As filed with the Securities and Exchange Commission on April 22, 1998
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. 28 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 31 (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 May 1, 1998 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) 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.
Title of Securities Being Offered:
Shares of Beneficial Interest:
Franklin Strategic Income Fund - Class I
Franklin Strategic Income Fund - Class II
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?";
"Useful Terms and Definitions"
9. Legal Proceedings Not Applicable
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 Not Applicable
13. Investment Objectives and "How does the Fund Invest its
Policies Assets?"; "What are the Fund's
Potential Risks?"; "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 Not Applicable
Securities
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"
o 194STKP
SUPPLEMENT DATED MAY 1, 1998
TO THE PROSPECTUS OF
FRANKLIN STRATEGIC INCOME FUND
DATED SEPTEMBER 1, 1997
The prospectus is amended as follows:
I. The section "Expense Summary" is replaced with the following:
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of Class I shares for the
fiscal year ended April 30, 1997. The Fund's actual expenses may vary.
CLASS I CLASS II
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A.SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge (as a percentage of Offering Price) 4.25% 1.99%
Paid at time of purchase ............................. 4.25%++ 1.00%+++
Paid at redemption++++ ............................... None 0.99%
Exchange Fee (per transaction) ........................ $5.00* $5.00*
B.ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees ....................................... 0.63%** 0.63%**
Rule 12b-1 Fees ....................................... 0.15%*** 0.65%***
Other Expenses ........................................ 0.27% 0.27%
Total Fund Operating Expenses ......................... 1.05%** 1.55%**
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 $53**** $74 $98 $165
CLASS II $35 $58 $94 $193
For the same Class II investment, you would pay projected expenses of $26
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? - Choosing a Share Class."
++++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 you would pay is the same. 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 operating
expenses were 0.23% for Class I and would have been 0.73% for Class II.
***These fees may not exceed 0.25% for Class I and 0.65% for Class II. 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.
II. The following unaudited information is added to the section "Financial
Highlights":
SIX MONTHS ENDED
OCTOBER 31, 1997
CLASS I (UNAUDITED)
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................... $10.86
Income from investment operations:
Net investment income ................................. .44
Net realized and unrealized gains ..................... .28
-------------
Total from investment operations ....................... .72
-------------
Less distributions from:
Net investment income ................................. (.45)
Net realized gains .................................... --
Total distributions .................................... (.45)
--------------
Net asset value, end of period ......................... $11.13
=============
Total return* .......................................... 6.72%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ...................... $79,156
Ratio to average net assets:
Expenses .............................................. .25%**
Expenses excluding waiver and payments by affiliate ... 1.03%**
Net investment income ................................. 7.88%**
Portfolio turnover rate ................................ 40.51%
*Total return does not reflect sales commissions or the Contingent Deferred
Sales Charge, and is not annualized.
**Annualized.
III. The following is added to the end of the section "The Board" found under
"Who Manages the Fund?":
The Board also monitors the Fund to ensure no material conflicts exist among
the Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
IV. The section "The Rule 12b-1 Plan" found under "Who Manages the Fund?" is
replaced with the following:
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, Securities
Dealers may not be eligible to receive the Rule 12b-1 fees associated with
the purchase.
Under the Class II plan, the Fund may pay Distributors up to 0.50% 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, Securities Dealers may not be eligible to receive this portion of
the Rule 12b-1 fees associated with the purchase.
The Fund may also pay a servicing fee of up to 0.15% 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.
V. The first paragraph under "How Is the Trust Organized?" is replaced with
the following two paragraphs:
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 Strategic Income Fund - Class I and Franklin Strategic Income Fund
- Class II. All shares outstanding before the offering of Class II shares on
May 1, 1998, 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.
VI. The section "How Do I Buy Shares?" is replaced in its entirety with the
following:
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, please follow the steps below. This will help avoid
any delays in processing your request.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The Fund's minimum
investments are:
o To open your account: ...... $100*
o To add to your account: .... $25*
*We may waive these minimums for retirement plans. We also reserve the
right to refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application,
including the optional shareholder privileges section. By applying for
privileges now, you can avoid the delay and inconvenience of having to
send an additional application to add privileges later. PLEASE ALSO
INDICATE WHICH CLASS OF SHARES YOU WANT TO BUY. IF YOU DO NOT SPECIFY A
CLASS, WE WILL AUTOMATICALLY INVEST YOUR PURCHASE IN CLASS I SHARES. It
is important that we receive a signed application since we will not be
able to process any redemptions from your account until we receive your
signed application.
