-COMMON-STOCK> 989,630
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 23,016,155
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (14,874,935)
<NET-ASSETS> 1,236,293,746
<DIVIDEND-INCOME> 3,507,667
<INTEREST-INCOME> 4,606,507
<OTHER-INCOME> 0
<EXPENSES-NET> (7,937,518)
<NET-INVESTMENT-INCOME> 176,656
<REALIZED-GAINS-CURRENT> 40,556,983
<APPREC-INCREASE-CURRENT> (72,391,160)
<NET-CHANGE-FROM-OPS> (31,657,521)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,065,131
<NUMBER-OF-SHARES-REDEEMED> (75,501)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 767,279,787
<ACCUMULATED-NII-PRIOR> 124,074
<ACCUMULATED-GAINS-PRIOR> 16,100,061
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,859,067
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,937,518
<AVERAGE-NET-ASSETS> 799,844,264
<PER-SHARE-NAV-BEGIN> 20.480
<PER-SHARE-NII> .010
<PER-SHARE-GAIN-APPREC> (1.52)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.970
<EXPENSE-RATIO> .690
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN STRATEGIC SERIES APRIL 30, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATMENTS.
</LEGEND>
<SERIES>
<NUMBER> 031
<NAME> FRANKLIN GLOBAL HEALTH CARE FUND CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 158,208,945
<INVESTMENTS-AT-VALUE> 142,420,421
<RECEIVABLES> 22,816,436
<ASSETS-OTHER> 32,501
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 165,269,358
<PAYABLE-FOR-SECURITIES> 3,903,540
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 613,746
<TOTAL-LIABILITIES> 4,517,286
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 169,453,745
<SHARES-COMMON-STOCK> 9,348,985
<SHARES-COMMON-PRIOR> 5,630,910
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,087,677
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (15,789,350)
<NET-ASSETS> 160,752,072
<DIVIDEND-INCOME> 300,791
<INTEREST-INCOME> 806,990
<OTHER-INCOME> 0
<EXPENSES-NET> (1,722,873)
<NET-INVESTMENT-INCOME> (615,092)
<REALIZED-GAINS-CURRENT> 9,002,325
<APPREC-INCREASE-CURRENT> (33,436,572)
<NET-CHANGE-FROM-OPS> (25,049,339)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (288,917)
<DISTRIBUTIONS-OF-GAINS> (3,142,405)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,894,341
<NUMBER-OF-SHARES-REDEEMED> (6,350,088)
<SHARES-REINVESTED> 173,822
<NET-CHANGE-IN-ASSETS> 51,837,682
<ACCUMULATED-NII-PRIOR> 67,625
<ACCUMULATED-GAINS-PRIOR> 2,154,213
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 873,754
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,722,873
<AVERAGE-NET-ASSETS> 149,550,161
<PER-SHARE-NAV-BEGIN> 19.34
<PER-SHARE-NII> (.060)
<PER-SHARE-GAIN-APPREC> (2.753)
<PER-SHARE-DIVIDEND> (.037)
<PER-SHARE-DISTRIBUTIONS> (.380)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.11
<EXPENSE-RATIO> 1.140
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
STRATEGIC SERIES APRIL 30, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 032
<NAME> FRANKLIN GLOBAL HEALTH CARE FUND CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 158,208,945
<INVESTMENTS-AT-VALUE> 142,420,421
<RECEIVABLES> 22,816,436
<ASSETS-OTHER> 32,501
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 165,269,358
<PAYABLE-FOR-SECURITIES> 3,903,540
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 613,746
<TOTAL-LIABILITIES> 4,517,286
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 169,453,745
<SHARES-COMMON-STOCK> 628,581
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,087,677
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (15,789,350)
<NET-ASSETS> 160,752,072
<DIVIDEND-INCOME> 300,791
<INTEREST-INCOME> 806,990
<OTHER-INCOME> 0
<EXPENSES-NET> (1,722,873)
<NET-INVESTMENT-INCOME> (615,092)
<REALIZED-GAINS-CURRENT> 9,002,325
<APPREC-INCREASE-CURRENT> (33,436,572)
<NET-CHANGE-FROM-OPS> (25,049,339)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (90,072)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 642,015
<NUMBER-OF-SHARES-REDEEMED> (18,004)
<SHARES-REINVESTED> 4,570
<NET-CHANGE-IN-ASSETS> 51,837,682
<ACCUMULATED-NII-PRIOR> 67,625
<ACCUMULATED-GAINS-PRIOR> 2,154,213
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 873,754
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,722,873
<AVERAGE-NET-ASSETS> 149,550,161
<PER-SHARE-NAV-BEGIN> 17.370
<PER-SHARE-NII> (.070)
<PER-SHARE-GAIN-APPREC> (.850)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.380)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.070
<EXPENSE-RATIO> 1.920
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
STRATEGIC SERIES APRIL 30, 1997 ANNUAL REPORT AND IS QUALIFIES IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 081
<NAME> FRANKLIN NATURAL RESOURCES FUND CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 42,285,656
<INVESTMENTS-AT-VALUE> 43,909,884