4. Make your investment using the table below.
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------------
BY MAIL For an initial investment:
Return the application to the Fund with your check
made payable to the Fund.
For additional investments:
Send a check made payable to the Fund. Please include
your account number on the check.
- ------------------------------------------------------------------------------
BY WIRE 1. Call Shareholder Services or, if that number is
busy, call 1-650/312-2000 collect, to receive a wire
control number and wire instructions. You need a new
wire control number every time you wire money into
your account. If you do not have a currently
effective wire control number, we will return the
money to the bank, and we will not credit the
purchase to your account.
2. For an initial investment you must also return
your signed shareholder application to the Fund.
IMPORTANT DEADLINES: If we receive your call before
1:00 p.m. Pacific time and the bank receives the
wired funds and reports the receipt of wired funds to
the Fund by 3:00 p.m. Pacific time, we will credit
the purchase to your account that day. If we receive
your call after 1:00 p.m. or the bank receives the
wire after 3:00 p.m., we will credit the purchase to
your account the following business day.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. The class that may be best
for you depends on a number of factors, including the amount and length of
time you expect to invest. Generally, Class I shares may be more attractive
for long-term investors or investors who qualify to buy Class I shares at a
reduced sales charge. Your financial representative can help you decide.
Class I
o Higher front-end sales charges than Class II shares. There are several
ways to reduce these charges, as described below. There is no front-end
sales charge for purchases of $1 million or more.*
o Contingent Deferred Sales Charge on purchases of $1 million or more sold
within one year
o Lower annual expenses than Class II shares
Class II
o Lower front-end sales charges than Class I shares
o Contingent Deferred Sales Charge on purchases sold within 18 months
o Higher annual expenses than Class I shares
*If you are investing $1 million or more, it is generally more beneficial
for you to buy Class I shares because there is no front-end sales charge and
the annual expenses are lower. Therefore, ANY PURCHASE OF $1 MILLION OR MORE
IS AUTOMATICALLY INVESTED IN CLASS I SHARES. You may accumulate more than $1
million in Class II shares through purchases over time. If you plan to do
this, however, you should determine if it would be better for you to buy
Class I shares through a Letter of Intent.
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 TO
AS A PERCENTAGE OF DEALER AS A
- ---------------------------------------------------------------------------
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- ---------------------------------------------------------------------------
CLASS I
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
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 "Choosing a Share Class."
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.
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions. 403(b) plans that only allow salary deferral
contributions and that purchased Class I shares of the Fund at a reduced
sales charge under the group purchase privilege before February 1, 1998,
however, may continue to do so.
SALES CHARGE WAIVERS. If one of the following sales charge waivers applies
to you or your purchase of Fund shares, you may buy shares of the Fund
without a front-end sales charge or a Contingent Deferred Sales Charge. All
of the sales charge waivers listed below apply to purchases of Class I
shares only, except for items 1 and 2 which also apply to Class II purchases.
Certain distributions, payments or redemption proceeds that you receive may
be used to buy shares of the Fund without a sales charge if you reinvest
them within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton
Fund. The distributions generally must be reinvested in the same class
of shares. Certain exceptions apply, however, to Class II shareholders
who chose to reinvest their distributions in Class I shares of the Fund
before November 17, 1997, and to Advisor Class or Class Z shareholders
of a Franklin Templeton Fund who may reinvest their distributions in
Class I shares of the Fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton
Fund if you originally paid a sales charge on the shares and you
reinvest the money in the same class of shares. This waiver does not
apply to exchanges.
If you paid a Contingent Deferred Sales Charge when you redeemed your
shares from a Franklin Templeton Fund, a Contingent Deferred Sales
Charge will apply to your purchase of Fund shares and a new Contingency
Period will begin. We will, however, credit your Fund account with
additional shares based on the Contingent Deferred Sales Charge you paid
and the amount of redemption proceeds that you reinvest.
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.
3. Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
4. 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 or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any
tax consequences that may apply.
5. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
Various individuals and institutions also may buy Class I shares without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. 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.
2. 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.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for
clients participating in comprehensive fee programs
4. Registered Securities Dealers and their affiliates, for their investment
accounts only
5. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
6. 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
7. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
8. Accounts managed by the Franklin Templeton Group
9. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
10. Group annuity separate accounts offered to retirement plans
11. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
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, SIMPLEs or
SEPs must also meet the requirements described under "Group Purchases -
Class I Only" above to be able to buy Class I shares without a front-end
sales charge. We may enter into a special arrangement with a Securities
Dealer, based on criteria established by the Fund, to add together certain
small Qualified Retirement Plan accounts for the purpose of meeting these
requirements.
For retirement plan accounts opened on or after May 1, 1997, a Contingent
Deferred Sales Charge may apply if the retirement plan is transferred out of
the Franklin Templeton Funds or terminated 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 0.75% 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.
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.
VII. The second paragraph under "May I Exchange Shares for Shares of Another
Fund?" is replaced with the following two paragraphs:
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 goal
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.
VIII. The fifth sentence in the section "Contingent Deferred Sales Charge,"
found under "May I Exchange Shares for Shares of Another Fund? - Will Sales
Charges Apply to My Exchange?", is replaced with the following:
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. If you exchange your Class II shares for shares of Money
Fund II, however, the time your shares are held in that fund will count
towards the completion of any Contingency Period.
IX. The following replaces the section "Limited Exchanges Between Different
Classes of Shares" found under "May I Exchange Shares for Shares of Another
Fund?":
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.
X. The first two paragraphs under "How Do I Sell Shares? - Contingent
Deferred Sales Charge" are replaced with the following:
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 is
transferred out of the Franklin Templeton Funds or terminated within 365
days of the account's initial purchase in the Franklin Templeton Funds.
XI. The 4th, 8th and 9th waiver categories in the section "Waivers" found
under "How Do I Sell Shares? - Contingent Deferred Sales Charge" are replaced
with the following:
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, or (iv) the Securities Dealer of
record has entered into a supplemental agreement with Distributors
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 IRAs due to death or disability or upon periodic
distributions based on life expectancy
XII. The following paragraph is added to the section "What Distributions
Might I Receive from the Fund?":
Dividends and capital gains are calculated and distributed the same way for
each class. The amount of any income dividends per shares will differ,
however, generally due to the difference in the Rule 12b-1 fees of Class I
and Class II.
XIII. The following paragraph is added to the section "Distribution Options"
found under "What Distributions Might I Receive from the Fund?":
Distributions may be reinvested only in the same class of shares, except as
follows: (i) Class II shareholders who chose to reinvest their distributions
in Class I shares of the Fund or another Franklin Templeton Fund before
November 17, 1997, may continue to do so; and (ii) Class II shareholders may
reinvest their distributions in shares of any Franklin Templeton money fund.
XIV. The second sentence of the last paragraph under "What Distributions
Might I Receive from the Fund? - Distribution Options" is replaced with the
following:
IF YOU DO NOT SELECT AN OPTION, WE WILL AUTOMATICALLY REINVEST DIVIDEND AND
CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS OF THE FUND.
XV. The first paragraph under "Transaction Procedures and Special
Requirements - Share Price" is replaced with the following:
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.
XVI. The second paragraph under "Transaction Procedures and Special
Requirements - How and When Shares are Priced" is replaced with the following:
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.
XVII. The sections "Automatic Payroll Deduction" and "Electronic Fund
Transfers" under "Services to Help You Manage Your Account" apply only to
Class I shares.
XVIII. The last sentence in the section "TeleFACTS(R)" under "Services to Help
You Manage Your Account" is replaced with the following:
You will need the code number for each class to use TeleFACTS(R). The code
number is 194 for Class I and 294 for Class II.
XIX. The following terms and definitions are revised or added, as applicable,
to the section "Useful Terms and Definitions":
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.
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. The holding period for Class I begins on
the first day of the month in which you buy shares. Regardless of when
during the month you buy Class I shares, they will age one month on the last
day of that month and each following month. The holding period for Class II
begins on the day you buy your shares. For example, if you buy Class II
shares on the 18th of the month, they will age one month on the 18th day of
the next month and each following month.
IRA - Individual retirement account or annuity qualified under section 408
of the Code
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 4.25% for Class I and 1% for Class II.