<RECEIVABLES> 2,833,294
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 46,743,178
<PAYABLE-FOR-SECURITIES> 16,180
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 217,793
<TOTAL-LIABILITIES> 233,973
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 45,258,447
<SHARES-COMMON-STOCK> 3,226,036
<SHARES-COMMON-PRIOR> 754,261
<ACCUMULATED-NII-CURRENT> 227,995
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (601,447)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,624,210
<NET-ASSETS> 46,509,205
<DIVIDEND-INCOME> 265,233
<INTEREST-INCOME> 209,971
<OTHER-INCOME> 0
<EXPENSES-NET> (273,251)
<NET-INVESTMENT-INCOME> 201,953
<REALIZED-GAINS-CURRENT> 52,954
<APPREC-INCREASE-CURRENT> 442,249
<NET-CHANGE-FROM-OPS> 697,156
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (151,754)
<DISTRIBUTIONS-OF-GAINS> (678,900)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,011,712
<NUMBER-OF-SHARES-REDEEMED> (1,593,404)
<SHARES-REINVESTED> 53,467
<NET-CHANGE-IN-ASSETS> 36,600,337
<ACCUMULATED-NII-PRIOR> 16,048
<ACCUMULATED-GAINS-PRIOR> 186,460
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 175,237
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 364,968
<AVERAGE-NET-ASSETS> 27,910,372
<PER-SHARE-NAV-BEGIN> 13.140
<PER-SHARE-NII> .090
<PER-SHARE-GAIN-APPREC> 1.254
<PER-SHARE-DIVIDEND> (.092)
<PER-SHARE-DISTRIBUTIONS> (.322)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.070
<EXPENSE-RATIO> .980
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FRANKLIN STRATEGIC SERIES APRIL 30, 1997 ANNUAL
REPORT AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 083
<NAME> FRANKLIN NATURAL RESOURCES FUND ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 42,285,656
<INVESTMENTS-AT-VALUE> 43,909,884
<RECEIVABLES> 2,833,294
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 46,743,178
<PAYABLE-FOR-SECURITIES> 16,180
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 217,793
<TOTAL-LIABILITIES> 233,973
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 45,258,447
<SHARES-COMMON-STOCK> 79,796
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 227,995
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (601,447)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,624,210
<NET-ASSETS> 46,509,205
<DIVIDEND-INCOME> 265,233
<INTEREST-INCOME> 209,971
<OTHER-INCOME> 0
<EXPENSES-NET> (273,251)
<NET-INVESTMENT-INCOME> 201,953
<REALIZED-GAINS-CURRENT> 52,594
<APPREC-INCREASE-CURRENT> 442,249
<NET-CHANGE-FROM-OPS> 697,156
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 147,426
<NUMBER-OF-SHARES-REDEEMED> (67,630)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 36,600,337
<ACCUMULATED-NII-PRIOR> 16,048
<ACCUMULATED-GAINS-PRIOR> 186,460
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 175,237
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 364,968
<AVERAGE-NET-ASSETS> 27,910,372
<PER-SHARE-NAV-BEGIN> 14.660
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> (.590)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.070
<EXPENSE-RATIO> .640
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
STRATEGIC SERIES APRIL 30, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 091
<NAME> FRANKLIN BLUE CHIP FUND
<S> <C>
<PERIOD-TYPE> 11-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> JUN-3-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 4,636,276
<INVESTMENTS-AT-VALUE> 4,923,328
<RECEIVABLES> 703,928
<ASSETS-OTHER> 6,989
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,634,245
<PAYABLE-FOR-SECURITIES> 18,934
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 15,367
<TOTAL-LIABILITIES> 34,301
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,285,111
<SHARES-COMMON-STOCK> 516,168
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 12,294
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 15,519
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 287,020
<NET-ASSETS> 5,599,944
<DIVIDEND-INCOME> 36,106
<INTEREST-INCOME> 41,262
<OTHER-INCOME> 0
<EXPENSES-NET> (41,753)
<NET-INVESTMENT-INCOME> 35,615
<REALIZED-GAINS-CURRENT> 15,018
<APPREC-INCREASE-CURRENT> 287,020
<NET-CHANGE-FROM-OPS> 337,653
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (22,820)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 612,646
<NUMBER-OF-SHARES-REDEEMED> (98,638)
<SHARES-REINVESTED> 2,160
<NET-CHANGE-IN-ASSETS> 5,599,944
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 25,008
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 74,144
<AVERAGE-NET-ASSETS> 3,334,385
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> .090
<PER-SHARE-GAIN-APPREC> .821
<PER-SHARE-DIVIDEND> (.061)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.850
<EXPENSE-RATIO> 1.250
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