SIMPLE (Savings Incentive Match Plan for Employees) - An employer sponsored
salary deferral plan established under section 408(p) of the Code
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.
o 194 STKSAI
SUPPLEMENT DATED MAY 1, 1998
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN STRATEGIC INCOME FUND
DATED SEPTEMBER 1, 1997
As of May 1, 1998, the Fund offers two classes of shares: Franklin Strategic
Income Fund - Class I and Franklin Strategic Income Fund - Class II. The
Statement of Additional Information is amended as follows to reflect this and
other changes:
I. The following replaces the information on Trustee David W. Garbellano in
the section "Officers and Trustees":
Edith E. Holiday (46) Trustee
3239 38th Street, N.W.
Washington, DC 20016
Director (1993-present) of Amerada Hess Corporation and Hercules
Incorporated; Director of Beverly Enterprises, Inc. (1995-present) and H.J.
Heinz Company (1994-present); director or trustee of 25 of the investment
companies in the Franklin Templeton Group of Funds; formerly, chairman
(1995-1997) and trustee (1993-1997) of National Child Research Center,
assistant to the President of the United States and Secretary of the
Cabinet (1990-1993), general counsel to the United States Treasury
Department (1989-1990) and counselor to the Secretary and Assistant
Secretary for Public Affairs and Public Liaison-United States Treasury
Department (1988-1989).
II. The following is added to the section "Officers and Trustees":
As of April 2, 1998, the officers and Board members, as a group, owned of
record and beneficially approximately 5,773 shares, or less than 1% of the
Fund's total outstanding shares.
III. The following sentence is added to the first paragraph of the section
"Management Fees" found under "Investment Management and Other Services":
Each class pays its proportionate share of the management fee.
IV. The last sentence of the second paragraph under "How Do I Buy, Sell and
Exchange Shares? - Additional Information on Buying Shares" is replaced with
the following:
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.
V. The sales charge table near the top of page 18, referring to Taiwan
investors, applies only to Class I shares.
VI. The first two paragraphs in the section "Other Payments to Securities
Dealers" found under "How Do I Buy, Sell and Exchange Shares?" apply only to
Class I shares, and the following paragraph is added to the section:
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares, however, those who have shown an interest in the
Franklin Templeton Funds are more likely to be considered. To the extent
permitted by their firm's policies and procedures, a registered
representative's expenses in attending these meetings may be covered by
Distributors.
VII. The reduced sales charge discussed under "How Do I Buy, Sell and
Exchange Shares? - Letter of Intent" applies only to Class I shares.
VIII. The second and third paragraphs under "How Do I Buy, Sell and Exchange
Shares? - General Information" are replaced with the following:
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. The Fund is not responsible for tracking down uncashed
checks, unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional 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.
IX. The section "The Rule 12b-1 Plan" found under "The Fund's Underwriter" is
replaced with the following:
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 0.50% 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 0.15% 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.
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 $65,613 for advertising, printing, and payments to
underwriters and broker-dealers pursuant to the Class I plan, of which the
Fund paid Distributors $33,351.
X. The following information is added to the applicable sections under "How
does the Fund Measure Performance?":
TOTAL RETURN
The Fund's average annual total return for the one-year period ended
October 31, 1997, and for the period from inception (June 1, 1994) through
October 31, 1997, was 6.27% and 11.49%, respectively.
The Fund's cumulative total return for the one-year period ended October
31, 1997, and for the period from inception (June 1, 1994) through October
31, 1997, was 6.27% and 45.00%, respectively.
YIELD
The Fund's yield for the 30-day period ended October 31, 1997, was 6.45%.
CURRENT DISTRIBUTION RATE
The Fund's current distribution rate for the 30-day period ended October
31, 1997, was 7.75%.
XI. The following is added to the section "Miscellaneous Information":
As of April 2, 1998, 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 94404 ............ 708,946.669 5.26%
XII. The following is added to the section "Financial Statements":
The unaudited financial statements contained in the Semiannual Report to
Shareholders of the Trust, for the six month period ended October 31, 1997,
are incorporated herein by reference.
XIII. The following terms and definitions are revised under the section
"Useful Terms and Definitions":
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.
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 4.25% for Class I and 1% for Class II.
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 FEES RECEIVED FROM THE TEMPLETON GROUP
RECEIVED FRANKLIN TEMPLETON OF 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.
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
(1) Unaudited Financial Statements of the Franklin Strategic Income Fund
incorporated herein by reference to the Registrant's Semi-Annual Report
to Shareholders dated October 31, 1997 as filed with the SEC
electronically on Form Type N-30D on January 12, 1998
(i) Financial Highlights
(ii) Statement of Investments - October 31, 1997
(iii) Statements of Assets and Liabilities - October 31, 1997
(iv) Statements of Operations for the six months ended - October 31,
1997
(v) Statements of Changes in Net Assets - for the six months ended
October 31, 1997 and for the year ended April 30, 1996
(vi) Notes to Financial Statements
(2) Audited Financial Statements incorporated herein by reference to the
Registrants Annual Report to Shareholders dated April 30, 1997 as filed
with the SEC electronically on Form Type N-30D on July 8, 1997
(i) Statement of Investments in Securities Net Assets - April 30, 1997
(ii) Statements of Assets and Liabilities - April 30, 1997
(iii) Statements of Operations - for the year ended April 30, 1997
(iv) Statements of Changes in Net Assets - for the years ended
April 30, 1997 and 1996
(v) Notes to Financial Statements
(vi) Report of Independent Accountants
b) Exhibits:
The following exhibits are incorporated by reference, except exhibits 11(i),
15(x), 17(i), 17(ii) and 18(vi) 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) copies of all instruments defining the rights of the holders of the
securities being registered including, where applicable, the relevant
portion of the articles of incorporation or by-laws of the Registrant
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
(iii) Amendment dated May 7, 1997 to Master Custody Agreement between
Registrant and Bank of New York dated February 16, 1996
Filing: Post-Effective Amendment No. 27 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: March 13, 1998
(iv) Amendment dated October 15, 1997 to Exhibit A in the Master
Custody Agreement between Registrant and Bank of New York dated
February 16, 1996
Filing: Post-Effective Amendment No. 27 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: March 13, 1998
(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 Accountants dated April 20, 1998
(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 for Franklin Global Utilities Fund -
Class II 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 for Franklin Natural Resources Fund 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) Letter of Understanding for Franklin California Growth Fund Class
II dated August 30, 1996
Filing: Post-Effective Amendment No. 27 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: March 13, 1998
(v) Letter of Understanding for Franklin Global Health Care Fund
dated August 30, 1996
Filing: Post-Effective Amendment No. 27 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: March 13, 1998
(vi) Letter of Understanding for Franklin Blue-Chip Fund dated May 24,
1996
Filing: Post-Effective Amendment No. 27 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: March 13, 1998
(vii) Letter of Understanding for Franklin Biotechnlogy Discovery Fund
dated September 5, 1997
Filing: Post-Effective Amendment No. 27 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: March 13, 1998
(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) 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. 27 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: March 13, 1998
(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
Filing: Post-Effective Amendment No. 26 to Registration Statement
on Form N-1A
File No. 33-39088
Filing Date: August 29, 1997
(x) Distribution Plan pursuant to Rule 12b-1 between Registrant on
behalf of Franklin Strategic Income Fund - Class II, and
Franklin/Templeton Distributors, Inc. dated February 26, 1998
(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 New York Tax-Free Trust
Filing: Post-Effective Amendment No. 12 to Registration
Statement on Form N-1A
File No. 33-7785
Filing Date: April 25, 1995
(17) Power of Attorney
(i) Power of Attorney for Franklin Strategic Series dated April 16, 1998
(ii) Certificate of Secretary for Franklin Strategic Series dated
April 16, 1998
(18) Copies of any plan entered into by Registrant pursuant to Rule 18f-3
under the 1940 Act
(i) Multiple Class Plan for Franklin Global Utilities Fund 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
(vi) Multiple Class Plan for Franklin Strategic Income Fund, dated
February 26, 1998
(27) Financial Data Schedule
Not Applicable
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON COTROL WITH REGISTRANT
None
ITEM 26 NUMBER OF HOLDERS OF SECURITIES
As of January 31, 1998 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 57,229 11,880 N/A
Franklin Strategic Income Fund 4,747 N/A N/A
Franklin MidCap Growth Fund 2,250 N/A N/A
Franklin Global Utilities Fund 16,731 1,283 N/A
Franklin Small Cap Growth Fund 180,507 63,011 845
Franklin Global Health Care Fund 25,358 3,476 N/A
Franklin Natural Resources Fund 7,445 N/A 103
Franklin Blue Chip Fund 2,486 N/A N/A
Franklin Biotechnology Discovery Fund 6,420 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 of 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 Franklin Advisers,
Inc. ("Advisers") also serve as officers and/or directors for (1) Advisers'
corporate parent, Franklin Resources, Inc., and/or (2) other investment
companies in the Franklin Templeton Group of Funds. In addition, Mr. Charles
B. Johnson was formerly a director of General Host Corporation. For
additional information please see Part B and Schedules A and D of Form ADV of
Advisers (SEC File 801-26292) incorporated herein by reference, which sets
forth the officers and directors of Advisers 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
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.
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 Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
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 22nd day of April, 1998.
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
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: April 22, 1998
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: April 22, 1998
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: April 22, 1998
FRANK H. ABBOTT, III* Trustee
Frank H. Abbott, III Dated: April 22, 1998
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: April 22, 1998
HARMON E. BURNS* Trustee
Harmon E. Burns Dated: April 22, 1998
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: April 22, 1998
EDITH E. HOLIDAY* Trustee
Edith E. Holiday Dated: April 22, 1998
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: April 22, 1998
FRANK W.T. LAHAYE* Trustee
Frank W.T. LaHaye Dated: April 22, 1998
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: April 22, 1998
*By /s/Larry L. Greene
Attorney-in-Fact
(Pursuant to Power of Attorney filed herein)
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.B8(iii) Amendment dated May 7, 1997 to Master Custody *
Agreement between Registrant and Bank of New
York dated February 16, 1996
EX-99.B8(iv) Amendment dated October 15, 1997 to Exhibit A *
in the Master Custody Agreement between
Registrant and Bank of New York dated February
16, 1996
EX-99.B11(i) Consent of Independent Accountants dated April Attached
20, 1998
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) Letter of Understanding for Franklin *
California Growth Fund dated August 30, 1996
EX-99.B13(v) Letter of Understanding for Franklin Global *
Health Care Fund dated August 30, 1996
EX-99.B13(vi) Letter of Understanding for Franklin Blue Chip *
Fund dated May 24, 1996
EX-99.B13(vii) Letter of Understanding for Franklin *
Biotechnology Discovery Fund dated September
5, 1997
EX-99.B14(i) Copy of Model Retirement Plan *
EX-99.B15(i) Amended and Restated Distribution Plan between *
the Registrant, on behalf of Franklin
California Growth Fund, Franklin Small Cap
Growth Fund, Franklin Global Health Care Fund
and Franklin Global Utilities Fund, and
Franklin/Templeton Distributors, Inc., dated
July 1, 1993
EX-99.B15(ii) Distribution Plan between the Registrant, on *
behalf of Franklin Global Utilities Fund -
Class II, and Franklin/Templeton Distributors,
Inc., dated March 30, 1995
EX-99.B15(iii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of Franklin
Strategic Income Fund, and Franklin/Templeton
Distributors, Inc., dated May 24, 1994
EX-99.B15(iv) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of the
Franklin Natural Resources Fund, and
Franklin/Templeton Distributors, Inc., dated
June 1, 1995
EX-99.B15(v) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of the
Franklin MidCap Growth Fund, and
Franklin/Templeton Distributors, Inc., dated
June 1, 1996
EX-99.B15(vi) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of the
Franklin Blue Chip Fund, and
Franklin/Templeton Distributors, Inc., dated
May 28, 1996
EX-99.B15(vii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of Franklin
Small Cap Growth Fund - Class II, and
Franklin/Templeton Distributors, Inc., dated
September 29, 1995
EX-99.B15(viii) Distribution Plan pursuant to Rule 12b-1 *
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 *
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.B15(x) Distribution Plan pursuant to Rule 12b-1 Attached
between Registrant on behalf of Franklin
Strategic Income Fund - Class II, and
Franklin/Templeton Distributors, Inc. dated
February 26, 1998
EX-99.B16(i) Schedule for Computation of Performance *
Quotation
EX-99.B17(i) Power of Attorney for Franklin Strategic Attached
Series dated April 16, 1998
EX-99.B17(ii) Certificate of Secretary for Franklin Attached
Strategic Series dated April 16, 1998
EX-99.B18(i) Multiple Class Plan for Franklin Global *
Utilities Fund 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-99.B18(vi) Multiple Class Plan for Franklin Strategic Attached
Income Fund dated February 26, 1998
* Incorporated by reference
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No.
28 to the Registration Statement of Franklin Strategic Series on Form N-1A
File No. (33-39088) 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.
San Francisco, California
April 20, 1998
CLASS II DISTRIBUTION PLAN
I. Investment Company: FRANKLIN STRATEGIC SERIES
II. Fund: FRANKLIN STRATEGIC INCOME 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: 0.50% FIXED INCOME
B. Service Fee: 0.15% FIXED INCOME
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 the Fund named above ("Fund"), 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 the Fund and its shareholders.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a monthly 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, the 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 Fund's 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 the Fund on behalf of customers;
forwarding certain shareholder communications from the Fund 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 the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of Class shares issued
by the Fund within the context of Rule 12b-1 under the Act, then such
payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to
be made pursuant to the Plan under this paragraph, exceed the amount
permitted to be paid pursuant to the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board, for its review, on a
quarterly basis, a written report of the monies reimbursed to it and to
others under the Plan, and shall furnish the Board with such other
information as the Board may reasonably request in connection with the
payments made under the Plan in order to enable the Board to make an informed
determination of whether the Plan should be continued.
5. The Plan shall continue in effect for a period of more than one
year only so long as such continuance is specifically approved at least
annually by 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 the 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 Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan,
may not be amended to increase materially the amount to be spent for
distribution pursuant to Paragraph 1 hereof without approval by a majority of
the Fund's outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered
into pursuant to this Plan, shall be approved by 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 Fund's 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: February 26, 1998
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
POWER OF ATTORNEY
The undersigned officers and trustees of Franklin Strategic Series (the
"Registrant") hereby appoint MARK H. PLAFKER, HARMON E. BURNS, DEBORAH R.
GATZEK, KAREN L. SKIDMORE AND LARRY L. GREENE (with full power to each of
them to act alone) his attorney-in-fact and agent, in all capacities, to
execute, file or withdraw any of the documents referred to below relating to
Post-Effective Amendments to the Registrant's registration statement on Form
N-1A under the Investment Company Act of 1940, as amended, and under the
Securities Act of 1933 covering the sale of shares by the Registrant under
prospectuses becoming effective after this date, including any amendment or
amendments increasing or decreasing the amount of securities for which
registration is being sought, with all exhibits and any and all documents
required to be filed with respect thereto with any regulatory authority.
Each of the undersigned grants to each of said attorneys, full authority to
do every act necessary to be done in order to effectuate the same as fully,
to all intents and purposes as he could do if personally present, thereby
ratifying all that said attorneys-in-fact and agents, may lawfully do or
cause to be done by virtue hereof.
The undersigned officers and trustees hereby execute this Power of
Attorney as of this 16th day of April, 1998.
/S/ RUPERT H. JOHNSON, JR. /S/ CHARLES B. JOHNSON
Rupert H. Johnson, Jr., Principal Charles B. Johnson,
Executive Officer Trustee
and Trustee
/S/ FRANK H. ABBOTT, III /S/ HARRIS J. ASHTON
Frank H. Abbott, III, Harris J. Ashton,
Trustee Trustee
/S/ HARMON E. BURNS /S/ S. JOSEPH FORTUNATO
Harmon E. Burns, S. Joseph Fortunato,
Trustee Trustee
/S/ EDITH E. HOLIDAY /S/ FRANK W. T. LAHAYE
Edith E. Holiday, Frank W. T. LaHaye,
Trustee Trustee
/S/ GORDON S. MACKLIN /S/ MARTIN L. FLANAGAN
Gordon S. Macklin, Martin L. Flanagan,
Trustee Principal Financial Officer
/S/ DIOMEDES LOO-TAM
Diomedes Loo-Tam,
Principal Accounting Officer
CERTIFICATE OF SECRETARY
I, Deborah R. Gatzek, certify that I am Secretary of Franklin Strategic
Series (the "Trust").
As Secretary of the Trust, I further certify that the following
resolution was adopted by a majority of the Trustees of the Trust present at
a meeting held at 777 Mariners Island Boulevard, San Mateo, California, on
April 16, 1998.
RESOLVED, that a Power of Attorney, substantially in the form of
the Power of Attorney presented to this Board, appointing Harmon
E. Burns, Deborah R. Gatzek, Karen L. Skidmore, Larry L. Greene
and Mark H. Plafker as attorneys-in-fact for the purpose of
filing documents with the Securities and Exchange Commission, be
executed by each Trustee and designated officer.
I declare under penalty of perjury that the matters set forth in this
certificate are true and correct of my own knowledge.
Dated: April 16, 1998 /s/ Deborah R. Gatzek
Deborah R. Gatzek
Secretary
FRANKLIN STRATEGIC SERIES
ON BEHALF OF
FRANKLIN STRATEGIC INCOME FUND
Multiple Class Plan
This Multiple Class Plan (the "Plan") has been adopted by a
majority of the Board of Trustees of the Franklin Strategic Series (the
"Trust"), on behalf of its series Franklin Strategic Income Fund (the
"Fund"). The Board has determined that the Plan is in the best interests of
each class and the Fund as a whole. The Plan sets forth the provisions
relating to the establishment of multiple classes of shares for the Fund.
1. The Fund shall offer two classes of shares, to be known as
Franklin Strategic Income Fund - Class I and Franklin Strategic Income Fund -
Class II.
2. Class I shares shall carry a front-end sales charge ranging
from 0% - 4.25%, and Class II shares shall carry a front-end sales charge of
1.00%.
3. Class I shares shall not be subject to a contingent
deferred sales charge ("CDSC") except in the following limited
circumstances. On investments of $1 million or more, a contingent deferred
sales charge of 1.00% of the lesser of the then-current net asset value or
the original net asset value at the time of purchase applies to redemptions
of those investments within the contingency period of 12 months from the
calendar month following their purchase. The CDSC is waived in certain
circumstances, as described in the Fund's prospectus.
4. Class II shares redeemed within 18 months of their purchase
shall be assessed a CDSC of 1.00% on the lesser of the then-current net asset
value or the original net asset value at the time of purchase. The CDSC is
waived in certain circumstances as described in the Fund's prospectus.
5. The Rule 12b-1 Plan associated with Class I shares may be
used to reimburse Franklin/Templeton Distributors, Inc. (the "Distributor")
or others for expenses incurred in the promotion and distribution of the
shares of Class I. Such expenses include, but are not limited to, the
printing of prospectuses and reports used for sales purposes, expenses of
preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a prorated
portion of the Distributor's overhead expenses attributable to the
distribution of Class shares, as well as any distribution or service fees
paid to securities dealers or their firms or others who have executed a
servicing agreement with the Fund for the Class, the Distributor or its
affiliates.
The Rule 12b-1 Plan associated with Class II shares has two
components. The first component is a shareholder servicing fee, to be paid
to broker-dealers, banks, trust companies and others who will provide
personal assistance to shareholders in servicing their accounts. The second
component is an asset-based sales charge to be retained by the Distributor
during the first year after sale of shares, and, in subsequent years, to be
paid to dealers or retained by the Distributor to be used in the promotion
and distribution of Class II shares, in a manner similar to that described
above for Class I shares.
The Plans shall operate in accordance with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., Article
III, section 26(d).
6. The only difference in expenses as between Class I and
Class II shares shall relate to differences in the Rule 12b-1 plan expenses
of each class, as described in each class' Rule 12b-1 Plan.
7. There shall be no conversion features associated with the
Class I and Class II shares.
8. Shares of either Class may be exchanged for shares of
another investment company within the Franklin Templeton Group of Funds
according to the terms and conditions stated in each fund's prospectus, as it
may be amended from time to time, to the extent permitted by the Investment
Company Act of 1940 and the rules and regulations adopted thereunder.
9. Each Class will vote separately with respect to the Rule
12b-1 Plan related to that Class.
10. On an ongoing basis, the trustees pursuant to their
fiduciary responsibilities under the 1940 Act and otherwise, will monitor the
Fund for the existence of any material conflicts between the interests of the
two classes of shares. The Trustees, including a majority of the independent
Trustees, shall take such action as is reasonably necessary to eliminate any
such conflict that may develop. Franklin Advisers, Inc. and
Franklin/Templeton Distributors, Inc. shall be responsible for alerting the
Board to any material conflicts that arise.
11. All material amendments to this Plan must be approved by a
majority of the Trustees of the Fund, including a majority of the Trustees
who are not interested persons of the Fund.
I, Deborah R. Gatzek, Secretary of the Franklin Templeton Group
of Funds, do hereby certify that this Multiple Class Plan was adopted by
Franklin Strategic Series, on behalf of its series, Franklin Strategic Income
Fund, by a majority of the Trustees of the Trust on February 26, 1998.
/s/ Deborah R. Gatzek
Deborah R. Gatzek
Secretary
